Novartis chief fights to restore faith

Joe Jimenez took charge of Novartis six years ago Reuters

Joe Jimenez is facing a battle to restore investor confidence in Novartis, after a series of setbacks which have sent shares in the Swiss pharma group down more than a quarter in the past year. 

Weak sales of a new heart drug have combined with problems in its Alcon eyecare business, to create arguably the rockiest period for Mr Jimenez since the American took charge six years ago. 

Legal risks have added to the gloom, as Novartis faces investigation for suspected marketing abuses in the US, South Korea and Turkey on top of recent cases in Japan and China.

All these problems have been simmering for months but are now coming to the boil as a succession of analysts cut growth forecasts for the group. 

Mr Jimenez still has credit with investors for an overhaul in which Novartis has narrowed the sprawling range of businesses built by his predecessor, Daniel Vasella. He is likely to point to progress in cutting costs and restructuring Alcon when he announces first-quarter results on Thursday. 

However, the headline numbers are unlikely to part the clouds hanging over Novartis. Analysts expect sales and profits to be down as the eyecare business continues to drag on performance.

The mood was different a year ago, when the group was preparing to launch Entresto. Data showing that the drug cut deaths by a fifth in clinical trials fuelled confidence that it would be the new blockbuster Novartis needed to offset the imminent loss of patent protection on its best-selling Gleevec cancer drug. 

Yet instead of the expected gush, sales of Entresto started at a trickle. The $5 million (CHF4.8 million) registered in the final quarter of 2015 was less than a tenth of analysts’ forecasts. They have described the launch as a “huge disappointment”. 

Novartis declined to comment but analysts sympathetic to the group pointed out that Mr Jimenez always said it would take time for Entresto to gain momentum. There has, so far, been no retreat from his long-term target for peak annual sales of $5 billion from the drug. Others are no longer as confident. Citigroup last month slashed its sales forecast from $10 billion in 2025 to just $2 billion.

Tougher times ahead?

The worry for investors is that Entresto may be a harbinger of tougher times ahead in the US. Two hyped cholesterol-lowering drugs from Sanofi and Amgen have also been stuck in the slow lane since their launch last year. 

This has added to evidence that US insurers and healthcare providers are becoming more aggressive in their bargaining with big pharma as structural changes in the health system increase incentives for cost savings. 

Without a strong contribution from Entresto this year, Novartis has been left exposed to a decline at Alcon – a business acquired from Nestlé for $50 billion in a two-part transaction completed in 2010. A target was set for Alcon to return to growth by the end of the year. However, Seamus Fernandez, analyst at Leerink, says the business may be sold if the turnround falters. 

Further uncertainty comes from the investigations facing Novartis over suspected marketing abuses in the US, Turkey and South Korea. That is on top of a $25 million settlement paid to the US Securities and Exchange Commission last month for bribery in China and a suspension of its business in Japan for manipulating clinical trial data. 

“Sham” doctors’ meetings

The biggest peril is from a lawsuit being pursued by Preet Bharara, the US attorney-general for the southern district of New York. He has accused Novartis of funnelling kickbacks to prescribers through as many as 80,0000 “sham” educational meetings where doctors were wined and dined. 

Mr Bharara secured a $390 million settlement from Novartis in a separate case last year, and Andrew Baum, analyst at Citigroup, says there is a “high probability” of another fine that could be similar in scale to the record $3 billion paid by GlaxoSmithKlinein 2012.

Like GSK, Novartis might also have to commit to marketing reforms that would make it harder to aggressively push Entresto. Mr Baum said this could “severely impact” on earnings.

In an attempt to clean up, Novartis has appointed a chief ethics officer. 

For all the challenges, some analysts still see reasons for optimism. Another new product, Cosentyx for psoriasis, has started strongly with forecasts of $2.5 billion in annual sales by 2020. 

Copyright The Financial Times Limited 2016