Novartis AG (NYSE:NVS) Q1 2023 Earnings Call Transcript April 25, 2023

Operator: Good morning and good afternoon, and welcome to the Novartis Q1 2023 Results Release Conference Call and Live Webcast. Please note that during the presentation, all participants will be in a listen-only mode and the conference is being recorded. A recording of the conference call, including the Q&A session, will be available on our website shortly after the call ends. With that, I would like to hand over to Mr. Samir Shah, Global Head of Investor Relations. Please go ahead, sir.

Samir Shah: Thank you very much and good morning and good afternoon everybody. Thank you once again for all the participants on the call and the webcast for taking the time to listen to our quarterly conference call. Before I start, just a Safe Harbor statement. The information presented today contains forward-looking statements that involve known and unknown risks, uncertainties, and other factors. These may cause actual results to be materially different from any future results, performance, or achievements expressed or implied by such statements. For a description of some of these factors, please refer to the company's Form 20-F, its most recent quarterly results on Form 6-K that respectively were filed with and furnished to the US Securities and Exchange Commission. And with that, I'll hand across to Vas.

Vas Narasimhan: Thank you, Samir and thanks everyone, for joining today's call. If we move to slide four, Novartis delivered a strong first quarter to start the year. We had strong sales growth, robust margin expansion, we hit our key innovation milestones, and we're raising our full year 2023 guidance, which Harry will go through in more detail. As you saw in this morning's press release, sales were up 8%, core operating income was up 15% in constant currencies. In Innovative Medicines, sales were up 7% and core operating income was up 18%. We achieved a core margin of 38.7% in IM, and Sandoz was up 8% with core operating income up 3%. I'll go through some of the innovation milestones in the subsequent slides as well as an update on our recent approvals of our Milburn and Zaragoza manufacturing facilities.

Now, moving to slide five, our key 2023 readouts for our upcoming high-value medicines remain on track. You surely saw earlier in the quarter, our Phase 3 NATALEE trial in adjuvant breast cancer testing this medicine in a broad patient population, have met its primary endpoint at its second interim analysis. Pluvicto is continues to stay on track with the PSMA 4 trial in metastatic castrate-resistant prostate cancer. Having a positive topline readout, we expect to achieve the OS endpoints over the course of the summer with a detailed data presentation in the second half of the year and plan for regulatory submissions in the second half of 2023. And iptacopan continues to stay on track as well. Tomorrow, we will read out the data from the APPOINT-PNH trial in treatment-naive patients.

I'll speak more about that in a moment and we're on track with both the IgAN and C3G readouts. Now, moving to slide six. Our submission-enabling readouts are expected to increase in the 2024 and 2025 timeframe with a number of, we think, potentially exciting assets if the data continues to hold. Remibrutinib will achieve its primary analysis in CSU for efficacy in the second half of 2023 and the final analysis, which would include additional safety follow-up alongside potential submission in 2024. We've accelerated our assemblies timing in first-line CML with a readout and submission now expected in 2024. Also of note, we remain on track with our SMA IT readout for OAV-101 for 2024 and I also wanted to highlight that ianalumab across a broad range of indications has began -- begun Phase 3 clinical starts, including in first and second-line ITP as well as in SLE and lupus nephritis.

Now moving to the next slide, slide seven and turning to a little bit more detail on some of these innovation highlights. The NATALEE study met its primary endpoint, demonstrating clinically meaningful iDFS in a broad early breast cancer population. This study looked at Kisqali plus endocrine therapy with a 400-milligram dose and it significantly reduced the risk of disease recurrence for standard endocrine therapy alone. The benefit was consistent in a broad population of stage II and III early best breast cancer patients. We expect to present this data at an upcoming medical meeting, and we're on track for worldwide regulatory submissions in the second half of 2023. As a reminder, 30% to 60% of patients with stage II and III early breast cancer treated with endocrine therapy alone remain at risk of breast cancer recurrence.

And I also wanted to highlight that our 400-milligram dose was used specifically to reduce dose-dependent AEs given the importance of a good tolerability profile in treating early breast cancer. Now moving to slide eight. I wanted to get into a little bit more detail on the patient population addressed by the Kisqali NATALEE study. We've previously guided that this is a multibillion-dollar opportunity for Kisqali in addition to the multibillion-dollar opportunity we have in the metastatic setting. You can see here on the left-hand side of the slide, the incidents that we now estimate based on updated data sets that we've been able to identify, the NATALEE population covers 70% of stage II and 100% of stage III patients, and it's approximately 2 to 3 times the size of the competitor study.

You can see the profile in a bit more detail on the right-hand side of the slide. You can see that in the stage II population, we have unique tonality and a total population across the stage III as well that's unique to NATALEE. So it gives you a good sense of the comparison across the NATALEE and monarchE profiles. Now moving to slide nine and turning to iptacopan. Our APPOINT-PNH data showed clinically meaningful increases in hemoglobin, and we top lined this data in the quarter four of last year. This was a single arm Phase 3 study in adult patients with PNH with hemolysis and anemia, they were naive to complement inhibitors and complements the already -- the data we've already demonstrated in patients who were not adequately controlled by C5 inhibitors.

The study met its primary endpoint, had a strong safety profile. And as I already mentioned, the data will be presented tomorrow, and we look forward to using that data alongside our already completed previous trials as part of our regulatory package. We have completed the submission of iptacopan in the US, and we are awaiting regulatory acceptance, which we hope will happen soon. Now moving to slide 10. We strengthened our radioligand therapy pipeline with multiple deals over the course of the quarter. Some of the recent business development activities included a discovery collaboration with Bicycle Therapeutics, which employs cyclic peptides and that allows us to target additional interesting targets from a radioligand therapy perspective and it supplements our existing discovery platform.

In addition, we completed an acquisition of FAP-2286 from Clovis Oncology, which is a fibroblast activation protein, and we believe it represents a promising RLC target in a range of solid tumors you see listed here. The asset is in Phase 1/2 development. It's shown first signs of efficacy. And it complements the growing clinical stage pipeline we have outlined on the right-hand side of the slide, which includes taking Lutathera into multiple different solid tumors, the continued expansion of Pluvicto, as I've already outlined, as well as the progress we're making on NeoB and now the acquisition of FAP-2286. So we look forward to keeping you updated as we continue to progress our radioligand therapy portfolio. Now moving to slide 11 and turning to our growth in the quarter and growth drivers.

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Our key growth drivers delivered 67% growth in constant currencies, and we expect that growth to continue. This growth was highlighted by performance from Entresto, Pluvicto, Kesimpta and Kisqali. Now turning to these brands, each one in turn on slide 12. Entresto delivered strong double-digit growth across geographies. You can see a growth rate of 32% with growth across ex-US and the US a strong weekly TRx trend, which is continuing the trend we've seen now for multiple years with this medicine. The momentum is outpacing the market with the US NBRx now up 30%, we continue to see growth in the EU with HFrEF patients. And importantly, in China and Japan, we're not only seeing expansion in heart failure patients, but also a significant contribution from our indications in these geographies in hypertension.

We remain confident in the future growth profile. We expect further penetration across half breast robust guideline positions to support our overall growth. And importantly, we received CHMP positive opinion for pediatric heart failure, which, if ultimately approved by the European Commission, will extend the loss of exclusivity in the EU until the end of 2026. Now moving to the next slide, slide 13. Cosentyx ex-US growth offset our US declines. And as we've guided to, we continue to believe that global full year sales will be broadly in line with the prior year. Getting into a little bit more on these dynamics. In the US, we saw demand growth, which was solid, offset by revenue deductions, about half of the decline that we saw was due to prior year base effects where the revenue deductions that we disclosed in quarter four were not in Q1 of last year.

In addition, we did have some inventory movements. So overall, we do see in the US approximately a high sum-single-digit decline in Cosentyx performance, which is in line with what our expectations were. Ex-US, we see strong growth in our core indications. Importantly, in China, we're outperforming the market with our NRDL listing with Cosentyx double-digit growth now post-COVID. As I mentioned, we expect our sales to be broadly in line, and our future growth will be driven by life cycle management. We have the CHMP opinion for hidradenitis expected in quarter two, we're expecting approvals in the US for both hidradenitis and our IV formulation in the second half, we're on track with our lupus nephritis and GCA studies, and we've initiated two additional studies in polymyalgia rheumatica and rotator cuff tendinopathy.

So moving to slide 14, just to highlight some of the data we released in Cosentyx in the quarter. In hidradenitis, we had demonstrated durable efficacy sustained up to one year. This is a disease that's characterized by lesions and abscesses patients really suffer from the disease. So really, what is critical is that we can address pain and address some of the more problematic manifestations of the disease. On the right-hand side, our data demonstrate durable efficacy, which is sustained out to one year across the various patient populations, greater than 70% of patients were flare fee greater than 65% had solid pain control. And we saw a fast and lasting quality of life improvement. So taken together, we think the medicine is well-positioned in what could be a sizable market as more and more therapies become available to treat these patients with the biologics that they likely need.

Now, moving to the next slide, slide 15. Cosentyx continued its strong launch trajectory, doubling sales versus prior year. You can see the 100% growth on the chart, this was driven by strong TRx growth were up 89% versus prior year, strong NBRx growth were up 60% versus prior year. Importantly, the B-cell NBRx show that we -- is currently about 50% of the MS market. So, there continues to be room for further B-cell expansion. In Europe, there was strong launch momentum as well with now 65% of the population with access to Kesimpta. We're confident in the continued growth of this medicine. We think there's significant room to grow the B-cell market share in the US. And we also have a compelling product profile, one minute a month dosing from home or anywhere strong five-year efficacy and safety data.

So, we'll continue to drive strong performance with Kesimpta over the course of this year. Now, you likely saw on slide 16 that Kisqali had an outstanding quarter and we're gaining momentum globally with increasing recognition of its differentiated profile supported by strong Phase 3 outcomes data. You see growth of 81% on the sales line are metastatic breast cancer market share. NBRx share is now at 28% in the US. In the EU 5, our NBRx share is up to now 38%. We have the favorable NCCN guidelines as the only Category 1 treatment for first-line metastatic breast cancer with an aromatase inhibitor and the positive readout as we've already discussed for the Phase 3 NATALEE study. So, we expect continued momentum for Kisqali as it achieved its multibillion-dollar potential in the metastatic setting.

Now, moving to slide 17, with Leqvio, our adoption is continuing to expand as we steadily progress this launch. What we wanted to highlight here is when you look at adoption, the number of facilities that are now ordering we're up to 2,200 facilities. Our number of physicians that have experience now with Leqvio's up to 9,600 and our focus now is to drive greater depth in these accounts as these accounts get more comfortable with buy and bill, which will absolutely be critical for the long-term success of this product. Our access rate is at 76% adherence now to the second dose within 95 days to 75%. So, the foundations are getting put in place for this medicine, and we continue to track well against the Entresto launch curve, which I think is -- gives you an indication of how we expect the launch to progress in the US.

Globally, we're also seeing now the beginning of an acceleration as we continue to expand in Europe, and also wait for further acceleration in the UK with the NHS national program. Now, turning to slide 18. Pluvicto is continuing to see outstanding demand and a strong benefit driven by a strong run of benefit risk profile and the unmet need in the post-taxane metastatic castrate-resistant prostate cancer setting. You saw the sales evolution now up to $211 million on the quarter. We do expect Q2 sales to be broadly in line with Q1 as we continue to ramp up the Milburn and Zaragoza facilities. We have 200 unique accounts, but importantly, have over 100 additional accounts were prepared to add on as supply continues to ramp, moving towards our goal to estimated 500 accounts in the US as we move into broader and broader settings.

Our FDA submission for PSMAfore, including the OS data is on track, as I previously mentioned, and to get into a little bit more detail on the supply, turning to slide 19. As you saw in our announcement last week, Milburn is approved for Pluvicto commercial supply in the US, and we already have started production in this facility. We also have Zaragoza approved in the EU, and we expect that facility to start producing for EU patients over the course of the coming weeks. As we continue to add additional lines and bring additional lines operational in Milburn over the course of the coming months, we will expect to see in the second half of the year, a significant expansion in capacity, which will allow us to accelerate the launch as we move into the end of 2024 and 2025.

Importantly, our Indianapolis facility as well as now in preparation for FDA filing, we hope to have that facility approved before the end of this year. And the last element of our story on production is the building of automated production lines, which allowed substantial capacity. We continue to target a capacity of at least 250,000 doses in 2024. Now lastly, turning to Scemblix. Scemblix continues to do well in the third-line setting for CML. Q1 sales were $76 million. Our global rollout is ongoing with approval in 46 countries. We have access pathways in 2019. And I think there's a strong recognition of the efficacy and tolerability benefit of this medicine, and that's indicated by the rapid enrollment of the efficacy study with completed enrollment ahead of plan with a readout and filing now expected in 2024.

So a strong start to the year, a strong first quarter. And to give you more perspective on the financial performance in Q1, I'll hand it over to Harry. Harry?

Harry Kirsch: Yes. Thank you, Vas. Good morning and good afternoon, everyone. I'm now going to talk you through some of the financials for the first quarter. And as always, my comments refer to growth rates in constant currencies unless otherwise noted. And as you will see from the numbers, it really has been a very strong start to the year. Now on slide 23. We detailed the strength of the top and bottom line performance during the quarter. Overall, we really have excellent business momentum, and our efforts to focus and streamline the business are starting to pay off on both the top and the bottom line. Sales grew 8%, benefiting from the strong performance of our in-market brands, in particular, Entresto, Pluvicto, Kesimpta, Kisqali, as Vas already laid out.

Core operating income growth was up 15%, driven mainly by higher sales and core EPS even grew 25% to $1.71, faster than core operating income, benefiting from a lower weighted average number of shares outstanding. Free cash flow was $2.7 billion, growing 95%, mainly driven by higher income, favorable changes in working capital and some onetime legal matter. In summary, as I said, a very strong start to the year. Next slide, please. Details here due to the performance of Innovative Medicines and Sandoz. Overall, the picture is quite cream above the board. And on the back of the strong sales performance of our growth drivers, IM sales grew 7%, which drove an increase in IM core operating income of 18% and the core margin reached 38.7%, up, I would say, an impressive 360 basis points increase versus prior year.

Sandoz net sales grew 8% this quarter, mainly driven by Europe, which benefited from continued momentum of prior year launches and a very strong cough and cold season. Sandoz core op inc was up 3% lower than sales, mainly due to some prior year divestment income and Sandoz core margin was 21%. Next slide, please. The strong start of the year and confidence in our future growth allows us to raise both top and bottom line guidance for the full year of 2023. As you recall, we usually don't do that in quarter one, but we really do have good momentum, and we don't think that will change as we go forward. For Innovative Medicines and Novartis excluding Sandoz, we now expect sales to grow mid-single digit and core operating income to grow high single to low double-digit.

For Novartis, including Sandoz, which is based on the group guidance and assuming for the forecasting numbers that Sandoz would remain within the group for the entire full year of 2023, we now expect sales to grow mid-single digit and core operating income to grow high single digit. Our key assumption is that no Sandostatin LAR generics would enter in the US in 2023. As you will note from next slide, Sandoz guidance also rates for the top line. For 2023, we now expect Sandoz top line to grow mid-single digit. We are maintaining Sandoz core operating income guidance as expected to decline low double digit for now. This is mainly related to the investments to transition to a separate Sandoz and expected continued inflationary pressures. And as you can imagine, bottom line performance for business during the separation is a bit more difficult to predict.

Therefore, we want to see quarter two before considering a guidance upgrade also on the bottom line. Midterm, we expect Sandoz sales to grow low to mid-single-digit CAGR and core operating income margin is expected to expand to the mid-20s, driven by continued sales growth and operational efficiencies. On the next slide, I would like to detail some of the important news flow and milestones for the Sandoz business. As mentioned, Sandoz had a good start with 8% sales up, sales in Europe were particularly strong, up 16% and biopharma growth was also very strong at 17%. Sandoz continuing to progress its biosimilar pipeline, biosimilar adalimumab was approved in both US and Europe, denosumab biosimilar filings -- filing was accepted in the US and we expect the Phase 3 readout of aflibercept biosimilar in the second half of 2023.

The planned spin-off is well on track for the second half of this year. The Capital Market Days are planned in early June in both New York and London. We also announced that Gilbert Ghostine has been appointed as Sandoz Chairman-Designate. Just for your information, Novartis implemented a couple of small transfers of certain manufacturing services and our malaria drug Coartem between Sandoz IM it's around $200 million of sales. So it's a very minor impact on segment reporting and the financials related to those. To help your modeling for the future, we will publish these small changes on our website tomorrow. Should there be any questions, our Investor Relations team is always ready to help. On the next slide, I'd like to outline again, as I did three months ago, the key drivers of core operating income growth for the rest of the year.

Expected core operating income growth drivers include the continued strong sales performance of our in-market growth brands and acceleration of recent launches. Pluvicto growth, mainly as of quarter three is now also well supported after the just announced FDA approval for our Millburn manufacturing site for the US. We expect China growth to accelerate, particularly in the second half of the year. We saw a good quarter one of 5%, but not to the usual growth rates we would expect and our team is ready to execute in the reopened market in China. Our simplified organizational structure and productivity programs are expected to continue delivering SG&A savings and the core operating income growth, if you go to the right side, of course, there are a few headwinds, which we like inflation would expect to continue throughout the year.

Of course, we monitor that. If there's any change, we would update you as always. And also some headwinds from generic erosion as we still continue to have Gilenya generics erosion US, Lucentis in Europe, and of course, then the further acceleration of standup investments to transition Sandoz to a standalone company. We had relatively little of the standup investments in quarter one, but it's also one of the reasons for the expected core OpInc decline at Sandoz. In short, I'm convinced we are very well set up to continue our business momentum and are confident in our short, mid, and long-term growth objectives on both top and bottom-line. Last but not least, on the next slide, a few words on the currency impact, noting the constantly changing currencies.

In Q1, currency had a negative 5% point impact on net sales and a negative 7% point impact on core operating income. Looking forward, if late April rates prevail for the remainder of 2023, we expect the full year impact of currencies on the topline to be neutral and in the bottom-line to be negative 3% to negative 4% points, that has mainly to do with the Swiss franc actually strengthening also versus the euro as overall, the dollar has weakened a bit again, but still better than what we had before, and we see a bit of positives on the currencies. As a reminder, in order to help you model these impacts, which is never easy from the outside in, we update the currency impacts expected on our website monthly. And with that, I hand back to Vas.

Vas Narasimhan: Thank you, Harry. So, moving to slide 30. Just in conclusion, we had a strong start to 2023, as you heard throughout the call, particularly with Entresto, Kisqali, and Kesimpta with broad-based. Our launches are performing well, Pluvicto and Scemblix continue on a strong trajectory and Leqvio is progressing steadily. We're confident in our midterm growth outlook. NATALEE had its positive Phase 3 readout looking forward to presenting that data. We had positive topline of iptacopan and consistently not presenting additional data as we move to C3G and IgAN. Pluvicto reading out in earlier lines of therapy, we'll have readouts upcoming Scemblix, remibrutinib, SMA, , amongst others. And with all of that momentum, we're raising our full year guidance, and we'll look forward to continuing the strong operational performance over the course of this year.

So, with that, I'll open the line to questions. I would ask each of the questioners to limit themselves to one question. In addition, because our presentation was a bit shorter today, we'll aim to end the questioning period at 3:15 Central European Time. So, operator, you can open the line for questions.

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