Novartis faces drug pipeline test with valuation premium in focus

By Bhanvi Satija

LONDON, July 20 (Reuters) - Novartis investors will look beyond Tuesday's quarterly results for indications about three major drug trial readouts due in the second half of the year seen as vital to justifying the Swiss drugmaker's premium valuation.

Analysts say the experimental drugs - pelacarsen for cardiovascular disease, remibrutinib for multiple sclerosis and genetic disorder drug del-desiran - could shape the Basel-headquartered firm's growth outlook into the next decade, as looming patent expiries put drugmakers' pipelines under increasing scrutiny.

"Markets can be unforgiving in R&D...with even a small shortfall in clinical trials being punished heavily, whilst knockout results are treated with relief," said Ketan Patel, a fund manager at London-based Novartis investor Whitefriars.

Shares in Britain's AstraZeneca slid earlier this month after the trial failure of a nerve disease drug to treat heart conditions.

Novartis Chief Executive Vas Narasimhan, who has led the company for eight years, expects the firm to grow through what he has called the largest patent expiry period in its history.

"Management's body language on those (trial) readouts will be very much a focus," said Barclays analyst James Gordon.

Analysts estimate the three drugs together represent more than $10 billion in peak annual sales potential, which would balance out expected U.S. and European patent losses for top-sellers Cosentyx, used for psoriasis and arthritis, and breast-cancer therapy Kisqali around the turn of the decade.

Sales of heart drug Entresto, already facing competition from generics, are expected to drop by $4 billion this year.

TRIAL RESULTS KEY TO VALUATION

Some analysts have warned that much of the potential upside from the trial results is already reflected in Novartis' sector-leading valuation of some 16 times forward earnings. Its shares have risen 11% so far this year and around a quarter over the past 12 months.

"At 16 times, you do need those growth levers to come through," said Jefferies analyst Michael Leuchten.

"It's more about the momentum in the second half, and then you might as well tuck in the slightly riskier pipeline readouts that are around the corner."

Goldman Sachs analyst James Quigley said Novartis needed at least two of the three trials to come good.

"If two of those fail, that 16-times multiple looks very, very vulnerable," he said.

MANAGEMENT CONFIDENCE

Investors will focus on management's confidence, the likely timing of readouts and language around "clinically meaningful" benefits, a metric that usually determines whether a drug's effect is large enough for doctors, patients and payers.

UBS analysts expect pelacarsen could reach statistical significance at around a 12% relative risk reduction, while clinicians may want to see 15% or more to view the result as clearly meaningful.

For pelacarsen, the first expected trial result, the HORIZON study is testing whether lowering lipoprotein(a), or Lp(a), reduces the risk of heart attacks or strokes.

"Lp(a) is particularly interesting because there is nothing on the market today," said Sven Borho, managing partner at investment firm OrbiMed, which manages recent Novartis investor Worldwide Healthcare Trust's portfolio.

If Novartis' drug is first to market, it could become a significant sales driver, Borho said. "It will be big because you're going to be on it for the rest of your life."

(Reporting by Bhanvi Satija in London; Editing by Kirsten Donovan)