Swiss pharmaceutical giant Novartis reported second-quarter results in which core operating profit exceeded market expectations, despite a 50% year-on-year decline in sales of its flagship heart-failure drug Entresto. Growth in newer medicines, particularly cancer treatments, combined with cost reductions, offset the weakness in Entresto.
Operating profit adjusted for special items reached $5.94 billion, significantly exceeding analysts’ average estimate of approximately $5.31 billion. Total net sales also rose by 1% on a constant-currency basis to $14.41 billion.
These results offer a symbolic case study of an unavoidable challenge for pharmaceutical companies: patent expiration and the subsequent transformation of their business structures.
Entresto’s 50% Sales Decline Demonstrates the Destructive Force of Patent Expiration
The greatest challenge currently facing Novartis is the expiration of patents protecting Entresto, which has historically accounted for approximately 10% of the company’s total sales.
Entresto sales fell by 50% year on year to $1.18 billion as competition from generic drugs intensified in the United States. The figure also fell below the market forecast of $1.23 billion.
Developing a new medicine requires considerable time and enormous investment. Once a drug is approved and becomes established in the market, however, patent protection can limit competition for a certain period and enable the manufacturer to generate substantial profits. Once the relevant patents expire and generic alternatives enter the market, price competition and prescription switching can accelerate rapidly, causing sales to decline sharply over a short period.
This phenomenon, in which the expiration of patents on a key product causes a sudden drop in sales and profits, is commonly known as a “patent cliff.” The halving of Entresto sales once again demonstrates that the effects of a patent cliff are anything but gradual.
Kisqali and Scemblix Are Emerging as New Pillars of Revenue
At the same time, Novartis’s earnings also show signs that the company is reducing its dependence on a single flagship drug.
Sales of the breast cancer treatment Kisqali increased by 44% to $1.7 billion, while sales of the chronic myeloid leukemia treatment Scemblix nearly doubled to $562 million. Sales of the psoriasis treatment Cosentyx also rose by 12% to $1.82 billion, including approximately $100 million attributable to a special factor in the United States.
What is particularly noteworthy is that Novartis is not attempting to offset the decline in Entresto with a single replacement blockbuster. Instead, it is absorbing the impact through the growth of several different products.
For pharmaceutical companies, a strategy that relies heavily on a single blockbuster can produce high profitability when successful. However, it also creates a risk that the business will be severely disrupted by patent expiration, safety concerns, or the emergence of competing therapies. It is therefore important to develop multiple products with different indications and mechanisms of action and to diversify revenue sources.
These results suggest that Novartis is attempting to transition from an Entresto-centered revenue structure to a portfolio-based model built around a combination of products such as Kisqali, Scemblix, and Cosentyx.
Cost Reductions Supported the Profit Beat
Nevertheless, the growth of newer medicines alone does not fully explain why operating profit exceeded market expectations.
Novartis’s core selling, general, and administrative expenses totaled $3.24 billion, down 6% year on year. Productivity improvements and tighter control of operating expenses appear to have softened the effect of Entresto’s sharp decline on profits.
Barclays also identified operating-expense restraint as the principal reason why profit exceeded expectations.
This is an important point when evaluating the strength of the latest results. An increase in profit driven by sales growth has different implications for long-term sustainability from maintaining profit by reducing expenditure.
Cost reductions are an effective response to patent expiration. However, if a company cuts research and development spending or reduces the commercial infrastructure needed to support new medicines, it may sacrifice future growth opportunities. Pharmaceutical companies must therefore make the difficult management decision of protecting short-term profitability while continuing to invest in the next generation of products.
Novartis’s decision to maintain its full-year forecast of a low-single-digit decline in core operating profit on a constant-currency basis should also be viewed cautiously. Cost controls produced visible benefits during the first half of the year, but spending on research and development, marketing, and other activities may increase during the second half.
The Next Focus Is the Pipeline That Could Support Growth in the 2030s
Investors are looking beyond the current earnings figures to the clinical-trial results for pipeline candidates pelacarsen, remibrutinib, and pelacarsen’s fellow late-stage candidate, deldesiran.
These drug candidates are estimated to have combined peak annual sales potential of approximately $10 billion and are expected to play an important role in determining Novartis’s growth beyond 2030.
Even products that are currently growing, such as Cosentyx and Kisqali, will eventually lose patent protection. In other words, merely replacing declining Entresto sales with Kisqali and other existing growth products would only postpone the underlying problem. Novartis must bring the next generation of products to market before its current growth drivers mature.
However, sales forecasts for pipeline drugs involve considerable uncertainty. In addition to the possibility that clinical trials may fail to produce the expected results, actual sales will be influenced by numerous factors, including regulatory review, competing therapies, drug pricing, insurance reimbursement, and adoption by physicians and patients.
The prospect of $10 billion in combined peak sales is attractive, but it should not be regarded as guaranteed future revenue. Rather, it represents an expected value that can be realized only if the company successfully overcomes multiple development and commercialization risks.
Pharmaceutical Patent Strategy Must Shift from “Protection” to “Generational Transition”
Patent strategy in the pharmaceutical industry cannot be completed simply by protecting one promising compound for as long as possible.
In addition to compound patents, companies may be able to maintain a product’s competitiveness for a certain period by building a portfolio of surrounding patents covering formulations, dosage regimens, indications, combination therapies, manufacturing methods, and other aspects. Patent protection, however, cannot be extended indefinitely.
Ultimately, a pharmaceutical company must develop its next product while its existing products remain protected and then shift the center of its earnings from one generation to the next without interruption. In this sense, a pharmaceutical company’s intellectual-property strategy is not merely an effort to extend a period of exclusivity. It is the design of a continuous process of product succession across the entire research and development pipeline.
Novartis’s latest results simultaneously reflect four elements: the sharp revenue decline caused by the expiration of Entresto’s patents, expanding sales of newer medicines, the protection of profits through cost reductions, and expectations for the next generation of pipeline candidates.
Can Novartis Overcome the Patent Cliff?
In the second quarter, Novartis suffered a major blow from the halving of Entresto sales. Nevertheless, growth in Kisqali and Scemblix, together with disciplined cost management, enabled the company to generate profit above market expectations.
This indicates that the company’s response to patent expiration is producing some results. However, because the profit outperformance was supported by expense restraint, it is too early to conclude from this quarter alone that Novartis has returned to a sustainable long-term growth trajectory.
Attention will now shift to whether the company’s growing products can continue to offset the decline in Entresto and whether its pipeline candidates can develop into new sources of revenue for the 2030s.
The challenge facing Novartis is not simply a decline in sales of one product. It is the continuous generational transition unique to the pharmaceutical industry: shifting the center of revenue from today’s flagship medicine to the next one, and then to the candidates that will follow.
The latest results suggest that Novartis has begun building a bridge across the patent cliff. Whether that bridge will extend into the 2030s will depend on the clinical data yet to be released and the company’s ability to commercialize its next generation of medicines.