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Novartis says nuclear and other new technologies will drive 20% of sales by 2023


IFRS 9 Impairment How It Impacts Your Corporation And How We Can Help

The Market Intelligence Platform

Novartis says nuclear and other new technologies will drive 20% of sales by 2023

Novartis AG CEO Vas Narasimhan is staking his reputation on a pledge to use nuclear medicine and other pioneering technologies to drive some 20% of the Swiss pharmaceutical company's revenue within the next five years.

Narasimhan hopes to mine a rich seam of potential multibillion-dollar drugs across six different therapeutic areas, ranging from oncology to respiratory and neuroscience, by developing platforms for gene therapy, cell therapy and a type of nuclear medicine known as radioligand therapy.

All three are new approaches that Novartis is pursuing as part of a transformation of its business model under Narasimhan, who took over as CEO barely a year ago after 13 years with the Swiss pharmaceutical group, most recently as head of research and development. While his predecessor Joe Jimenez had a background in consumer goods — working in senior positions at H.J. Heinz before taking over Novartis' consumer business — Narasimhan is a Harvard-trained doctor who also worked at McKinsey & Co.

With 60 regulatory submissions expected before 2021 and a pipeline that includes 26 potential blockbusters, Narasimhan has moved rapidly to focus Novartis back on the science — and he intends to use these new technologies, alongside greater attention to data and analytics, as a platform to pull ahead of his competitors in the race to find new medicines.

"They are higher risk than continuing to focus on small molecules and biologics," the CEO told a small group of journalists gathered in London at a recent research and development update. "But I also think there's a risk in not pushing into new technologies and new areas of science to find breakthrough medicines."

He conceptualized the matrix of research platforms and therapeutic areas in terms of a game board that the company would use to make breakthroughs in medicine.

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With the acquisition in late 2017 of France's CERN spin-out Advanced Accelerator Applications SA, Novartis gained the radioligand technology, which is being deployed against certain types of gastrointestinal cancers, and more recently acquired Endocyte Inc. to build on the nuclear medicine franchise. Molecular nuclear medicine uses tiny amounts of radiopharmaceuticals, which are injected into the body and accumulate in specific organs where lesions or tumors are found. It has potential application in neurology, cardiology and orthopedics, although Novartis is using it only in oncology.

The AveXis Inc. acquisition on April 9 brought in a gene therapy platform, as well as a lead product AVXS-101, for spinal muscular atrophy type 1 with blockbuster potential. Novartis had already signaled an interest in gene therapy by licensing the rights to Spark Therapeutics Inc.'s Luxturna for a rare type of eye disease, outside of the U.S. in January 2018. Gene therapy is an experimental technique in which genes treat or prevent disease by being injected into cells.

The cell therapy platform is rooted in Novartis' own development of Kymriah, the first ever chimeric antigen receptor T cell medicine to be approved by U.S. regulators. CAR-T cell therapy harnesses the patients' own immune system to kill cancer cells, in a complex process that involves collecting some of the patient's white blood cells through a specialized blood filtration system and re-engineering them before infusing the patient once again.

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Vas Narasimhan

Looking ahead, Narasimhan's game board could be shaken up by exiting therapeutic areas that Novartis has had a presence in, and seeking breakthrough medicines in new fields. He signaled a potentially broader presence in diseases of the liver, where the Basel, Switzerland-based group has already indicated an increasing interest in fatty liver disease by signing up joint ventures with Allergan PLC and Pfizer Inc., and in kidney disease. Also known as NASH, the market for the condition is estimated to be worth $18.3 billion by 2026, according to a recent estimate by GlobalData.

"We're asking ourselves the question: Over time do we need to pivot to new areas and exit older areas?"

Novartis been more rigorous with its early-stage research, based at the Cambridge, Massachusetts-based Novartis Institutes for BioMedical Research. Jay Bradner, who has overseen NIBR since 2015, has accelerated the pace of out-licensing on a number of projects that do not meet a more stringent time threshold, according to Narasimhan. Bradner co-founded five companies from his laboratory at the Dana-Farber Cancer Institute, where he was a physician for a decade, before joining Novartis.

Alongside the appointment of a new head of R&D in John Tsai, the imminent spin-out of its Alcon eye care division in January 2019, and selling the consumer business back to GlaxoSmithKline PLC, all the vital signs at Novartis point to a company that does not want to be distracted from pursuing the science.

"The bets we make today pay off seven to 10 years from now and we have to be completely aligned as a leadership team behind that," the CEO said.

Reiterated commitment to Sandoz

Narasimhan nevertheless remains committed to keeping the generics business for the moment, although analysts at Cowen have questioned whether he might be preparing Sandoz for a similar spinoff to Alcon. Noting that such a move is at least 12 to 18 months away, given the time required to compile independent financial data, Cowen's Steve Scala, who has an "outperform" rating on the company, also highlighted complicating factors including some shared manufacturing for both Novartis and Sandoz.

"Novartis is working to give Sandoz more freedom to operate autonomously within the group to ensure it can compete sustainably in the global off-patent segment," company spokesman Sreejit Mohan told S&P Global Market Intelligence. "Our goal is to transform Sandoz into a focused and agile global leader in differentiated off-patented medicines."

Tim Anderson, analyst at Wolfe Research with a "market weight" rating on Novartis, said the R&D update reaffirmed his positive view of the company, noting that the group's core R&D abilities are solid and that it is a catalyst-rich pipeline story in the near-term.

"I think a lot of the interest is being driven by the pharma world going through its own technology revolution at the moment," said Nooman Haque, an investment banker to the life sciences industry at Silicon Valley Bank. "I do think there's a lot of promise but is it going to be as transformative to those big pharma models?

"For the early stage, no doubt, but how quickly will pharma be to adopt it? I see a parallel in the early days of the internet."

Credit Analysis
IFRS 9 Impairment How It Impacts Your Corporation And How We Can Help

IFRS 9 is a reporting standard for financial instruments that replaces IAS39 (the previous incurred loss standard) with the introduction of provisions for expected credit losses (ECLs) on all financial assets, such as those held to collect contractual cash flows, or held with the possibility of being sold.

The date for adoption was January 1, 2018 and is mandatory for public non-financial corporations (and financial institutions) across a number of jurisdictions outside the United States, including many European countries.

The two key changes introduced by the IFRS 9 accounting standard are:

  • Calculation and provisions must be performed on all affected financial assets, not just the impaired ones, as per the standard it replaces
  • New expected credit loss calculations

Additional challenges will be presented when making assessments for low default asset classes, and companies may find it difficult to access models and sufficient data history.

Impact for non-financial corporations

Non-financial corporations will have some material exposure to many of the financial assets that are defined under IFRS 9. These include investment portfolios, intercompany loans, lease receivables, contract assets, and trade receivables, as illustrated below and further explained in our webinar on IFRS 9 for non-financial corporates.

This, together with the need to assess losses on performing and non-performing assets, might have a material impact on the profit and loss (P&L) of such companies.

ECL calculations under IFRS 9

The IFRS 9 accounting standard introduces new expected credit loss (ECL) calculations that require more data and new models. The key requirements are:

  • Significant increase in credit risk (SICR): Expected loss needs to be assessed at each reporting period to identify a SICR since initial recognition
  • Explicit macro-economic forecasts need to be considered using factors such as the relevant GDP growth, unemployment rate, and stock market index growth figures
  • Credit risk metrics such as probability of default (PD), credit rating, credit score, and loss given default (LGD) need to be adjusted to point in time (PiT), versus through the cycle (TTC)
  • Calculations need to be extended over the lifetime of the assets for underperforming exposures, or in standardized calculations

General versus simplified approach

When performing ECL calculations for trade receivables, the company can choose to take a general or simplified approach (the company is presented with a choice between the two depending on the type of exposure).

  • The general approach uses the 12-month ECL calculation for performing assets (Stage 1 assets) and lifetime calculation for the assets whose creditworthiness has deteriorated since recognition (Stage 2 assets)
  • The simplified approach uses the lifetime ECL calculation for all performing and non-performing assets

The simplified approach can have a bigger impact on P&L expense, as all losses are calculated over the lifetime of the asset, while the general approach can have more impact on P&L volatility, as assets might move between stages incurring 12-month and lifetime calculations.

How S&P Global Market Intelligence can help

A best practice approach used by many financial institutions, which non-financial corporations can also use to comply with the new provision, is to use the existing TTC metrics and convert them into PiT metrics to reflect the current credit cycle, as well as include the required future macroeconomic considerations.

S&P Global Market Intelligence has developed models and tools to help your business undertake the relevant ECL calculations. These models can also be used to assess the creditworthiness of your counterparties and recovery of your exposure in the context of your core business process such as customer credit, supply chain risk, vendor management, and selection and transfer pricing.

The calculation method involves four steps:

  1. We calculate the TTC metric, i.e. the S&P Global Market Intelligence Fundamental PD, CreditModel™ score, for the concerned entity.
  2. We apply our macro-economic model, which weights user defined macro-economic scenarios to produce weighted average forecasted PDs.
  3. We apply a credit cycle adjustment, which converts the TTC risk metric into a PiT PD, leveraging the difference between observed default rates from S&P Global Ratings’ rated universe over last year versus over the past 30+ years.
  4. In addition, as a best practice, we also offer the option to incorporate market-based forward looking information. This is done by further adjusting the PD with the analysis of PD Market Signals country and industry benchmark trends over the past three months versus the past year.

In addition to this quantitative approach available on the Credit Analytics platform, we also offer scorecards that cover low default asset classes for PD, LGD, and point in time adjustments.

Learn More About Credit Analysis
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