Earnings Call Transcript - NVS Q4 2023

Operator, Operator

Good morning, and good afternoon, and welcome to the Novartis Q4 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. Please limit yourselves to one question and return to the queue for any follow-up. 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, Global Head of Investor Relations

Thank you very much, and good morning, and good afternoon, everybody. Thank you again for listening to our full year results and Q4 results. The information presented today contains forward-looking statements that involve known and unknown risks, uncertainties, and other factors. These may cause the 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 and its most recent quarterly results on Form 6-K that respectively were filed with and furnished to the U.S. Securities and Exchange Commission. And with that, I'll hand it across to Vas.

Vas Narasimhan, CEO

Thank you, Samir, and thanks everyone for joining today's call. I know it's a busy day with many companies reporting, but we hope to provide you with some insights into our Q4 2023 results and also some perspectives on the outlook for Novartis in 2024 and beyond. As you saw in our earnings release this morning, we delivered a strong full year performance with margin expansion and strong innovation momentum, with 10 positive Phase III readouts over the course of 2023. As a reminder, our full year guidance at the start of the year was quite a bit lower than where we ended up, and we had multiple earnings upgrades over the course of the year. Q4 sales were up 10%. Core operating income was up 13%. And on the full year, we were up 10% on sales and core operating income was up 18%, all in constant currencies. We also had the successful spin-off of Sandoz as a significant value-creating event for Novartis and our shareholders. We provided our updated 2024 guidance, where we expect to grow in the mid-single digits, and core operating income is expected to grow in the high single digits. We've chosen to be prudent with this guidance at this point in time. Looking to our midterm guidance, we've extended our midterm guidance of 5% constant currency CAGR growth from 2023 to 2028 and continue to hold to our core operating income margin guidance of 40% plus by 2027. This year was a critical year for the company, because we completed the transformation of Novartis, laying a strong foundation for our future growth. Since 2014, we have spun off both Alcon and Sandoz in shareholder-friendly ways. We have exited our OTC stake, also in a shareholder-friendly approach, creating a new OTC company with GSK. We notably exited our Roche stake, completing a $15 billion share buyback and continuing another $15 billion share buyback which is ongoing currently and we expect to complete by mid-2025. That leaves us as a pure play innovative medicines company with a margin of 36% on its way to 40% plus. Strong free cash flow and a strong innovation engine positions us well for the long run. When looking at Q4, we observed significant underlying growth among our key growth drivers, which overall grew 40% this quarter. We expect this growth rate to continue, giving us confidence that we can grow in the mid-single digits in the coming years. Entresto delivered 31% growth with sales reaching $6 billion, and we are well on track to reach our peak sales goal of $7 billion plus. This growth was seen both in the U.S. and ex-U.S. geographies. We continue to reach record highs on our weekly TRX, with constant currency growth of 27% and 26% in the U.S. and ex-U.S. China and Japan also contributed strongly with their ongoing hypertension launches. We maintain our guidance that lack of exclusive (LOE) would not occur until 2025 and our EU regulatory data protection extends to November 2026. Cosentyx reached $5 billion in sales in 2023, expecting at least mid to high single-digit growth in 2024, proceeding towards our $7 billion peak sales goal. We witnessed 17% growth in the U.S. and 26% outside the U.S. Kesimpta doubled its sales in the full year to $2.2 billion. We remain on track to reach our $4 billion peak sales guidance. Strong growth is being seen in the U.S., alongside increasing growth in Europe and ex-U.S. markets. Kisqali sales reached $2.1 billion in the setting of metastatic breast cancer, and we maintain our $4 billion peak sales guidance in this space alone. Furthermore, regarding the metastatic setting, our median overall survival demonstrated across pivotal trials supports our growth in this domain. Our product Pluvicto reached near blockbuster sales at $980 million for the full year, where we expect robust growth going into 2024 with improvements in our supply situation and expanding treatment demographics. Scemblix had a strong year, achieving $125 million in Q4 2023, where we've seen leading third-line market share. We are excited about upcoming submissions and presentations for Scemblix, which will confirm its potential as a multibillion-dollar medicine for Novartis. Leqvio continued to show steady expansion, delivering $123 million in the quarter, with positive growth signals in both the U.S. and international markets. Fabhalta is showing positive early launch signals. We do expect a modest ramp for this brand, given the competitive dynamics within the PNH market. As noted, we had 10 positive Phase III readouts with significant sales potential throughout 2023. A lot of this data will be presented in 2024. Looking ahead, we have confidence in a steady stream of innovation to drive the company's growth beyond 2028 with a number of exciting assets in our pipeline. We signed 15 strategic deals, exits, and acquisitions totaling over $6 billion. Our M&A remains focused on bolt-on acquisitions in the sub-$5 billion space. We are extending our midterm guidance, now looking at a 5% CAGR growth from 2023 to 2028, which reflects strong momentum. ESG is very much part of our strategy, and we plan to continue leading in environmental sustainability and ethical standards.

Harry Kirsch, CFO

Hello, Matthew. Good to have you around. I think quarter four came in exactly as we forecasted for the year and outlined our full year guidance in October. We increased our function costs in the full year by 3% in constant currencies with a growth of 10% on the top line. Quarter four of 2022 had very low spending due to restructuring, but our current quarter four spending consistent with our usual pattern. In 2023, top line growth was 10%, and core operating income grew 18%, leading to a 2.4% point margin increase. Core EPS was $6.47 and full year cash flow exceeded $13 billion. We plan to maintain a consistent growing annual dividend. Our recent share buyback of up to $15 billion announced in July 2023 is still in play, with intentions to complete by the end of 2025. For 2024, our full year guidance foresees sales growing in the mid-single digits and core operating income growing in the high single digits. However, this guidance is prudent, assuming a higher generic impact in 2024.

Vas Narasimhan, CEO

In conclusion, we had a strong 2023 with multiple guidance increases, double-digit growth for both sales and core operating income. We believe our strategy as a pure play in innovative medicines is delivering strong operational performance.

Operator, Operator

Thank you. We will now go to our first question. Your first question comes from the line of Matthew Weston from UBS. Please go ahead.

Matthew Weston, Analyst

Thank you very much. It's Matt Weston from UBS. My one question is around the growth in SG&A that we saw in Q4, and what it means for 2024 guidance. There was a significant step up in commercial spending. Vas, you mentioned in your opening remarks that you felt that 2024 guidance was prudent. Is the Q4 step up bringing forward or front loading launch spend given the exciting opportunities you have in 2024? Or is that level a good indicator of the cost acceleration we should expect for the full year? Any help, gratefully received.

Vas Narasimhan, CEO

Thanks, Matthew. I'll hand it over to Harry.

Harry Kirsch, CFO

Hello, Matthew. Good to have you around. I think quarter four came exactly in as we forecasted for the year and outlined our full year guidance in October. We increased our function costs in the full year by 3% in constant currencies with a growth of 10% on the top line. Quarter four spent is as usual seasonality of higher spent levels. We are back to that normal pattern. So you should have no worries about our cost development for 2024. Our guidance of continued margin improvement is intact due to the top line growth and productivity programs.

Matthew Weston, Analyst

Many thanks indeed.

Vas Narasimhan, CEO

Thank you Matthew. Next question operator.

Operator, Operator

Thank you. Your next question comes from the line of Andrew Baum from Citi. Please go ahead.

Andrew Baum, Analyst

Hi. I'm not sure if Dave is on the call, but someone might like to take this question relating to your cardiovascular outcome trials. I've previously asked about why not unblind the ORION-4, particularly given the pressures from the IRA and the nine years prior to price negotiation. I'd ask the same question about Horizon. Is there any possibility of either of these trials being unblinded before the publicly stated dates? Additionally, could you also opine on whether bipartisan efforts to reclassify advanced therapies for 13 years rather than nine-year exclusivity will start to move?

Vas Narasimhan, CEO

Yes, thank you, Andrew. So right now there's no plan to adjust our thought process on waiting for these studies to run to completion. I think by having a longer follow-up, we're more likely to deliver differentiated cardiovascular risk reduction in ORION-4. We're also keenly aware of the points you've raised about the IRA. There is bipartisan support for an amendment to move from 9 to 13 years for genetically targeted therapies, though I think it will still take some time given it's an election year. We're hopeful of progress on this front over the coming years. We've continued to invest in lifecycle management for our siRNA portfolio, striking deals that aim for annual dosing, alongside pursuing combinations to bolster our position ahead of the nine-year time frame. Next question, operator.

Operator, Operator

Thank you. Your next question comes from the line of Florent Cespedes from Societe Generale. Please go ahead.

Florent Cespedes, Analyst

Good afternoon. Thank you very much for taking my question. A quick one on your midterm guidance. You have updated this guidance, but now starting from a higher base than in 2023. Is there anything new versus the last update last year? Do you see new drivers helping to achieve this midterm guidance?

Vas Narasimhan, CEO

Yes, thank you, Florent. We saw strong dynamic growth for Kesimpta and Kisqali with returning demand signals for Pluvicto, which gives us confidence in brand outlook towards peak sales guidance. The approved Iptacopan and positive data across several indications enhances that view. Strong pipeline performance and inline brands provide strong momentum for our long term growth targets.

Florent Cespedes, Analyst

Thank you very much.

Vas Narasimhan, CEO

Next question operator.

Operator, Operator

Thank you. Your next question comes from the line of Graham Parry, Bank of America. Please go ahead.

Graham Parry, Analyst

Great. Thanks for taking my question. It's on Pluvicto. The Q4 number was a drop-off quarter-on-quarter. You mentioned seeing about a 50% increase in patient starts in Q3. Why did that not translate into a higher sales number in Q4? And how many treatment centers are you targeting for 2024?

Vas Narasimhan, CEO

Yes. Thanks, Graham. On Pluvicto in Q4, we saw a steady rebuild; however, we did not see the full replenishment of the patient base due to earlier supply constraints. We expect growth in new patient starts, but the holiday period had an impact. We aim to expand to 500 plus centers as supply is now unconstrained. Next question operator.

Operator, Operator

Thank you. Your next question comes from the line of John Priestner from JP Morgan. Please go ahead.

John Priestner, Analyst

Hi. Thanks very much for taking my question. The 2024 guidance includes generic impacts regarding Promacta and Tasigna. What are your thoughts on the timings of these generic entries?

Vas Narasimhan, CEO

Yes. Thanks, John. We expect three generic entries in 2024, including Promacta and Tasigna, although it's challenging to specify precise timing due to various factors. For forecasting, we're cautious and note there's uncertainty about IP defense outcomes.

Harry Kirsch, CFO

Yes. John, it’s important to defend our IP accordingly, and we'll continue to do so for Promacta, while tracking the landscape for generic entries round the clock. Our assumptions are merely for performance forecasting.

Vas Narasimhan, CEO

Next question operator.

Operator, Operator

Thank you. Your next question comes from the line of Tim Anderson, Wolfe Research. Please go ahead.

Tim Anderson, Analyst

Thank you. On Cosentyx, what is your expectation regarding pricing and market access dynamics in 2024, especially with a similar product on the market now? Are you seeing access tightening or net price erosion?

Vas Narasimhan, CEO

We're optimistic on the access environment for Cosentyx in 2024. We’ve encountered modest growth in net shifts and improved access. We do not foresee significant tightening despite the presence of biosimilars. Our strong positioning and ongoing launches lend support to stable access dynamics. Next question operator.

Operator, Operator

Thank you. Your next question comes from the line of Simon Baker, Redburn. Please go ahead.

Simon Baker, Analyst

Thank you for taking my question. What are your thoughts on the uptake for Cosentyx in HS? Some clients are suggesting it’s slower than expected. How do you project its potential uptake over the next year or so?

Vas Narasimhan, CEO

It's early days, but we have received positive feedback from clinicians. Cosentyx has an outstanding long-term safety profile, and these factors give us a good position for the launch, although we’ll need time to build awareness among patients and physicians.

Operator, Operator

Thank you. Your next question comes from the line of Kerry Holford from Berenberg. Please go ahead.

Kerry Holford, Analyst

Could you clarify, with Kisqali, when do you expect it to be eligible for price negotiation under IRA?

Vas Narasimhan, CEO

On Kisqali, we don't expect this eligibility to come into effect until closer to the end of the decade. Since the early breast cancer won’t mostly affect Medicare, we have a significant runway for this medicine in connected settings. Next question operator.

Operator, Operator

Thank you. Your next question comes from the line of Seamus Fernandez from Guggenheim Securities. Please go ahead.

Seamus Fernandez, Analyst

Could you clarify your business development strategy? Is there flexibility to pursue larger acquisitions?

Vas Narasimhan, CEO

While we evaluate a wide range of opportunities, our focus remains on smaller, bolt-on acquisitions under $5 billion, where we find the most value and differentiation.

Operator, Operator

Thank you. Your next question comes from the line of Emily Field, Barclays. Please go ahead.

Emily Field, Analyst

What is the current recruitment status for the MS trials for remibrutinib?

Vas Narasimhan, CEO

Recruitment for the MS trials is on track, and we’re looking forward to further progress while successfully navigating the competitive landscape. Next question operator.

Operator, Operator

Thank you. Your next question comes from the line of Peter Welford from Jefferies. Please go ahead.

Peter Welford, Analyst

Could you explain your cautious commentary regarding Fabhalta and Iptacopan? Does this reflect the PNH market dynamics or barriers getting the drugs in front of doctors?

Vas Narasimhan, CEO

The cautious outlook we presented reflects not only the REMS and infrastructure setups, but also the unique nature of the ultra-rare PNH market. We're striving to ensure broad doctor engagement and accessibility as we aim to increase patient starts. Thank you, Peter. Next question operator.

Operator, Operator

Thank you. Your next question comes from the line of Richard Parkes from BNP Paribas. Please go ahead.

Richard Parkes, Analyst

In relation to your cardiovascular franchise, do you have enough upcoming products to maintain healthy growth given LOEs?

Vas Narasimhan, CEO

We are confident in our cardiovascular pipeline, including multiple siRNA-based therapies and ongoing programs that will support our growth in this arena. The prospect of new products should ensure sustained growth even as LOEs approach. Next question operator.

Operator, Operator

Thank you. Your next question comes from the line of Mark Purcell from Morgan Stanley. Please go ahead.

Mark Purcell, Analyst

Can you help us understand the B-cell NBRx share dynamics for Kesimpta, especially in light of its leadership and how it compares to the U.S. share?

Vas Narasimhan, CEO

In the U.S., B-cell class share is in the mid-50s, with Kesimpta's share in the high 20s, aiming to grow further. We are also experiencing strong shares in key ex-U.S. markets. Next question operator.

Operator, Operator

Thank you. Your last question comes from the line of Stephen Scala from TD Cowen. Please go ahead.

Stephen Scala, Analyst

What happens with Entresto IRA price negotiation in 2026 when generics can launch in 2025?

Vas Narasimhan, CEO

If a generic for Entresto launches, it'll likely make the medication ineligible for price negotiation under the IRA, as per current guidelines. We will continue to strategically navigate the potential impacts.

Matthew Weston, Analyst

Thank you very much. Thanks for taking the follow-up.

Vas Narasimhan, CEO

Thank you for your participation today. We look forward to keeping you updated throughout 2024.

Operator, Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.