NVS Amends sNDA; Completes Merger

Novartis (NVS - Snapshot Report) recently announced amendment to its supplemental new drug application (sNDA) for Afinitor tablets. Afinitor is currently marketed for the treatment of advanced renal cell carcinoma (RCC; kidney cancer) after treatment with an anti-VEGF therapy like Pfizer’s (PFE - Analyst Report) Avastin, Sutent or Onyx Pharmaceuticals/Bayer’s (ONXX - Analyst Report/BAYRY - Analyst Report) Nexavar. Afinitor is also marketed for the treatment of subependymal giant cell astrocytomas (SEGA), a benign brain tumor associated with tuberous sclerosis (TS).

Novartis was seeking FDA approval for the treatment of patients with advanced neuroendocrine tumors (NET) of gastrointestinal, lung or pancreatic origin from the US Food and Drug Administration (FDA). The amendment is now limited only to treat patients with advanced NET of pancreatic origin. The amendment was based on a feedback from the FDA.

The application is due to be reviewed by an advisory panel to the FDA on April 12, 2011. The amendment by Novartis suggests that Afinitor may not be approved for the treatment of patients with advanced neuroendocrine tumors (NET) of gastrointestinal and lung origin.

In another development, Novartis announced an agreement with Meda to sell global rights to manufacture market and commercialize Elidel (pimecrolimus) cream 1% for an upfront payment of $420 million in cash. Elidel is used to treat mild to moderate atopic dermatitis. The objective behind the deal is to focus on commercialization of new and core products.

The deal is expected to close in the second quarter of 2011, following which Novartis will make the upfront payment. Within 3 years of closing the deal, Meda will take over the global manufacturing of Elidel. Of the $406 million gain from the transaction, $345 million will be recognized by the end of 2011. The remainder will be recognized in 2012 and 2013.

Meanwhile, Novartis also announced that it has completed the merger with Alcon Inc. (ACL). Per the terms of the merger agreement, Alcon shareholders will receive a total consideration of $168 per share in the form of 2.9228 Novartis shares or American Depositary Shares (ADS) along with a cash payment of $8.20 for each share.

Alcon will become the second largest division within Novartis following the completion of the merger. Moreover, Novartis’ CIBA Vision, select eye care medicines and an Alcon business wing will be integrated into Alcon, forming an organization, which will contribute more than $8.7 billion in sales (over 70%) to the eye care segment.

The acquisition of Alcon is expected to help Novartis diversify and make up for revenues, which is lost to generic competition. Moreover, it will help the company strengthen its position in the eye care market, which presents significant growth potential due to the unmet needs of an ageing population.

Our Recommendation

Currently, we have a Neutral recommendation on Novartis, which is supported by a Zacks #3 Rank (short term “Hold” rating). We are pleased with Novartis’ wide range of products and its efforts to diversify further as is evident by the acquisition of Alcon. However, we prefer to remain on the sidelines due to the imminent patent cliff faced by Novartis.

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