What’s wrong with Novartis? Actually nothing.

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The News:

Novartis AG (Basel CHE) has been the subject of widespread and lingering chatter to the effect that its stature among the Big Pharma league players has diminished, and investors are increasingly concerned about the future. Is this anxiety misplaced?

@Novartis investors are increasingly concerned, but is this anxiety misplaced? Click To Tweet

Perhaps ask Pfizer Inc. (NYC), whose targeted cancer treatment Xalkori will now have to step aside and cede some room in the treatment of non-small cell lung cancer (NSCLC).

Novartis’s (Basel CHE) Zykadia has just received FDA clearance to compete for previously untreated NSCLC patients who’ve tested positive for the anaplastic lymphoma kinase (ALK) gene mutation, giving Pfizer’s Xalkori its first competition in that patient category.

The US agency based the approval on Phase 3 data showing Zykadia could more than double progression-free survival to 16.6 months compared with standard first-line pemetrexed-platinum chemo.

Previously, the med had been sanctioned only in patients who had already failed on Xalkori.

It’s a lift for Novartis, says FiercePharma, as the Swiss drug giant is working to boost Zykadia beyond the $91 million it generated in 2016. That take comprised just a minute fraction of the colossal $12.79 billion Novartis’s oncology unit posted for the year.

Now, the pharma titan will have access to a larger proportion of the ALK-positive population–which makes up 3% to 7% of NSCLC patients. And it’s not just a larger number of patients at stake: That first-line group tends to remain on therapy longer.

Crucially, however, the Novartis approval will put pressure on another med besides Xalkori–Roche Holding AG’s rival Alecensa. That Swiss drugmaker’s contender is also aiming for a first-line go-ahead after picking up a breakthrough designation from the FDA last October.

And Novartis isn’t planning to stop there as far as regulatory expansion goes, says FiercePharma. Earlier this year, Zykadia picked up an FDA breakthrough designation for front-line treatment of ALK-positive lung cancer patients with brain metastases.

Steve’s Take:

What a splendid way to begin the week, if you’re Novartis that is. Earlier-than-expected approval for its NSCLC med and renewed speculation on the Street about possible plans for a major acquisition–perhaps even a mega-merger. Sounds downright marvelous.

So why the prevailing sentiment among markets here and abroad that there’s something truly wrong with Novartis?

Well, nine consecutive quarters of falling sales will definitely lead to serious head scratching among analysts and investors who reason: with the stock still trading at a premium to 5-years’ average historical P/E, why either jump in or by more?

So how did all this happen?

Novartis reported better than expected results for Entresto and Cosentyx in the first quarter of 2017 compared to Street expectations. Entresto sales were $84 million, 5% above consensus, driven by some improvement of the formulary coverage in the US and EU, while Cosentyx sales were $410 million, 4% above consensus, despite competition by Eli Lilly & Co.’s Taltz in the US.

Then the latest quarterly performance for its Alcon unit has been in-line with street expectations and better than some numbers, according to Seeking Alpha (SA). First-quarter sales were up 1% YoY but EBIT margin was only 13%, 400 bps down YoY. Thus, even if these numbers have been in line with consensus, SA doesn’t see any tangible signs of improvement of the growth trajectory of Alcon. The top-line growth acceleration at Alcon has failed to materialize, with sales growing only 1%.

On Sandoz, SA said:

Novartis downgraded the guidance for 2017 sales growth at Sandoz (from low single digit growth to in-line versus 2016), to take into account the delay of Glatopa 40 mg (Copaxone’s generic). In addition to that, SA says, “the performance of Sandoz has been bad in Q1/2017, with a 9% miss compared to consensus related to operating income (EBIT margin down 100 bps YoY).

Then there were key staff defections reported by EndPoints back in March, when Seattle Genetics announced that Karen Walker would be joining the company as vice president of Global Quality in mid-April. She was formerly vice president Global Head Cell and Gene Therapies Technical Development and Manufacturing at Novartis.

Particularly notable was that Walker was one of several recent high-profile defections from Novartis’s CAR-T operations. Walker was one of three senior executives who headed Novartis’s CAR-T initiative after . . .

“a bruising restructuring over the summer in which the unit was chopped up and absorbed inside a huge R&D organization,” John Carroll at EndPoints News said.

The other two were Samuele Butera, who held the commercial/business role, and David Lebwohl, who oversaw clinical operations. Carroll put it succinctly at the time: “…bleeding talent the way Novartis has is indicative of deep problems.”

And then there were the more recent layoffs, following the defections.

Novartis last week confirmed that it would chop 250 jobs from other operations in the US. The company filed a WARN notice in New Jersey indicating that 204 jobs would be trimmed from its East Hanover operations effective July 28. The company confirmed the cuts, saying another 45 or so jobs will be eliminated from various US locations including Fort Worth, TX, and Cambridge, MA.

The week prior, the company said it would add about 350 jobs in Switzerland, mostly in “innovative biologics manufacturing” and development–even as it intended to eliminate 500 slots in traditional manufacturing, coordination and development operations over the next year and a half.

What’s missing in all this “bad” news?

Seemingly absent from the recent blather from doomsday alarmists is the fact that CEO Joe Jimenez has quietly primed the market for a potential series of asset sales to do small deals to fill the gaps.

A series of such asset deals could put $50 billion cash in the hands of the recently minted California-born CEO, according to FiercePharma. While he has said he is looking for manageable deals, the company’s pharma portfolio has gaping holes in it, and some analysts are getting anxious the Swiss pharma might squander its opportunity as it did when it bought eye-care specialist Alcon, one of the operations Jimenez might unload.

A sale of Alcon could bring in $25 billion to $35 billion. Novartis paid $60 billion for it seven years ago.

Another $10 billion might come from Novartis selling its stake in its consumer health JV with GlaxoSmithKline. It has only until next March to decide whether to exercise an option for that 36.5% portion, Reuters noted.

Finally, Novartis has a stake in Swiss neighbor Roche–which Jimenez’s predecessor Daniel Vasella bought–that is worth an estimated $14 billion. The company has said it might sell that to do deals.

Jimenez has said he is on the hunt for smaller acquisitions, but as a leader in cancer medicine with no immuno-oncology drug on the market, some investors have worried Novartis might take a run at Bristol-Myers Squibb or AstraZeneca PLC. BMS’s Opdivo is one of the leaders in the immuno-oncology market, and AstraZeneca just this month won FDA approval for its checkpoint inhibitor Imfinzi in bladder cancer.

While Stephen Anness of Invesco Perpetual is all for Novartis selling the assets, he is a bit uneasy about what it would do with pockets stuffed with cash.

“I would be very cautious about selling stakes…in things to raise a war chest to go and do a massive deal, only for that deal to go and be another poor deal,” Anness said to Reuters.

Leerink Partners’ Seamus Fernandez earlier this year wrote that Opdivo, Yervoy and the BMS’ burgeoning immuno-oncology pipeline were “a high-value industry asset,” but with BMS’ shares depressed on Opdivo’s trip up, the NYC-based icon could make a enticing target.

Finally, John Carroll at EndPoints reports that the cen­ter ring at the American Society of Clinical Oncology (ASCO) meeting this week­end will fea­ture CTL019, No­var­tis’s lead CAR-T candidate that ap­pears to be headed to a land­mark ap­proval in a mat­ter of months.

But the pharma giant will also be putting the spot­light on a next generation CAR-T ther­apy–CTL119–with a, “com­pelling glimpse at its promise of im­prov­ing reengi­neered cells’ per­sis­tence, amping up their ther­a­peu­tic po­ten­tial.”

Massively summarized, after three months, 8 of 9 evalu­able pa­tients in a small study of CTL019 added to Imbruvica were free of any sign of can­cer in their bone mar­row. The 9th had a par­tial re­sponse.

“By fo­cus­ing on new con­structs and new deals, No­var­tis execs are sig­nal­ing that they plan to re­main a dom­i­nant player. And CTL119 is part of that case,” says Carroll.

Bottom Line:

Steve's Take: The problems at @Novartis is nothing that a big deal at the right price won't fix Click To Tweet

The un­der­ly­ing mes­sage: No­var­tis is plan­ning to stay a leader long after CTL019 makes drug his­tory. And what if that takes a mega-merger with BMS or AZN? With a cash pile of $50 billion in his pocket, I wouldn’t put it past CEO Jimenez.

What’s wrong with Novartis? Nothing its ascending role in high-value cancer treatments and a big deal at the right price and under the right terms won’t erase in a hurry.