NVS Novartis AG

By Denise Roland 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (November 20, 2018).

Novartis AG's recent acquisition streak is pivoting the company toward new treatments that bear little resemblance to traditional drugs.

The Swiss company has spent nearly $15 billion in the past year to build its presence in cutting-edge areas of medical research, including gene therapy, or treatments that introduce new DNA into the body, and radiopharmaceuticals, which are drugs that carry radioactive particles to tumors for close-range radiotherapy.

The deals build on Novartis's early move into a new form of cancer therapy known as CAR-T, and underscore new Chief Executive Vas Narasimhan's ambition to get ahead on innovative therapies that he believes will drive significant future growth.

"We thought if we could gain a leadership position it'd be harder for competition to take us on," Dr. Narasimhan, who led drug development at Novartis before becoming CEO, said in an interview. The 42-year-old Harvard-trained doctor said at a recent investor event that he hopes such therapies will generate a fifth of Novartis's revenue within five years. Currently, they are a tiny fraction of its $49 billion in yearly sales.

The new treatments pose challenges. The jury is still out on how gene therapies, which potentially offer one-time cures for previously untreatable diseases, should be priced. Radiopharmaceuticals are logistically challenging to deliver because of the short half-life of the radioactive component.

Dr. Narasimhan acknowledged at the event that risks were higher than with conventional drugs but added that "there's a risk in not pushing into new technologies and new areas of science to find breakthrough medicines."

In October last year, Novartis paid $3.9 billion for Advanced Accelerator Applications, which makes a radiopharmaceutical for a rare form of gut and pancreas cancer. Last month, it said it would pay $2.1 billion for radiopharmaceutical specialist Endocyte Inc., which targets prostate cancer.

In April, it bought AveXis Inc., which is developing a gene therapy aimed at a fatal infant muscle-wasting disease, for $8.7 billion. Novartis also struck a licensing deal in January giving it the right to sell Spark Therapeutic Inc.'s gene therapy for a rare eye disorder in Europe and other markets outside the U.S.

None of the new acquisitions are likely to generate a fast return for Novartis. The therapy by Endocyte is still under development. Meanwhile, the AveXis gene therapy is in the hands of regulators, with a decision expected in the first half of next year. AAA's radiopharmaceutical and Spark's gene therapy both target rare conditions, with modest potential markets.

But they do position Novartis as a potential leader in these areas: Today, just one gene therapy, Spark's Luxturna, and a handful of radiopharmaceutical treatments, one of them Novartis's, are available in the U.S.

Gene therapy is a fast-expanding area, with around 180 clinical trials under way in the U.S. alone, according to Datamonitor Healthcare. Novartis was the first to get U.S. approval for a high-tech therapy known as CAR-T, where disease-fighting white blood cells are removed from a patient, genetically modified to enhance their cancer-fighting ability, and reinfused into the body. Trials show its product, called Kymriah, improves survival rates for certain forms of hard-to-treat blood cancer and typically only needs to be given once.

"CAR-T made us start to think of things differently," said Liz Barrett, head of Novartis Oncology. "Do you want to be in the world of introducing incrementally better medicines" when "payers have a much higher bar for what's reimbursed?"

Still, Novartis's experience with Kymriah underscores the challenges associated with selling expensive medicines at a time when drug pricing is attracting political scrutiny. Its price tag of up to $475,000 per patient has attracted criticism from patient groups. Novartis says its pricing is responsible, pointing to independent studies that show Kymriah could command a price of $600,000 to $750,000.

The high cost of Kymriah and the other currently available CAR-T, Gilead Sciences Inc.'s Yescarta, is putting pressure on hospitals, which in some cases lose money by offering the therapy, says Joanna Hiatt Kim, vice president for payment policy at the American Hospital Association. For now, many hospitals are absorbing the cost because the number of patients is small, said Ms. Kim. But as more such therapies become available, price is likely to become a bigger sticking point.

"If you're losing $200,000 to $300,000 per case, there's simply so many times you can do that," she said.

Novartis's move into gene therapy is likely to bring more pricing controversy. The only gene therapy currently available in the U.S. -- Spark's Luxturna -- costs $850,000 per patient, raising questions about how health systems will be able to pay for such treatments as they become more common.

"The economics of developing a drug are becoming much more challenging," said Ed Schoonveld, pricing and market access expert at health care consulting firm ZS Associates. Existing payment models aren't set up to handle the high prices of the one-time cures that gene therapies typically provide, he said.

Novartis says its leading gene therapy would be cost-effective at $4 million a patient. While that would mean a high upfront cost, the company says it would be in line with less expensive medicines that need to be taken repeatedly. Novartis has yet to decide pricing, and is conscious of potential push back.

"The media will put our one-day sticker price in the headline without educating society that this is actually great value," Dr. Narasimhan said. "We're giving a lifetime benefit."

To pre-empt pricing issues, Novartis is talking with some insurers about different ways to pay, such as in installments or depending on how well patients respond to therapy.

Still, such models also throw up problems. Novartis already offers an outcome-based pricing option for Kymriah where it only gets paid if patients are doing well 30 days after treatment. But hospitals have questioned whether that time frame is appropriate for assessing success, according to the AHA's Ms. Kim. The merit of paying in installments is also challenged when a patient dies before the treatment has been paid off.

Radiopharmaceuticals don't present the same pricing difficulties. Lutathera, at $190,000 for a standard four-dose course, is more in line with other new cancer drugs, according to Novartis's Ms. Barrett.

But they are complex to produce. The radioactive component only lasts about 72 hours, meaning they need to be made on demand and sent quickly to the hospital that needs them.

Ms. Barrett said Lutathera's early commercial success -- it went on sale in July -- was in part due to the company "working very closely with institutions in making the logistics as easy as possible."

While Novartis's strategy involves taking on some risk, its first-mover role could play to its advantage, according to Dan Mahony, a fund manager at Polar Capital LLC, which holds Novartis stock. "That initial foray doesn't make them much money," he said, "but it teaches them about how the market will work."

Write to Denise Roland at Denise.Roland@wsj.com

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November 20, 2018 02:47 ET (07:47 GMT)

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