On October 27, 2020 Exact Sciences Corp. (Nasdaq: EXAS) reported that the company generated revenue of $408.4 million for the third quarter ended September 30, 2020, compared to $218.8 million for the same period of 2019 (Press release, Exact Sciences, OCT 27, 2020, View Source [SID1234569105]).

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"The Exact Sciences team delivered a strong quarter and made significant progress towards our vision," said Kevin Conroy, Chairman and CEO. "We’re confident in the long-term growth outlook for both Cologuard and Oncotype DX and are excited about our extensive pipeline of liquid biopsy tests. Our team and the depth and breadth of our capabilities position us at the forefront of advanced cancer diagnostics."

Third Quarter 2020 Financial Results

For the three-month period ended September 30, 2020, as compared to the same period of 2019 (where applicable):

Total revenue was $408.4 million, compared to $218.8 million
Screening revenue was $214.6 million, a decrease of 2 percent
Precision Oncology revenue was $91.6 million
COVID-19 testing revenue was $102.2 million
Gross margin including amortization of acquired intangible assets was 72 percent, and non-GAAP gross margin excluding amortization of acquired intangible assets was 77 percent
Intangible asset impairment of $209.7 million was primarily related to a one-time impairment of certain in-process research and development assets related to an in vitro diagnostic version of Oncotype DX
Net loss was $219.9 million, or $1.46 per share, compared to a net loss of $40.5 million, or $0.31 per share
EBITDA was $(160.2) million and adjusted EBITDA was $94.5 million
Non-cash interest expense related to convertible debt was $20.6 million, compared to $11.0 million
Cash, cash equivalents, and marketable securities were $1.3 billion at the end of the quarter
Screening includes laboratory service revenue from Cologuard and revenue from Biomatrica products. Precision Oncology includes laboratory service revenue from global Oncotype DX products.

Non-GAAP Disclosure
In addition to the company’s financial results determined in accordance with U.S. GAAP, the company provides non-GAAP measures that it determines to be useful in evaluating its operating performance. The company presents EBITDA, adjusted EBITDA, as well as non-GAAP gross margin and non-GAAP gross profit. EBITDA and adjusted EBITDA consist of net loss after adjustment for those items shown in the table below. The company defines non-GAAP gross profit and non-GAAP gross margin as GAAP gross profit and GAAP gross margin, respectively, excluding amortization of acquired intangible assets. The amortization of acquisition-related intangible assets used in the calculation of non-GAAP gross profit and non-GAAP gross margin pertain only to the amortization associated with developed technology acquired and recorded through purchase accounting transactions. The amortization of these intangible assets will recur in future periods until such intangible assets have been fully amortized. The company believes that these non-GAAP measures are useful in evaluating the company’s operating performance. The company uses this non-GAAP financial information to evaluate ongoing operations and for internal planning and forecasting purposes. Non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance. However, non-GAAP financial information is presented for supplemental information purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with U.S. GAAP. For example, non-GAAP gross margin and non-GAAP gross profit exclude the amortization of acquired intangible assets although such measures include the revenue associated with the acquisitions. For a reconciliation of these non-GAAP measures to GAAP, see below "EBITDA and Adjusted EBITDA Reconciliations" and "Non-GAAP Gross Profit and Non-GAAP Gross Margin Reconciliations."

Third Quarter Conference Call & Webcast
Company management will host a conference call and webcast on Tuesday, October 27, 2020, at 8 a.m. ET to discuss third quarter 2020 results. The webcast will be available at www.exactsciences.com. Domestic callers should dial 833-235-7650 and international callers should dial +1-647-689-4171. The access code for both domestic and international callers is 9947369.

An archive of the webcast will be available at www.exactsciences.com. A replay of the conference call will be available by calling 800-585-8367 domestically or 416-621-4642 internationally. The access code for the replay of the call is 9947369. The webcast, conference call and replay are open to all interested parties.

About Cologuard
Cologuard was approved by the FDA in August 2014, and results from Exact Sciences’ prospective 90-site, point-in-time, 10,000-patient pivotal trial were published in the New England Journal of Medicine in March 2014. Cologuard is included in the American Cancer Society’s (2018) colorectal cancer screening guidelines and the recommendations of the U.S. Preventive Services Task Force (2016) and National Comprehensive Cancer Network (2016). Cologuard is indicated to screen adults 45 years of age and older who are at average risk for colorectal cancer by detecting certain DNA markers and blood in the stool. Do not use Cologuard if you have had precancer, have inflammatory bowel disease and certain hereditary syndromes, or have a personal or family history of colorectal cancer. Cologuard is not a replacement for colonoscopy in high risk patients. Cologuard performance in adults ages 45-49 is estimated based on a large clinical study of patients 50 and older. Cologuard performance in repeat testing has not been evaluated.

The Cologuard test result should be interpreted with caution. A positive test result does not confirm the presence of cancer. Patients with a positive test result should be referred for diagnostic colonoscopy. A negative test result does not confirm the absence of cancer. Patients with a negative test result should discuss with their doctor when they need to be tested again.

Medicare and most major insurers cover Cologuard. For more information about Cologuard, visit www.cologuardtest.com. Rx only.

About Oncotype DX
The Oncotype DX portfolio of breast, colon and prostate cancer tests applies advanced genomic science to reveal the unique biology of a tumor in order to optimize cancer treatment decisions. In breast cancer, the Oncotype DX Breast Recurrence Score test is the only test that has been shown to predict the likelihood of chemotherapy benefit as well as recurrence in invasive breast cancer. Additionally, the Oncotype DX Breast DCIS Score test predicts the likelihood of recurrence in a pre-invasive form of breast cancer called DCIS. In prostate cancer, the Oncotype DX Genomic Prostate Score test predicts disease aggressiveness and further clarifies the current and future risk of the cancer prior to treatment intervention, and the Oncotype DX AR-V7 Nucleus Detect test helps determine which patients with metastatic castration-resistant prostate cancer (mCRPC) are resistant to androgen receptor (AR)-targeted therapies. The Oncotype DX AR-V7 Nucleus Detect test is performed by Epic Sciences at its centralized, CLIA-certified laboratory in San Diego and offered exclusively by Exact Sciences. With more than 1 million patients tested in more than 90 countries, the Oncotype DX tests have redefined personalized medicine by making genomics a critical part of cancer diagnosis and treatment. To learn more about Oncotype DX tests, visit www.OncotypeIQ.com, www.MyBreastCancerTreatment.org or www.MyProstateCancerTreatment.org.

On October 27, 2020 Exact Sciences Corp. (Nasdaq: EXAS) and Thrive Earlier Detection Corp. ("Thrive"), a healthcare company dedicated to incorporating earlier cancer detection into routine medical care, reported they have entered into a definitive agreement under which Exact Sciences will acquire Thrive for cash and stock consideration of up to $2.15 billion (Press release, Exact Sciences, OCT 27, 2020, View Source [SID1234569104]). The transaction was unanimously approved by both companies’ Boards of Directors and is anticipated to close during the first quarter of 2021, subject to regulatory approval and the satisfaction of other conditions.

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Combining Thrive’s pioneering early-stage screening test, CancerSEEK, with Exact Sciences’ best-in-class scientific platform, clinical organization, and commercial infrastructure will establish Exact Sciences as a leading competitor in blood-based, multi-cancer screening. Thrive, with an early version of CancerSEEK, has conducted a first-of-its-kind 10,000-patient, prospective, interventional study in a real-world clinical setting. In this landmark study, using its mutation and protein biomarker approach, CancerSEEK achieved promising results detecting 10 different types of cancer, including seven with no recommended screening guidelines, with very few false positives. Bringing together highly complementary scientific approaches and the strengths of both organizations, Exact Sciences expects to develop a more accurate test and accelerate the widespread adoption of this potentially life-saving advancement.

"The acquisition of Thrive is a giant leap toward ensuring blood-based, multi-cancer screening becomes a reality and eventually, the standard of care. We couldn’t be more excited that Exact Sciences will be at the forefront of this incredible opportunity to serve patients," said Kevin Conroy, Chairman and CEO of Exact Sciences. "We have long respected the Thrive team for their rigorous scientific approach, having participated in both funding rounds as an investor. We are proud to take our partnership to the next level by leveraging Exact Sciences’ established R&D team and highly accurate testing platform to augment development of CancerSEEK and accelerate its commercialization. By combining the expertise of both organizations, we believe we can bring this powerful technology to patients faster."

"Thrive is driven by the knowledge that if cancer is caught early enough, it can be more effectively treated or even cured, and every patient deserves a chance for a better outcome," said David Daly, CEO of Thrive. "Our team has made significant progress toward our mission and we are eager to collaborate with and benefit from Exact Sciences’ expertise, and believe that together we will enable broader, quicker adoption of our test. With the support of our ongoing partnership with Johns Hopkins University, we are energized to contribute meaningfully to our shared mission of advancing the fight against cancer and providing life-changing answers to patients in need."

Creating a Leader in Blood-Based, Multi-Cancer Screening

Transforming the Future of Cancer Diagnostics with a Premier R&D Team: The Exact Sciences R&D team has robust clinical and evidence generation capabilities. This powerful team will be complemented and enhanced by the addition of Thrive’s R&D groups specializing in next-generation sequencing and bioinformatics in liquid biopsy. The combined R&D team’s impact will be amplified by Exact Sciences’ database of proprietary biomarkers, extensive blood sample biorepository, financial strength, and each company’s established partnerships with leading institutions, including Mayo Clinic and Johns Hopkins University.
Accelerating the Approval, Availability, and Adoption of Multi-Cancer Screening: Exact Sciences is uniquely positioned to support the development of Thrive’s CancerSEEK product and facilitate its success. By leveraging Exact Sciences’ proven clinical and regulatory teams, scaled laboratory and IT capabilities, and well-established primary care sales team and direct-to-consumer marketing experience, the Company expects to bring blood-based, multi-cancer screening to patients faster and with greater certainty.
Positioning Exact Sciences as a Leader in a $25 Billion+ Market and Demonstrating Capabilities as a Research and Commercialization Partner-of-Choice: The need to detect the deadliest cancers at earlier, more treatable stages is urgent, and multi-cancer screening can be an impactful solution. Thrive has conducted a large study in a real-world clinical setting, with promising results at a low false positive rate. By joining with Thrive, Exact Sciences would be well-positioned to compete in a significant U.S. market, estimated to be at least $25 billion. Exact Sciences is already home to two of the strongest and fastest-growing brands in cancer diagnostics, Cologuard and Oncotype DX. With the addition of Thrive, Exact Sciences would have the scientific rigor necessary to bring tests to patients at every step of their cancer journey, from screening to minimal residual disease, recurrence monitoring, and therapy selection. This rigor and Exact Sciences’ existing commercial strength further distinguish the Company as a leading developer and provider of innovative products across the cancer continuum.
Transaction Terms and Additional Information
Under the terms of the agreement, Thrive will receive total consideration of up to $2.15 billion, of which $1.7 billion would be payable at closing, comprised of 65% in Exact Sciences common stock and 35% in cash, subject to certain adjustments. An additional $450 million would be payable based upon the achievement of certain milestones related to the development and commercialization of a blood-based, multi-cancer screening test. The transaction is subject to customary closing conditions and regulatory approvals and is anticipated to close during the first quarter of 2021. XMS Capital is serving as financial advisor to Exact Sciences, and K&L Gates is serving as legal advisor. Goldman Sachs & Co. LLC is serving as financial advisor to Thrive, and Goodwin Procter LLP is serving as legal advisor.

Exact Sciences also Acquires Base Genomics to Extend its DNA Methylation Capabilities
Exact Sciences also announced today that it has acquired Base Genomics, an epigenetics company working to set a new standard in DNA methylation analysis, one of the most promising approaches to detecting cancer in its earliest stages. Base Genomics has a talented team and innovative technology enabling highly accurate DNA methylation analysis. It also allows for the analysis of DNA methylation and mutations in a single sample. Base Genomics’ differentiated technology is highly complementary to Exact Sciences’ existing methylation expertise and multi-marker approach. This acquisition will enhance Exact Sciences’ efforts in cancer diagnostics across the continuum. The terms of this transaction were disclosed in Form 10-Q, filed with the U.S. Securities and Exchange Commission earlier today. XMS Capital is serving as financial advisor to Exact Sciences, and K&L Gates is serving as legal advisor. William Blair is serving as financial advisor to Base Genomics, and Bristows LLP is serving as legal advisor.

Conference Call & Third Quarter 2020 Earnings Results
In a separate press release issued today, the Company announced its earnings results for the third quarter of 2020.

Exact Sciences will host a conference call today at 8:00 a.m. ET to discuss the transaction, as well as its third quarter 2020 earnings results. Associated presentation materials and an infographic regarding the transaction will be available on the investor relations section of Exact Sciences website at exactsciences.com/investor-relations/events-and-presentations/.

On October 27, 2020 Merck (NYSE: MRK), known as MSD outside the United States and Canada, reported financial results for the third quarter of 2020.

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"We continue to execute on our strategic priorities and remain confident we will achieve solid full-year revenue growth despite the impact of the ongoing COVID-19 pandemic. Demand for our products remains robust, and production, supply and distribution of our medicines, vaccines and animal health products are moving forward with minimal disruption," said Kenneth C. Frazier, chairman and chief executive officer, Merck. "I am confident in our ability to advance our promising pipeline and clinical trials despite the challenging environment, and I believe that our leadership and track record of solid commercial execution will continue to drive long-term growth."

GAAP (generally accepted accounting principles) earnings per share assuming dilution (EPS) was $1.16 for the third quarter of 2020. Non-GAAP EPS of $1.74 for the third quarter of 2020 excludes acquisition- and divestiture-related costs, restructuring costs, pretax charges of $1.1 billion related to certain license and collaboration agreements, and certain other items. Year-to-date results can be found in the attached tables.

COVID-19 Research Highlights

Building on the company’s experience with antivirals and vaccines, Merck advanced its multiple scientific programs in an effort to help combat SARS-CoV-2, specifically,

Molnupiravir (formerly known as MK-4482) — an orally available antiviral candidate in development for the treatment of COVID-19 in collaboration with Ridgeback Bio with the initiation of two large pivotal Phase 2/3 trials: a trial anticipated to enroll approximately 1,450 non-hospitalized adult COVID-19 patients (outpatient) and another planned to enroll approximately 1,300 hospitalized adult COVID-19 patients;
V591 — a SARS-CoV-2 vaccine candidate that uses a measles virus vector platform has entered Phase 1 development; and
V590 — a SARS-CoV-2 vaccine candidate in development in collaboration with the International AIDS Vaccine Initiative (IAVI) that uses a recombinant vesicular stomatitis virus (rVSV) platform, the same platform used for Merck’s approved Ebola Zaire virus vaccine, will enter Phase 1 development shortly.
Oncology Pipeline Highlights

Merck continued to advance the development programs for KEYTRUDA (pembrolizumab), the company’s anti-PD-1 therapy; Lynparza (olaparib), a PARP inhibitor being co-developed and co-commercialized with AstraZeneca; and Lenvima (lenvatinib mesylate), an orally available tyrosine kinase inhibitor being co-developed and co-commercialized with Eisai Co., Ltd. (Eisai), in addition to other notable developments as follows:

Merck announced the following regulatory milestones for KEYTRUDA:
Approval in the United States by the Food and Drug Administration (FDA) of an expanded indication as monotherapy for the treatment of adult patients with relapsed or refractory classical Hodgkin lymphoma (cHL) based on the Phase 3 KEYNOTE-204 trial and an updated pediatric indication for the treatment of pediatric patients with refractory cHL or cHL that has relapsed after two or more lines of therapy, both of which were previously approved under the FDA’s accelerated approval process; and
Two approvals in Japan: (1) as monotherapy for the treatment of patients whose tumors are PD-L1-positive and have radically unresectable, advanced or recurrent esophageal squamous cell carcinoma (ESCC) who have progressed after chemotherapy based on the KEYNOTE-181 trial; and (2) use at an additional recommended dosage of 400 mg every six weeks (Q6W) administered as an intravenous infusion over 30 minutes across all adult indications, including KEYTRUDA monotherapy and combination therapy.
Merck presented results from the pivotal Phase 3 KEYNOTE-590 trial for the first-line treatment of patients with locally advanced or metastatic esophageal and gastroesophageal junction (GEJ) cancer at the European Society for Medical Oncology (ESMO) (Free ESMO Whitepaper) Virtual Congress 2020. In the study, KEYTRUDA in combination with platinum-based chemotherapy (cisplatin plus 5-fluorouracil [5-FU]) significantly improved overall survival (OS) and progression-free survival (PFS) versus chemotherapy regardless of histology or PD-L1 expression status.
Merck presented five-year survival results from the pivotal Phase 3 KEYNOTE-024 trial at the ESMO (Free ESMO Whitepaper) Virtual Congress 2020, which demonstrated a sustained, long-term survival benefit and durable responses with KEYTRUDA versus chemotherapy as a first-line treatment in patients with metastatic non-small cell lung cancer (NSCLC) whose tumors express PD-L1 (tumor proportion score [TPS] ≥50%) with no EGFR or ALK genomic tumor aberrations. Results from KEYNOTE-024 represent the longest follow-up survival data for an immunotherapy in a randomized Phase 3 study for the first-line treatment of metastatic NSCLC.
Merck presented long-term findings from the EORTC1325/KEYNOTE-054 trial evaluating KEYTRUDA as adjuvant therapy in resected, high-risk stage III melanoma at the ESMO (Free ESMO Whitepaper) Virtual Congress 2020.
Merck presented three-year survival data from the KEYNOTE-021 (Cohort G) study that evaluated KEYTRUDA in combination with chemotherapy in patients with advanced nonsquamous NSCLC regardless of PD‑L1 expression with no EGFR or ALK genomic tumor aberrations at the IASLC 2020 North America Conference on Lung Cancer (NACLC). Updated follow-up data from a Phase 1/2 study of quavonlimab (MK-1308), a novel investigational anti-CTLA-4 antibody, in combination with KEYTRUDA in patients with advanced NSCLC also was presented; a Phase 3 study of quavonlimab coformulated with KEYTRUDA in first-line advanced NSCLC is planned.
Merck and AstraZeneca announced the adoption of two positive opinions by the Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency (EMA) for Lynparza:
As a first-line maintenance treatment with bevacizumab for homologous recombination deficient (HRD)-positive advanced ovarian cancer who are in complete or partial response following completion of first-line platinum-based chemotherapy in combination with bevacizumab based on the Phase 3 PAOLA-1 trial, and
As monotherapy for the treatment of BRCA1/2 metastatic castration-resistant prostate cancer (mCRPC) patients who have progressed following a prior therapy that included a new hormonal agent based on the Phase 3 PROfound trial. Final results from this study were recently presented at the ESMO (Free ESMO Whitepaper) Virtual Congress 2020.
Merck and AstraZeneca presented positive five-year follow-up data from the Phase 3 SOLO-1 trial, which demonstrated a long-term PFS benefit of Lynparza versus placebo as a first-line maintenance treatment in patients with newly diagnosed, advanced BRCA-mutated (BRCAm) ovarian cancer who were in complete or partial response to platinum-based chemotherapy.
Merck and Eisai presented first-time data from two studies evaluating KEYTRUDA plus Lenvima at the ESMO (Free ESMO Whitepaper) Virtual Congress 2020: data from the Phase 2 LEAP-004 study for the second-line treatment of patients with unresectable or advanced melanoma who progressed on anti-PD-1/PD-L1 therapy and from the Phase 2 LEAP-005 study in previously-treated patients with six tumor types, including biliary tract cancer, colorectal cancer, gastric cancer, glioblastoma multiforme, ovarian cancer and triple-negative breast cancer.
Merck also presented new data for three investigational medicines from its oncology pipeline at the ESMO (Free ESMO Whitepaper) Virtual Congress 2020:
New Phase 1 data for the company’s anti-TIGIT therapy vibostolimab (MK-7684) as monotherapy and in combination with KEYTRUDA in patients with metastatic NSCLC,
First-time Phase 1 results for the novel anti-immunoglobulin-like transcript 4 (ILT4) therapy MK-4830 in patients with advanced solid tumors, and
New Phase 2 data evaluating the hypoxia-inducible factor-2 alpha (HIF-2α) inhibitor MK-6482 in von Hippel-Lindau (VHL) patients with non-renal cell carcinoma (RCC) tumors and updated data in VHL patients with clear cell RCC.
Other Pipeline Highlights

Merck announced that two Phase 3 adult studies [the pivotal PNEU-AGE trial (V114-019) as well as the PNEU-TRUE trial (V114-020)] and separately two other Phase 3 adult studies [the PNEU-PATH (V114-016) and PNEU-DAY (V114-017) trials], evaluating the safety, tolerability and immunogenicity of V114, the company’s investigational 15-valent pneumococcal conjugate vaccine, each met their primary immunogenicity objectives. These findings, and additional Phase 3 data from the clinical program, will form the basis of global regulatory licensure applications beginning with the FDA before the end of the year.
Merck presented results from two pivotal Phase 3 trials (COUGH-1 and COUGH-2) evaluating gefapixant, an investigational, orally administered selective P2X3 receptor antagonist, in which gefapixant 45 mg twice daily demonstrated a statistically significant reduction in 24-hour cough frequency compared to placebo at Week 12 and 24 in adult patients with refractory or unexplained chronic cough. The gefapixant 15 mg twice daily treatment arms did not meet the primary efficacy endpoint in either Phase 3 study. The results were presented at the Virtual European Respiratory Society (ERS) International Congress 2020.
Merck presented Week 96 data from the Phase 2b trial that showed islatravir, the company’s investigational oral nucleoside reverse transcriptase translocation inhibitor (NRTTI), in combination with doravirine (PIFELTRO), maintained viral suppression in treatment-naïve adults with HIV-1 infection. Also presented at the virtual 2020 International Congress on Drug Therapy in HIV Infection (HIV Glasgow 2020 Virtual) were results from Phase 1/1b studies for MK-8507, the company’s investigational once-weekly, oral non-nucleoside reverse transcriptase inhibitor (NNRTI), that support further investigation for once-weekly oral administration as part of combination antiretroviral therapy.
The FDA has granted V181, the company’s investigational dengue vaccine in Phase 1 development, Fast Track designation.
Business Developments

Merck and Seagen Inc. (formerly known as Seattle Genetics, Inc.) announced two strategic oncology collaborations, in which Merck will make $810 million of upfront payments in the aggregate as well as acquire a $1 billion equity stake in Seagen common stock:
Companies to co-develop and co-commercialize Seagen’s ladiratuzumab vedotin, an investigational antibody-drug conjugate targeting LIV-1, globally; and
Companies enter into exclusive license and co-development agreement to accelerate global reach of Tukysa (tucatinib), a small molecule tyrosine kinase inhibitor for the treatment of HER-2 positive cancers. Merck was granted an exclusive license to commercialize Tukysa in Asia, the Middle East and Latin America and other regions outside of the U.S., Canada and Europe.
Merck and Hanmi Pharmaceutical announced that the companies have entered into an exclusive licensing agreement for the development, manufacture and commercialization of efinopegdutide (formerly HM12525A), Hanmi’s investigational once-weekly glucagon-like peptide-1 (GLP-1)/glucagon receptor dual agonist, for the treatment of nonalcoholic steatohepatitis (NASH);
Merck announced the completion of its acquisition of IdentiGEN, a leader in DNA-based animal traceability solutions for livestock and aquaculture; and
Merck announced the completion of its acquisition of the worldwide rights to VECOXAN (diclazuril), an oral suspension for the prevention of coccidiosis in calves and lambs.
Organon & Co.

Merck continued to make progress on the Organon & Co. (Organon) spinoff, including additional leadership appointments, and expects the transaction to be completed in the second quarter of 2021.
Third-Quarter Financial Impact of COVID-19

In the third quarter, the estimated negative impact of the COVID-19 pandemic to Merck’s pharmaceutical revenue was approximately $475 million, bringing the company’s year-to-date negative impact on revenue to approximately $2.1 billion. Lower back-to-school demand negatively impacted vaccine sales, in particular GARDASIL 9 (Human Papillomavirus 9-valent Vaccine, Recombinant) in the U.S. In addition, access to health care providers remains reduced, although improved from the second quarter. The negative impact to Animal Health sales in the third quarter was immaterial.

Operating expenses were positively impacted in the third quarter by approximately $115 million, primarily driven by lower promotional and selling costs as well as lower research and development (R&D) expenses, net of investments in COVID-19-related antiviral and vaccine research programs.

Third-Quarter Revenue Performance

The following table reflects sales of the company’s top pharmaceutical products, as well as sales of animal health products.

*Alliance revenue for these products represents Merck’s share of profits, which are product sales net of cost of sales and commercialization costs.
**Other revenues are comprised primarily of third-party manufacturing sales and miscellaneous corporate revenues, including revenue hedging activities.

Pharmaceutical Revenue

Third-quarter pharmaceutical sales increased by $225 million, or 2%, to $11.3 billion. The increase was driven primarily by growth in oncology and certain hospital acute care products, partially offset by the negative impact of the COVID-19 pandemic and the ongoing impacts of the loss of market exclusivity for several products.

Growth in oncology was largely driven by higher sales of KEYTRUDA, which grew 21% to $3.7 billion in the quarter. In the U.S., sales of KEYTRUDA grew 24% to $2.2 billion. Global sales growth of KEYTRUDA reflects continued strong momentum from the NSCLC indications as well as continued uptake in other indications, including adjuvant melanoma, RCC, bladder, head and neck squamous cell carcinoma (HNSCC) and microsatellite instability-high (MSI-H) cancers as well as uptake following the recent launch of the Q6W dosing regimen in the U.S., partially offset by the negative impacts of the COVID-19 pandemic and pricing in Japan. Also contributing to growth in oncology was higher alliance revenue related to Lynparza and Lenvima reflecting continued uptake in approved indications in the U.S., Europe and China.

Performance in hospital acute care reflects higher demand globally for BRIDION (sugammadex), a medicine for the reversal of neuromuscular blockade induced by rocuronium bromide or vecuronium bromide in adults undergoing surgery and the ongoing launch of PREVYMIS (letermovir), a medicine for prophylaxis (prevention) of cytomegalovirus (CMV) infection and disease in adult CMV-seropositive recipients of an allogeneic hematopoietic stem cell transplant.

In addition, sales of JANUVIA (sitagliptin) and JANUMET (sitagliptin and metformin HCI) increased slightly in the quarter reflecting strong demand from certain international markets, partially offset by continued pricing pressure in the U.S.

Vaccine sales performance reflects higher sales of PNEUMOVAX 23 (pneumococcal vaccine polyvalent), a vaccine to help prevent pneumococcal disease, primarily driven by higher volumes in the U.S., Europe and Japan attributable in part to increased demand for pneumococcal vaccination during the COVID-19 pandemic.

Vaccine sales were negatively affected by declines in sales of GARDASIL [Human Papillomavirus Quadrivalent (Types 6,11,16 and 18) Vaccine, Recombinant]/GARDASIL 9, vaccines to prevent certain cancers and other diseases caused by HPV, largely due to lower demand in the U.S. and Hong Kong, SAR, PRC attributable to the COVID-19 pandemic, partially offset by higher volumes in China and in Europe.

Combined sales of pediatric vaccines VARIVAX (Varicella Virus Vaccine Live), a vaccine to help prevent chickenpox; PROQUAD (Measles, Mumps, Rubella and Varicella Virus Vaccine Live), a combination vaccine to help protect against measles, mumps, rubella and varicella; and M-M-R II (Measles, Mumps and Rubella Virus Vaccine Live), a vaccine to help prevent measles, mumps and rubella, declined in the third quarter, primarily due to lower demand in the U.S. related to the COVID-19 pandemic.

Pharmaceutical sales in the quarter were negatively affected by the ongoing impacts from the loss of market exclusivity, including for NUVARING (etonogestrel/ethinyl estradiol vaginal ring), NOXAFIL (posaconazole) and EMEND (aprepitant)/EMEND (fosaprepitant dimeglumine) for Injection.

Animal Health Revenue

Animal Health sales totaled $1.2 billion in the third quarter of 2020, an increase of 9% compared with the third quarter of 2019; excluding the unfavorable effect from foreign exchange, Animal Health sales grew 12%. Growth in companion animal products was driven largely by higher demand in companion animal vaccines and higher demand for the BRAVECTO (fluralaner) line of products for parasitic control. Performance in livestock products reflects higher demand globally for ruminant, poultry and swine products.

Third-Quarter Expense, EPS and Related Information

GAAP Expense, EPS and Related Information

Gross margin was 72.3% for the third quarter of 2020 compared to 67.8% for the third quarter of 2019. The increase reflects lower acquisition- and divestiture-related costs and the favorable effect of product mix, partially offset by the unfavorable effects of pricing pressure, inventory write-offs, higher amortization of intangible assets related to collaborations and foreign exchange.

Selling, general and administrative expenses were $2.5 billion in the third quarter of 2020, a decrease of 5% compared to the third quarter of 2019. The decrease primarily reflects lower administrative and selling costs, including less travel and meeting expenses, due in part to the COVID-19 pandemic, partially offset by higher acquisition- and divestiture-related costs, primarily reflecting costs related to the company’s planned spinoff of Organon.

Research and development expenses were $3.4 billion in the third quarter of 2020, an increase of 6% compared with the third quarter of 2019. The increase was primarily driven by higher upfront payments related to collaborations and license agreements, higher expenses related to clinical development and increased investment in discovery research and early drug development, partially offset by lower charges for the acquisitions of businesses, as well as lower laboratory, travel and meeting expenses due to the COVID-19 pandemic.

Other (income) expense, net, was $312 million of income in the third quarter of 2020 compared to $35 million of expense in the third quarter of 2019, primarily due to higher income from investments in equity securities, net, which was $360 million in 2020 compared with $16 million in 2019, largely from the recognition of unrealized gains on securities.

The effective income tax rate was 14.1% for the third quarter of 2020 compared to 18.7% in the third quarter of 2019. The effective income tax rate in 2019 reflects the unfavorable impact of a charge for the acquisition of Peloton Therapeutics, Inc. (Peloton) for which no tax benefit was recognized.

GAAP EPS was $1.16 for the third quarter of 2020 compared with $0.74 for the third quarter of 2019.

Non-GAAP Expense, EPS and Related Information

Non-GAAP gross margin was 74.8% for the third quarter of 2020 compared to 75.9% for the third quarter of 2019. The decrease in non-GAAP gross margin reflects the unfavorable effects of pricing pressure, inventory write-offs, higher amortization of intangible assets related to collaborations and foreign exchange, partially offset by the favorable effect of product mix.

Non-GAAP selling, general and administrative expenses were $2.2 billion in the third quarter of 2020, a decrease of 13% compared to the third quarter of 2019. The decrease primarily reflects lower administrative and selling costs, including less travel and meeting expenses, due in part to the COVID-19 pandemic.

Non-GAAP R&D expenses were $2.3 billion in the third quarter of 2020, a 3% increase compared to the third quarter of 2019. The increase was primarily driven by higher expenses related to clinical development and increased investment in discovery research and early drug development, partially offset by lower laboratory, travel and meeting expenses due to the COVID-19 pandemic.

Non-GAAP other (income) expense, net, was $311 million of income in the third quarter of 2020 compared to $29 million of expense in the third quarter of 2019, primarily due to higher income from investments in equity securities, net, which was $360 million in 2020 compared with $16 million in 2019, largely from the recognition of unrealized gains on securities.

The non-GAAP effective income tax rate was 14.8% for the third quarter of 2020 compared to 15.7% for the third quarter of 2019, reflecting the favorable impact of earnings mix.

Non-GAAP EPS was $1.74 for the third quarter of 2020 compared with $1.51 for the third quarter of 2019.

Financial Outlook

The updated full-year guidance that Merck is providing below includes its current assumption of the impact from the COVID-19 pandemic, which is expected to continue to be offset by favorability from underlying business strength. The company continues to assume that the majority of the negative impact occurred during the second quarter. However, it now expects some residual negative impacts in the fourth quarter, largely in Europe and certain emerging markets. In addition, the phasing of the recovery of GARDASIL 9 demand is slower than originally anticipated, in particular in the U.S.

For the full-year 2020, Merck now expects an unfavorable impact to revenue of approximately $2.35 billion (excluding the impact of foreign exchange) due to the COVID-19 pandemic, comprised of approximately $2.3 billion for pharmaceuticals and approximately $50 million for Animal Health, including the impacts in the first three quarters of the year.

For the full-year 2020, Merck now expects a net favorable impact to operating expenses of approximately $625 million, reflecting continued lower spending due to the COVID-19 pandemic, partially offset by spending on its COVID-19-related antiviral and vaccine research programs.

Merck narrowed and raised its full-year 2020 revenue range to be between $47.6 billion and $48.6 billion, including a negative impact from foreign exchange of approximately 1.5% at mid-October exchange rates. The company’s guidance assumes $120 million of revenue for the replenishment of doses of GARDASIL 9 that were borrowed from the U.S. Centers for Disease Control and Prevention (CDC) Pediatric Vaccine Stockpile in the fourth quarter of 2019.

Merck narrowed and lowered its full-year 2020 GAAP EPS range to be between $4.55 and $4.65. Merck narrowed and raised its full-year 2020 non-GAAP EPS range to be between $5.91 and $6.01, including a negative impact from foreign exchange of approximately 2.5% at mid-October exchange rates. The non-GAAP range excludes acquisition- and divestiture-related costs, costs related to restructuring programs and certain other items.

The company does not have any non-GAAP adjustments to revenue.
**EPS guidance for 2020 assumes a share count (assuming dilution) of approximately 2.54 billion shares.

A reconciliation of anticipated 2020 GAAP EPS to non-GAAP EPS and the items excluded from non-GAAP EPS are provided in the table below.
Earnings Conference Call

Investors, journalists and the general public may access a live audio webcast of the call today at 8:00 a.m. EDT on Merck’s website at View Source Institutional investors and analysts can participate in the call (833) 353-0277 or toll free (469) 886-1947 and using ID code number 4664137. Members of the media are invited to monitor the call by dialing (833) 353-0277 or toll free (469) 886-1947 and using ID code number 4664137. Journalists who wish to ask questions are requested to contact a member of Merck’s Media Relations team at the conclusion of the call. (Press release, Merck & Co, OCT 27, 2020, View Source [SID1234569103])

On October 27, 2020 Prokarium, a privately-held biotechnology company developing novel immunotherapies and vaccines based on its engineered microbial platform, reported the closing of a Series B investment round of $21M led by Korea Investment Partners (KIP) (Press release, Prokarium, OCT 27, 2020, View Source [SID1234569102]). In addition to KIP, the UK government’s Future Fund (FF), Flerie Invest and Riyadh Valley Company (RVC) also participated in the financing round.

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"We are very pleased with this strong financial support and with the global networks our investors bring," said Ted Fjallman, PhD, CEO of Prokarium. "The funds will support the development efforts of our microbial immunotherapy for the treatment of non-muscle invasive bladder cancer, which we plan to advance to the clinic by 2022, as well as the expansion of our pipeline across multiple solid tumours. This financing, together with our recently announced partnership with the Wellcome Trust for funding our clinical studies of Entervax, positions Prokarium well to realize the potential of our microbial immunotherapy platform."

"KIP is delighted to lead this financing of Prokarium and to continue to invest in their team and platform" said Sangwoo Lee, Managing Director, KIP. "Prokarium’s approach of developing microbial immunotherapy that stimulates innate immunity and modulates the tumour microenvironment is very exciting and has the potential to transform cancer treatment across the world."

In conjunction with the financing, Hyam Levitsky, MD, will join Prokarium’s Board of Directors. Hy brings over 30 years of internal medicine, oncology and immunology research experience and currently serves as the President of Research and Development at Century Therapeutics. Prior to Century, he served as the Executive Vice President and Chief Scientific Officer at Juno Therapeutics and Head of Cancer Immunology Experimental Medicine at Roche.

"I am excited to join Prokarium’s Board and to provide my scientific expertise to develop novel microbial immunotherapies" said Hyam Levitsky. "Prokarium’s bacterial strains have the potential to be potent activators of multiple innate immune pathways, harnessing intrinsic microbial properties combined with modulatory effects from cutting-edge engineering to initiate and drive a patient’s anti-tumor responses. This harbours the potential to perform both as a monotherapy or in combination with other immunotherapies."

Prokarium also strengthens its executive team with the promotion of Kristen Albright, PharmD, to Chief Operating Officer, Livija Deban, PhD, to Vice President of Research, and the appointment of Peter McGowan, FCCA, as Chief Financial Officer.

"I am very pleased to announce these well-deserved appointments on Prokarium’s executive team," said Steve Chatfield, PhD, Chairman of Prokarium. "It is critical that we have the optimal organizational structure in place to drive the continued advancement of our pipeline and the success of our company."

On October 27, 2020 Novartis reported to deliver solid performance with double digit increases in core operating income and expanding margins, despite the impact of COVID-19 on healthcare systems (Press release, Novartis, OCT 27, 2020, View Source [SID1234569101]). Our key growth drivers and launches are performing well. The strength of Novartis’ underlying operations enables us to upgrade our Full Year 2020 core operating income guidance. We are excited about the progress of our pipeline including the recent US approval of Kesimpta for the treatment of relapsing forms of multiple sclerosis. We continue to integrate ESG across all our operations, with commitments to ambitious climate and access to medicines targets, as we strive for more sustained impact on our journey to become an ESG leader".

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COVID-19 update

The COVID-19 situation continues to evolve and is taking differing courses across the multitude of geographies that Novartis operates in. We continue to take strong actions to help address the pandemic. Our primary concerns remain the health and safety of our associates and patients.

During the third quarter, overall market conditions have been recovering, though COVID-19 continues to weigh on certain therapeutic areas, most notably in dermatology, ophthalmology and the Sandoz retail business. Our operations remain stable and cash collections continue to be according to our normal trade terms, with days sales outstanding at normal levels. Novartis remains well positioned to meet its ongoing financial obligations and has sufficient liquidity to support our normal business activities. At present, drug development operations are continuing with manageable disruptions (please see Innovation Review Section of the Condensed Interim Financial Report for further information), with our range of digital technologies allowing us to proactively manage our clinical trials portfolio and rapidly mitigate any disruptions.

Novartis continues to work closely with third parties to fight the COVID-19 pandemic. In September, we announced a collaboration with the African Union to facilitate the supply of COVID-19 related medicines – with a portfolio of 15 Novartis generic and over-the-counter medicines being offered at zero-profit to 55 African and 15 CARICOM eligible countries.

Financials

In order to comply with International Financial Reporting Standards (IFRS), Novartis has separated the Group’s reported financial data into "continuing" and "discontinued" operations. The results of the Alcon business in 2019 are reported as discontinued operations. See page 42 and Notes 2, 3 and 10 in the Condensed Interim Financial Report for a full explanation.

The commentary below focuses on continuing operations including the businesses of Innovative Medicines and Sandoz, as well as the continuing Corporate functions. We also provide information on discontinued operations.

Continuing operations third quarter

Net sales were USD 12.3 billion (+1%, 0% cc) in the third quarter driven by volume growth of 7 percentage points, offset by price erosion of 4 percentage points and the negative impact from generic competition of 3 percentage points.

Operating income was USD 2.4 billion (+2%, +9% cc) mainly due to lower spending, improved gross margin and gains on financial assets, partly offset by higher legal charges.

Net income was USD 1.9 billion (-5%, 0% cc) as higher operating income was offset by a higher tax rate. EPS was USD 0.85 (-6%, 0% cc), in line with net income.

Core operating income was USD 4.1 billion (+9%, +11% cc) due to lower spending and improved gross margin. Core operating income margin was 33.2% of net sales, increasing by 2.4 percentage points (+3.2 percentage points cc).

Core net income was USD 3.5 billion (+8%, +10% cc) mainly driven by growth in core operating income. Core EPS was USD 1.52 (+8%, +9% cc), in line with core net income.

Free cash flow from continuing operations amounted to USD 2.7 billion (-32%) compared to USD 4.0 billion in the prior year quarter. This decrease was due to lower cash flows from operating activities, including higher payments related to legal settlements.

Innovative Medicines net sales were USD 9.8 billion (+2%, +1% cc) with volume contributing 9 percentage points to growth, pricing had a negative impact of 5 percentage points and generic competition had a negative impact of 3 percentage points mainly due to Afinitor and Exjade. Pharmaceuticals BU sales grew 2% (cc) driven by strong growth from Entresto, Cosentyx and Zolgensma. Growth was partly offset by declines in Established Medicines and ophthalmology brands. Oncology BU sales were broadly in line with prior year (-1% cc). Strong performance of Kisqali, Promacta/Revolade, Jakavi, Tafinlar + Mekinist and Piqray was offset by generic competition for Afinitor and Exjade. The COVID-19 pandemic continued to negatively impact dermatology and ophthalmology.

Sandoz net sales were USD 2.4 billion (-2%, -3% cc) with a volume decline of 1 percentage point (cc) impacted by ongoing disruptions to HCP practices due to COVID-19, which limited patient access to treatments for our retail business. There was a negative price effect of 2 percentage points (cc), despite the benefit from off-contract sales and favorable revenue deduction adjustments. The decline was partly offset by global sales of Biopharmaceuticals, growing 13% (cc), with strong growth across all regions.

Continuing operations nine months

Net sales were USD 35.9 billion (+2%, +4% cc) in the first nine months mainly driven by Entresto, Zolgensma and Cosentyx. Volume contributed 9 percentage points to sales growth, partly offset by price erosion of 3 percentage points and the negative impact from generic competition of 2 percentage points.

Operating income was USD 7.5 billion (+3%, +11% cc) mainly driven by sales growth, improved gross margin and lower spending, partly offset by higher amortization and lower divestment gains.

Net income was USD 6.0 billion (-1%, +6% cc) as higher operating income was offset by a higher tax rate. EPS was USD 2.62 (0%, +7% cc), growing faster than net income and benefiting from lower weighted average number of shares outstanding.

Core operating income was USD 11.9 billion (+12%, +16% cc) mainly driven by higher sales and improved gross margin. Core operating income margin was 33.2% of net sales, increasing by 2.8 percentage points (+3.6 percentage points cc).

Core net income was USD 10.1 billion (+11%, +15% cc) mainly driven by growth in core operating income. Core EPS was USD 4.44 (+12%, +16% cc), growing faster than core net income benefiting from lower weighted average number of shares outstanding.

Free cash flow from continuing operations amounted to USD 8.3 billion (-12%) compared to USD 9.4 billion in the prior year period, primarily as higher operating income adjusted for non-cash items was more than offset by payments related to legal settlements and lower divestment proceeds.

Innovative Medicines net sales were USD 28.8 billion (+4%, +5% cc) with volume contributing 12 percentage points to growth, pricing a negative 4 percentage points and generic competition had a negative impact of 3 percentage points. Pharmaceuticals BU grew 6% (cc) driven by Entresto (+48% cc), Zolgensma (reaching USD 0.7 billion) and Cosentyx (+12% cc). Growth was partly offset by declines in Lucentis and other ophthalmology products, primarily driven by lower demand due to COVID-19. Oncology BU grew 4% (cc) driven by Promacta/Revolade (+24% cc), Kisqali (+59% cc) and Piqray (reaching USD 0.2 billion).

Sandoz net sales were USD 7.1 billion (-2%, 0% cc) as volume growth of 2 percentage points (cc) was impacted by ongoing disruptions to HCP practices due to COVID-19, which limited patient access to treatments for our retail business. There was a negative price effect of 2 percentage points (cc), despite the benefit from off-contract sales and favorable revenue deduction adjustments. Sales in Europe grew 2% (cc), while sales in the US declined 14%, driven by oral solids. Global sales of Biopharmaceuticals grew 20% (cc) to USD 1.4 billion, with strong growth across all regions.

Discontinued operations

Discontinued operations include the business of Alcon and certain corporate costs directly attributable to Alcon up to the spin-off date. As the Alcon spin-off was completed on April 9, 2019, the first nine months of the prior year included three months of operating results of the divested business.

In the first nine months of 2020, there were no activities related to discontinued operations. In the first nine months of 2019, discontinued operations net sales were USD 1.8 billion, operating income amounted to USD 71 million and net income from discontinued operations was USD 4.6 billion, including the non-taxable non-cash net gain on distribution of Alcon Inc. to Novartis AG shareholders which amounted to USD 4.7 billion. For further details see Note 2 "Distribution of Alcon Inc. to Novartis AG shareholders", Note 3 "Significant transactions – Completion of the spin-off of the Alcon business through a dividend in kind distribution to Novartis AG shareholders" and Note 10 "Discontinued operations".

Total Group nine months

For the total Group, net income amounted to USD 6.0 billion compared to USD 10.6 billion in the prior year, including the non-taxable non-cash net gain on distribution of Alcon Inc. Basic earnings per share was USD 2.62 compared to USD 4.62 in prior year. Cash flow from operating activities for the total Group amounted to USD 9.6 billion and free cash flow to USD 8.3 billion.

Key growth drivers

Underpinning our financial results in the quarter is a continued focus on key growth drivers (ranked in order of contribution to Q3 growth) including:

Entresto (USD 632 million, +45% cc) sustained strong growth with increased patient share across markets, driven by demand as the essential first choice therapy for rEF heart failure.
Zolgensma (USD 291 million, +79% cc) delivered significant growth. Contributing factors included geographic expansion outside the US and increased newborn screening in the US.
Cosentyx (USD 1 012 million, +7% cc) saw continued growth despite lower new patient starts across the market in dermatology and rheumatology due to COVID-19.
Kisqali (USD 183 million, +50% cc) continued strong growth across all geographies, benefiting from the ongoing impact of positive overall survival data.
Promacta/Revolade (USD 442 million, +16% cc) grew across all regions, driven by increased use in chronic immune thrombocytopenia and as first-line treatment for severe aplastic anemia in the US.
Beovu (USD 51 million) launch roll-out continued, with approval now in more than 45 countries.
Jakavi (USD 335 million, +18% cc) growth was driven by strong demand in the myelofibrosis and polycythemia vera indications.
Tafinlar + Mekinist (USD 397 million, +14% cc), continued to show solid growth driven by demand in adjuvant melanoma as well as NSCLC.
Mayzent (USD 49 million) continued to grow steadily. Growth is driven by fulfilling an important unmet need in patients showing signs of progression.
Piqray (USD 83 million, +95% cc) grew significantly in the US as the launch roll-out continued.
Kymriah (USD 122 million, +51% cc) grew strongly in Europe, US and Japan. Coverage continues to expand, with more than 260 qualified treatment centers and 26 countries having coverage for at least one indication.
Adakveo (USD 35 million) US launch continues to progress well, with close to 100% brand awareness among hematologists and expanding payer coverage decisions.
Biopharmaceuticals (USD 498 million, +13% cc) continued strong growth across all regions.
Emerging Growth Markets* Strong growth in China (+13% cc) to USD 667 million was offset by COVID-19 related declines in certain emerging markets. Overall, sales grew 4% (cc).
*All markets except the US, Canada, Western Europe, Japan, Australia and New Zealand
R&D Update – key developments from the third quarter

New approvals and regulatory update

Kesimpta
(Ofatumumab) Received FDA approval as a subcutaneous injection for the treatment of relapsing forms of multiple sclerosis (RMS), to include: clinically isolated syndrome, relapsing-remitting disease and active secondary progressive disease. Kesimpta is the first self-administered, targeted B-cell therapy for RMS patients.
Piqray

Received EC approval (in combination with fulvestrant) for the treatment of HR+/HER2- advanced breast cancer with a PIK3CA mutation, after disease progression following endocrine therapy as monotherapy. Approximately 40% of HR+/HER2- advanced breast cancer patients have a PIK3CA mutation, which is associated with a poor prognosis.
Leqvio
(Inclisiran) Received positive CHMP opinion for the treatment of adults with hypercholesterolemia or mixed dyslipidemia, marking an important milestone towards it becoming potentially available in the EU.
Cosentyx

Received EC approval for the treatment of moderate-to-severe plaque psoriasis in children and adolescents aged 6 to <18 years.
Approved in Japan for non-radiographic axial spondyloarthritis.
Xolair

Received EC approval as an add-on therapy for the treatment of adults with severe chronic rhinosinusitis with nasal polyps (CRSwNP).
Enerzair Breezhaler

Received EC approval, including the first digital companion (sensor and app) that can be prescribed alongside a treatment for uncontrolled asthma.
Received approval in Canada.
Adakveo

Received positive CHMP opinion for the prevention of recurrent vaso-occlusive crises in patients with sickle cell disease. If approved, Adakveo would be the first targeted sickle cell disease therapy available for use in Europe.
Beovu

EMA approved a safety label update to include additional information regarding retinal vasculitis and retinal vascular occlusion, helping guide physicians in their treatment of wet AMD.
AVXS-101 IT FDA has acknowledged the potential of AVXS-101 IT and requested a pivotal confirmatory study to supplement the existing STRONG data and further support the regulatory submission for AVXS-101 IT.
Iptacopan
(LNP023)

EMA granted PRIME designation for iptacopan in C3 glomerulopathy (C3G).
FDA and EMA have granted an orphan drug designation to iptacopan for the treatment of C3G and paroxysmal nocturnal hemoglobinuria (PNH).
Branaplam (LMI070) FDA granted orphan drug designation for branaplam (LMI070) for the treatment of Huntington’s Disease. Branaplam is an orally administered, once weekly, small molecule RNA splicing modulator that is currently under investigation for the treatment of spinal muscular atrophy.
Regulatory submissions and filings

Cosentyx Submitted in the US for pediatric psoriasis indication.
Kesimpta
(Ofatumumab) Submitted in Japan for relapsing multiple sclerosis.
Xolair File accepted in the US for self-administered prefilled syringe.
Results from ongoing trials and other highlights

Asciminib
(ABL001)

Phase III ASCEMBL study met its primary endpoint of superiority in major molecular response rate at 24 weeks for asciminib vs. bosutinib in patients with chronic myeloid leukemia (CML) previously treated with two or more tyrosine-kinase inhibitors. Asciminib is an investigational treatment specifically targeting the ABL myristoyl pocket (STAMP).
Beovu Phase III KITE study in diabetic macular edema (DME) met its primary endpoint, with Beovu 6mg demonstrating non-inferiority to aflibercept 2mg in mean change in best-corrected visual acuity at year one. In a secondary endpoint, Beovu demonstrated superior improvement versus aflibercept in change of central subfield thickness over the period of week 40 through week 52. More than half of patients in the Beovu arm were maintained on a three-month dosing interval through year one. Beovu demonstrated an overall well-tolerated safety profile comparable to aflibercept; in addition the rate of intraocular inflammation was equivalent between Beovu and aflibercept.
Jakavi

Phase III REACH3 study in chronic GvHD met its primary endpoint of demonstrating superior overall response rate at week 24 in patients compared to best available therapy. The study also met key secondary endpoints, significantly improving failure-free survival and patient-reported symptoms.
Kymriah

Phase II ELARA trial met its primary endpoint (complete response rate) at the interim analysis, demonstrating clinically meaningful benefit in patients with relapsed or refractory follicular lymphoma. No new safety signals were observed.
Iptacopan
(LNP023)

Data from two ongoing Phase II studies for iptacopan in PNH and C3G were presented at the European Society for Blood and Marrow Transplantation and the American Society of Nephrology, respectively.
In the PNH study, compared to baseline, iptacopan substantially improved hematological response as add-on therapy to eculizumab, including a clinically relevant increase of Hb by 2.87 g/dL (p<0.001) in the absence of red blood cell transfusions. These effects were retained in the seven of ten patients who discontinued eculizumab.
In the C3G study, iptacopan treatment led to a 49% reduction in urine protein/creatinine ratio at week 12 when compared to baseline as well as stabilization of renal function (assessed by estimated glomerular filtration rate).
In both studies iptacopan showed a favorable safety and tolerability profile.
Zolgensma Phase III STR1VE-EU interim data, in SMA patients with more aggressive disease at baseline, demonstrated significant therapeutic benefit, including prolonged event-free survival, increased motor function and milestone achievement.
Leqvio
(Inclisiran) Pooled data from Phase III ORION-10 and -11 trials, presented at the European Society of Cardiology, showed highly consistent efficacy in lowering low-density lipoprotein cholesterol (LDL-C) with a safety and tolerability profile similar to placebo.
Kisqali Phase III NATALEE trial protocol was amended to increase the sample size (from c.4000 patients to c.5000 patients). The final analysis (event-driven trial) is expected for end 2022 and submission to occur in 2023.
Spartalizumab (PDR001) combination with Tafinlar + Mekinist The Phase III COMBI-i study did not meet its primary endpoint of investigator-assessed progression-free survival for patients with advanced BRAF V600-mutated melanoma. However, the study underscores the importance of Tafinlar + Mekinist as an effective treatment option in such patients. Data from COMBI-i show positive durable responses and PFS benefit for patients treated with Tafinlar + Mekinist in the comparator arm of the trial, despite the study not meeting the primary endpoint.
Canakinumab The Phase III CANOPY-1 trial in patients with non-small cell lung cancer passed the interim analysis; the study continues as planned.
ESG update

ESG, a key strategic priority for the Novartis Board of Directors and Executive Committee, is integrated across Novartis operations. Novartis focuses on four strategic ESG pillars defined as material by stakeholders: Ethical Standards, Pricing and Access, Global Health Challenges and Corporate Citizenship. In each of these areas, the company has developed ambitious and challenging targets. These include addressing access and global health challenges, which are areas with the highest unmet need worldwide and where Novartis can have the greatest material ESG impact. Novartis is also reinforcing its ambition to be a healthcare industry leader in environmental sustainability, further strengthening its already ambitious target for carbon neutrality to include its entire supply chain by 2030. Novartis issued the healthcare industry’s first sustainability linked bond demonstrating its commitment to wider society. Recent ESG rating agencies upgrades were based on recent settlements, strong governance including extensive ethics policies, leading programs to expand access to healthcare to people in resource-constrained settings and comprehensive employee engagement strategy relative to peers.

Capital structure and net debt

Retaining a good balance between investment in the business, a strong capital structure and attractive shareholder returns remains a priority.

During the first nine months of 2020, Novartis repurchased a total of 14.7 million shares for USD 1.3 billion on the SIX Swiss Exchange second trading line to mitigate dilution related to participation plans of associates. In addition, 1.6 million shares (USD 0.2 billion) were repurchased from associates. In the same period, 25.8 million shares (for an equity value of USD 1.4 billion) were delivered as a result of options exercised and share deliveries related to participation plans of associates. Consequently, the total number of shares outstanding increased by 9.5 million versus December 31, 2019. Novartis aims to offset the dilutive impact from equity based participation plans of associates over the remainder of the year. These treasury share transactions resulted in a decrease in equity of USD 0.1 billion and a net cash outflow of USD 0.2 billion including the benefit from option proceeds.

In the third quarter of 2020, Novartis issued the first healthcare industry sustainability-linked bond with a notional amount of EUR 1.85 billion (USD 2.2 billion) and a coupon of 0.00%, reinforcing its commitment to patient access.

As of September 30, 2020, the net debt increased to USD 25.4 billion compared to USD 15.9 billion at December 31, 2019. The increase was mainly driven by the acquisition of The Medicines Company for USD 9.6 billion and the USD 7.0 billion annual dividend payment, partly offset by USD 8.3 billion free cash flow during the first nine months of 2020.

As of Q3 2020, the long-term credit rating for the company is A1 with Moody’s Investors Service and AA- with S&P Global Ratings.

The Group has not experienced liquidity or cash flow disruptions during the nine months of 2020 due to the COVID-19 pandemic. We believe that Novartis is well positioned to meet its ongoing financial obligations and has sufficient liquidity to support our normal business activities.

2020 Outlook

Barring unforeseen events

Continuing operations (Excluding Alcon from both 2019 and 2020)

Net Sales Expected to grow mid single digit (cc)

From a divisional perspective, we expect net sales performance (cc) in 2020 to be as follows:
Innovative Medicines: expected to grow mid single digit
Sandoz: expected to grow broadly in line with prior year, decreased from low single digit
Core operating income Expected to grow low double digit to mid teens (cc), upgraded from low double digit
Our guidance assumes that we see a continuation of the return to normal global healthcare systems including prescription dynamics, particularly ophthalmology, in Q4 2020. In addition, we assume that no Gilenya and no Sandostatin LAR generics enter in 2020 in the US.

Foreign exchange impact
If late-October exchange rates prevail for the remainder of 2020, the foreign exchange impact for the year would be negative 1 percentage points on net sales and negative 4 percentage points on core operating income. The estimated impact of exchange rates on our results is provided monthly on our website.

1 Continuing operations include the businesses of Innovative Medicines and Sandoz Division including the US generic oral solids and dermatology portfolio as well as the continuing corporate functions and discontinued operations include the business of Alcon. See page 42 of the Condensed Interim Financial Report for full explanation.
2 Constant currencies (cc), core results and free cash flow are non-IFRS measures. An explanation of non-IFRS measures can be found on page 54 of the Condensed Interim Financial Report. Unless otherwise noted, all growth rates in this Release refer to same period in prior year.