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Novartis: it's an uphill climb to the bottom

Healthcare European Pharmaceuticals Novartis It's an uphill climb to the bottom from Equal Weight Earnings and execution headaches: With the sector at a 30% premium to the EU
market (1yr fwd PE) earnings and execution uncertainties are not en vogue, which is why we now rate Novartis a relative UW (was EW). The company's top-line growth is >50% dependent on two launch products (Entresto in heart failure and Cosentyx in lowered -6% from CHF 90.00 psoriasis), which both need to deliver on current expectations to justify today's valuation - failure would push the ‘15-20 EPS CAGR below sector average exposing Price (13-Jan-2016) 17% of ‘20 EPS and remove CHF9/share in valuation. With Alcon (second largest division) potentially declining in ‘16 we see little reason for the stock to shed its discount as earnings and growth trajectory are at risk; there isn't enough pipeline news flow to protect the multiple. UW rating, PT CHF85 from CHF90 (due to poorer Alcon outlook and slower Entresto ramp). Market Cap (CHF mn) Launch dependency: Cosentyx and Entresto are estimated (company provided
Shares Outstanding (mn) consensus) to deliver a combined $1.5bn in sales in ‘16. Our proprietary data suggests that is a tough ask. We are optimistic on Cosentyx but less on the Entresto uptake as 52 Wk Avg Daily Volume (mn) even amongst specialists the new written prescription share remains low. Unfortunately 52 Wk Avg Daily Value (CHF mn) before Medicare blocks are removed standard prescription trends remain a poor tracker Dividend Yield (%) of performance but worryingly Corlanor prescriptions (also HF) are showing no signs of Return on Equity TTM (%) inflection following the removal of NDC blocks. Should the same hold true for Entresto Current BVPS (USD) in the next few weeks questions will start concerning whether consensus estimates Source: Thomson Reuters looking for $5bn in revenues in 2020 are reasonable. Halving the Entresto sales estimate removes 17% from ‘20 earnings and exposes CHF9/share in valuation. Price Performance Alcon headache: Alcon's innovation challenges and overall growth malaise now seems
well understood but despite management's promise of a ‘growth acceleration plan'
announced with FY15 results there is no obvious quick fix in our view. Asset disposals
that are earnings dilutive but margin and growth enhancing are not obvious and there
seems little choice but to sit it out. Moving Alcon pharma into Novartis pharma is
clearly an option but can do little in light of the exclusivity losses that face $300m of
Alcon US pharma sales in 2016 alone.
Valuation and risk: We value Novartis through a DCF valuation, assuming a risk-free
rate derived from the yield curve, an equity risk premium of 5%, an asset beta of 0.9, pre-tax cost of debt based on CDS spreads and a target debt ratio of 10%. These assumptions result in a dynamic cost of capital and our price target of CHF85. European Pharmaceuticals
NOVN.VX: Financial and Valuation Metrics EPS USD
Michael Leuchten
+44 (0)20 3134 3039 4.99A 5.19A 5.06E 5.34E 5.80E 4.99A 5.19A 5.00E 5.32E 6.17E Mark Purcell
5.01A 5.14A 5.09E 5.31E 5.99E +44 (0)20 3134 7189 16.4 15.8 16.2 15.4 14.2 Source: Barclays Research. Consensus numbers are from Thomson Reuters Olivia Capra
+44 (0)20 3555 2669 Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Israel Akinrinsola Investors should consider this report as only a single factor in making their investment decision. +44 (0)20 3134 5995 This research report has been prepared in whole or in part by equity research analysts based outside the US who are not registered/qualified as research analysts with FINRA. PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 16. Barclays Novartis European Pharmaceuticals
Industry View: NEUTRAL
Stock Rating: UNDERWEIGHT
Income statement ($mn)
2014A 2015E 2016E
CAGR Price (13-Jan-2016)
CHF 82.85
Price Target
CHF 85.00
y Underweight? Following a drastic portfolio
ructuring the company had been on track for a oothed earnings profile. However the recent weakness in Alcon and the heavy reliance on Entresto Pre-tax income (adj) 2.9% and Cosentyx to deliver growth and margin exposes Net income (adj) 2.4% 2016 earnings estimates as well as the growth trajectory to risk. Diluted shares (mn) Upside case
CHF 117.00
The upside to our investment case resides mainly Margin and return data
Average with restructuring where every $1bn in savings would
Gross margin (%) e. A $3bn savings program would add EBIT (adj) margin (%) ur margin estimate, driving the upside Pre-tax (adj) margin (%) Net (adj) margin (%) CHF 58.00
our investment case resides with an inability to protect the gross margin as Gleevec goes Balance sheet and cash flow ($mn)
CAGR off patent (CHF6/share) as well as Entresto
commercial failure in heart failure (CHF18/share). Tangible fixed assets Residual downside resides with further Lucentis Intangible fixed assets Cash and equivalents 125,387 121,755 122,196 -0.4% Upside/Downside scenarios
Short and long-term debt Other long-term liabilities Total liabilities Total invested capital Net debt/(funds) Provisions 12,524 Shareholders' equity Change in working capital Cash flow from operations Capital expenditure Valuation and leverage metrics
EV/EBITDA (adj) (x) Equity FCF yield (%) Dividend yield (%) Total debt/capital (%) Net debt/equity (%) Selected operating metrics
Source: Company data, Barclays Research Note: FY End Dec Barclays Novartis Investment summary Novartis has de-rated over the last three months on the back of two main reasons in our view – continuing weak Alcon performance and a slower than hoped for (by the bulls) initial uptake of Entresto (Novartis' main pipeline/launch product) in heart failure. The stock has pulled back to below its 4 year average relative to the sector and we think it will struggle shed this discount as uncertainty about the growth outlook will unlikely subside anytime soon. The answer to the question ‘has the valuation reached interesting levels' is a clear ‘no' from our perspective. FIGURE 1
Novartis has de-rates and given top-line exposure recovery seems unlikely
PE (x) rel to sector, Source: Thompson DataStream, Barclays Research Despite the promised Alcon ‘growth acceleration plan' (due with FY 2015 late January) there is unlikely going to be a quick fix for the division and with >50% of 2015-20 top-line growth coming from only two products (Entresto in heart failure and Cosentyx in psoriasis) the ongoing lack of visibility especially for Entresto is going to be a major issue for the multiple in our view. FIGURE 2
Novartis top-line growth is heavily dependent on Entresto and Cosentyx
Source: Barclays Research The problem is that with the Gleevec US erosion unavoidable from February and Alcon facing headwinds that are not going to be fixed on the quick the company may be forced Barclays Novartis into investing less into the launches than hoped in 2016. In turn that means the launch trajectory may stay sub-optimal for now and if our assumption about heart failure guidelines is correct (we think it is unlikely that generic ACE inhibitors will be removed from guidelines which means tough pre-authorisation requirements are here to stay) there may be little evidence to boost confidence in the $5bn consensus (company provided) peak sales estimate for Entresto. For illustrative purposes should Entresto only reach half the estimated sales potential Novartis' EPS CAGR drops to 5% and below the sector average resulting in a PEG of almost 3x, which would screen expensive v the sector – in this scenario 2020 EPS estimates would fall 17%. This sort of execution risk we believe will hold the stock back in the absence of meaningful news flow in 2016 which is why we rate Novartis a relative UW (from EW). FIGURE 3
Under scenario where Entresto reaches 50% of current estimates the stock is expensive
($m, except per share data)
36 350 1000 2000 3000 4000 100 850 1,750 2,900 4,000 4,950 5.06 5.34 5.80 6.67 7.25 7.35 8% 5.11 5.31 6.06 7.06 7.57 7.92 9% Basic EPS Scenario 50% Entresto % below consensus -1% -7% -11% Source: Barclays Research, Company provided consensus Entresto – we have three problems (market potential isn't one) As mentioned above Novartis' top-line is heavily dependent on Entresto. Confidence in the product's performance will remain a significant contributor to the stock's multiple. IMS prescription trends remain a poor tool to track the product's outlook at the moment as 65% of the product's potential patient population is treated by Medicare and 10% by Medicaid, which means reimbursement blocks (NDC blocks) deny reimbursement in the first six months for the majority of patients before things start to normalise. This at least has been the excuse why prescription trends have been slow. For illustrative purposes assuming that the current US launch trajectory continues in a linear manner, IMS prescription data projects US Entresto revenues of c$350m in 2020E. It is thought that the launch trajectory will pick-up a) once Medicare/Medicaid reimbursement is achieved, and b) after ACC/AHA guideline recommendation for Entresto in 2016. Unfortunately there has been no inflection for Amgen's Corlanor (also heart failure) which has worked through the majority of the National Drug Code (NDC) blocks and a Class1A/Class1B guideline recommendation for Entresto is unlikely to displace the Class1A recommendation for ACE inhibitors in symptomatic heart failure. It seems that at the moment pharmacy benefit managers (PBMs) have put tough pre-authorisation restrictions in place for Entresto (including prior failure on ACE inhibitors), which we believe will continue to dampen uptake especially in the primary care prescriber base which accounts for just under half of total written prescriptions. We would not be surprised to see Novartis management talk down the Entresto uptake in H1 2016 arguing for acceleration in H2 that then still will be slow. Barclays Novartis Problem #1 – no inflection for Corlanor
Novartis estimates that the potentially eligible heart failure with reduced ejection fraction (HFrEF) patient population NYHA II-IV for Entresto is split 25% commercial, 65% Medicare Part D and 10% Medicaid/other. Whilst on the commercial side some formulary acceptance was achieved in 2015, PBMs have put tough pre-authorisation restrictions in place including prior failure on beta blockers and ACE inhibitors. For Medicare no reimbursement was anticipated for 2015 with National Drug Code (NDC) blocks in place. These NDC blocks result in significant out-of-pocket expenses for patients and even after formulary placement co-pays may represent costs up to 2-3x commercial co-pays (prior to falling into the Medicare doughnut hole) and normally these NDC blocks are removed after six (Entresto was launched in July 2015). This means in theory we should start to see an improvement in prescribing trends from January (gradual but improvement nevertheless). FIGURE 4
Whilst Entresto's launch remains ahead of Corlanor's the lack of inflection is worrying
Source: IMS Health, Barclays Research Amgen's Corlanor in chronic heart failure was launched in April 2015 (three months before the roll-out of Entresto) and the removal of NDC blocks should already have led to a pick-up in prescription trends as reimbursement expanded from commercial to the Medicare/Medicaid segments. Unfortunately this has not happened. Whilst significant prior authorisations and step edits are being imposed, we understand that the majority of Corlanor claims are getting approved with the last NDC blocks (Kaiser and United Health) removed by the end of 2015/early 2016. However despite access to >70% of covered lives, the Corlanor launch trajectory has remained linear since May 2015 and there has been no inflection point as NDC blocks have been removed. There is a different method of action and there is debate how applicable the European SHIFT trial is for the US market for Corlanor, but the lack of inflection is noticeable. At this point we do not understand why the removal of NDC blocks would provide an inflection point for Entresto prescriptions and not Corlanor prescriptions. Continued linear performance of prescriptions trends would not only be an issue for 2016 estimates but also the longer term outlook. Problem #2 – will guideline updates boost Entresto in 2016?
Entrestro was approved by the FDA 7 July 2015, based on positive data from the PARADIGM-HF study (study was stopped early due to an overwhelming benefit with Entresto compared to an active control of ACE inhibitor enalapril dosed 10mg BID). Whilst the enalapril dose used in the trial is within the recommended dose range (per guidelines 10-20mg BID) and in-line with the two trials that led to inclusion of enalapril in HF guidelines (16.6mg and 18.4mg in the COnSEnSUS trial and SOLVD trials, respectively), the Barclays Novartis trial did not use the maximum recommended dose (40mg daily as a single dose or in two divided doses). FIGURE 5
2013 ACCF/AHA Guideline for the Management of Heart Failure (published June 2013)
Treatment recommendation
Conditions for which there is evidence In all patients with a recent or remote history of MI or ACS and reduced EF, ACE
and/or general agreement that this inhibitors should be used to prevent symptomatic HF and reduce mortality. In
procedure is useful and effective. patients intolerant of ACE inhibitors, ARBs are appropriate unless contraindicated
Based on the presence of multiple In all patients with a recent or remote history of MI or ACS, statins should be used to randomized clinical trials. prevent symptomatic HF and cardiovascular events In patients with structural cardiac abnormalities, including LV hypertrophy, in the absence of a history of MI or ACS, blood pressure should be controlled in accordance with clinical practice guidelines for hypertension to prevent symptomatic HF ACE inhibitors should be used in all patients with a reduced EF to prevent
symptomatic HF, even if they do not have a history of MI
Based on the presence of a single In all patients with a recent or remote history of MI or ACS and reduced EF, evidence- randomized trial or nonrandomized based beta blockers should be used to reduce mortality Based on expert consensus Beta blockers should be used in all patients with a reduced EF to prevent symptomatic HF, even if they do not have a history of MI Conditions for which there is conflicting To prevent sudden death, placement of an ICD is reasonable in patients with evidence and/or a divergence of opinion asymptomatic ischemic cardiomyopathy who are at least 40 days post-MI, have an LVEF about the usefulness/efficacy of of 30% or less, are on appropriate medical therapy, and have reasonable expectation of performing the procedure survival with a good functional status for more than 1 year Weight of evidence/opinion is in favor of usefulness/ efficacy Based on the presence of a single randomized trial or nonrandomized studies Conditions for which there is evidence Nondihydropyridine calcium channel blockers with negative inotropic effects may be and/or general agreement that the harmful in asymptomatic patients with low LVEF and no symptoms of HF after MI procedure is not useful/effective and in some cases may be harmful Based on expert consensus Source: Barclays Research, ACCF/AHA Guidelines; LOE – "Level Of Evidence" The ACCF/AHA treatment guidelines for the management of heart failure classify the level of agreement on whether a medicine or procedure should be used and the level of evidence to support the recommendation. The use of ACE inhibitors such as enalapril for the treatment of patients with symptomatic heart failure whether they have a history of myocardial infarction or not is given the highest Class 1A recommendation in the guidelines. We believe that the ACCF/AHA treatment guidelines for the management of heart failure could be updated in 2016 to include treatment with Entresto based on the PARADIGM-HF trial data. However whilst Entresto could be potentially given a Class 1A / Class 1B recommendation, it is unlikely that the use of ACE inhibitors will be entirely demoted in the guidelines from a Class 1A recommendation. As an example Brilinta demonstrated a 16% reduction in the risk of cardiovascular death, non-fatal myocardial infarction and stroke in secondary prevention acute coronary syndromes patients compared to clopidogrel (a treatment benefit not dissimilar to that seen with Entresto over enalapril) yet the ACCF/AHA treatment guidelines for the management of acute coronary syndromes (updated October 2014) equally recommended clopidogrel and Brilinta at a Class 1B level but accompanied by a Class2a LOE B guideline that "it is reasonable to choose Brilinta over clopidogrel" in patients with NSTE-ACS treated with an early invasive, ischemia-guided and/or coronary stenting strategy. Barclays Novartis Therefore in our view, Entresto is likely to continue to be impacted by tough prior-authorisation restrictions put in place by PBMs and patients will have to fail on ACE inhibitors ahead of starting treatment with Entresto. Problem #3 – no help yet from heart failure with preserved ejection fraction
Entresto US revenues are currently annualising at $31m based on monthly IMS MIDAS data emphasising the difficult dynamics discussed above. Given the early stages of the roll-out, we analysed leading indicator data from AlphaImpactRx to hunt for clues as to what could be holding back the Entresto launch. These data suggest that the heart failure market is currently split 73% reduced ejection fraction and 27% preserved ejection fraction in terms of Total Written prescriptions (TWRx), which is somewhat different from the 50:50 split in terms of patients that Novartis has guided towards ahead of the PARAGON-HF study which is expected to complete May 2019. Whilst cardiologists make just over two thirds of New Written Prescription (NWRx) start decisions, TWRx's are split 56:44 between cardiologists and primary care physicians. FIGURE 6
Entresto and Corlanor revenue progression has been slow
Source: IMS MIDAS FIGURE 7
Entresto has captured a modest share of New Written Prescription starts in reduced ejection fraction heart failure patients
Parameter
NWRx share
TWRx share
% HF market that is dynamic
Source: Barclays Research, AlphaImpactRx This data suggests that there is no off-label use of Entresto in patients with preserved ejection fraction heart failure. As of November 2015, Entresto is capturing a 6.9% NWRx share of the reduced ejection fraction heart failure opportunity, with a TRWx share of just 2.4%. We believe that the primary care prescribing base is struggling the most with the Barclays Novartis tough prior-authorisation restrictions put in place by PBMs, which is reflected in an NWRx share of 4.7%. We will continue to follow these data to see whether after capturing poorly controlled rEF heart failure patients, Entresto's NWRx share shows changes in dynamics. Whether the removal of NDC blocks and the potential for ACCF/AHA guideline changes will lead to a pickup in NWRx in 2016 remains to be seen. For now we are worried to see that even amongst specialists the new written prescription share is low (we would expect that specialists are more willing and able to get around pre-authorisation requests). Cosentyx faring better (for now) Cosentyx (psoriasis) is currently faring better than Entresto. Initial prescription trends may have been flattered by the loading dose of the product followed by a slight slowdown due to the monthly maintenance dosing (that is what our TWRx data suggests), and potentially there also is a small slowdown as the low hanging fruits of TNF/Stelara failures has been captured leaving the product to fight more for 1st line and methotrexate/Otezla failures. However, assuming the product continues to follow its linear launch trajectory that the IMS total prescriptions show, it is actually on track to make $1bn in 2016 revenues (our 2016 estimate v consensus $600m) in the US alone. IMS prescription volume suggests this market is expanding allowing for some share loss whilst still delivering overall growth. FIGURE 8
New written prescription share - dermatologists
Source: AlphaImpactRx Barclays Novartis FIGURE 9
New written prescription share - dermatologists
Source: ImpactRx FIGURE 10
Psoriasis market prescription trends - IMS
Source: IMS Health Cosentyx' performance in Europe is harder to grasp for now (early days) but performance in countries like Germany is encouraging (33% value share). Barclays Novartis FIGURE 11
Cosentyx v Stelara EU revenues
Source: IMS MIDAS As US weekly prescriptions continue to deliver, confidence in Cosentyx estimates should increase in the next few months at least ahead of the launch of competitor ixekizumab (Lilly) in H1 2016. This launch of Lilly's competing anti-IL17 agent will provide an important focus point in the roll-out of Cosentyx, with additional share of voice providing an opportunity for the IL-17 class to make further inroads into the share of incumbents Stelara, Humira and Enbrel. However on the flip-side, an important focus will be how much market share ixekizumab captures from Cosentyx based on its efficacy and more convenient dosing profile. FIGURE 12
Cosentyx and ixekizumab dosing schedule
Wk 10 Wk 11
Cosentyx 2x150mg 2x150mg 2x150mg 2x150mg ixekizmb 2x80mg 1x80mg Source: Barclays Research Cosentyx is administered as two 150mg injections at the initiation of therapy, week 1, 2, 3, 4 and then monthly ie 8 individual injections in the first four weeks of treatment (10 in the first eight weeks). In the pivotal psoariasis trials at 12 weeks, Cosentyx demonstrated a PASI75 score (simplistically, 75% skin clearance) in 67-87% of patients and PASI90 score in 59% of patients. Lilly's ixekizumab is expected to be available in an autoinjector at launch, administered as two 80mg injections on treatment initiation followed by a single injection at week 2, 4, 6, 8, 10, 12 (four injections in the first four weeks and six in the first eight weeks) or a single injection at week 4, 8, 12 followed by a single 80mg injection every 4 or 12 weeks. Despite a lower injection burden, ixekizumab was able to demonstrate a PASI75 score in 87-90% of patients, a PASI90 score in 68-71% and a PASI100 in 35-41% of patients. The catch-22 is that just as the 2016/17 Entresto estimates may start to look shaky, confidence in Cosentyx might also take a hit as Lilly's product takes share. Alcon – waiting for the growth acceleration plan The loss of exclusivities within Alcon pharma has already impacted 2015 but an additional $300m in US revenues alone are exposed in 2016. On top of that Alcon's surgical division continues to struggle with a negative mix effect as patients are opting for mono-focal lenses instead of the higher priced multi-focal lenses (on top of that reimbursement systems Barclays Novartis outside the US still don't really help). In general Alcon is facing an innovation problem that has driven a 2% decline in revenues (in constant currencies) in Q3, is likely to drive a further decline in Q4 and with the above mentioned loss of additional exclusivities means 2016 is also facing an uphill battle as headwinds will not annualise until late in the year. In response to this management has promised a ‘grow acceleration plan' (read restructuring plan?) to be announced with the FY results. As this mostly seems to be an innovation problem though we struggle to see how aggressively management would be able to drive growth in absence of new product launches (that will take time) unless products are in-licensed (Roche opting into ex-US Fovista rights in November clearly did not help). Here are the potential options we currently see none of which really deliver the quick fix the company may want given that 2016 is already a challenging year for the group given the Gleevec US patent expiry: • Move Alcon pharma into Novartis pharma – there may be synergies to be had from the Lucentis and Alcon pharma sales set-up/overlap but ultimately this would equate to watering the issue down by hiding it in the much larger Novartis pharma unit. Unfortunately unless the surgical division starts to grow significantly faster the impact on Alcon sales growth would be limited in the near term • Dispose of contact lens solutions – the structural shift to daily contact lenses has had a negative effect on lens solution revenues particularly as the EM growth has not been strong enough to offset this. Novartis could look to dispose of the solutions business but given its size (we estimate $556m in 2015 or 6% of Alcon) this is not enough to move the needle from a growth perspective. It would however slightly benefit the margin • Cost efficiency program – whilst management has previously stated that the focus for Alcon must be on the top-line and not the margin all bets may be off given things have not gone according to plan. Given that Alcon seems to be facing an innovation problem cuts to R&D seems unlikely in our view so efficiency gains would be limited to COGS and SG&A. An efficiency program is possible but with headwinds annualising in H2 we suspect management may take a watchful waiting approach before implementing such a program Overall whilst management has options, it seems unlikely they will move the needle drastically or quickly and impacts in 2016 are likely going to be limited. Barclays Novartis News flow – not enough in the tank 2016 is an execution year (Gleevec erosion v new oncology products acquired from GSK v Entresto and Cosentyx launch). What 2016 isn't really is a pipeline year. Overall there are only few items that we believe could cause some excitement (Tasigna treatment free remission data, LEE011, Tekturna ATMOSPHERE, serelaxin RELAX-AHF2) but there is enough controversy around each one of those items for the execution risk to remain in the driving seat. What % of Tasigna patients reaches sustained MR4.5 over 2 years and how does this stack up against Gleevec generics and tolerability being the main driver of switches in the CML market? Will Pfizer convert the accelerated Ibrance approval into full approval prior to LEE011 filing and will Lilly steal the show with abemaciclib (breakthrough status)? Would ATMOSPHERE overcome the Tasigna renal safety concerns? Who would pay for serelaxin (ER product)? Novartis' CEO is probably right that the company's early pipeline is not appreciated enough but this pipeline keeps moving out a year every year which means the near term challenges are a bigger concern for now. FIGURE 13
Novartis near-term news flow
Impact Comment
PKC412 filing in AML Event driven pIII trial so pushed into 2016 PKC412 filing in aggressive systemic Filing has shifted to 2016 to allow longer follow-up time for the pivotal Afinitor approval in advanced non- Filed Q3 2015 in US, Japan and EU functional carcinoid tumors Signifor filing in Crushing's disease Patients with MR4.5 with >2 yr of Tasigna and 1yr of sustained MR4.5 Tasigna treatment free remission filing High discontinued treatment and were monitored for 1 year LEE011+letrozole filing in HR+/HER2- Phase III study enrolled but no pII data and Pfizer gained accelerated postmenopausal advanced breast cancer approval for Ibrance and has survival data H1 2016. Lilly's abemaciclib has 1st line breast cancer (MONALEESA-2) breakthrough status and does not require treatment holiday (data 2017) Serelaxin RELAX-AHF2 trial in acute heart Designed to replicate the mortality results from RELAX-AHF. Trial significantly larger than RELAX-AHF. Not stopped at interim ATMOSPHERE: Tekturna chronic heart Impact of aliskiren on cardiovascular morbidity and mortality in patients failure outcome study results with acute and chronic congestive heart failure on top of standard therapy In Aug. 2012, Novartis acquired rights from University of Pennsylvania to CART-19 now identified as CTL019 BYM338 filing in sporadic inclusion body Phase II data presented at American Neurological Association October 2013. Received FDA Breakthrough Therapy designation, Q3 2013 Ilaris/ACZ885 filing in hereditary periodic Registration trial FPFV June 2014 Fovista (OAP030A/E10030) filing in wet Roche has opted in as of November 2015 Gilenya filing in chronic inflammatory demyelinating polyradiculoneuropathy Arzerra CLL filing (relapsed) Afinitor filing TSC seizures Was meant to be 2017 but lower than expected event rate pushed filing Afinitor filing DLBCL out but now saying 2016 again BKM120+fulvestrant filing in mBC ER+ AI BELLE-2 data disappointing - Novartis press release said no benefit overall resistant/mTOR naïve but looking at subgroups BKM120+fulvestrant filing in 3rd line mBC Promacta/Revolade filing myelodysplastic syndrome / AML associated thrombocytopenia Tafilnar/Mekinist filing in V600+ NSCLC Barclays Novartis Tafilnar/Mekinist filing in V600+ adjuvant Phase III trial initiated 2014. Novartis has entered into a clinical Zykadia/LDK378 ALK+ NSCLC post collaboration with BMY to evaluate Zykadia, INC280 and EGF816 in chemo, crizotininb naïve filing combination with BMY's nivolumab in Phase I/II trials in NSCLC Promacta/Revolade filing myelodysplastic Gilenya pIII in chronic inflammatory demyelinating neuropathy Ilaris/ACZ885 filing secondary prevention Interim analyses mid 2015 and H2 2016 LCI699 filing in Cushing's Study design changed from single arm to randomized double-blinded trial KAE609 filing in malaria CTL019 filing in DLBCL Arzerra NHL (refractory) filing Arzerra NHL (relapsed) filing Cosentyx/AIN457 filing in non- radiographic axial spondyloarthritis EGF816 filing in solid tumours INC280 filing in NSCLC LEE011+tamoxifene+goserelin or NSAI+goserelin filing in HR+/HER2- premenopausal advanced breast cancer 1st line (MONALEESA-7) QVM149 asthma filing Zykadia/LDK378 ALK+ NSCLC (brain LEE011 filing in solid tumors Source: Company data, Barclays Research Barclays Novartis FIGURE 14
Novartis 4Q15 preview
Barclays
Continuing ($m except per share data)
Gross profit
Marketing & sales % of revenues Research & development % of revenues % of revenues Other income & expense Operating income
Core operating profit
Income from associate companies Net financial income Income before tax
Net income
Minority interest NI attributable to Novartis shareholders 2,450 Average number of shares outstanding Core EPS (basic) Sales by division
Pharmaceuticals 7,860 Core EBIT by division
Pharmaceuticals 1,977 Corporate/Other (62) Source: Company data, Barclays Research Barclays Novartis FIGURE 15
Novartis 4Q15 preview
Mekinist/Tafilnar 0 Sandimmun/ Neoral Comtan/Stalevo 89 Total Pharma sales
Source: Barclays Research, Company data Barclays Novartis ANALYST(S) CERTIFICATION(S):
We, Michael Leuchten, Mark Purcell and Olivia Capra, hereby certify (1) that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report. IMPORTANT DISCLOSURES CONTINUED
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services, if applicable) from this issuer within the past 12 months.
L: This issuer is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate.
M: This issuer is, or during the past 12 months has been, a non-investment banking client (securities related services) of Barclays Bank PLC
and/or an affiliate.
N: This issuer is, or during the past 12 months has been, a non-investment banking client (non-securities related services) of Barclays Bank PLC
and/or an affiliate.
O: Barclays Capital Inc., through Barclays Market Makers, is a Designated Market Maker in this issuer's stock, which is listed on the New York
Stock Exchange. At any given time, its associated Designated Market Maker may have "long" or "short" inventory position in the stock; and its
associated Designated Market Maker may be on the opposite side of orders executed on the floor of the New York Stock Exchange in the stock.
P: A partner, director or officer of Barclays Capital Canada Inc. has, during the preceding 12 months, provided services to the subject company for
remuneration, other than normal course investment advisory or trade execution services.
Q: Barclays Bank PLC and/or an affiliate is a Corporate Broker to this issuer.
R: Barclays Capital Canada Inc. and/or an affiliate has received compensation for investment banking services from this issuer in the past 12
Barclays Novartis IMPORTANT DISCLOSURES CONTINUED
S: Barclays Capital Canada Inc. is a market-maker in an equity or equity related security issued by this issuer.
T: Barclays Bank PLC and/or an affiliate is providing equity advisory services to this issuer.
U: The equity securities of this Canadian issuer include subordinate voting restricted shares.
V: The equity securities of this Canadian issuer include non-voting restricted shares.
W: Barclays Bank PLC and/or an affiliate should be assumed to be an actual beneficial owner of 1% or more of all the securities (including debt
securities) of this issuer as of the end of the month prior to the research report's issuance.
Risk Disclosure(s)
Master limited partnerships (MLPs) are pass-through entities structured as publicly listed partnerships. For tax purposes, distributions to MLPunit holders may be treated as a return of principal. Investors should consult their own tax advisors before investing in MLP units. Guide to the Barclays Fundamental Equity Research Rating System:
Our coverage analysts use a relative rating system in which they rate stocks as Overweight, Equal Weight or Underweight (see definitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry (the "industry coverage universe"). In addition to the stock rating, we provide industry views which rate the outlook for the industry coverage universe as Positive, Neutral or Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone. Stock Rating
Overweight - The stock is expected to outperform the unweighted expected total return of the industry coverage universe over a 12-month
investment horizon.
Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the industry coverage universe over a 12-
month investment horizon.
Underweight - The stock is expected to underperform the unweighted expected total return of the industry coverage universe over a 12-month
investment horizon.
Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable or to
comply with applicable regulations and/or firm policies in certain circumstances including where the Investment Bank of Barclays Bank PLC is
acting in an advisory capacity in a merger or strategic transaction involving the company.
Industry View
Positive - industry coverage universe fundamentals/valuations are improving.
Neutral - industry coverage universe fundamentals/valuations are steady, neither improving nor deteriorating.
Negative - industry coverage universe fundamentals/valuations are deteriorating.
Below is the list of companies that constitute the "industry coverage universe": European Pharmaceuticals
Actelion (ATLN.VX) Almirall SA (ALM.MC) AstraZeneca (AZN.L) Bayer AG (BAYGn.DE) GlaxoSmithKline (GSK.L) H Lundbeck A/S (LUN.CO) Hikma Pharmaceuticals (HIK.L) Merck KGaA (MRCG.DE) Novartis (NOVN.VX) Novo Nordisk (NOVOb.CO) Sanofi (SASY.PA) Distribution of Ratings:
Barclays Equity Research has 2829 companies under coverage. 41% have been assigned an Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 50% of companies with this rating are investment banking clients of the Firm. 39% have been assigned an Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 43% of companies with this rating are investment banking clients of the Firm. 16% have been assigned an Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 37% of companies with this rating are investment banking clients of the Firm. Guide to the Barclays Research Price Target:
Each analyst has a single price target on the stocks that they cover. The price target represents that analyst's expectation of where the stock will trade in the next 12 months. Upside/downside scenarios, where provided, represent potential upside/potential downside to each analyst's pricetarget over the same 12-month period. Top Picks:
Barclays Equity Research's "Top Picks" represent the single best alpha-generating investment idea within each industry (as defined by the relevant Barclays Novartis IMPORTANT DISCLOSURES CONTINUED
"industry coverage universe"), taken from among the Overweight-rated stocks within that industry. Barclays Equity Research publishes global and
regional "Top Picks" reports every quarter and analysts may also publish intra-quarter changes to their Top Picks, as necessary. While analysts
may highlight other Overweight-rated stocks in their published research in addition to their Top Pick, there can only be one "Top Pick" for each
industry. To view the current list of Top Picks, go to the Top Picks page on Barclays Live (https://live.barcap.com/go/keyword/TopPicksGlobal).
To see a list of companies that comprise a particular industry coverage universe, please go to http://publicresearch.barclays.com. Barclays legal entities involved in publishing research:
Barclays Bank PLC (Barclays, UK) Barclays Capital Inc. (BCI, US) Barclays Securities Japan Limited (BSJL, Japan) Barclays Bank PLC, Tokyo branch (Barclays Bank, Japan) Barclays Bank PLC, Hong Kong branch (Barclays Bank, Hong Kong) Barclays Capital Canada Inc. (BCCI, Canada) Absa Bank Limited (Absa, South Africa) Barclays Bank Mexico, S.A. (BBMX, Mexico) Barclays Capital Securities Taiwan Limited (BCSTW, Taiwan) Barclays Capital Securities Limited (BCSL, South Korea) Barclays Securities (India) Private Limited (BSIPL, India) Barclays Bank PLC, India branch (Barclays Bank, India) Barclays Bank PLC, Singapore branch (Barclays Bank, Singapore) Barclays Bank PLC, Australia branch (Barclays Bank, Australia) Barclays Novartis IMPORTANT DISCLOSURES CONTINUED
Novartis (NOVN VX / NOVN.VX)
CHF 82.85 (13-Jan-2016)
Rating and Price Target Chart - CHF (as of 13-Jan-2016)
Adjusted Price Target
Jan- 2016 18-Jul-2013 Source: Thomson Reuters, Barclays Research Historical stock prices and price targets may have been adjusted for stock splits and dividends. Source: IDC, Barclays Research A: Barclays Bank PLC and/or an affiliate has been lead manager or co-lead manager of a publicly disclosed offer of securities of Novartis in the
previous 12 months.
C: Barclays Bank PLC and/or an affiliate is a market-maker in equity securities issued by Novartis.
D: Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from Novartis in the past 12 months.
E: Barclays Bank PLC and/or an affiliate expects to receive or intends to seek compensation for investment banking services from Novartis within
the next 3 months.
J: Barclays Bank PLC and/or an affiliate is a liquidity provider and/or trades regularly in the securities by Novartis and/or in any related
derivatives.
K: Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation (including compensation for brokerage
services, if applicable) from Novartis within the past 12 months.
L: Novartis is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate.
M: Novartis is, or during the past 12 months has been, a non-investment banking client (securities related services) of Barclays Bank PLC and/or
an affiliate.
N: Novartis is, or during the past 12 months has been, a non-investment banking client (non-securities related services) of Barclays Bank PLC
and/or an affiliate.
Valuation Methodology: We value Novartis through a DCF valuation assuming a risk-free derived from the yield curve, an equity risk premium of
5%, an asset beta of 0.9, pre-tax cost of debt based on CDS spreads and a target debt ratio of 10%. These assumptions result in a dynamic cost
of capital and our price target of CHF85.
Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: Risks include: net cost savings and further
convincing clinical data on the upside, Entresto lack of commercial success and less cost control on the downside. Sector risks include further
healthcare reform efforts in the US/EU, more payor pressure, as well as further regulatory and pipeline set-backs.
DISCLAIMER:
This publication has been produced by the Investment Bank of Barclays Bank PLC and/or one or more of its affiliates (collectively and each individually,"Barclays"). It has been distributed by one or more Barclays legal entities that are a part of the Investment Bank as provided below. It is provided to our clientsfor information purposes only, and Barclays makes no express or implied warranties, and expressly disclaims all warranties of merchantability or fitness for aparticular purpose or use with respect to any data included in this publication. Barclays will not treat unauthorized recipients of this report as its clients andaccepts no liability for use by them of the contents which may not be suitable for their personal use. Prices shown are indicative and Barclays is not offeringto buy or sel or soliciting offers to buy or sel any financial instrument. Without limiting any of the foregoing and to the extent permitted by law, in no event shall Barclays, nor any affiliate, nor any of their respective officers,directors, partners, or employees have any liability for (a) any special, punitive, indirect, or consequential damages; or (b) any lost profits, lost revenue, loss ofanticipated savings or loss of opportunity or other financial loss, even if notified of the possibility of such damages, arising from any use of this publication orits contents. Other than disclosures relating to Barclays, the information contained in this publication has been obtained from sources that Barclays Research believes tobe reliable, but Barclays does not represent or warrant that it is accurate or complete. Barclays is not responsible for, and makes no warranties whatsoever asto, the content of any third-party web site accessed via a hyperlink in this publication and such information is not incorporated by reference. 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