Novartis_Profile by landell

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									      Novartis
                                                                            Industry view:                       NEUTRAL
      Novartis AG                                                           Company view:             MARKET-PERFORM                                     Indigo Equity Research Limited
      Latest results:                Q4 2010                                Company Rating:                 LOW MED. HIGH                              info@indigo-equity-research.com
      Country:                     Switzerland                                         Risk                  -     ## -                                 www.indigo-equity-research.com
      Sector:                         Pharma                                           Quality               -     ## -
      RIC (Ticker):                   NVS.OL                                           Valuation             -     ## -                                                                  15 Feb 2011


                                                                                                                                                            Share Price - Last 10 Years
      Investment Profile                                                                                                                 70

                                                                                                                                         60
      Executive Summary
      Novartis has the profile of a high quality, "safe" and reliable company. This is a reflection of Novartis having                   50

      grown revenues, EPS and dividends relatively consistently over the last ten years, with stable profit margins.                     40




                                                                                                                                   USD
      Gearing is low and cash flow is strong. As a 'value' stock the high dividend yield is crucial to its valuation.
                                                                                                                                         30

      Overall, Novartis has performed well compared to its peers and given the negative pharma industry trends.                          20
      Critically, it has mostly avoided major litigation & PR disasters of that other pharma companies have had.                         10
      It is operationally diversified with pharma, vaccines & diagnostics, generics, and consumer health divisions.
      The pipeline of new drugs under development is good relative to other pharma companies, but not that good                           0




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                                                                                                                                                                                                                2010

                                                                                                                                                                                                                         2011
      in absolute terms. New drug launches since 2005 are generating few block buster drugs (with sales >$1bn).
      Novartis' revenue and EPS are under pressure and the outlook is restricted due to the patent cliff (eg. Diovan),                               NOVARTIS                            S&P 500 (Rebased)
      as well as its relatively weak presence in the growth areas of emerging markets and new biotech drugs.
      Nonetheless, despite these significant issues it is worth remembering that healthcare is a growth sector.                    Capital Structure                                        Per Share            Total
                                                                                                                                                                                               ($)              ($ Bn)
                                                                                                                                   Share Price                                                      55.9
                                                                                                                                   Number of Shares (bn)                                                                 2.3
      Significant recent events - Novartis                                                                                         Market Capitalization                                                               127.9
        - Mediocre Q4 2010 results. Revenues (excluding Alcon) fell compared to the prior year, mainly due to the                  Net (Debt) / Cash                                                -6.5               -14.9
          ending of H1N1 vaccine sales, which dampened Group results. The core business divisions, Pharma                          Minority Interests & Prefs                                        -                   -
          and Sandoz, performed well, growing revenues and maintaining margins within normal ranges.                               Enterprise Value (EV)                                            62.4               142.8
        - Novartis acquired the remaining 75% of Alcon in 2010-11.                                                                 Net Debt / Market Cap.                                                               12%


                                                                                                                                   Financial Results                              2010           2011e             2012e
      Pharma industry overview                                                                                                     y/e 31 Dec                                    ($ Bn)          ($ Bn)            ($ Bn)
      (See also Pharma Industry comments on Page 2.)                                                                               Sales                                           50.6            57.1                 60.2
      Overall pharma industry fundamentals remain subdued with the patent cliff, USA health care reform, EU                        EBIT                                            11.5             9.4                  9.8
      austerity pricing and possible regulatory changes (especially on biologics & genetics). Industry news flow                   Net Income                                       9.8             7.3                  7.6
      is generally poor; failures of drugs in development, drug withdrawals, litigation & mergers (to cut costs).                  Share Capital                                   63.2            67.5                 69.0
      Investor sentiment towards the Pharma sector is cautious and dividends are seen as being important.                          Total Assets                                   123.3           128.1                129.9
                                                                                                                                   FCF                                             11.8             3.4                  8.3

      SWOT Analysis - Novartis                                                                                                     Per Share Data                                 2010           2011e             2012e
                                                                                                                                   EPS                              ($)            4.28             3.17                3.32
      Strengths                                                        Weaknesses                                                  DPS                              ($)            2.20             2.52                2.84
        - Large size & strong market position.                          - Dependent on USA, Japan & Europe;                        Cash EPS                         ($)            5.18            1.51                 3.61
        - Technology (patents) & brand.                                   which are low growth markets.                            BV                               ($)           27.64           29.54                30.20
        - Operationally diversified (in pharma, vaccines,               - 6 drugs represent 33% of total 2010 sales.
          generics, and consumer health).                               - Few promising new blockbuster drugs.                     Efficiency analysis                            2010           2011e             2012e
        - Good management.                                              - Drug development pipeline is highly uncertain.           EBIT Margin                                   22.8 %          16.5 %           16.3 %
        - Low gearing and strong cash flows.                            - Few biotech drugs. Little biotech R&D.                   Net Profit Margin                             19.3%           12.7%            12.6%
        - High dividend yield & dividend growth.                        - 2010 revenues depended heavily on 2 drugs,               Asset Turnover                                41.1%           44.5%            46.3%
        - High R&D expenditure.                                           Diovan ($6.1 bn) and Gleevec ($4.3 bn).                  Net Gearing**                                 195.1%          189.7%          188.1%
        - Good research facilities and distribution networks.           - Low revenue growth in its largest drugs.                 ROE                                           15.5%            10.7%                11.0%

      Opportunities                                                    Threats                                                     ** = Net Assets / Share Capital & Reserves
       - Emerging markets.                                              - Patent cliff. 4 key patents (including Diovan),          Growth analysis               2010     2011e                                    2012e
       - Synergies from Alcon acquisition.                                 expire by 2012; $10 bn or 20% of 2010 sales.            Sales                                         14.4 %          12.7 %                5.5 %
       - New drugs (see list on Page 3).                                - Cozaar, a main competitor to Diovan, went                EBIT                                          15.7 %          -18.3 %               4.2 %
       - "Branded" generic drug & biosimilar sales.                        off-patent in 2010.                                     Net Income                                    16.6 %          -25.9 %               4.7 %
       - New biotech drugs.                                             - Lucentis faces competition from Avastin.                 EPS                                           15.7 %           0.0 %            4.7 %
       - Cost savings and efficiency focus.                             - Potential increasing tax rates.                          DPS                                            4.8 %          14.4 %           12.7 %
       - Benefits of new organisational structure?                      - Swine flu (H1N1) vaccine sales boosted 2010
       - Personalized healthcare & specialised treatments.                 results, but this looks set to dry up in 2011.          Valuation Multiples                            2010           2011e             2012e
       - New regulation of biotech?                                     - Exposed to the appreciation of Swiss Franc.              EV / Sales                                       2.8              2.5                 2.4
                                                                                                                                   EV / EBIT*                                      12.7             15.2                14.6
                                                                                                      Pharma = Pharmaceutical      P / Sales                                        2.5              2.2                 2.1
                           2010 Revenues                                                                                           P / EBIT*                                       11.4             13.6                13.0
                                                                                        2010 EBIT
                             by Division                                               by Division                                 PE*                                             13.1             17.6                16.8
                                                                                                                                   PEG                                              0.8              -                   -
                           Other                                                         Other                                     P / BV                                           2.0              1.9                 1.9
                           23%                                                           13%                                       P / FCF                                         10.8             37.2                15.5
                                                                                Sandoz
                                                                                 11%                                               EV / Assets Value                                1.2              1.1                 1.1
                                                                                                                                   Dividend Yield                                 4.3 %           4.5 %            5.1 %
                        Sandoz         Pharma                                                                                      Div. Pay-out Ratio                            55.7 %          79.3 %           85.3 %
                         17%            60%
                                                                                                   Pharma                          Net Debt / EBITDA                                1.3                 1.2              1.1
                                                                                                    76%
Sandoz = Generic Division              Other = Consumer Health, Alcon & Vaccines.                  Charts are for the period YTD   * = Excluding unusual & exceptional items
                                                                                                                                   2011e, 2012e etc… = Consensus Estimates.
Page 1 of 6                                      CONFIDENTIAL For illustration purposes only.                                                                               Sources: Novartis, Bloomberg
  Novartis                                                                                                                                    15 Feb 2011


                                           Pharmaceutical Industry - Brief Overview




Industry overview:   Pharma industry has the profile of a defensive, fragmented, capital intensive and highly regulated industry with
                     high barriers to entry, significant R&D requirements (typically 14-20% of pharma sales) and high profit margins.
                     "Defensive" means that revenues and profit margins are typically relatively stable over the economic cycle.
                     Pharma companies typically depend on a few highly successful drugs for much of their revenues and profits.
                     Pharma companies has depended much on the constant development of new drugs to replace those going off-patent.
                            - Numerous patent challenges and disputes are normal I tis industry.
                            - Patents typically last 15-20 years. Post-patent, prices of drugs can decline 30-90%.
                            - Patents (and names) for the same drug vary by region, so patent exclusivity is usually lost over a period.
                            - The results of R&D are very binomial, either successful or a failure.
                     The world pharmaceutical market in 2009 was valued at $808 bn (up 7% from 2008). Source: IMS Health.
                            - USA represented about 40% of global pharma sales in 2009 and grew at 5.5%.
                            - USA, Europe and Japan represented about 80% of global pharma sales in 2009.
                            - Patents expiring in 2012 on key drugs are worth some $130bn in 2009 sales.
                            - The off-patent prescription drug market is worth an estimated $270 bn in annual sales.
                     The pharma industry is expected to continue to grow, but companies have been down-sizing as growth slows.

Industry drivers:    Revenues are driven by growing incomes & populations, changing health problems (from sedentary life styles,
                     aging populations, poor nutritional habits, and increasing chronic health issues) and a high willingness to
                     spend on healthcare. In general, people are living longer and spending more on healthcare than before.

Pharma company       The sources for earnings growth for companies in the Pharma sector include:
growth drivers:      Emerging markets, as their growing middle classes expand with rapid economic growth.
                            - Emerging market pharma growth tends to be around 15-20%: about triple OECD growth of 3-7%.
                            - Emerging markets represent about 85% of the world population and about 20% of the pharma market.
                            - However, drug prices & margins tend to be lower in emerging markets.
                     Extending patents via incremental modifications to drugs,
                     New biotechnology drugs (including biologics, biosimilars, therapeutic proteins and mAbs):
                            - Most traditional drugs are typically simple molecules (chemicals) that are used to treat the symptoms of a disease or illness.
                                       - Simple molecule drug sales represent about 75% of all pharma sales, but are expected to shrink in future.
                                       - Pharma growth is in biotech / biologics; but these represent only about 15% of all pharma sales.
                            - Biotechnology uses genetics & biological processes to manufacture existing medicines relatively more cheaply.
                            - Biotech drugs tend to be relatively large, complex molecules derived from biological (or natural) processes (and can involve the
                                use of DNA), and usually more effective (partly as they target the underlying mechanisms of a disease or illness).
                            - These drugs are also typically harder to manufacture & copy; and represent a significant technological advancement.
                            - New biotechnology holds much commercial potential but has yet to deliver significant growth.
                            - Biosimilars refers to generic copies or variants of pharma or biotech drugs, that are made with biological processes.
                     Progress in genetics is allowing for possibilities of personalised healthcare: eg. Tailoring drugs to individuals.
                     Personalized healthcare; enabled by specialist drugs and genetics & genomics.
                     Specialised healthcare treatments and orphan drugs (which are developed to treat a rare medical conditions).
                     The off-patent (generic) prescription drug market, is expected to grow rapidly; especially as many key drugs go off-patent.
                     Cost cutting (eg. via acquisitions), internal restructuring and improving R&D productivity (eg. From the greater use of computer technology).

Shifting dynamics:   Among the important trends in this industry, the dynamics of Pharma companies are shifting, from:
                          - a focus & culture of sales & marketing to regulation & litigation focus; (as seen in some choices of pharma company CEOs).
                          - doing everything in-house (R&D, manufacturing, drug commercialisation .…), to greater collaboration with other parties.
                          - a mass-market to a target-market approach.
                          - the provision of drugs to total health care packages.
                          - a focus on treatment to prevention; in healthcare companies and regulations.
                          - traditional R&D and clinical trials to using IT (and computerized techniques) more in drug development.

Key challenges:      The patent cliff.
                            - A significant number of key drugs start to loose their patents 2011-2, and they are not being replaced by new drugs.
                              This is despite billions spent by pharma companies on R&D.
                     High costs of drug development and diminishing returns to R&D.
                            - It is estimated that it typically takes about $1bn and 12-15 years to develop a new drug; and only about 20-30% of approved
                              drugs recover their costs. The number of new 'block buster' drugs launched has been declining over the last 10 years.
                            - New drug discoveries are proving to be little better than existing drugs, indicating that few commercially viable new drugs
                              remain to be discovered based on existing technology. Genetics and new biotechnology has yet to deliver material results.
                            - Increasing healthcare standards; making regulatory approval harder or increasing litigation risks.
                     Pharma industry competition is increasing from: Lower-cost generic manufacturers, imported drugs (from lower-cost
                     countries), and similar (patented) drugs from other companies.
                     Regulation is becoming increasingly risk averse and strict. Regulation of biotech drugs remains unclear.
                            - Also, the time & costs required for regulatory approval of drugs is increasing.
                            - For example, regulation of: drug prices, approved drugs, rebates, marketing for drugs, and what drugs doctors can prescribe.
                            - Regulation of new biotech and biosimilar drugs is seen as being very restrictive.
                            - Every year, only about 25 - 35 new drugs are approved by regulators (such as the FDA in USA).
                     Healthcare reform; especially in USA (eg. Medicare reform): and “austerity” pricing (eg. Europe).
                            - Govt. expenditure now 'trades down' and focuses on the cheaper drugs / alternatives.
                     Consumer and Govt groups are gaining pricing power and pressurizing drug prices.
                            - eg. Interested groups are collaborating to pool their purchases and bargaining power.

Page 2 of 6                                        CONFIDENTIAL For illustration purposes only.                                         Sources: Novartis, Bloomberg
  Novartis                                                                                                                                                        15 Feb 2011


                                                      Company Background Information - Novartis

                   2010 Revenues                                             2010 Pharma                                             2010 Pharma Revenues
                     by Division                                               Revenues                                                  by Geography
                    Other             Largest 6                                              Diovan                                   Rest of
                    19%                Pharma                                                 21%                                     World
                                        Drugs                                                                                          19%               USA
                                        33%                                  Rest                                                                        33%
                                                                                                                                        Japan
                 Sandoz                                                      49%
                                                                                                                                         11%
                  17%              Rest of
                                                                                              Next largest
                                   Pharma                                                                                                Europe
                                                                                               5 Drugs
                                    31%                                                                                                   37%
                                                                                                 30%                                                      Charts are for the period YTD

Business                         Novartis is one of the largest diversified pharmaceutical companies in the world. It is focused mainly on USA & European markets.
description:                     Novartis provides patented drugs, generic drugs, vaccines & diagnostics, consumer health products and eye care (Alcon).
                                 Novartis is based in Basel, Switzerland and has about 100,000 employees. The financial reporting currency is USD.
                                 Novartis has equity investments in other Pharma companies. eg. 33% of voting shares Roche, and 6% of total equity.
                                 The investment in Roche is accounted for as an associated company, as was Alcon in 2008/9.
                                 Its strategy is to strengthen its healthcare portfolio through R&D and M&A.
                                 Its customers include patients, doctors, clinics, hospitals, healthcare providers, and retail & wholesale drug distributors.
                                 Its main competitors include other pharma companies such as: Pfizer, Bristol-Myers, Sanofi-Aventis, GlaxoSmithKline (GSK),
                                 Astra Zeneca, Merck, and Johnson & Johnson; as well as Generic drug companies such as: Teva, Actavis, Barr & Mylan.

Brief history:                   Novartis was created in 1996 from the merger of the Swiss companies Ciba-Geigy and Sandoz Laboratories.
                                 In 2000, Novartis combined its agricultural division with that of AstraZeneca to create Syngenta.
                                 In 2002, the food and beverage division was sold, and 33% of Roche was acquired.
                                 In 2003, Novartis combines all its generic drug production, under the brand of Sandoz.
                                 In 2005, Sandoz acquired Hexal (Germany) and Eon Labs (USA); generic drug companies.
                                 Novartis spun out its chemicals activities as Ciba Specialty Chemicals (now a part of BASF).
                                 In 2006, Novartis acquired the remaining stake in California-based Chiron Corp. for $5.7bn (vaccines diagnostics).
                                 In 2007, Novartis sold Gerber Products, a infant and baby products producer, to Nestlé.
                                 2008 - 11 Novartis acquired 100% of Alcon (USA eye care company) in stages, mostly from Nestle, for about USD 48 bn in total.
                                 In 2009, Novartis (Sandoz) acquired EBEWE Pharma for $1.3 bn in cash.

Management:                      Daniel Vasella, M.D. has been Chairman since 1996. He is Swiss and joined Sandoz in 1988.
                                 Joseph Jimenez was made CEO in 2010. He was previously CEO of the Pharma Division. He joined Novartis in 2006.
                                 Previously, Mr. Jimenez worked for more than 20 years in the food industry, for companies such as Heinz.

Key Divisions:                   Description:


Pharmaceutical                   This Division researches, develops, manufactures and distributes branded pharmaceutical products (drugs).
                                 Novartis has 15 manufacturing facilities and 2 biotech sites.

                                                                   Sales     Sales         Sales*     Change
                                                                    2009      2010          2010      2009-10   Patent
                                 Drug Name:                        ($ bn)    ($ bn)          (%)        (%)     Expires   Description / Treatment
                            1    Diovan                                6.0          6.1    12.0%       0.7%      2012     Hypertension (Cardio)
                            2    Gleevec                               3.9          4.3    8.4%         8.1%     2016     Chronic myeloid leukemia
                            3    Zometa                                1.5          1.5    3.0%         2.9%     2012     Cancer complications (bones).
                            4    Sandostatin                           1.2          1.3    2.6%        11.8%     2014     Acromegaly - pituitary gland disorder
                            5    Femara                                1.3          1.4    2.7%        8.7%      2011     Breast cancer
                            6    Lucentis                              1.2          1.5    3.0%        24.4%     2020     Age-related macular degeneration
                            7    Exelon                                1.0          1.0    2.0%        5.1%      2012     Alzheimer's disease
                            8    Neoral / Sandimmun                    0.9          0.9    1.7%        -5.2%     2009     Transplantation
                            9    Voltarin                              1.5          1.1    2.3%       -25.0%              Inflammation/pain
                            10   Exforge                               0.7       0.7       1.4%        4.3%      2020     Hypertension (Cardio)
                                 Total                                17.0      17.9       35.4%       5.6%
                                                                                          Sales* = Percentage of Total Novartis Sales
                                 The key new drugs launched since 2005 with annualised sales of over $200m: Lucentis (age-related macular degeneration), Tektuma
                                 (hypertension), Exforge (hypertension), Exelon/Exelon Patch (Alzheimer’s disease), and Exjade (iron chelator).

Sandoz                           Develops, manufactures and distributes generic pharmaceutical drugs, including biosimilars.
                                 Products are in the form of capsules, tablets, liquids, ampoules, vials and creams.

Vaccines and Diagnostics         This Division also researches, develops, manufactures and distributes preventative vaccine treatments & diagnostic tools.
                                 It was established in 2006 with the acquisition of Chiron. Novartis is the world's 5th largest vaccine manufacturer.
                                 Key products include influenza, meningitis, pediatric and travel vaccines. There is a focus on infectious diseases.

Consumer Health                  This Division is involved in the manufacture, marketing & distribution of products that improve the health of consumers. 3 business units:
                                        - OTC (Over The Counter) - eg. Products for colds, coughs, respiratory and derminological problems.
                                        - Animal health - products to prolong and save animal lives.
                                        - CIBA Vision - contact lenses and lens care.

Alcon                            A USA eye care company; which provides eye care products for treating various eye diseases and eye conditions, from common
                                 allergies to rare diseases. Products include surgical equipment and devices, pharmaceuticals and consumer vision care products.

Page 3 of 6         CONFIDENTIAL For illustration purposes only.                                                                                             Sources: Novartis, Bloomberg
        Novartis                                                                                                                                                                                                                                                                                             15 Feb 2011


                                                                                                                                           Financial Results - Quarterly Since 2000

                                                                        Revenue and Growth**                                                                                                                                          Revenue Growth by Division
                     16                                                                                                                                                      40%                          30%

                                                                                                                                                                                                          25%
                     12                                                                                                                                                      30%
                                                                                                                                                                                                          20%
       USD (bn)




                                                                                                                                                                                       Growth**
                         8                                                                                                                                                   20%                          15%

                                                                                                                                                                                                          10%
                         4                                                                                                                                                   10%
YTD                                                                                                                                                                                                        5%

                         0                                                                                                                                                   0%                            0%




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                                                                                                                                                           2010
                                                                                                                                                                                                          -5%
                     -4                                                                                                                                                      -10%
                                                                                                                                                                                                         -10%
                              Pharma                             Sandoz                             Other                      Revenue                              Growth**
                                                                                                                                                                                                                           Pharma                                Sandoz                                            Total
      Growth** = Estimated organic revenue growth adjusted for the Alcon acquisition.
      "Other" includes Vaccines, Alcon, Consumer Health and Corporate activities.

                                                                EBIT - Operating Income                                                                                                                                                      EBIT Margins by Division
                    4                                                                                                                                                   40%                              40%
                                                                                                                                                                                                         35%
                    3                                                                                                                                                   30%                              30%
                                                                                                                                                                                                         25%
        USD (bn)




                    2                                                                                                                                                   20%
                                                                                                                                                                                    Margin




                                                                                                                                                                                                         20%
                                                                                                                                                                                                         15%
                    1                                                                                                                                                   10%
                                                                                                                                                                                                         10%

                    0                                                                                                                                                   0%                                5%
                             2001


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                                                                                                                                                                                                          0%
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                                                                                                                                                                                                                                                                                                                             2010
                    -1                                                                                                                                                  -10%

                             Pharma                              Sandoz                            Other                      EBIT                         EBIT Margin                                                             Pharma                          Sandoz                                            EBIT



                                                                                           Margins                                                                                                                                                        EPS*
                    100%                                                                                                                                                                                 1.40

                    80%                                                                                                                                                                                  1.20
                                                                                                                                                                                                         1.00
                    60%
                                                                                                                                                                                                         0.80
                                                                                                                                                                                                  USD




                    40%                                                                                                                                                                                  0.60

                    20%                                                                                                                                                                                  0.40
                                                                                                                                                                                                         0.20
                         0%
                                                                                                                                                                                                           -
                                    2001


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                                                                                                                                                                                                                                                                                                                              2010
                    -20%

                                    Net income Margin*                                             EBIT* Margin                                          Gross Margin
                                                                                                                                                                                                                                     EPS*                                             Linear (EPS* )
      * = excludes unusual items.                                                                                                                                                                                                                                                             * = excludes unusual items.


                                                                        Net Income Analysis                                                                                                                                                     EPS & Growth
                    8                                                                                                                                                         8                          2.00                                                                                                                       40%


                    6                                                                                                                                                         6                          1.50                                                                                                                       30%
         USD (bn)




                                                                                                                                                                                   USD (bn)




                    4                                                                                                                                                         4                          1.00                                                                                                                       20%
                                                                                                                                                                                                                                                                                                                                             Growth
                                                                                                                                                                                                   USD




                    2                                                                                                                                                         2                          0.50                                                                                                                       10%

                    0                                                                                                                                                         0
                                                                                                                                                                                                               -                                                                                                                    0%
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                    -2                                                                                                                                                        -2
                                                                                                                                                                                                         -0.50                                                                                                                      -10%

                         EBIT*                    Tax                   Other                     Net Interest                         Unusual                    Net Income*                                              EPS*               Unusual Items                      EPS* Growth (12m av.)                                   -

      "Other" includes non-operating items (eg. income from associates - eg. Roche).                                                                                                              Unusual items:
      "Unusual" includes one-off, exceptional and extraordinary items.                                                                                                                                 1) 2007 divestment of medical nutrition Gerber to Nestle for a $5.2bn gain.
      * = excludes unusual items.                                                                                                                                                                      2) $ 1bn in restructuring costs in 2007.

                                                                                                                                                                                                  * = excludes unusual items.
                                                                                                                                                                                                  Most Unusual Items relate to acquisitions, disposals or restructurings.
                                                                                                                                                                                                  See "Notes" on Page 5 for description of any large Unusual Items.
      Page 4 of 6                                                                                                             CONFIDENTIAL For illustration purposes only.                                                                                                                    Sources: Novartis, Bloomberg
        Novartis                                                                                                                                                                                                                                                                                                 15 Feb 2011


                                                                                                                                          Additional Analysis - Quarterly Since 2000

                                                                  Research & Development                                                                                                                                                                       Dividends Per Share
                       4.0                                                                                                                                                   20%
                                                                                                                                                                                                                   2.50                                                                                                               100%
                       3.5
                       3.0                                                                                                                                                   15%                                   2.00                                                                                                               80%




                                                                                                                                                                                     R&D % Sales
                       2.5
       USD (m)




                                                                                                                                                                                                                   1.50                                                                                                               60%




                                                                                                                                                                                                                                                                                                                                                    Growth
                                                                                                                                                                                                   USD
                       2.0                                                                                                                                                   10%
                       1.5                                                                                                                                                                                         1.00                                                                                                               40%

                       1.0                                                                                                                                                   5%                                    0.50                                                                                                               20%
                       0.5
                                                                                                                                                                                                                   0.00                                                                                                               0%
                       0.0                                                                                                                                                   0%




                                                                                                                                                                                                                               2001

                                                                                                                                                                                                                                             2002

                                                                                                                                                                                                                                                       2003

                                                                                                                                                                                                                                                               2004

                                                                                                                                                                                                                                                                      2005

                                                                                                                                                                                                                                                                             2006

                                                                                                                                                                                                                                                                                    2007

                                                                                                                                                                                                                                                                                              2008

                                                                                                                                                                                                                                                                                                         2009

                                                                                                                                                                                                                                                                                                                       2010
                               2001


                                             2002


                                                           2003


                                                                         2004


                                                                                        2005


                                                                                                       2006


                                                                                                                     2007


                                                                                                                                   2008


                                                                                                                                                 2009


                                                                                                                                                               2010
                                                                                                                                                                                                                  -0.50                                                                                                               -20%

                                                      R&D                                                     R&D % of Sales                                                                                                                            DPS                                  DPS Growth




                                                           Historical Valuation Multiples                                                                                                                                                           Number of Shares & Pay-out ratio
                   5                                                                                                                                                           50                                  4.0                                                                                                                80%
                                                                                                                                                                                                                   3.5
                   4                                                                                                                                                           40
       P / BV




                                                                                                                                                                                                                   3.0                                                                                                                60%




                                                                                                                                                                                                                                                                                                                                                    Pay-out Ratio
                                                                                                                                                                                     P / EBIT




                                                                                                                                                                                                   Shares (bn)
                   3                                                                                                                                                           30                                  2.5
                                                                                                                                                                                                                   2.0                                                                                                                40%
       P / Sales




                   2                                                                                                                                                           20
                                                                                                                                                                                                                   1.5
                                                                                                                                                                                     PE




                                                                                                                                                                                                                   1.0                                                                                                                20%
                   1                                                                                                                                                           10
                                                                                                                                                                                                                   0.5
                   0                                                                                                                                                           0                                   0.0                                                                                                                0%
                        2000


                                      2001


                                                    2002


                                                                  2003


                                                                                2004


                                                                                               2005


                                                                                                              2006


                                                                                                                            2007


                                                                                                                                          2008


                                                                                                                                                        2009


                                                                                                                                                                      2010




                                                                                                                                                                                                                              2001

                                                                                                                                                                                                                                         2002

                                                                                                                                                                                                                                                       2003

                                                                                                                                                                                                                                                               2004

                                                                                                                                                                                                                                                                      2005

                                                                                                                                                                                                                                                                             2006

                                                                                                                                                                                                                                                                                     2007

                                                                                                                                                                                                                                                                                               2008

                                                                                                                                                                                                                                                                                                          2009

                                                                                                                                                                                                                                                                                                                        2010
                                      P / Sales                                   P / BV                                     P / EBIT                                    PE*                                                                   # Shares in issue                               Pay-Out Ratio*
                                                                                                                                    * = excludes unusual items.                                                                                                                                      * = excludes unusual items.


                                                                                                                              Free Cash Flow Analysis - Quarterly Since 2000

                                                              Free Cash Flow Analysis                                                                                                                                                                  Free Cash Flow Breakdown
                   10                                                                                                                                                          100%                               12                                                                                                                       12
                                                                                                                                                                                                                  10                                                                                                                       10
                    8                                                                                                                                                          80%
                                                                                                                                                                                                                   8                                                                                                                       8
                    6                                                                                                                                                          60%                                 6                                                                                                                       6
                                                                                                                                                                                                     USD (bn)




                                                                                                                                                                                                                                                                                                                                                    USD (bn)
       USD (bn)




                                                                                                                                                                                        Growth




                    4                                                                                                                                                          40%                                 4                                                                                                                       4
                                                                                                                                                                                                                   2                                                                                                                       2
                    2                                                                                                                                                          20%
                                                                                                                                                                                                                   0                                                                                                                       0
                                                                                                                                                                                                                       2001


                                                                                                                                                                                                                                      2002


                                                                                                                                                                                                                                                     2003


                                                                                                                                                                                                                                                              2004


                                                                                                                                                                                                                                                                      2005


                                                                                                                                                                                                                                                                             2006


                                                                                                                                                                                                                                                                                      2007


                                                                                                                                                                                                                                                                                                 2008


                                                                                                                                                                                                                                                                                                                2009


                                                                                                                                                                                                                                                                                                                               2010



                    0                                                                                                                                                          0%
ms.                                                                                                                                                                                                               -2                                                                                                                       -2
                           2001


                                         2002


                                                       2003


                                                                     2004


                                                                                       2005


                                                                                                      2006


                                                                                                                     2007


                                                                                                                                   2008


                                                                                                                                                 2009


                                                                                                                                                               2010




                    -2                                                                                                                                                         -20%                               -4                                                                                                                       -4

                                                      FCF                                                      FCF Growth (12m av.)                                                                                            Net income                      Net CAPEX            Other               Working Capital                         -
      2007 includes the proceeds from the divestment of Gerber.                                                                                                                                                                                                                     Net CAPEX = Depreciation - CAPEX


                                                                                                                                                                        Balance Sheet Analysis

                                                                                2010 Assets by Type                                                                                                                                      2010 Liabilities & Share Capital by Type
                         70                                                                                                                                                                                            70

                         60                                                                                                                                                                                            60

                         50                                                                                                                                                                                            50
         USD (bn)




                                                                                                                                                                                                       USD (bn)




                         40                                                                                                                                                                                            40

                         30                                                                                                                                                                                            30

                         20                                                                                                                                                                                            20

                         10                                                                                                                                                                                            10

                          0                                                                                                                                                                                              0
      Intangible assets mostly comprises goodwill from acquisitions.
      Page 5 of 6                                                                                                              CONFIDENTIAL For illustration purposes only.                                                                                                                          Sources: Novartis, Bloomberg
   Novartis                                                                                                                                                                        15 Feb 2011


                                                                                      Quarterly Accounts

($ m)       y/e 31 Dec
Profit & Loss                                                     2009                                             2010                                            2011
                                                                    Q1          Q2          Q3           Q4          Q1          Q2          Q3          Q4          Q1          Q2          Q3          Q4

Revenues                                                         9,709      10,546       11,086      12,926      12,131      11,716      12,578      14,199
Revenue Growth                                                   -2.0%       -1.7%        3.2%       28.3%       24.9%       11.1%       13.5%        9.8%
Gross Margins                                                    73.4%       73.2%       72.0%       71.6%       74.5%       72.6%       70.9%       68.1%
EBIT                                                             2,347       2,364       2,634       2,637       3,511       2,961       2,587       2,467
 EBIT Margin                                                     22.7%       22.6%       24.8%       22.8%       28.1%       25.0%       20.9%       16.2%
 Tax Charge                                                       14%         16%         15%         14%         16%         18%         17%           6%
Net Income                                                       1,962       2,035       2,098       2,305       2,933        2,417       2,275       2,169
Net Income Margin                                               20.2 %      19.3 %      18.9 %      17.8 %      24.2 %       20.6 %      18.1 %      15.3 %
EPS             ($)                                               0.87        0.90        0.92        1.01         1.29        1.06        0.99        0.95




                                                                                       Annual Accounts

($ Bn)     y/e 31 Dec                                                                                                                                                                  Consensus Estimates
Profit & Loss                                                     2001        2002        2003        2004         2005        2006        2007        2008        2009        2010       2011e      2012e
Revenues                                                           22.7        20.8        24.9        27.1        29.4        34.4        38.1         41.5        44.3        50.6        57.1        60.2
Revenue Growth                                                               -8.5%       19.5%        9.1%        8.6%       16.8%       10.7%         8.9%        6.8%       14.4%       12.7%        5.5%
EBIT                                                               5.2         5.1         5.8         6.1         6.5         7.6         6.7          8.8        10.0        11.5         9.4         9.8
 EBIT Margin                                                     23.0%       24.4%       24.0%       23.2%       22.3%       22.4%       19.3%       21.0%        23.2%       22.3%       16.5%       16.3%
 Tax Charge                                                       17%         17%         17%         16%         14%         15%         13%         14%          15%         15%         15%         15%
Net Income                                                         3.4         3.8         3.8         4.8         6.1         7.2        11.9         8.2          8.4         9.8         7.3         7.6
Net Income Margin                                                14.9%       18.3%       15.2%       17.7%       20.8%       20.9%       31.4%       19.8%        19.0%       19.3%       12.7%       12.6%
EPS         ($)                                                   1.37        1.58        1.59        2.03        2.63        3.06        5.15        3.62         3.70        4.28        3.17        3.32
DPS         ($)                                                   0.65        0.68        0.71        0.78        0.88        0.88        1.60        2.00         2.10        2.20        2.52        2.84

Balance Sheet                                                     2001        2002        2003        2004         2005        2006        2007        2008        2009        2010       2011e       2012e
Intangible & Goodwill Assets                                       4.7         4.4         4.7         5.6         13.3        21.2        21.2        20.8        22.4        64.9        64.9        64.9
Tangible Fixed Assets                                             18.7        19.7        22.3        22.9         23.0        25.4        26.8        36.6        39.4        31.7        30.5        29.1
Current Assets                                                    24.5        20.7        22.3        23.9         21.4        21.4        27.4        20.9        33.7        26.7        32.7        35.8
Total Assets                                                      47.9        44.9        49.3        52.5         57.7        68.0        75.5        78.3        95.5       123.3       128.1       129.9
Current Liabilities                                                6.6         5.4         6.5         7.7          8.2         9.6        11.5        11.3        14.2        16.0        16.5        16.8
Long term Liabilities                                              7.4         8.5         9.6         9.5          9.4        10.7         9.6        11.5        18.6        35.5        35.5        35.5
Total Liabilities                                                 17.6        16.7        18.9        21.3         24.7        26.9        26.2        28.0        38.1        60.1        60.6        60.9
Share Capital & Reserves                                          30.3        28.2        30.4        31.2         33.0        41.1        49.2        50.3        57.4        63.2        67.5        69.0
Total Liabilities & Reserves                                      47.9        44.9        49.3        52.5         57.7        68.0        75.5        78.3        95.5       123.3       128.1       129.9

Cash Flow                                                         2001        2002        2003        2004         2005        2006        2007        2008        2009        2010       2011e       2012e
Op FCF                                                              5.3         5.2         6.7         6.2         7.8         8.8        16.8         9.7        12.2        14.1          6.0        11.1
Investing                                                          -3.4        -2.9        -1.3        -2.8        -7.2        -6.4        -6.2       -10.4       -14.2       -15.8         -2.6        -2.9
Financing                                                          -0.3        -4.0        -5.8        -3.0        -0.3        -4.9        -9.3        -2.6         2.8         4.1         -5.8        -6.5
Cash Flow                                                          1.7         -0.8        -0.2         0.4         0.2        -2.5         1.5        -3.3         0.9         2.4         -2.3         1.8
FCF                                                                3.6          4.1         5.1         4.8         6.4         6.5        13.7         7.3         9.5        11.8          3.4         8.3



Notes - Unusual or significant items
Most unusual items relate to one-off charges & gains, and asset (or goodwill) write-downs arising from acquisitions, disposals and restructurings.
      1) 2007 divestment of medical nutrition Gerber for a $5.2 bn gain. This division represented about $2 bn sales in 2006.
      2) Novartis recorded $ 1bn in restructuring costs in 2007.
      3) In 2010, Novartis lost a $250 m court case in USA for gender discrimination.
      4) In 2010, fined $0.6 bn for illegal marketing, kickbacks & promoting uses not approved by the FDA - for the drug Trileptal (epilepsy).                             y/e = (financial) year end
                                                                                                                                                                             FCF = Free Cash Flow
Indigo Equity Research determined what constituted "Unusual items" in this report on the basis of                                                              EBIT = Earnings Before Interest & Tax
assessing what items were significantly separate to the core business.                                                                                                       (ie. Operating Income)
Copyright © 2011 Indigo Equity Research Limited                                                                                                           2011e, 2012e etc… = Consensus Estimates
Explanation of Company Ratings used by Indigo Equity Research:
Ratings are subjective. Note that an ideal investment opportunity could be low risk, high quality and low valuation.
            Risk = Risk of earnings disappointment or volatility.
         Quality = Quality of the company based on criteria such as management, market position, pricing power, market growth, quality of services etc…..
       Valuation = Absolute measure of valuation multiples; based on a range of metrics such as P/Sales, PE, P/BV, EV/EBITDA, Div Yield …..
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Page 6 of 6                         CONFIDENTIAL For illustration purposes only.                                                                                             Sources: Novartis, Bloomberg

								
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