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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.
     It is operationally diversified with pharma, vaccines & diagnostics, generics, and consumer health divisions.                          10

     The pipeline of new drugs under development is good relative to other pharma companies, but not that good                                0




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     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%

     Pharma industry overview                                                                                                         Financial Results                            2010                2011e           2012e
     Overall pharma industry fundamentals remain subdued with the patent cliff, USA health care reform, EU                            y/e 31 Dec                                  ($ Bn)               ($ Bn)          ($ Bn)
     austerity pricing and possible regulatory changes (especially on biologics & genetics). Industry news flow                       Sales                                            50.6             57.1            60.2
     is generally poor; failures of drugs in development, drug withdrawals, litigation & mergers (to cut costs).                      EBIT                                             11.5              9.4             9.8
     Investor sentiment towards the Pharma sector is cautious and dividends are seen as being important.                              Net Income                                        9.8              7.3             7.6
                                                                                                                                      Share Capital                                    63.2             67.5            69.0
                                                                                                                                      Total Assets                                    123.3            128.1           129.9
     SWOT Analysis - Novartis                                                                                                         FCF                                              11.8              3.4             8.3
                                                                                                                                      Per Share Data                                  2010             2011e           2012e
     Strengths                                                         Weaknesses                                                     EPS                               ($)            4.28             3.17            3.32
       - Large size & strong market position.                           - Dependent on USA, Japan & Europe;                           DPS                               ($)            2.20             2.52            2.84
       - Technology (patents) & brand.                                    which are low growth markets.                               Cash EPS                          ($)            5.18             1.51            3.61
       - Operationally diversified (in pharma, vaccines,                - 6 drugs represent 33% of total 2010 sales.                  BV                                ($)           27.64            29.54           30.20
         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 %
                                                                                                                                      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
                                                                                                                                      EV / Sales                                        2.8               2.5                 2.4
                                                                                                          Pharma = Pharmaceutical     EV / EBIT*                                       12.7              15.2                14.6
               2010 Revenues                              2010 Revenues                                                               P / Sales                                         2.5               2.2                 2.1
                                                                                                            2010 EBIT
                 by Division                                by Division                                    by Division                P / EBIT*                                        11.4              13.6                13.0
                                                                                                                                      PE*                                              13.1              17.6                16.8
                                                                            Largest 6
              Other                                          Other                                           Other                    PEG                                               0.8               -                   -
                                                                             Pharma
              23%                                            19%                                             13%                      P / BV                                            2.0               1.9                 1.9
                                                                              Drugs
                                                                              33%                                                     P / FCF                                          10.8              37.2                15.5
                                                        Sandoz                                      Sandoz                            EV / Assets Value                                 1.2               1.1                 1.1
       Sandoz               Pharma                                                                   11%
                                                         17%                                                                          Dividend Yield                                  4.3%               4.5%                5.1%
        17%                  60%                                          Rest of
                                                                          Pharma                                        Pharma
                                                                           31%                                           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 2                                        CONFIDENTIAL                For illustration purposes only.                                             Sources: Novartis, Bloomberg



   Buy the complete (6 page) report.                                                                                                               www.indigo-equity-research.com
             Novartis                                                                                                                                                                                                                                                 15 Feb 2011


                                                                                                   Financial Results - Quarterly Since 2000

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

                                                                                                                                                                       25%
              12                                                                                                            30%
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 USD (bn)




                                                                                                                                       Growth**
                  8                                                                                                         20%                                        15%

                                                                                                                                                                       10%
                  4                                                                                                         10%
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                  0                                                                                                         0%                                         0%
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                                                                                                                                                                       -5%
              -4                                                                                                            -10%
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                       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%
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                                                                                                                                                                       25%
  USD (bn)




             2                                                                                                             20%
                                                                                                                                   Margin




                                                                                                                                                                       20%
                                                                                                                                                                       15%
             1                                                                                                             10%
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             0                                                                                                             0%                                          5%
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             -1                                                                                                            -10%

                      Pharma                       Sandoz              Other              EBIT                 EBIT Margin                                                                      Pharma                         Sandoz                                      EBIT



                                                     Net Income Analysis                                                                                                                                    EPS & Growth
             8                                                                                                               8                                         2.00                                                                                                           40%


             6                                                                                                               6                                         1.50                                                                                                           30%


             4                                                                                                               4
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                                                                                                                                                                       1.00                                                                                                           20%




                                                                                                                                                                                                                                                                                               Growth
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             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.)                          -

                                                       * = excludes unusual items.                                                                                                                                 * = excludes unusual items.
"Other" includes non-operating items (eg. income from associates).                                                                                              Unusual items:
"Unusual" includes one-off, exceptional and extraordinary items.                                                                                                     1) 2007 divestment of medical nutrition Gerber to Nestle for a $5.2bn gain.
Indigo Equity Research determined what constituted "Unusual items" in this report on                                                                                 2) $ 1bn in restructuring costs in 2007.
the basis of assessing what items were significantly separate to the core business.

Copyright © 2011 Indigo Equity Research Limited
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Page 2 of 2                                                                                CONFIDENTIAL                                           For illustration purposes only.                                                                       Sources: Novartis, Bloomberg



        Buy the complete (6 page) report.                                                                                                                                                                                www.indigo-equity-research.com

				
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