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INDEPENDENT RESEARCH Novartis 30th October 2012 Ophthalmology : A growth avenue

Healthcare Fair Value CHF62 vs. 61 (price CHF56.80) BUY

Bloomberg NOVN VX Reuters NOVN.VX 12-month High / Low (CHF) 59.0 / 47.8 Market capitalisation (CHFm) 153,712 Enterprise Value (BG estimates CHFm) 153,855 Avg. 6m daily volume ('000 shares) 3,828 Free Float 100% 3y EPS CAGR 3.6% Gearing (12/11) 23% Dividend yields (12/12e) 4.12%

In September, BG Club Healthcare held a meeting with Prof. Renard (Chief Scientific Officer of Société Française d’Ophtalmologie and former Head of the Ophthalmology Department at Hôtel Dieu, Paris). Besides discussions about market trends and demographics, Novartis was the central company discussed during the meeting. While Alcon was confirmed as a terrific asset, Lucentis was more challenged.

Age-related macular degeneration (AMD) was the first topic of interest during this meeting and Prof. Renard acknowledged that this market segment was still carrying a very high potential with growth rates in double-digits. In 2050, close to 50% of over 80-year old people will have AMD. 70% of those are of the dry form for which no treatment is available whereas 30% are of the wet form with anti-VEGF competing although these do not target the primary origin of the disease. The physician considers that all products are more or less similar.

Although Lucentis is today widely used, Prof. Renard sees two risks for the drug: (i) a come-back of Avastin which could benefit from new head-to-head trials against Lucentis showing no difference between the two; and (ii) competition from Eylea if Bayer uses pricing as a differentiating factor. Moreover RVO and DME are not so significant opportunities, which are questionable statements at least for DME.

As for Alcon, Prof. Renard considers this is by far the leader in the field of eye surgery with two distinctive arguments: the wider scope in terms of products referenced and the best representatives that are real partners to physicians. Interestingly too, he stressed that for each surgery procedure, around EUR400 of consumables are used, which is supportive of a strong business model for Alcon.

Lastly, we learnt that there are still many opportunities to capture in the field of ophthalmology which is good news for the main players. The dry form of AMD, dry eye, prostaglandins without preservative in glaucoma or solutions to recapture elasticity of basal membrane are among the key avenues for future growth. Fovista and ocriplasmin were also discussed and the second is introduced into our model, impacting our FV by CHF1.

YE December 12/11 12/12e 12/13e 12/14e Revenue (USDm) 58,566 55,790 56,660 59,012 EBIT(USDm) 10,998 11,819 13,073 14,653 Basic EPS (USD) 3.76 4.12 4.53 5.14 Diluted EPS (USD) 5.54 5.30 5.56 6.15 EV/Sales 2.9x 2.9x 2.8x 2.5x EV/EBITDA 10.6x 9.7x 8.7x 7.7x EV/EBIT 15.5x 13.9x 12.0x 10.2x P/E 11.0x 11.4x 10.9x 9.9x ROCE 11.4 12.7 14.3 16.6

29/10/12

N D J F M A M J J A S O 90

95

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105

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115

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NOVARTIS 'R'STOXX EUROPE 600 E - PRICE INDEX

Source: Thomson Reuters Datastream

Analyst: Sector Analyst Team: Eric Le Berrigaud Mathieu Chabert 33(0) 1 56 68 75 33 Martial Descoutures eleberrigaud@bryangarnier.com Sébastien Malafosse

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Income Statement (USDm) 2009 2010 2011 2012e 2013e 2014e Revenues 44,267 50,624 58,566 55,790 56,660 59,012 Change (%) 6.8% 14.4% 15.7% -4.7% 1.6% 4.2% EBITDA 12,775 15,103 16,195 16,919 18,073 19,453 EBIT 9,982 11,526 10,998 11,819 13,073 14,653 Change (%) 11.4% 15.5% -4.6% 7.5% 10.6% 12.1% Core EBIT 11,437 14,005 15,909 15,087 15,939 17,445 Financial result (353) (628) (753) (666) (545) (395) Pre-tax profit 10,374 11,702 10,773 11,756 13,176 14,938 Exceptionals (452) 0.0 0.0 0.0 0.0 0.0 Tax 1,468 1,733 1,528 1,681 2,108 2,390 Profits from associates 293 804 528 603 647 680 Minority interests 54.0 239 132 90.0 90.0 80.0 Net profit 8,400 9,730 9,113 9,985 10,978 12,468 Net profit, restated 8,418 9,730 9,113 9,985 10,978 12,468 Change (%) 3.6% 15.6% -6.3% 9.6% 9.9% 13.6% Cash Flow Statement (USDm) Operating cash flows 9,191 10,254 12,386 12,891 13,312 14,278 Change in working capital 1,031 802 (1,683) 1,513 485 (355) Capex, net 1,887 1,678 2,100 2,050 2,050 2,050 Financial investments (12,332) (14,078) (860) (1,500) 0.0 0.0 Dividends 3,941 4,486 5,368 5,809 6,454 7,229 Net debt (3,461) 14,853 16,425 9,799 2,499 (4,435) Free cash flow (2,028) (1,689) 8,740 12,435 13,755 14,163 Balance Sheet (USDm) Shareholders funds 57,462 69,769 72,794 77,060 81,673 86,992 +Provisions (780) (2,061) (2,161) (2,261) (2,361) (2,461) +Net debt (3,461) 14,853 16,425 9,799 2,499 (4,435) =Invested capital 53,221 82,561 87,058 84,598 81,811 80,095 Fixed assets 58,247 93,066 95,880 93,433 91,130 89,060 + Working capital 44.6 480 2,163 650 166 520 + Other (5,071) (10,985) (10,985) (10,985) (10,985) (10,985) =Capital employed 53,221 82,561 87,058 83,098 80,311 78,595 Total balance sheet 95,505 123,318 127,356 132,007 137,006 142,436 Financial Ratios Operating margin 22.55 22.77 18.78 21.19 23.07 24.83 Core operating margin 25.84 27.66 27.16 27.04 28.13 29.56 Tax rate 14.80 14.81 14.18 14.30 16.00 16.00 Net margin 19.02 19.22 15.56 17.90 19.37 21.13 ROE (after tax) 15.60 15.30 12.78 13.33 13.83 14.78 ROCE (after tax) 24.39 12.16 11.36 12.66 14.25 16.57 Gearing -6.02 21.29 22.56 12.72 3.06 -5.10 Pay out ratio 46.67 42.72 40.65 47.17 50.33 48.78 Number of shares, diluted (m) 2,268 2,288 2,424 2,424 2,424 2,424 Per share data (USD) EPS 3.70 4.25 3.76 4.12 4.53 5.14 Restated EPS 3.71 4.25 3.76 4.12 4.53 5.14 Core EPS 4.50 5.15 5.54 5.30 5.56 6.15 Change (%) 7.9% 14.5% 7.5% -4.3% 5.0% 10.5% BV per share 25.22 30.49 29.97 31.70 33.56 35.72 Operating cash flows / share 4.05 4.48 5.11 5.32 5.49 5.89 FCF / share (0.89) (0.74) 3.61 5.13 5.67 5.84 Net dividend per share 2.10 2.20 2.25 2.50 2.80 3.00

Source: Company Data; Bryan, Garnier & Co ests.

Company description Novartis has a long history of successive acquisitions since it was formed in 1996 by the merger between the two Swiss companies Ciba and Sandoz. Different businesses were created through acquisitions like Vaccines & Diagnostics when Chiron was fully integrated or Ophtalmics more recently when Alcon was acquired for more than $40bn. The generics business, renamed Sandoz, was also reinforced with various acquisitions like Hexal, Eon Labs or Ebewe. In the recent years, Novartis rejuvenated a large part of its pharma portfolio and launched very innovative drugs like Lucentis, Afinitor or Gilenya that will manage the patent expiry of blockbusters like Diovan. Jimenez and Symonds are also trying to use CFROI as a key metrics to measure performance and achievements within the group.

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Introduction Since the BG HealthCare Club dedicated to Ophthalmology, which took place in September, often referred to Novartis, we decided a note branded Novartis may be a good way to summarise the main take-aways from it. However, before we go into this topic more intensively, let’s summarise our view about the company as a whole and where we think the investment case stands.

Novartis is not an easy story to advertise as it covers many different businesses each with their own specificities and momentum and also because the company has not committed to any kind of medium-term guidance that could help navigate through troubled waters with a lot of swing factors. Among these, it is worth stressing patent expiries, with Diovan and Zometa at the front of the scene, manufacturing issues at Lincoln which are weighing on the Consumer Healthcare and Animal Health activities, pressures on Sandoz from enoxaparin competition but more structurally from price cuts in Germany and questions around Vaccines. Margin sustainability or even expansion during this period is also questioned with various mix impacts playing out, including strong activity, product and geographical mix changes on top of continuous productivity improvements and cost savings.

The market sees margin contraction in 2013 (from -40bp to +10bp depending in the consensus used) followed by limited expansion by 10 to 80bp in 2014 and 2015. We assume that a quicker uptake is possible. Even in 2013, and although Diovan US and Zometa will affect margins in Pharmaceuticals, we believe that margin expansion is possible because (i) Consumer Healthcare will start to recover, (ii) Sandoz and Vaccines will at worst stabilise, (iii) Alcon is again expected to grow and (iv) Pharmaceuticals should be able to offset patent losses with new and increasingly profitable products and further cost savings. In 2014, we have a 150bp margin expansion in our estimates.

In conclusion, we think there are two obvious levers to consensus numbers: (i) although we consider global revenue forecasts as fair and reasonable, we see a clear upside for a few references such as Gilenya or Lucentis for which we have 2016 sales targets 20-30% above consensus; and (ii) the Core operating margin is definitely where most of the upside stands although we do not fully understand where the difference with the Street comes from (profitability from under-appreciated products, mix trends, recovery in CH and Vaccines or divestment, cost cuttings …). If Novartis is successful in addressing at least part of these during its Investors’ Day in Boston on November 8th, then we think there is room for further share price increase and multiple expansion.

Fig. 1: Main differences with consensus

USDm 2012e 2013e 2014e 2015e

Sales

BG 55,790 56,660 59,012 60,960

consensus BB 56,792 57,309 59,388 62,192

difference -1.8% -1.1% -0.6% -2.0%

Core EBIT

BG 15,087 15,939 17,445 19,193

consensus BB 15,030 15,317 16,386 17,532

difference 0.0% 4.1% 6.5% 9.5%

Core EPS

BG 5.30 5.56 6.15 6.81

consensus BB 5.26 5.47 6.03 6.52

difference -0.1% 1.6% 2.0% 4.4%

Source: Bryan, Garnier & Co ests., Bloomberg restated consensus

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1. AMD, a terrific opportunity

Age-related macular degeneration (AMD) is with no doubt one of most significant market segment opportunities for the healthcare industry. It is growing at a rate of over 10% per year and it is estimated that by 2050 around half of the population above 80 years will have AMD.

Indeed there are two different forms of AMD: 70% are of a dry form with no available treatment whereas 30% are of a wet or proliferative form with anti-VEGF now forming the cornerstone of available treatments today, with an estimated success rate of 60 to 70%. This is up from 20-30% with the previous standard Visudyne which addressed the disease downstream whereas it should be addressed even further upstream than anti-VEGF to attack the origin, i.e. ischaemia of vision cells and lack of oxygen.

It is then obvious to eye specialists that VEGF is not the exclusive intermediate responsible for the disease, by far. Interleukins and other growth factors are likely to be involved in AMD and one of these could well be the key but has yet to be identified. This is an area for research but nothing will hit the market in the coming five years.

A word on Fovista which is one of the potential new targets as an anti-PDVF: Prof. Renard doubts about a shining future unless it proves it can work alone or with a dual-chamber syringe. The number of injections made into the eye cannot really be increased further, even for an additional efficacy of around 30% except for some but not all patients.

Fig. 2: Trends in key eye procedures in France

Source: Prof. Renard

So let’s come back to anti-VEGF as it is the standard at present and likely to be so for a few more years. We summarise Prof. Renard’s view on the topic as follows:

- All products are similar. Eylea is no better than Lucentis which is no better than Avastin. In France and in Europe, where on-demand treatment is widely adopted, Eylea will not be convincing about reducing the number of injections. The actual average number of injections with Lucentis is 6 or 7 in Europe and Eylea will show no improvement on that basis;

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diabetic retinopathies

cataract surgery

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Eylea shows no improvement over Lucentis

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>> Novartis agrees in saying that Eylea will not have the same avenue to communicate as in the US with PRN on label in Europe.

- Lucentis has been overly protected on the back of safety concerns with Avastin which are

overdue. Prof. Renard had used Avastin in daily practice very safety for several years until he was prevented from doing so (letter sent to physicians on July 15th, 2012). In his opinion, infections are largely misuse-related but as long as hospitals are well-equipped and pharmacists are doing their job properly, there is no risk. Now the Direction Générale de la Santé has recently re-authorised Avastin where Lucentis is not approved and he believes that if the French head-to-head study comparing Avastin to Lucentis (led by GEFAL) that is due soon confirms previous results, then Avastin could be back in the game; >> Novartis doubts this will happen as increased risk associated with the use of Avastin was again highlighted after the recently published IVAN study.

- Moreover, without being sure it will ever have any implication, he noticed that safety with Lucentis could also well be challenged. The drug contains a fragile fragment of protein which requires a cold chain to be respected. In daily practice, it is not: the pharmacist does not always stock it in the freezer, the patient carries it to hospital without care and the hospital leaves it until use without taking care of the temperature. What are the implications in terms of safety? Nobody knows, but this could have an impact on efficacy/safety; >> Novartis is unaware of any problem ever raised about this and does not believe it is relevant.

- Considering that Eylea is no better than Lucentis, Prof. Renard believes there is a

significant risk that Bayer might have to accept playing with the price in order to capture a decent market share. As far as the French situation is concerned, Prof. Renard believes that Lucentis’s price has been negotiated downwards by 10% this year and another 10% to take effect in January 2013 (price per injection to go down from EUR1,000 to EUR900). Beyond that, he thinks Bayer might be compelled to accept a negotiated price of around EUR600 per injection. What would happen to Lucentis then? Deflation would not be good for either of the two players. >> Novartis thinks it is possible that such a strategy can be implemented but Bayer will also have to find a way to save returns for the drug despite royalties paid to Regeneron. Moreover, Novartis thinks that an aggressive pricing strategy would make price-sensitive physicians move from Avastin to Eylea whereas Lucentis would not be significantly impacted. As or price reductions for Lucentis, Novartis agrees with the numbers but stresses that it is part of volumes vs price discussions with French authorities.

Somewhat beyond AMD but still about Lucentis we then asked Prof. Renard about the opportunity for the drug to expand into other market segments. He agreed, but surprisingly quoted them as “much less significant opportunities than AMD”. RVO and DME taken together would not represent more than a tenth of AMD although patients are younger and might require longer treatments.

>> Novartis does not disagree for RVO but strongly disagrees about DME. According to data presented at the EURETINA congress, a quarter of people with diabetes aged 45 and above has DME (diabetic

Avastin is also a good product for AMD

Will Bayer use price as a marketing advantage ?

Unlike what Prof. Renard said, Novartis sticks to the idea that DME is a huge new market segment

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macular oedema). So far, DME has been treated by laser surgery and corticosteroids. Now VEGF inhibitors are a good alternative, although admittedly not for all of them. Novartis adds that these patients are younger than those with AMD on average (and sometimes a second cycle of treatment will be needed) and so compliance will be higher, and in 70% of the cases both eyes will be affected.

As a reminder, we have a USD3.6bn peak sales estimate in 2018 for Lucentis ex-US, i.e. only for the Novartis territories, to be compared with a USD2.3bn reported sales over the last four quarters and USD2.65bn for consensus in 2015. This is a 9% average growth rate which is not excessive in our view when compared to the 23% rate reported in Q3 this year but which has be put in the context of an expanding market so far without competition.

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2. Alcon is a prime quality asset

We asked Prof. Renard how he would rank eye specialists based on his experience. Immediately Alcon came as the clear number 1:

(i) very good in R&D, he had visited its R&D sites twice and he was impressed and, with Novartis Group behind it now, it is likely that Alcon’s leadership will last and even increase;

(ii) its scope is the largest, although he believes that anything outside surgery is less relevant to them and less supported too;

(iii) last, but not least, they have very good representatives who have strong loyalties to the company and as such he enjoyed the same rep for 20 years at Hotel Dieu. The latter was so involved within the department that he had the keys and he sometimes the first to open the door in the morning to prepare everything for the first procedure of the day. He was a team member! This is a very strong asset for the hospital, all the more so that in such a department, reps have more time to spend with physicians than in general medicine where they are competing against patients. Between two interventions, he can discuss with the medical team about new machines and functionalities.

By the way, he ranked Bausch & Lomb number 2 (good in surgery) and could find no other company to rank. Asked about Abbott, he was not supportive at all.

Addressing the business model of Alcon and similar companies, Prof. Renard noted that it would be supported by underlying trends in France. The country is adopting an Anglo-Saxon working model made of two different categories of eye specialists with ophthalmologists on one side and orthoptists on the other side. The first category (with less and less people) will dedicate more and more time to emergency interventions including surgery, whereas the second (which has 50% more people in 2012 compared to 2000) will be in charge of detection, control and prescription for eye diseases. This will help solve the problem of an ageing population of physicians in France and also speed up either time before a surgery procedure is executed or time before a check-in at the doctor’s surgery can be obtained. As a consequence for Alcon and its business, ophthalmologists will be more and more focused on surgery, located in hospitals or in big surgeries which should allow the rejuvenating or renewing very expensive machines more often. In refractive surgery for instance, a femtosecond laser costs between EUR400,000 and EUR500,000 and a new machine comes out every other year. With 400 procedures a year, one need five years to get it amortised. However, prices are going down and, a few years ago, an excimer laser (Lasik) was no cheaper than EUR1m. In 2008, France had only 12 machines and this was representative of the average equipment in Western countries whereas Asia had almost nothing. Today there are 300 in France and the potential is around 1,000. So prices will drop further and this downward trend is possible because the number of installed machines has increased dramatically. And the model is the one used in diagnostics or with coffee machines: the more one has installed in the market, the higher sales one can achieve with consumables. As an example, Prof. Renard illustrated that for each vitrectomy surgery one has around EUR400 of consumables on the table and the market is growing at a mid-single digit rate.

The same representative for 20 years

EUR400 of consumables on the table for each vitrectomy

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Fig. 3: Trends in cataract procedures in France

Source: Prof. Renard

As a reminder, Alcon achieved USD3.6bn in sales in the surgical business in 2011 (o/w 78% is made up of products for cataract surgery), representing 36% of total revenues at Alcon. We expect this business to grow 7.5% p.a. by 2016 to USD5bn (excluding ocriplasmin, see later), when it will weigh 43-44% of the company. We are very

comfortable with these assumptions after our discussion with Prof. Renard even though it is worth stressing that in the short term it could suffer from economic market conditions and price pressures in Europe as illustrated by the Q3 numbers.

Fig. 4: Evolution of surgery revenues within Alcon (USDm)

Source: Company Data; Bryan, Garnier & Co ests.

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3. What else?

As a more general comment, the meeting with Prof. Renard was also an opportunity to stress the numerous avenues for growth in the field of ophthalmology. It is fair to expect that Novartis as the number 1 in the category will try to capture as much as possible from this growth.

(i) In AMD, as already discussed, dry forms of the disease which represent 70% of the total are not addressed by any therapeutic solution and so represent a tremendous opportunity for industry players. Even in wet forms of the disease, much still has to be achieved at least for two reasons: first is the very invasive means of administration of current anti-VEGF (i.e. intravitreal injections); second and more importantly is that VEGF is definitely not at the origin of the ischaemia and so key other factors still have to be found and developed as therapeutic solutions. As far as formulation, Prof. Renard highlighted that developments were ongoing with a technique known as iontophoresis (a technique that uses a small electric charge to deliver a polarised molecule) which does not make a hole in the eye and thus carries much less risk of infection. If successful, this could change the game;

(ii) In retinal surgery, the industry has failed to find smaller-sized needles (too fragile, breaking too often) and there is no real breakthrough expected in the short term. And Prof. Renard is not so sure that the “chemical solution” ocriplasmin is a sound advance. First of all because it is another intravitreal solution although only one is needed. He stressed that ocriplasmin may break some bridges between vitreous and retina but only when there is no fibrosis, i.e. it would mainly address the early-stage of the disease, when surgery is not really an option (too early or too risky). He warned that the market is not so large with around 100,000 retinal procedures in France per year, including more than half related to detachments of the retina. For the addressable market, ocriplasmin will have to be competitive in price compared to surgery whose estimated total cost would be around EUR2,000. If ocriplasmin is priced at EUR2,000 and 25,000 procedures are addressable, then the market potential in France would be EUR50m. Prof. Renard also added that ocriplasmin would be a much larger drug if it was proved that it was also effective in other diseases like certain forms of AMD (plasmin dissolves fibrin). As a reminder, Novartis has negotiated the rights to ocriplasmin with ThromboGenics for ex-US territories. >> Novartis clarifies that EUR2,000 is supposedly the price for surgery in public hospitals in France but this is not the average price for Europe so that a slightly higher price is possible for ocriplasmin. By the way, the incidence is projected to be at least 150,000 patients in Europe only with other opportunities in other territories like Australia.

Now that it has been approved in the US with the brand name Jetrea, we are introducing ocriplasmin into our sales model within Alcon (CHMP decision is expected in H1 2013). We base our assumptions on an annual volume of patients of 150,000 and a price of USD4,000 which translates into peak sales of USD600m in 2017.

We are introducing ocriplasmin in our sales model with a USD600m peak sales

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This is how ThromboGenics describes ocriplasmin, called Jetrea in the US market : “When the vitreous gel adheres too strongly to the retina, it can lead to VMT (vitreomacular traction), which may in the long-run affect vision significantly. The patient may eventually develop a range of eye disorders, including macular pucker, macular hole, AMD (age-related macular generation), retinal tears, detachment, and macular edema. Symptomatic VMA is not a disease or a problem in itself, but if left untreated can lead to eye conditions that may result in vision loss, and even total blindness. There are proteins that cause VMA. Jetrea, an enzyme, breaks these proteins down, allowing for the vitrous and macula to separate properly, thus reducing the likelihood of "tugging".”

(iii) In refractive surgery, although it is growing very quickly (but from a low base), solutions are very expensive (machines) and in general not so well designed. Long-sightedness is clearly its very first market in ophthalmology as 100% of the worldwide population over 45 is affected! Prof. Renard considers that glasses have great perspectives ahead and are unlikely to be challenged by surgical techniques. However, the underlying cause of the disease is well identified but not yet addressed: a loss of elasticity of the basal membrane which causes loss of capacity to transport oxygen. This loss of elasticity is partly age-related and found in other diseases (skin, joint, macula …). Any advance here would open very promising growth avenues in various domains.

(iv) Lastly, Prof. Renard addressed two other frequent eye diseases: - The first is glaucoma: there are many product families already in the market place

including many generics. However generics face problems with prostaglandins as they are difficult products to stabilise. A step forward in the field would be the availability of prostaglandins without preservatives as they would be safer drugs, but preservatives are also responsible for the penetration of the drug so the equation has not yet been solved. Another good solution would be a cannabinoid derivative under an eye drop from.

- The second is dry eye where three layers are required, a proteinic one (hyaluronic acid), an aqueous one (salt water) and an external lipidic one. But there is a clear issue with dosage of each component which has so far made it impossible to combine everything into a single product.

The discussions with Prof. Renard left us very confident not only about Alcon but also about Lucentis, although his view on the latter was more balanced. Alcon has an unchallenged position within the surgery market whereas Lucentis will benefit a rapidly growing AMD market. Concerns about price pressures and limitations of new segment expansion (notably in DME) are irrelevant or overstated in our view. Moreover introduction of ocriplasmin into our sales model impacts FV by CHF1 to CHF62 per share.

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APPENDIX : Alcon’s sales to 2017

USDm 2010 2011 % cc Q1 2012 % cc Q2 2012 % cc Q3 2012 % cc Q4 2012 2012e % cc 2013e % cc 2014e % cc 2015e % cc 2016e % cc 2017e % cc

Cataract products 2668 2 858 4 713 6 757 6 685 2 691 2 846 4 3045 7 3258 7 3486 7 3661 5 3807 4

Vitreoretinal products 424 529 21 141 17 140 11 139 3 138 558 10 603 8 651 8 697 7 731 5 768 5

Refractive/Other 129 200 51 64 54 60 24 49 7 67 240 20 288 20 346 20 415 20 477 15 525 10

Ocriplasmine 40 200 400 520 600

Surgical 3221 3 587 8 918 10 957 8 873 3 896 3 644 3 976 4 455 4 998 5 389 5 700

Infection/Inflammation 839 967 14 250 12 267 7 232 1 240 989 6 1058 7 952 -10 904 -5 941 4 959 2

Glaucoma 1136 1 287 10 306 -1 335 6 314 2 334 1289 3 1366 6 1366 0 1093 -20 1038 -5 1038 0

Allergy/Otic/nasal 813 884 7 264 1 243 -6 208 5 211 926 5 972 5 1021 5 766 -25 689 -10 689 0

Dry eye/Other 727 810 10 209 13 216 8 209 3 220 854 9 922 8 968 5 1016 5 1026 1 1037 1

Pharmaceuticals 3515 3 948 10 1 029 6 1 061 4 963 3 1 004 4 057 4 318 4 307 3 779 3 695 3 724

Contact lenses 1579 1 701 3 424 4 446 6 438 4 419 1727 6 1813 5 1904 5 1980 4 2059 4 2141 4

Solutions/Other 716 713 -4 170 -2 184 -1 186 3 150 690 1 696 1 752 8 812 8 869 7 930 7

Vision Care 2295 2 414 1 594 2 630 4 624 4 568 2 416 2 509 2 656 2 792 2 928 3 071

Alcon 9 031 9 949 7 2 541 6 2 648 5 2 460 3 2 468 10 117 10 804 7 11 418 6 11 569 1 12 012 4 12 495 4

Source: Company Data; Bryan, Garnier & Co ests.

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Novartis

Price Chart and Rating History

Novartis

Ratings

Date Ratings Price

18/07/11 BUY CHF50.35

Target Price

Date Target price

30/10/12 CHF62

20/07/12 CHF61

18/06/12 CHF62

13/01/12 CHF60

20/12/11 CHF59

26/10/11 CHF61

14/09/11 CHF60

18/07/11 CHF66

29/10/12

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44

46

48

50

52

54

56

58

60

62

NOVARTIS 'R'

Source: Thomson Reuters Datastream

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Novartis

Bryan Garnier stock rating system For the purposes of this Report, the Bryan Garnier stock rating system is defined as follows: Stock rating

BUY Positive opinion for a stock where we expect a favourable performance in absolute terms over a period of 6 months from the publication of a recommendation. This opinion is based not only on the FV (the potential upside based on valuation), but also takes into account a number of elements including a SWOT analysis, positive momentum, technical aspects and the sector backdrop. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion.

NEUTRAL Opinion recommending not to trade in a stock short-term, neither as a BUYER or a SELLER, due to a specific set of factors. This view is intended to be temporary. It may reflect different situations, but in particular those where a fair value shows no significant potential or where an upcoming binary event constitutes a high-risk that is difficult to quantify. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion.

SELL Negative opinion for a stock where we expect an unfavourable performance in absolute terms over a period of 6 months from the publication of a recommendation. This opinion is based not only on the FV (the potential downside based on valuation), but also takes into account a number of elements including a SWOT analysis, positive momentum, technical aspects and the sector backdrop. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion.

Distribution of stock ratings

BUY ratings 45.8% NEUTRAL ratings 35.5% SELL ratings 18.7%

Research Disclosure Legend

1 Bryan Garnier shareholding in Issuer

Bryan Garnier & Co Limited or another company in its group (together, the “Bryan Garnier Group”) has a shareholding that, individually or combined, exceeds 5% of the paid up and issued share capital of a company that is the subject of this Report (the “Issuer”).

No

2 Issuer shareholding in Bryan Garnier

The Issuer has a shareholding that exceeds 5% of the paid up and issued share capital of one or more members of the Bryan Garnier Group.

No

3 Financial interest A member of the Bryan Garnier Group holds one or more financial interests in relation to the Issuer which are significant in relation to this report

No

4 Market maker or liquidity provider

A member of the Bryan Garnier Group is a market maker or liquidity provider in the securities of the Issuer or in any related derivatives.

No

5 Lead/co-lead manager In the past twelve months, a member of the Bryan Garnier Group has been lead manager or co-lead manager of one or more publicly disclosed offers of securities of the Issuer or in any related derivatives.

No

6 Investment banking agreement

A member of the Bryan Garnier Group is or has in the past twelve months been party to an agreement with the Issuer relating to the provision of investment banking services, or has in that period received payment or been promised payment in respect of such services.

No

7 Research agreement A member of the Bryan Garnier Group is party to an agreement with the Issuer relating to the production of this Report.

No

8 Analyst receipt or purchase of shares in Issuer

The investment analyst or another person involved in the preparation of this Report has received or purchased shares of the Issuer prior to a public offering of those shares.

No

9 Remuneration of analyst The remuneration of the investment analyst or other persons involved in the preparation of this Report is tied to investment banking transactions performed by the Bryan Garnier Group.

No

10 Corporate finance client In the past twelve months a member of the Bryan Garnier Group has been remunerated for providing corporate finance services to the issuer or may expect to receive or intend to seek remuneration for corporate finance services from the Issuer in the next six months.

No

11 Analyst has short position The investment analyst or another person involved in the preparation of this Report has a short position in the securities or derivatives of the Issuer.

No

12 Analyst has long position The investment analyst or another person involved in the preparation of this Report has a long position in the securities or derivatives of the Issuer.

No

13 Bryan Garnier executive is an officer

A partner, director, officer, employee or agent of the Bryan Garnier Group, or a member of such person’s household, is a partner, director, officer or an employee of, or adviser to, the Issuer or one of its parents or subsidiaries. The name of such person or persons is disclosed above.

No

14 Analyst disclosure The analyst hereby certifies that neither the views expressed in the research, nor the timing of the publication of the research has been influenced by any knowledge of clients positions and that the views expressed in the report accurately reflect his/her personal views about the investment and issuer to which the report relates and that no part of his/her remuneration was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in the report.

Yes

15 Other disclosures Other specific disclosures: Report sent to Issuer to verify factual accuracy (with the recommendation/rating, price target/spread and summary of conclusions removed).

No

A copy of the Bryan Garnier & Co Limited conflicts policy in relation to the production of research is available at www.bryangarnier.com

London Dowgate Hill House 14-16 Dow Gate Hill London EC4R 2SU Tel: +44 (0) 207 332 2500 Fax: +44 (0) 207 332 2559 Authorised and regulated by the Financial Services Authority (FSA)

Paris 26 Avenue des Champs Elysées 75008 Paris Tel: +33 (0) 1 56 68 75 00 Fax: +33 (0) 1 56 68 75 01 Regulated by the Financial Services Authority (FSA) and l’Autorité des Marchés Financiers (AMF)

New York 750 Lexington Avenue New York, NY 10022 Tel: +1 (0) 212 337 7000 Fax: +1 (0) 212 337 7002 FINRA and SIPC member

Geneva rue de Grenus 7 CP 2113 Genève 1, CH 1211 Tel +4122 731 3263 Fax+4122731 3243 Regulated by the Swiss Federal Banking Commission

New Delhi The Imperial Hotel Janpath New Delhi 110 001 Tel +91 11 4132 6062 +91 98 1111 5119 Fax +91 11 2621 9062

Important information This independent investment research report (the “Report”) was prepared by Bryan Garnier & Co Limited and is being distributed only to clients of Bryan Garnier & Co Limited (the “Firm”). Bryan Garnier & Co Limited is authorised and regulated by the Financial Services Authority (the “FSA”) and is a member of the London Stock Exchange. This Report is provided for information purposes only and does not constitute an offer, or a solicitation of an offer, to buy or sell relevant securities, including securities mentioned in this Report and options, warrants or rights to or interests in any such securities. This Report is for general circulation to clients of the Firm and as such is not, and should not be construed as, investment advice or a personal recommendation. No account is taken of the investment objectives, financial situation or particular needs of any person. The information and opinions contained in this Report have been compiled from and are based upon generally available information which the Firm believes to be reliable but the accuracy of which cannot be guaranteed. All components and estimates given are statements of the Firm, or an associated company’s, opinion only and no express representation or warranty is given or should be implied from such statements. All opinions expressed in this Report are subject to change without notice. To the fullest extent permitted by law neither the Firm nor any associated company accept any liability whatsoever for any direct or consequential loss arising from the use of this Report. Information may be available to the Firm and/or associated companies which are not reflected in this Report. The Firm or an associated company may have a consulting relationship with a company which is the subject of this Report. This Report may not be reproduced, distributed or published by you for any purpose except with the Firms’ prior written permission. The Firm reserves all rights in relation to this Report. Past performance information contained in this Report is not an indication of future performance. The information in this report has not been audited or verified by an independent party and should not be seen as an indication of returns which might be received by investors. Similarly, where projections, forecasts, targeted or illustrative returns or related statements or expressions of opinion are given (“Forward Looking Information”) they should not be regarded as a guarantee, prediction or definitive statement of fact or probability. Actual events and circumstances are difficult or impossible to predict and will differ from assumptions. A number of factors, in addition to the risk factors stated in this Report, could cause actual results to differ materially from those in any Forward Looking Information.

Disclosures specific to clients in the United Kingdom This Report has not been approved by Bryan Garnier & Co Limited for the purposes of section 21 of the Financial Services and Markets Act 2000 because it is being distributed in the United Kingdom only to persons who have been classified by Bryan Garnier & Co Limited as professional clients or eligible counterparties. Any recipient who is not such a person should return the Report to Bryan Garnier & Co Limited immediately and should not rely on it for any purposes whatsoever.

Notice to US investors This research report (the “Report”) was prepared by Bryan Garnier & Co. Ltd. for information purposes only. The Report is intended for distribution in the United States to “Major US Institutional Investors” as defined in SEC Rule 15a-6 and may not be furnished to any other person in the United States. Each Major US Institutional Investor which receives a copy of this Report by its acceptance hereof represents and agrees that it shall not distribute or provide this Report to any other person. Any US person that desires to effect transactions in any security discussed in this Report should call or write to our US affiliated broker, Bryan Garnier Securities, LLC. 750 Lexington Avenue, New York NY 10022. Telephone: 1-212-337-7000. This Report is based on information obtained from sources that Bryan Garnier & Co. Ltd. believes to be reliable and, to the best of its knowledge, contains no misleading, untrue or false statements but which it has not independently verified. Neither Bryan Garnier & Co. Ltd. and/or Bryan Garnier Securities LLC make no guarantee, representation or warranty as to its accuracy or completeness. Expressions of opinion herein are subject to change without notice. This Report is not an offer to buy or sell any security. Bryan Garnier Securities, LLC and/or its affiliate, Bryan Garnier & Co. Ltd. may own more than 1% of the securities of the company(ies) which is (are) the subject matter of this Report, may act as a market maker in the securities of the company(ies) discussed herein, may manage or co-manage a public offering of securities for the subject company(ies), may sell such securities to or buy them from customers on a principal basis and may also perform or seek to perform investment banking services for the company(ies).

Bryan Garnier Securities, LLC and/or Bryan Garnier & Co. Ltd. are unaware of any actual, material conflict of interest of the research analyst who prepared this Report and are also not aware that the research analyst knew or had reason to know of any actual, material conflict of interest at the time this Report is distributed or made available.