EUR 4635.28 For Business Accounts Only

Role Reversal

Having been one of the worst performing stocks in 2016, we believe Novartis will be a leading performer through 2017 due to: potential Siponimod early approval, ongoing Cosentyx growth in light of Taltz PBM restrictions and a lack of a future patent cliff or significant exposure to US pricing risks. Add to this, rapid EPS growth from 2018, improving Entresto progress and a growing portfolio of biosimilars, and Novartis has the potential to perform well. We have been conservative with our 2017 EPS forecasts and still get to mid-single digit growth.

Near-term News flow a Bridge to EPS growth – In the coming months there will be a number of updates on key pipeline assets and newly launched drugs that will help bridge the gap to the double-digit EPS growth we are forecasting in 2018 and beyond.

Siponimod – Our MS Expert believes that 35-40% of MS patients are currently in the SPMS phase which implies a potential market size of almost $8bn in the US alone although other drugs are currently used (off label) in this setting. Novartis plan to initiate discussions with regulators in the coming weeks to assess the potential for early approval despite only having one study. This would be a material upside driver in our opinion.

Cosentyx – We expect Cosentyx to continue to grow materially from here following publication of the latest National Formularies from key PBM’s. United Health have placed Cosentyx on tier 3 vs Taltz on Tier 4 and Taltz has been completely excluded on Express Scripts’ formulary whilst Cosentyx is on the preferred tier. Whilst it may only be a 6- 12mth restriction on Taltz until a renegotiation, it comes at an important time & materially benefits Cosentyx.

LEE011 mature data could drive upgrades – The market was underwhelmed by the first publication of the LEE011 data at ESMO. However, given the data was immature and 58% of patients were still on treatment when the data was collected, we would expect the final PFS to be better than Ibrance. The key question is, is it sufficient to warrant using LEE011 given its inferior safety profile and probable need for monitoring. We believe there is upside risk to consensus.

Valuation – Our SFr.92 price target assumes that Novartis trades on a conservative 15% premium to the sector in 2018 despite growing significantly faster than all other EU Pharma large-cap stocks, except AZN.

Note: This initiation is also included within the "EU Pharmaceuticals - Opportunities Abound" report.