BUY BUY BUY BUY: Novartis Ag

July 16, 2017
NYSE: NVS
NOVARTIS AG
BUY HOLD SELL
BUY
RATING SINCE 06/05/2017
A+ A A- B+ B B- C+ C C- D+ D D- E+ E E- F TARGET PRICE $95.35
Annual Dividend Rate Annual Dividend Yield Beta Market Capitalization 52-Week Range Price as of 7/13/2017
$2.75 3.32% 0.75 $216.0 Billion $66.93-$86.90 $82.55
Sector: Health Care Sub-Industry: Pharmaceuticals Source: S&P

Weekly Price: (US$) SMA (50) SMA (100) 1 Year 2 Years
NVS BUSINESS DESCRIPTION
Novartis AG researches, develops, manufactures, 110
and markets healthcare products worldwide. The 105
company's Innovative Medicines segment offers
100
patented prescription medicines to enhance health
outcomes for patients and health-care providers. TARGET
TARGET
TARGETPRICE
PRICE$95.35
PRICE $95.35
$95.35 95
TARGET
90
STOCK PERFORMANCE (%)
3 Mo. 1 Yr. 3 Yr (Ann) 85
Price Change 12.85 0.63 -2.67 80
75
GROWTH (%)
Last Qtr 12 Mo. 3 Yr CAGR 70
Revenues -0.53 -1.27 -2.42 65
Net Income -17.16 -6.22 -13.15 Rating History
EPS -16.67 -4.32 -10.26 BUY HOLD BUY HOLD BUY
RETURN ON EQUITY (%) Volume in Millions

25
NVS Ind Avg S&P 500
Q1 2017 9.42 19.57 13.16
Q1 2016 9.37 14.36 11.83
0
Q1 2015 13.79 23.56 13.71 2015 2016 2017
COMPUSTAT for Price and Volume, TheStreet Ratings, Inc. for Rating History
P/E COMPARISON
RECOMMENDATION
We rate NOVARTIS AG (NVS) a BUY. This is driven by multiple strengths, which we believe should have a
greater impact than any weaknesses, and should give investors a better performance opportunity than most
stocks we cover. The company's strengths can be seen in multiple areas, such as its reasonable valuation
levels, good cash flow from operations, expanding profit margins, largely solid financial position with
reasonable debt levels by most measures and notable return on equity. We feel its strengths outweigh the
fact that the company has had sub par growth in net income.
31.03 94.57 24.41 HIGHLIGHTS

Net operating cash flow has increased to $2,045.00 million or 32.61% when compared to the same quarter last
NVS Ind Avg S&P 500
year. In addition, NOVARTIS AG has also modestly surpassed the industry average cash flow growth rate of
28.52%.
EPS ANALYSIS¹ ($)
The gross profit margin for NOVARTIS AG is rather high; currently it is at 64.51%. It has increased from the
same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit
margin of 14.43% trails the industry average.
The current debt-to-equity ratio, 0.46, is low and is below the industry average, implying that there has been
successful management of debt levels. Despite the fact that NVS's debt-to-equity ratio is low, the quick ratio,
which is currently 0.62, displays a potential problem in covering short-term cash needs.
Q1 0.94
Q2 0.76
Q3 0.74
Q4 0.44
Q1 0.84
Q2 0.75
Q3 0.81
Q4 0.40
Q1 0.70
NOVARTIS AG's earnings per share declined by 16.7% in the most recent quarter compared to the same
2015 2016 2017 quarter a year ago. The company has suffered a declining pattern of earnings per share over the past two
NA = not available NM = not meaningful
years. However, we anticipate this trend to reverse over the coming year. During the past fiscal year,
NOVARTIS AG reported lower earnings of $2.80 versus $2.88 in the prior year. This year, the market expects
1 Compustat fiscal year convention is used for all fundamental
data items. an improvement in earnings ($4.70 versus $2.80).
This report is for information purposes only and should not be considered a solicitation to buy or sell any security. Neither TheStreet Ratings nor any other party guarantees its accuracy Report Date: July 16, 2017 PAGE 1
or makes warranties regarding results from its usage. Redistribution is prohibited without the express written consent of TheStreet Ratings. Copyright(c) 2006-2016. All rights reserved.
July 16, 2017
NYSE: NVS
NOVARTIS AG
Sector: Health Care Pharmaceuticals Source: S&P
$2.75 3.32% 0.75 $216.0 Billion $66.93-$86.90 $82.55
PEER GROUP ANALYSIS INDUSTRY ANALYSIS

REVENUE GROWTH AND EBITDA MARGIN*
US pharmaceutical companies are involved in the discovery, manufacturing, distribution, and research of
generic and branded drugs. The industry accounts for 27.3% of the healthcare sector and is capital-intensive
20%
BMY with exorbitant R&D costs. Most companies are mature and characterized by high margins and higher
FA
dividend pay-outs. Major players include Pfizer (PFE), Bristol-Myers Squibb (BMY), Abbott Laboratories (ABT),
VO
and Eli Lilly (LLY). The industry employs more than 400,000 in the US. The 50 largest companies control over
RA
BL
80% of the market.

E
The industry faces unprecedented challenges from stringent environmental regulations and patent
LLY
expirations on billion-dollar products. Industry experts believe that generic competition will wipe out more
AGN than $60 billion from US industry sales over the next five years as more than three dozen drugs lose patent
JNJ
Revenue Growth (TTM)
PFE protection. Merck lost a $3 billion patent protection for its osteoporosis drug Fosamax in 2008 while Eli Lilly
MRK lost an estimated 90% of Zyprexa sales. The FDA is rejecting more drugs on safety concerns and a lack of
compelling evidence of definite advancement from existing drugs.
UN
FA
VO
-10%
The US government enacted the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) in
RA
B
AZN 2003 to provide prescription drug benefits to the elderly and disabled. Medicare Part D, a component of MMA,
LE
28% 46% which came into effect in 2006, altered the revenue model of pharma companies.
EBITDA Margin (TTM)
Companies with higher EBITDA margins and Horizontal and vertical integration has created health maintenance organizations (HMOs) and pharmacy
revenue growth rates are outperforming companies benefit management firms (PBMs). In order to cut costs and remain competitive, the US pharma majors have
with lower EBITDA margins and revenue growth been outsourcing research to low-cost service providers in India and China.
rates. Companies for this scatter plot have a market
capitalization between $82 Billion and $355.2 Billion. The promising era of personalized medicine has begun. Dozens of exciting new drugs for the treatment of dire
Companies with NA or NM values do not appear. diseases such as cancer, AIDS, Parkinson's, and Alzheimer's are either on the market or are very close to
regulatory approval. The industry has shifted its focus from blockbuster drugs (chemistry-based drugs) to
*EBITDA – Earnings Before Interest, Taxes, Depreciation and
Amortization. specialized products, geared towards specific disorders. Growth in American drug purchases will continue to
be supported by a rapidly aging population, inflation, and the introduction of expensive new drugs.
REVENUE GROWTH AND EARNINGS YIELD
20%
BMY PEER GROUP: Pharmaceuticals

Recent Market Price/ Net Sales Net Income
FA
Ticker Company Name Price ($) Cap ($M) Earnings TTM ($M) TTM ($M)
VO
RA
NVS NOVARTIS AG 82.55 216,021 31.03 48,457.00 6,367.00

BL
E
LLY LILLY (ELI) & CO 84.02 92,707 40.59 21,585.30 2,186.70

BMY BRISTOL-MYERS SQUIBB CO 54.67 90,069 18.98 19,965.00 4,836.00
LLY
AGN ALLERGAN PLC 244.13 86,450 NM 14,744.20 12,152.50
AGN NVO NOVO NORDISK A/S 42.61 83,625 19.91 15,797.06 5,397.98
PFE JNJ
Revenue Growth (TTM)
MRK AZN ASTRAZENECA PLC 32.39 81,997 24.17 24,180.00 3,390.00

NVS SNY JNJ JOHNSON & JOHNSON 131.86 355,209 22.16 72,174.00 16,505.00
UN
GSK GLAXOSMITHKLINE PLC 42.50 206,819 51.20 35,169.00 2,030.96

FA
GSK NVO
VO
-10%
PFE PFIZER INC 33.28 198,610 27.97 52,598.00 7,298.00

RA
B
AZN
LE
MRK MERCK & CO 62.89 172,015 40.57 39,929.00 4,346.00

-6% 6%
SNY SANOFI 48.64 122,646 25.74 37,111.90 9,829.77
Earnings Yield (TTM)
The peer group comparison is based on Major Pharmaceuticals companies of comparable size.
Companies that exhibit both a high earnings yield
and high revenue growth are generally more
attractive than companies with low revenue growth
and low earnings yield. Companies for this scatter
plot have revenue growth rates between -6.8% and
18.1%. Companies with NA or NM values do not
appear.
July 16, 2017
NYSE: NVS
NOVARTIS AG
$2.75 3.32% 0.75 $216.0 Billion $66.93-$86.90 $82.55
COMPANY DESCRIPTION STOCK-AT-A-GLANCE

Novartis AG researches, develops, manufactures, and Below is a summary of the major fundamental and technical factors we consider when determining our
markets healthcare products worldwide. The company's overall recommendation of NVS shares. It is provided in order to give you a deeper understanding of our
Innovative Medicines segment offers patented rating methodology as well as to paint a more complete picture of a stock's strengths and weaknesses. It is
prescription medicines to enhance health outcomes for important to note, however, that these factors only tell part of the story. To gain an even more comprehensive
patients and health-care providers. This segments also understanding of our stance on the stock, these factors must be assessed in combination with the stock’s
franchises ophthalmology, neuroscience, immunology valuation. Please refer to our Valuation section on page 5 for further information.
and dermatology, respiratory, cardio-metabolic, and
other medicines, as well as cell and gene therapies. The FACTOR SCORE
Sandoz segment offers active ingredients and finished
dosage forms of pharmaceuticals for dermatology, Growth out of 5 stars 2.0
respiratory and ophthalmic, cardiovascular, metabolism, Measures the growth of both the company's income statement and weak strong
central nervous system, pain, gastrointestinal, and cash flow. On this factor, NVS has a growth score better than 30% of
hormonal therapies; active pharmaceutical ingredients the stocks we rate.
and intermediates primarily antibiotics; protein or other
biotechnology-based products; and cytotoxic products for
the hospital markets, as well as biotechnology
Total Return out of 5 stars 2.5
manufacturing services to other companies. The Alcon Measures the historical price movement of the stock. The stock weak strong
segment offers eye care products, including ophthalmic performance of this company has beaten 40% of the companies we
surgical equipment, instruments, disposable products, cover.
and intraocular lenses for use in surgical procedures to
treat cataracts, vitreoretinal conditions, glaucoma, and Efficiency out of 5 stars 4.0
refractive errors; and contact lenses and lens care Measures the strength and historic growth of a company's return on weak strong
products. The company has collaboration and licensing invested capital. The company has generated more income per dollar of
agreements with Xencor for the development of capital than 70% of the companies we review.
bispecific antibodies for treating cancer; and Surface
Oncology to access four pre-clinical programs in
immuno-oncology. It also has collaboration and licensing
Price volatility out of 5 stars 3.5
agreements with Intellia Therapeutics for the discovery Measures the volatility of the company's stock price historically. The weak strong
and development of new medicines using CRISPR stock is less volatile than 60% of the stocks we monitor.
genome editing technology; and Caribou Biosciences for
the development of drug discovery tools. In addition, the Solvency out of 5 stars 4.5
company has a clinical research collaboration with Measures the solvency of the company based on several ratios. The weak strong
Bristol-Myers Squibb Company to investigate Opdivo company is more solvent than 80% of the companies we analyze.
(nivolumab) and Opdivo + Yervoy (ipilimumab) regimen in
combination with Mekinist as a treatment option for Income out of 5 stars 4.5
metastatic colorectal cancer. Novartis AG was founded
Measures dividend yield and payouts to shareholders. The company's weak strong
in 1895 and is headquartered in Basel, Switzerland.
dividend is higher than 80% of the companies we track.
NOVARTIS AG
Lichtstrasse 35 THESTREET RATINGS RESEARCH METHODOLOGY
Basel 4056
CHE TheStreet Ratings' stock model projects a stock's total return potential over a 12-month period including both
Phone: 41 61 324 1111 price appreciation and dividends. Our Buy, Hold or Sell ratings designate how we expect these stocks to
Fax: 41 61 324 7826 perform against a general benchmark of the equities market and interest rates. While our model is
http://www.novartis.com quantitative, it utilizes both subjective and objective elements. For instance, subjective elements include
Employees: 118000 expected equities market returns, future interest rates, implied industry outlook and forecasted company
earnings. Objective elements include volatility of past operating revenues, financial strength, and company
cash flows.
Our model gauges the relationship between risk and reward in several ways, including: the pricing drawdown
as compared to potential profit volatility, i.e.how much one is willing to risk in order to earn profits; the level of
acceptable volatility for highly performing stocks; the current valuation as compared to projected earnings
growth; and the financial strength of the underlying company as compared to its stock's valuation as
compared to projected earnings growth; and the financial strength of the underlying company as compared
to its stock's performance. These and many more derived observations are then combined, ranked, weighted,
and scenario-tested to create a more complete analysis. The result is a systematic and disciplined method of
selecting stocks.
July 16, 2017
NYSE: NVS
NOVARTIS AG
$2.75 3.32% 0.75 $216.0 Billion $66.93-$86.90 $82.55
Consensus EPS Estimates² ($) FINANCIAL ANALYSIS

IBES consensus estimates are provided by Thomson Financial NOVARTIS AG's gross profit margin for the first quarter of its fiscal year 2017 is essentially unchanged when
compared to the same period a year ago. Sales and net income have dropped, underperforming the average
competitor within its industry. NOVARTIS AG has weak liquidity. Currently, the Quick Ratio is 0.62 which
shows a lack of ability to cover short-term cash needs. The company's liquidity has increased from the same
period last year, indicating improving cash flow.
During the same period, stockholders' equity ("net worth") has decreased by 5.88% from the same quarter last
year. Overall, the key liquidity measurements indicate that the company is in a position in which financial
1.17 4.70 E 5.20 E difficulties could develop in the future.
Q2 FY17 2017(E) 2018(E)
STOCKS TO BUY: TheStreet Quant Ratings has identified a handful of stocks that can potentially TRIPLE in the
next 12-months. To learn more visit www.TheStreetRatings.com.
INCOME STATEMENT
Q1 FY17 Q1 FY16
Net Sales ($mil) 11,539.00 11,600.00
EBITDA ($mil) NA NA
EBIT ($mil) 1,506.00 2,092.00
Net Income ($mil) 1,666.00 2,011.00
BALANCE SHEET
Q1 FY17 Q1 FY16
Cash & Equiv. ($mil) 8,040.00 4,970.00
Total Assets ($mil) 131,986.00 132,448.00
Total Debt ($mil) 31,257.00 28,094.00
Equity ($mil) 67,586.00 71,813.00
PROFITABILITY
Q1 FY17 Q1 FY16
Gross Profit Margin 64.51% 63.86%
EBITDA Margin NA NA
Operating Margin 13.05% 18.03%
Sales Turnover 0.37 0.37
Return on Assets 4.82% 5.12%
Return on Equity 9.42% 9.37%
DEBT
Q1 FY17 Q1 FY16
Current Ratio 0.98 0.83
Debt/Capital 0.32 0.28
Interest Expense 180.00 185.00
Interest Coverage 8.37 11.31
SHARE DATA
Q1 FY17 Q1 FY16
Shares outstanding (mil) 2,366 2,381
Div / share 2.72 2.72
EPS 0.70 0.84
Book value / share 28.57 30.16
Institutional Own % NA NA
Avg Daily Volume 2,265,345 3,022,540
2 Sum of quarterly figures may not match annual estimates due to
use of median consensus estimates.
July 16, 2017
NYSE: NVS
NOVARTIS AG
$2.75 3.32% 0.75 $216.0 Billion $66.93-$86.90 $82.55
RATINGS HISTORY VALUATION

Our rating for NOVARTIS AG was recently BUY. This stock's P/E ratio indicates a significant discount compared to an average of 94.57 for the
upgraded from Hold to Buy on 6/5/2017. As of Pharmaceuticals industry and a premium compared to the S&P 500 average of 24.41. To use another
7/13/2017, the stock was trading at a price of $82.55 comparison, its price-to-book ratio of 2.89 indicates valuation on par with the S&P 500 average of 3.04 and a
which is 5.0% below its 52-week high of $86.90 and significant discount versus the industry average of 10.50. The price-to-sales ratio is well above the S&P 500
23.3% above its 52-week low of $66.93. average, but well below the industry average. Upon assessment of these and other key valuation criteria,
NOVARTIS AG proves to trade at a discount to investment alternatives within the industry.
2 Year Chart
$120
BUY: $104.11
HOLD: $77.27
BUY: $79.59
HOLD: $79.25
BUY: $81.83
Price/Earnings 1 2 3 4 5 Price/CashFlow 1 2 3 4 5
premium discount premium discount
$100 NVS 31.03 Peers 94.57 NVS 16.35 Peers 19.80
• Discount. A lower P/E ratio than its peers can • Discount. The P/CF ratio, a stock’s price divided by
$80 signify a less expensive stock or lower growth the company's cash flow from operations, is useful
expectations. for comparing companies with different capital
• NVS is trading at a significant discount to its peers. requirements or financing structures.
2015 2016 • NVS is trading at a discount to its peers.
Price/Projected Earnings 1 2 3 4 5 Price to Earnings/Growth 1 2 3 4 5

premium discount premium discount
MOST RECENT RATINGS CHANGES NVS 15.88 Peers 16.42 NVS 0.46 Peers 0.66
Date Price Action From To • Average. An average price-to-projected earnings • Discount. The PEG ratio is the stock’s P/E divided
6/5/17 $81.83 Upgrade Hold Buy ratio can signify an industry neutral stock price and by the consensus estimate of long-term earnings
9/29/16 $79.25 Downgrade Buy Hold average future growth expectations. growth. Faster growth can justify higher price
6/28/16 $79.59 Upgrade Hold Buy • NVS is trading at a valuation on par with its peers. multiples.
2/1/16 $77.27 Downgrade Buy Hold • NVS trades at a significant discount to its peers.
7/13/15 $104.11 No Change Buy Buy Price/Book 1 2 3 4 5 Earnings Growth 1 2 3 4 5
Price reflects the closing price as of the date listed, if available premium discount lower higher
NVS 2.89 Peers 10.50 NVS -4.32 Peers 17.64
• Discount. A lower price-to-book ratio makes a • Lower. Elevated earnings growth rates can lead to
RATINGS DEFINITIONS &
stock more attractive to investors seeking stocks capital appreciation and justify higher
DISTRIBUTION OF THESTREET RATINGS
with lower market values per dollar of equity on the price-to-earnings ratios.
(as of 7/13/2017) balance sheet. • However, NVS is expected to significantly trail its
• NVS is trading at a significant discount to its peers. peers on the basis of its earnings growth rate.
43.81% Buy - We believe that this stock has the
opportunity to appreciate and produce a total return of Price/Sales 1 2 3 4 5 Sales Growth 1 2 3 4 5
more than 10% over the next 12 months. premium discount lower higher
NVS 4.03 Peers 12.74 NVS -1.27 Peers 6.26
30.69% Hold - We do not believe this stock offers • Discount. In the absence of P/E and P/B multiples, • Lower. A sales growth rate that trails the industry
conclusive evidence to warrant the purchase or sale of the price-to-sales ratio can display the value implies that a company is losing market share.
shares at this time and that its likelihood of positive total investors are placing on each dollar of sales. • NVS significantly trails its peers on the basis of
return is roughly in balance with the risk of loss. • NVS is trading at a significant discount to its sales growth
industry on this measurement.
25.50% Sell - We believe that this stock is likely to
decline by more than 10% over the next 12 months, with DISCLAIMER:
the risk involved too great to compensate for any
possible returns. The opinions and information contained herein have been obtained or derived from sources believed to be reliable, but
TheStreet Ratings cannot guarantee its accuracy and completeness, and that of the opinions based thereon. Data is provided
via the COMPUSTAT® Xpressfeed product from Standard &Poor's, a division of The McGraw-Hill Companies, Inc., as well as
TheStreet Ratings other third-party data providers.
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July 16, 2017

Sector: Health Care Sub-Industry: Pharmaceuticals Source: S&P

RETURN ON EQUITY (%) Volume in Millions

31.03 94.57 24.41 HIGHLIGHTS

PEER GROUP ANALYSIS INDUSTRY ANALYSIS

80% of the market.

BMY PEER GROUP: Pharmaceuticals

NVS NOVARTIS AG 82.55 216,021 31.03 48,457.00 6,367.00

LLY LILLY (ELI) & CO 84.02 92,707 40.59 21,585.30 2,186.70

MRK AZN ASTRAZENECA PLC 32.39 81,997 24.17 24,180.00 3,390.00

GSK GLAXOSMITHKLINE PLC 42.50 206,819 51.20 35,169.00 2,030.96

PFE PFIZER INC 33.28 198,610 27.97 52,598.00 7,298.00

MRK MERCK & CO 62.89 172,015 40.57 39,929.00 4,346.00

COMPANY DESCRIPTION STOCK-AT-A-GLANCE

Consensus EPS Estimates² ($) FINANCIAL ANALYSIS

RATINGS HISTORY VALUATION

Price/Projected Earnings 1 2 3 4 5 Price to Earnings/Growth 1 2 3 4 5

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