full report - Jefferies

INDUSTRY NOTE 

Rating | Target | Estimate Change 

Healthcare | Pharmaceuticals May 28, 2013 

Pharmaceuticals 

Deconstructing Global Pharmaceuticals: 

Hunting for Restructuring Opportunities 

Key Takeaway 

As the Pharmaceuticals Industry looks towards restructuring and separation 

of undervalued assets we have prepared a highly proprietary sum of the parts 

analysis for our coverage universe to find the best opportunities. As a result we 

have upgraded Bayer and Merck & Co. to Buy from Hold and Eli Lilly to Hold 

from U/P, though it remains our least preferred stock. Novartis and Abbott are 

now our Top European and US picks respectively. 

Pharma remains attractive; Restructuring plays may offer the best upside: 

Whilst we have found dividend yield dislocations to be a great tool for stock selection over 

the past 12-18 months, the majority of these have now been neutralized. Whilst we are still 

highly focused on dividend yield as a relative and absolute driver of future performance, we 

now feel that restructuring plays may offer the best upside as the valuation discount to other 

sectors narrows. This report details sum of the parts valuations and strategic reviews for all 

of the diversified companies in our coverage universe in a highly detailed and systematic 

way that we believe has not been available to investors in the past. 

EQUITY RESEARCH GLOBAL 

Best Restructuring Plays; Upgrading Bayer and Merck to Buy: Our analysis shows 

that Abbott, Bayer, Merck & Co. and Novartis are the best restructuring plays in the group 

when considering the likelihood as well as the upside that could be generated by such 

activities. Bayer has one of the most attractive SOTP valuations in the group at €115.23, 36% 

above the stock price. We believe MaterialScience has become such as small component of 

group EBITDA (c15%) that its divestment is inevitable given the significant conglomerate 

discount it generates. Merck & Co. is likely to be forced into restructuring by investors as 

the Pharmaceuticals business underperforms. We see the probability of significant spin-outs 

or disposals increasing into 2014, with Animal and Consumer Health being the most likely 

candidates. Our SOTP valuation for Merck is $54.30, 15% above the stock price. 

Lilly upgraded to Hold from U/P; Remains least preferred stock: We have 

upgraded Eli Lilly to Hold from U/P as it lacks near term downside risk catalysts and the 3.6% 

dividend yield should protect the shares for now. We see EPS 5-10% below consensus in the 

mid term (2014E-15E) and limited or no restructuring options to rescue valuation should the 

pipeline continue to miss expectations over the next 12-18 months. 

Jeffrey Holford, PhD, ACA * 

Equity Analyst 

(212) 336-7409 jholford@jefferies.com 

Ian Hilliker § 


44 (0) 20 7029 8672 ihilliker@jefferies.com 

Terence McManus, PhD § 


44 (0) 20 7029 8274 tmcmanus@jefferies.com 

Swayampakula Ramakanth, PhD, MBA * 

Equity Associate 

(212) 336-7054 sramakanth@jefferies.com 

* Jefferies LLC 

§ Jefferies International Limited 

Current Previous Current Previous Current Previous 

Ticker Price Rating Rating Target Target Est. 2012 2013 2014 2012 2013 2014 

ABBV $45.44 BUY BUY $54.00 $51.00 EPS $NA $3.12 $3.20 $NA $3.12 $3.20 

ABT $37.76 BUY BUY $46.00 $43.00 EPS $1.74 $2.07 $2.54 $1.74 $2.08 $2.54 

AZN LN 3,428.00p HOLD HOLD 3,700.00p 3,100.00p EPS $6.87 $5.06 $4.55 $6.87 $5.06 $4.55 

BAYN GR €84.46 BUY HOLD €98.00 €88.00 EPS €5.35 €5.73 €6.55 €5.35 €5.73 €6.54 

BMY $47.40 BUY BUY $53.50 $45.00 EPS $1.99 $1.83 $2.06 $1.99 $1.83 $2.06 

GSK LN 1,749.50p HOLD HOLD 1,900.00p 1,600.00p EPS 111.44p 117.86p 131.08p 111.44p 118.43p 131.79p 

JNJ $86.82 HOLD HOLD $97.00 $90.00 EPS $5.10 $5.39 $5.98 $5.10 $5.39 $5.98 

LLY $54.14 HOLD UNPF $49.00 $44.00 EPS $3.39 $3.86 $2.67 $3.39 $3.88 $2.70 

MRK $47.16 BUY HOLD $54.00 $48.00 EPS $3.82 $3.45 $3.68 $3.82 $3.65 $4.00 

NOVN VX CHF71.25 BUY BUY CHF88.00 CHF81.00 EPS $5.25 $5.07 $5.57 $5.25 $5.07 $5.57 

NOVOB DC DKK967.50 HOLD HOLD DKK1,050.00 DKK950.00 EPS DKK38.85 DKK47.06 DKK51.93 DKK38.85 DKK47.06 DKK51.93 

PFE $29.04 BUY BUY $33.00 $33.00 EPS $2.19 $2.23 $2.30 $2.19 $2.28 $2.45 

ROG VX CHF253.10 BUY BUY CHF285.00 CHF255.00 EPS CHF13.49 CHF14.51 CHF15.52 CHF13.49 CHF14.51 CHF15.52 

SAN FP €84.51 BUY BUY €100.00 €100.00 EPS €6.14 €5.61 €6.83 €6.14 €5.61 €6.83 

ZTS $33.46 BUY BUY $40.00 $41.00 EPS $1.08 $1.43 $1.70 $1.08 $1.43 $1.70 

Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have a conflict 

of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 

Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 88 to 92 of this report.

Healthcare 


May 28, 2013 

Executive Summary 

We have made significant changes to our ratings, Price Targets and order of preference 

across our coverage universe to reflect what we think will be the most important drivers 

of share price performance for the Large Cap Pharmaceuticals sector. We have intensified 

our focus on dividend yield as a relative and absolute driver of stock performance as well 

as integrating a thorough review of restructuring potential across our universe into our 

valuation methodology. 

Changes to our recommendations, Price Targets and order of preference are summarized 

in Exhibit 1 and Exhibit 2, with the most significant being: 

• Novartis is now our Top Pick due to the greatest total upside available versus 

current prices as well as having the most restructuring potential over the next 

12-18 months in our view, 

• Abbott has been moved to 3 rd place from 7 th previously and is now our Top US 

Pick as we anticipate a positive inflection in revenue and earnings growth from 

H2’13 as the Established Pharmaceuticals business performance improves. 

Abbott also has significant further restructuring potential in our view, which is 

not well recognized by the market, 

• We have Upgraded Bayer to Buy from Hold to reflect the positive momentum in 

the Pharmaceuticals and CropScience divisions as well as some of the most 

significant upside potential from restructuring, which we believe could be 

crystallized over the next 12-24 months, 

• We have upgraded Merck & Co. to Buy from Hold as management clearly 

begins to recognize pressure from shareholders for better returns by the 

activation of an accelerated share repurchase program. We believe that further 

pressure over the next 12-18 months will lead to some restructuring of the 

business with Consumer and Animal Health being the most likely assets that 

could be sold or spun out, 

• We have upgraded Eli Lilly to Hold from Underperform as, even though it has 

been the worst performing US Large Cap Pharmaceuticals stock year to date, we 

do not see enough downside over the next 3-6 months to justify an 

Underperform rating. Furthermore we believe that the 2013E dividend yield of 

3.6% yield will protect it to a degree for now. We also see positive headline risk 

from ramucirumab in breast cancer over the summer, though we believe that 

the detailed data expected to be presented at the San Antonio Breast Cancer 

Symposium in December will show that the product is unlikely to gain approval 

in this indication. Eli Lilly remains our least preferred stock within the entire 

Large Cap Pharmaceuticals group, 

• Roche and Bristol-Myers have both dropped 3 places (Roche to 7 th , Bristol-Myers 

to 9 th ) as recent outperformance of the shares has reduced the upside potential 

relative to other stocks based on our current target prices. 

page 2 of 92 

Jeffrey Holford, PhD, ACA, Equity Analyst, (212) 336-7409, jholford@jefferies.com 

Please see important disclosure information on pages 88 - 92 of this report.

Healthcare 


May 28, 2013 

Exhibit 1: Global Pharmaceuticals coverage and order of preference 

Rank Prior Company Rating Positive attributes Negative attributes 

1 2 Novartis Buy Data (QVA149; Tasigna, Afinitor, Farydak, AIN457; Dovitinib); 

QVA149/ Relaxin EU reg decisions; Restructuring; Glivec patent 

2 1 Sanofi Buy Data (U300, otamixiban, iniparib, PCSK9, JAK-2, sarilumab, 

Lyxumia); Lemtrada reg. decision; Aubagio launch; Tresiba delay 

 

3 7 Abbott Buy Nutrition divison growth; Product cross-registrations in EPD; 

MitraClip/ ABSORB and Xpedition regulatory approvals/ launches 

4 3 AbbVie Buy Data (ABT-199, veliparib, Elagolix, GLPG0634, Hep C portfolio); +ve 

Humira revisions 

 

5 9 Bayer Buy Data (Nexavar, tedizolid, Eylea); Eylea/ regorafenib/ Xarelto/ 

alpharadin/ Lemtrada/ Riociguat reg. decisions and launches 

Lucentis/ Gilenya/ Afinitor competition; Generics (US Diovan 

Sep'12); OTC manufacturing; DPPIV safety 

Generics (Plavix May'12/ Eloxatin Aug'12); Lantus competition/ 

biosimilars; Lantus-Lixi delay; GLP-1 safety; EM/ AH growth 

European pricing pressure in EPD; MD pricing/ volume pressures 

Competitive data in Hep C; Xeljanz launch; AndroGel generics; 

Biosimilars 

Betaseron/ Nexavar/ Kogenate/ Xarelto competitive threats; YAZ 

litigation; Tough comps in CropScience; MaterialScience margins 

6 5 Zoetis Buy N. America drought resolution; Margin expansion Avian Flu; Pfizer share exchange offer 

 

 

 

 

 

 

 

 

7 4 Roche Buy Data (GA101, crenezumab, anti-PD-L1; ABT-199); Perjeta/ TDM-1/ 

Erivedge launches/ reg decisions; Capital allocation changes 

8 11 Merck & Co. Buy Data (preladenant; anti-PD1;MK-7009; MK-5172; V419; V503); 

suvorexant reg. decision; yield support; share repurchases 

9 6 Bristol-Myers Buy Data (HCV portfolio, anti-PD1, Yervoy prostate, Onglyza [SAVOR]); 

Forxiga US reg. decision; Eliquis launch 

10 8 Pfizer Buy Data (Dacomitinib, pablociclib, Prevnar-13, Eliquis, tofacitinib); 

Restructuring/ Buybacks; Eliquis/ Xeljanz launches 

11 10 Johnson & 

Johnson 

Source: Jefferies research 

Hold 

Data (TMC 435, canagliflozin, Ibrutinib, ACC-001); Restructuring 

(OCD); Buy backs; Pharma Review; Xarelto reg. decisions 

12 

13 

13 

14 

GlaxoSmithKline 

AstraZeneca 

Hold 

Hold 

Data (albiglutide, migalastat, MAGE 3, Arzerra, darapladib); Tykerb/ 

BRAF/ MEK/ Relvar/ Dolutegravir/ ANORO reg decisions; 

Restructuring 

Data (fostamatinib, olaparib, selumetinib, lesinurad, phase II 

portfolio); Yield support; Forxiga US refiling & reg decision 

14 12 Novo Nordisk Hold Data (Victoza obesity, LArFVIII, NN8828); Turoctocog alpha reg. 

decisions; Ex-US Tresiba launch 

= 15 15 Eli Lilly Hold Data (dulaglutide, empagliflozin, insulins, baricitinib, Edivoxetine, 

ramucirumab, Enzastaurin, necitumumab) 

Lucentis/ Pegasys/ Zelboraf/ Actemra competition; Biosimilars; 

Diabetes Care pricing, reimbursement 

Januvia growth; Generics (Singulair Aug'12); Odanacatib safety; 

DPPIV safety 

Generics (Plavix May'12); anti-PD-1 competitors; DPPIV/ GLP-1 

safety; DPPIV market slowdown; High PE multiple 

CAPiTA downside risk to Prevnar-13; Patent expiry drag 

MD pricing/ volume pressures; Consumer manufacturing; Zytiga/ 

Xarelto/ Remicade competition; DPPIV safety 

Advair generic approvals timing visibility (EU); European/ US 

pricing pressure; GLP-1 safety 

Crestor/ Seroquel XR substitution; Pulmicort generics; DPPIV/ GLP- 

1 safety 

Tresiba/ Ryzodeg regulatory delays (US); GLP-1 competition/ 

biosimilars/ safety; Prandin generics; Index reweighting 

Alimta challenge; Insulin share losses; High PE multiple; Cashflow; 

R&D setbacks (sola, tabalumab, basal insulin); DPPIV/ GLP-1 safety 

Exhibit 2: Summary of Global Pharmaceuticals coverage and recommendations 

Company Ticker Rating MV MV Price Target Up/down Dividend Total Revenue EPS PEG 

L.C. $m 24-May-13 price side Yield Return CAGR CAGR 12A-17E 

L.C. L.C. 2013E (%) 12A-17E 12A-17E 2013 PE 

Abbott ABT BUY $59,372m $59,372 $37.76 $46 21.8% 1.5% 23.3% 8.4% 19.0% 0.96 

AbbVie* ABBV BUY $72,340m $72,340 $45.44 $54 18.8% 3.5% 22.4% 5.9% *14.4% *1.01 

AstraZeneca AZN LN HOLD £44,641m $67,582 3428p 3700p 7.9% 5.4% 13.3% -4.0% -6.9% NA 

Bayer BAYN GR BUY €69,906m $90,391 €84.54 €98 15.9% 2.3% 18.2% 4.9% 12.2% 1.21 

Bristol-Myers BMY BUY $80,016m $80,016 $47.40 $53.5 12.9% 3.0% 15.8% 3.5% 9.9% 2.62 

Eli Lilly LLY HOLD $62,824m $62,824 $54.14 $49 -9.5% 3.6% -5.9% -0.4% -3.6% NA 

GlaxoSmithKline GSK LN HOLD £88,315m $133,699 1750p 1900p 8.6% 4.5% 13.1% 5.1% 10.3% 1.44 

Johnson & Johnson JNJ HOLD $238,328m $238,328 $86.82 $97 11.7% 3.0% 14.7% 3.9% 6.8% 2.33 

Merck & Co. MRK BUY $143,555m $143,555 $47.16 $54 14.5% 3.7% 18.2% 0.0% 3.5% 3.91 

Novartis NOVN VX BUY CHF172,332m $179,363 CHF71.25 CHF88 23.5% 3.3% 26.8% 3.3% 7.3% 1.99 

Novo Nordisk NOVOB DC HOLD DKK538,767m $93,476 DKK967.50 DKK1050 8.5% 2.3% 10.8% 6.9% 13.6% 1.51 

Pfizer PFE BUY $218,919m $218,919 $29.04 $33 13.6% 3.3% 17.0% 0.2% 3.8% 3.42 

Roche ROG VX BUY CHF214,522m $223,274 CHF253.10 CHF285 12.6% 3.1% 15.7% 4.0% 9.2% 1.89 

Sanofi SAN FP BUY €112,781m $145,831 €84.51 €100 18.3% 3.3% 21.6% 5.0% 11.3% 1.34 

Zoetis ZTS BUY $16,897m $16,897 $33.46 $40 19.5% 0.8% 20.3% 6.0% 17.7% 1.32 

Pan Euro Sector (wtd) $933,617 3.4% 4.0% 8.9% 1.52 

US Sector (wtd) $892,252 3.1% 2.5% 6.7% 2.50 

EU+US Average (wtd) $1,825,870 3.3% 3.3% 7.8% 2.00 

*Note: ABBV EPS CAGR and PEG based on 2013E-17E 

Source: Thomson One DataStream, Jefferies estimates 

page 3 of 92 



Dividend Yield 

2014E P/E 

Healthcare 

Jan-09 

Apr-09 

Jul-09 

Oct-09 

Jan-10 

Apr-10 

Jul-10 

Oct-10 

Jan-11 

Apr-11 

Jul-11 

Oct-11 

Jan-12 

Apr-12 

Jul-12 

Oct-12 

Jan-13 

Apr-13 

2014E P/E 

US Pharma Dividend Yield Spread 

Jan-09 

Apr-09 

Jul-09 

Oct-09 

Jan-10 

Apr-10 

Jul-10 

Oct-10 

Jan-11 

Apr-11 

Jul-11 

Oct-11 

Jan-12 

Apr-12 

Jul-12 

Oct-12 

Jan-13 

Apr-13 


May 28, 2013 

Absolute yield trade still on, but relative trade 

drying up 

We have previously made the observation that there appeared to be a stronger than usual 

influence of dividend yield against the performance of our Large Cap Pharmaceuticals 

universe and little correlation of P/E multiples against future growth over the past few 

years (Exhibit 3 and Exhibit 4). 

Exhibit 3: 2014E P/E versus 2012A-17E EPS CAGR for US 

Large Cap Pharmaceuticals universe 

LLY 

24X 

20X 

16X 

12X 

8X 

4X 

MRK 

PFE 

JNJ 

0X 

-5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 

2012E-2017E EPS CAGR 

Source: DataStream, Jefferies research 

BMY 

ABBV 

Exhibit 4: 2014E P/E versus 2012A-17E EPS CAGR for 

European Large Cap Pharmaceuticals universe 

AZN 

20X 

16X 

12X 

8X 

4X 

0X 

-10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 



NOVN 

ROG 

GSK 

SAN 

NOVOB 

BAYN 

This trend had helped us to be positive towards the sector overall given the well covered 

attractive yields available for many of the names that we cover. However, as dividend 

yields (particularly across the US names, which are less influenced in terms of relative 

performance by local market moves and FX) have coalesced, the ‚easy money‛ trades 

based on yield alone, such as AbbVie, have mostly disappeared. 

Exhibit 5: 2013E Dividend yield over time for US Large Cap 

Pharmaceuticals universe 

7.5% 

7.0% 

6.5% 

6.0% 

5.5% 

5.0% 

4.5% 

4.0% 

3.5% 

3.0% 

2.5% 

Exhibit 6: Dividend yield spread (Highest vs. lowest) for US 

Pharmaceuticals universe from January 2009 

350bps 

300bps 

250bps 

200bps 

150bps 

100bps 

50bps 

0bps 

ABBV BMY JNJ LLY MRK PFE 



page 4 of 92 





Healthcare 

EU Pharma Div Yield Spread 


May 28, 2013 

Whilst this trend has been less pervasive in the European names due to the influence of FX 

movements and other local market factors, we have seen it become more apparent over 

the last 12 months (Exhibit 7 and Exhibit 8). 

Exhibit 7: 2013E Dividend yield over time for European 

Large Cap Pharmaceuticals Universe 

8.0% 

7.0% 

6.0% 

5.0% 

4.0% 

3.0% 

2.0% 

1.0% 

Exhibit 8: Dividend yield spread (Highest vs. lowest) for 

European Pharmaceuticals universe from May 2012 

500bps 

450bps 

400bps 

350bps 

300bps 

250bps 

200bps 

150bps 

100bps 

50bps 

0bps 

AZN GSK NOVN NOVOB 

SAN ROG BAYN 



As a result we now expect performance to once again be more linked to earnings growth 

(as a driver of future yield) as well as other factors that could help stocks to ‚break out‛ 

from their peer groups on yield, such as major R&D breakthroughs, corporate 

restructuring, M&A and other shareholder friendly actions. 

Whilst we already closely monitor future drivers of dividend growth and yield for our 

coverage universe (Exhibit 9 and Exhibit 10) and potential restructuring opportunities, we 

have not previously formally reviewed the latter across our entire coverage universe in 

detail. 

Exhibit 9: Dividend yield estimates for US Large Cap Pharmaceuticals, 2012A-17E 

8% 

6% 

4% 

2% 

0% 

ABT ABBV BMY JNJ LLY MRK PFE ZTS 

2012A 2013E 2014E 2015E 2016E 2017E 

Source: Jefferies estimates, Thomson One DataStream 

page 5 of 92 




Healthcare 

US$ (billions) 

Growth rate 


May 28, 2013 

Exhibit 10: Dividend yield estimates for European Large Cap Pharmaceuticals, 2012A-17E 

8% 

6% 

4% 

2% 

0% 

AZN BAYN GSK NOVN NOVO ROG SAN 

2012A 2013E 2014E 2015E 2016E 2017E 

Source: Jefferies estimates, Thomson One DataStream 

Restructuring is the new diversification 

As the industry began to see the 2012 patent cliff forming ahead during the last decade 

there was a strong push towards diversification used to justify bolt-on acquisitions as well 

as mega-mergers. With the patent cliff now mostly in the ‚rear view mirror‛ for the sector 

(Exhibit 11), management teams now appear to be once again focused on maximizing 

the potential of their ‚Core‛ Pharmaceuticals divisions. 

Exhibit 11: Consolidated Core Pharmaceuticals Revenue Growth, 2007A-17E 

450 

400 

350 

300 

250 

200 

150 

100 

50 

0 

8% 

6% 

4% 

2% 

0% 

-2% 

-4% 

-6% 

Pharma Revenues 

Pharma Revenue Growth 

Source: Jefferies estimates, company data 

Recent examples would include the spin-off of Mead Johnson (MJN, $84.44, NC) by 

Bristol-Myers, the disposal of Nutrition assets and spin-off of Zoetis by Pfizer and the spinoff 

of AbbVie from Abbott. All three of these were ultimately well received by the market 

as it appears that the sum of the parts was greater than the whole in all cases. 

page 6 of 92 



Healthcare 


May 28, 2013 

Hunting for the next restructuring investment opportunities 

Seeking out the next most likely Large Cap Pharmaceuticals restructuring opportunities 

for investors would seem to be a worthwhile pursuit given the rising interest and 

valuations in the sector. Weeding out the first few companies that are unlikely contenders 

is relatively straightforward as they are those that have little or no diversification to their 

business. 

Exhibit 12 shows how our universe looks in terms of revenue diversification across the 

group, with AbbVie, Bristol-Myers, AstraZeneca, Novo Nordisk and Zoetis being the least 

diversified companies and hence the least likely to be able to perform any kind of valueenhancing 

restructuring. 

Exhibit 12: 2014E revenue diversification as a percentage of Group revenues by key operating segments 

100% 

90% 

80% 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 

Core Pharma Est. Pharma Vaccines Consumer Generics 

Diagnostics Devices Nutrition Animal Health Specialty Chemicals 

Cropscience Opthalmology Biosimilars 


page 7 of 92 



Healthcare 


May 28, 2013 

Spin Doctors - Who, When, How and 

How Much? 

The main focus of this report has been to review the remainder of our coverage list in 

detail for the best restructuring plays, given that we believe this will become an increasing 

industry trend. We have based our conclusions as to which companies might be the most 

attractive in this regard based on our sum of the parts (SOTP) analyses as well as recent 

management commentary regarding this specific issue as well as our own intuition, based 

on our experience of covering the broad US and European Large Cap Pharmaceuticals 

group. 

We have summarized our view on which companies have restructuring potential in 

Exhibit 13. 

Exhibit 13: Summary of JEF expectations for potential restructuring opportunities within Large Cap Pharmaceuticals 

Company Management Support* Separation Candidates Likelihood Accretion/ Potential JEF Price Mean Group SOTP vs. 

Dilution** Timing Target SOTP Valuation Stock Price 

Abbott Has historically performed spin-outs Nutrition/ Established Pharma; High 

16.4% 2015 $46 $48 27% 

Diagnostics; 

High 

1.5% 2015 

Medical Devices 

High 

-0.9% 2015 

Bayer 

Eli Lilly 

Glaxo 

SmithKline 

Johnson & 

Johnson 

Merck & Co. 

Novartis 

Pfizer 

Roche 

Sanofi 

Has indicated MaterialScience spin-out 

could be used to fund Healthcare 

acquisitions 

MaterialScience; 

Healthcare/ CropScience 

Has commented that it is not infavour of Animal Health; 

separation of the Animal Health business, Core Pharma 

but could be forced to consider it if the R&D 

pipeline misses expectations 

Has indicated potential to separate 

Established Pharma and ViiV 

Has indicated OCD will likely be separated; 

has not previously supported large scale 

break up 

Has previously indicated some interest in 

exploring strategic options for Consumer 

Health, but less so for Animal Health 

Established Pharma; 

ViiV; 

Consumer Health 

Ortho Clinical Diagnostics; 


Consumer Health; 

Animal Health; 

Vaccines 

Management has indicated Roche stake is Roche Bearer shares; 

for sale at the right premium and it will Vaccines; 

conduct a portfolio review over the next 24- OTC Consumer; 

36 months 


Diagnostics 

Management has inidicated it is considering Animal Health; 

separating Established Products over the Established Products; 

next 3 years 


Management has commented that it does 

not support separation of Diagnostics from 

the Group 

Management has stated that it is reviewing 

strategic options for Established 

Pharmaceutical tail products 

*Note – refers to JEF interpretation of management commentary on specific restructuring opportunities 

**Note – based on assuming cash proceeds are used to repurchase shares at the current market valuation 


High 

High 

Low 

Low 

High 

High 

Low 

High 

Low 

Medium 

Medium 

Low 

High 

High 

Medium 

Medium 

Low 

High 

Medium 

Low 

1.8% 

37.6% 

2.9% 

-11.6% 

-0.4% 

1.3% 

8.4% 

0.1% 

9.5% 

2.5% 

3.4% 

2.4% 

4.3% 

3.3% 

4.8% 

1.6% 

-0.2% 

1.2% 

-2.0% 

2.4% 

2014 

2014 

NA 

NA 

2015 

2015 

NA 

2013 

NA 

2014 

2014 

NA 

2013 

2014 

2015 

2015 

NA 

2013 

2016 

NA 

€ 98 € 115 36% 

$49 $48 -11% 

1,900p 1,817p 4% 

$97 $91 5% 

$54 $54 15% 

CHF 88 CHF 85 19% 

$33 $32 10% 

Diagnostics Low -1.7% NA CHF 285 CHF 280 11% 

Established Pharma; 



Medium 

Low 

Low 

-0.1% 

3.1% 

5.1% 

2015 

NA 

NA 

€ 100 € 102 21% 

page 8 of 92 



Healthcare 


May 28, 2013 

Best Restructuring Plays – ABT, BAYN, MRK, NOVN 

We see Abbott, Bayer, Merck & Co. and Novartis as the best restructuring plays within the 

Large Cap Pharmaceuticals universe when considering both the likelihood of any action as 

well as the ultimate level of upside versus the current share price that could be generated 

by such activities. 

Abbott - Significant restructuring potential that could surprise investors 

Abbott management has one of the industry’s strongest pedigrees when it comes to M&A 

and restructuring, in our view. Over the next two years we expect that management will 

execute their plan of strong top line growth through geographic expansion, new product 

launches and bolt-on acquisitions whilst laying the foundation for the next major 

restructuring of the group, which still contains four separate and distinct segments in 

Nutrition, Pharmaceuticals, Medical Devices and Diagnostics. In our view this will likely be 

followed by further break-up of the group, potentially into three pieces. 

We believe that Nutrition and Established Pharmaceuticals will likely be separated into a 

single company by 2015. We would then expect that the Medical Devices and Diagnostics 

businesses would be sold to other players or spun out around the same timeline as these 

industry segments likely consolidate in the future. 

Our mean sum of the parts valuation for Abbott is $47.81 per share versus the current 

price of $37.76 and our official Target Price of $46. 

Bayer – Upgrade to Buy as we wait for the inevitable separation of 

MaterialScience 

Even though MaterialScience now only represents circa 15% of EBITDA we believe that it 

still drags on the Group’s multiple due to its volatility and recent margin weakness. 

Management has clearly positioned it to one side, highlighting the synergies between 

Healthcare and CropScience and stating that MaterialScience could be used to fund 

further acquisitions in Healthcare if a suitably large opportunity came up. 

We are increasingly optimistic about the future prospects for the Pharmaceuticals division 

due the strong flow of new products and improving R&D productivity evident within the 

business. We now see a 5% revenue CAGR and 12% EPS CAGR for the business between 

2012A-17E, which are some of the highest growth rates in the group. 

As the future growth profile of the Pharmaceuticals business becomes increasingly 

attractive, we believe that the pressure to isolate it from the MaterialScience business will 

increase to realize the best overall valuation. Whilst we only see marginal accretion from 

theoretically monetizing MaterialScience and using the proceeds for share repurchases, 

we see significant upside to the valuation of the Pharmaceuticals and Healthcare business 

by separating them from it. 

The various sum of the parts valuation methodologies used by us provide a valuation 

range of €112 to €118 per share, with a mean valuation of €115 per share. This 

represents a mean of 36% upside and a maximum of 40% upside, relative to the current 

share price of €84.46. Our current target price based on valuing the 2014E earnings at a 

30% to 35% P/E premium relative to the German market is €98. 

Bayer currently trades on a 19% P/E premium to the German market based on 2014E EPS, 

which we believe does not give full credit to its above average growth profile. As a result 

of our increasing enthusiasm for Bayer’s Pharmaceuticals business, significant 

restructuring potential and attractive valuation we have upgraded the shares to Buy from 

Hold. 

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Merck & Co. – Upgrade to Buy as mounting shareholder pressure will likely 

lead to restructuring 

Merck & Co. faces multiple challenges including several patent expiries over the next few 

years, a worrying decline in the growth of the DPP-IV class (including Januvia), safety 

concerns on the incretin class (which includes DPP-IVs and GLP-1s) and poor R&D 

productivity. Whilst management has taken action to address these issues, including 

announcing significant additional share repurchases at the Q1’13 results as well as the 

appointment of a new head of R&D, these actions do not fully address the significant midterm 

issues that face the company. 

The success of Pfizer’s and Abbott’s recent corporate reorganizations has only added to 

the pressure on Merck & Co.’s management to respond to a lackluster share price 

performance versus its peers to make more significant changes to its strategy. We suspect 

that as the DPP-IV market likely undergoes a further slow down and the company appears 

to fall further behind in R&D that shareholders will demand the separation of one or two 

of the non-core businesses, which we believe could include Animal Health and Consumer 

Health. We estimate that the separation of these businesses and use of cash proceeds to 

fund further share repurchases would be circa 6% accretive to 2014E EPS and potentially 

focus the market towards a sum of the parts based valuation of the business, which by 

our estimates could drive up to 15% upside versus the current valuation. Furthermore, 

Merck & Co. continues to have one of the most attractive yields in the US Large Cap 

Pharmaceuticals universe at 3.7% versus the sector average of 3.3%. 

Our mean sum of the parts valuation for Merck & Co. is $54.30 per share versus the 

current price of $47.16 and our official Target Price of $54. Based on our valuation and 

belief that pressure to increase returns to shareholders will lead to divestments we have 

raised our PT to $54 from $48 and raised our rating to Buy from Hold. 

Novartis – Strong evidence of multiple divestments in place 

We have focused on Novartis as a restructuring play since September 2012, after which 

time we have seen Daniel Vasella step down as Chairman as well as management talk 

about the potential sales of the Roche Bearer share stake at valuations in excess of the 

current market value as well as the potential for a strategic review of the current portfolio. 

We continue to believe that there is a high probability of a disposal of the Roche stake in 

either H2’13 or 2014 followed by the divestment of the Vaccines business in 2014 with 

Merck & Co., Pfizer and Johnson & Johnson being the most logical potential acquirers. 

We then also see a decent probability that this could be followed by the disposal of the 

OTC Consumer and Animal Health businesses from 2015, by which time margins and 

revenue growth should be restored to normal after the recent manufacturing issues. 

Our mean sum of the parts valuation for Novartis is CHF84.59 per share versus the current 

price of CHF71.25 and our official Target Price of CHF88. 

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Potential Opportunities – GSK, JNJ, PFE 

Whilst we see a high likelihood that GlaxoSmithKline and Pfizer will undergo some form of 

further restructuring over the next few years, we do not see these potential events as 

investment opportunities given our sum of the parts valuations versus the current stock 

prices. Johnson & Johnson may also complete some asset disposals, such as OCD over the 

next year or so, though the more significant upside from a disposal of its Consumer unit is 

much less likely to occur in our view. 

GlaxoSmithKline – Restructuring lacks appeal on valuation 

GlaxoSmithKline has been active in divesting non-core businesses in the recent past (e.g. 

Australian brands, non-Core OTC brands) and has signaled that further divestments are in 

process (Lucozade and Ribena brands), as well as recently discussing potential future 

options for the newly formed Global Established Products portfolio and ViiV joint venture. 

We have been impressed with management's willingness to consider major restructuring 

of the business, which was a positive surprise when it was announced at the Q1’13 

results. However, we struggle to see how the separation of this business on its own can 

generate shareholder value as it would likely trade or be priced at a discount to the 

current Group multiple in our view. Our mean sum of the parts valuation for 

GlaxoSmithKline is 1,817p per share versus the current price of 1,749p and our official 

Target Price of 1,900p. Therefore, even though we see potential restructuring at 

GlaxoSmithKline as being highly likely over the next few years, we have maintained our 

Hold recommendation on the shares. 

Johnson & Johnson – Small moves on restructuring raise hopes of bigger 

things to come 

Management has repeatedly stated its commitment to remaining a diversified healthcare 

conglomerate with its Pharmaceuticals, Medical Devices & Diagnostics and Consumer 

units being core businesses within that strategy. However, a change in leadership last year 

and the recent announcement that the Ortho Clinical Diagnostic (OCD) business could be 

sold or spun out at the Q1’13 results may have raised market expectations for more 

significant changes within the Group structure. 

Aside from the separation of OCD business, which we see as being neutral in terms of its 

impact on earnings accretion/ dilution, the only other major piece we envisage being a 

potential disposal candidate is the Consumer Health business. Valued by us at circa $51bn 

we see it as a potential spin out candidate that would be circa 9% accretive to earnings if 

the proceeds were used to fund share repurchases. Our mean sum of the parts valuation 

for Johnson & Johnson is $91.38 per share versus the current price of $86.82 and our 

official Target Price of $97. 

Pfizer – The restructuring teaser turns into a saga 

Pfizer has been one of the most proactive companies in the sector within the last few 

years in terms of driving shareholder value through financial engineering and 

restructuring. With the Nutrition disposal successfully completed and Zoetis likely to be 

fully divested through a share exchange offer during June, investors have been hungry for 

more news of a potential break up of the Pharmaceuticals business into separate 

‚Innovative Core‛ and ‚Value Core‛ pieces, the latter of which likely has a weaker growth 

profile, but pays a decent dividend. 

However, as management significantly pushed back timing expectations on this potential 

transaction to 2016 at the earliest at the Q1’13 earnings call, and many questions remain 

unanswered as to how such a separation could actually work in practice, there is little 

upside for shareholders from this in the near term at least, it seems. Such a business 

separation could even destroy value given that the ‚Established Products‛ piece would 

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likely trade at a discount to the Group unless it paid a hefty dividend, which may be 

unsustainable in the mid- to long-term. 

We have also considered the potential value implications of the completion of the Zoetis 

share exchange offer in this report, which appears to only be 1.1% accretive to 2014E EPS 

as well as the potential divestment of the Consumer Health business, which we calculate 

would drive 2.4% EPS accretion if the proceeds were used to repurchase shares. 

Our mean sum of the parts valuation for Pfizer is $31.87 per share versus the current price 

of $29.04 and our official Target Price of $33. 

Least Likely - LLY, SAN, ROG 

Other companies that could consider restructuring include Eli Lilly, Sanofi, and Roche, in 

our view. However, each of these appears very unlikely for the reasons described here. 

Eli Lilly – Animal health could spin out, but only if the pipeline blows up 

It is sometimes mooted by investors and stock market commentators that management 

could unlock value from the company through a reorganization of the business into its 

Core Pharmaceuticals and Animal Health components. However, our analysis shows that 

this is unlikely to be the case unless the stock undergoes a significant decline in value 

given that the Animal Health business would be unlikely to trade at a significant premium 

to the current Group multiple. Furthermore the Core Pharmaceuticals business might 

struggle to maintain the current level of dividend if separated from the cash flow 

generating Animal Health business. 

We estimate that the Core Pharma business would have a valuation of circa $44.5bn if it 

existed as a separate entity today, whilst the Animal Health businesses could be spun out 

or sold for circa $8.0bn. On this basis our mean sum of the parts valuation for Eli Lilly is 

$48.29 per share versus the current price of $54.14 and our Target Price of $49. 

We have upgraded Eli Lilly to Hold from Underperform as, even though it has been the 

worst performing US Large Cap Pharmaceuticals stock year to date, we do not see 

enough downside over the next 3-6 months to justify an Underperform rating. 

Furthermore we believe that the 2013E dividend yield of 3.6% will protect it to a degree 

for now. We also see positive headline risk from ramucirumab in breast cancer over the 

summer, though we believe that the detailed data expected to be presented at the San 

Antonio Breast Cancer Symposium in December will show that the product is unlikely to 

gain approval in this indication. Eli Lilly remains our least preferred stock within the entire 

Large Cap Pharmaceuticals group. 

Sanofi – Diversification has worked well at Sanofi so no need to change it 

With Sanofi set to return to sustained double-digit earnings growth from Q4’13, we see 

little pressure for management to embark on re-structuring or disposals beyond perhaps 

Western European Established Products. Each of the non-pharmaceutical divisions are key 

parts of management’s growth strategy, being identified growth drivers which form part 

of the company’s long-term guidance. In addition, none of the non-pharmaceuticals 

divisions are sub-scale. There remains the possibility for specific disposals, such as the 

Animal Health, Consumer Health, Vaccines, Generics or Established Pharmaceuticals 

segments. 

We see Animal Health and the Vaccines businesses as being assets which are set to 

perform well, with comparable margins to Core Pharmaceuticals business. In addition the 

Vaccines business is too large and well-integrated with the Pharmaceuticals business to be 

considered as a spin-off. With sub-Group estimated EBITDA margins and growth, Generics 

and Consumer Health business units may be seen as viable divestment options. However 

both divisions remain integral to management’s strategy for diversified growth. Sanofi 

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management has recently commented about exploring options with Western European 

tail products. This follows Pfizer’s and GlaxoSmithKline’s moves to separately report tail 

products in Established Products business units and talk openly about potential 

divestment options in the future. However, valuation of such a business and the 

practicalities of separation make this unlikely any time soon. 

Our sum of the parts valuation for Sanofi is €102 per share, a c21% premium to the 

current share price, though very much in line with the €100 Price Target we already place 

on the business on the basis of remaining a diversified healthcare conglomerate. 

Roche – Few real options for restructuring; more likely to buy and build 

Roche consists of two main divisions, Pharmaceuticals and Diagnostics, between which 

the actual level of synergy is frequently debated in financial markets. The diagnostics 

division could theoretically exist as a stand-alone entity. However, the drive towards 

personalized medicine and the continuing growth in the use of companion diagnostics to 

correctly target novel treatments, which in turn helps raise their success rate, firmly links 

the Diagnostics division with the Core Pharma business in the eyes of management. 

Recent press speculation that Roche might also look to sell off the Diabetes Care unit 

seems unlikely for a number of reasons. Roche is already the leading global player in 

Diabetes care, accounting for almost a third of the market. Whilst a potential buyer might 

want to merge this business into its own operations and strip cost out, it would only be 

feasible for other major players, which would likely run into anti-trust issues. 

We believe that separating the Diagnostics division from the rest of the business would 

actually be dilutive to shareholders as it would be unlikely to achieve the group multiple 

as a standalone entity. For this reason, as well as management’s general aversion to any 

kind of restructuring we believe that separation of the Diagnostics division is highly 

unlikely. Instead we believe that Roche is more likely to add further businesses to both its 

Pharmaceuticals and Diagnostics divisions. We see AbbVie as a logical ‚bolt-on‛ to the 

Pharmaceuticals division to create another major business outside of oncology, whilst 

management also appear to be actively pursuing various strategies to add additional 

sequencing platforms to the Diagnostics division. 

Our mean sum of the parts valuation of circa CHF280 for Roche represents potential 

upside of circa 11%, versus the current share price of CHF253.10. Our current Target Price 

based on valuing 2014E earnings at a 25% to 30% P/E relative premium to the Swiss 

market is CHF285. 

ABBV, BMY and ZTS remain potential consolidation 

targets; AZN remains “in limbo” 

As already discussed, AbbVie, AstraZeneca, Bristol-Myers and Zoetis are not considered to 

be restructuring candidates by us due to their sole focus on Pharmaceuticals or Animal 

Health products in the case of Zoetis. However, several of these companies are potential 

acquisition targets in our view because of this focus, which could lead them to be viewed 

as large ‚bolt-on‛ transactions, particularly in the cases of AbbVie, Bristol-Myers and 

Zoetis. 

AbbVie – Looks like a prime consolidation target for Roche, maybe Novartis 

and Novo Nordisk too 

We believe that AbbVie presents an attractive consolidation target due to the focus of the 

business on Humira. This would make it an exceptionally easy company to integrate 

versus other large cap acquisitions due to the relative lack of complexity in its product 

mix, manufacturing and marketing infrastructure. Furthermore the dominance of Humira 

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on AbbVie’s earnings would be significantly diluted if acquired by another larger 

Pharmaceuticals company. 

Roche makes the most sense to us as a strategic acquirer of AbbVie given its need to 

diversify away from oncology in the long run, its focus on protein manufacturing, strong 

hepatitis C platform and low financing costs. However, we also see Novartis and Novo 

Nordisk as potential candidates to acquire AbbVie. 

AstraZeneca – Looks unattractive as a consolidation target; needs to fix R&D 

We believe that AstraZeneca is likely to be left on the sidelines as far as any industry 

consolidation over the next year or so is concerned due to an extended patent cliff 

through to 2017. A strong dividend yield of 5.4% should support the shares in the 

meantime as it progresses its internal R&D pipeline as well as potentially adds further 

assets via bolt on acquisitions. 

Bristol-Myers – Chances of a take-out from Pfizer diminishing as valuation 

soars 

We have previously stated that Bristol-Myers would make an excellent strategic fit for 

Pfizer given their collaboration on Eliquis and Bristol-Myers strong internal R&D efforts in 

cancer. Since that time the valuation of Bristol-Myers has risen substantially and may now 

be too expensive for Pfizer to justify an acquisition. Or it could be that PD-1 and Yervoy 

will be such attractive assets that Pfizer ultimately pays more than we previously expected 

to gain access to some of the most attractive products in the Pharmaceuticals industry. 

Zoetis – Likely acquisition target once the tax implications disappear in 2015 

We continue to believe that Zoetis remains an attractive acquisition target for other 

healthcare conglomerates without a significant presence in Animal Health such as 

GlaxoSmithKline and Johnson & Johnson. However, we believe that the negative tax 

implications of acquiring Zoetis prior to 2015 will keep any potential M&A interest on the 

sidelines. 

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EBITDA margin (2014E) 


May 28, 2013 

Abbott (Buy; PT $46) 

Well positioned, but the best is yet to come 

Abbott management has one of the industry’s strongest pedigrees when it comes to M&A 

and restructuring in our view, boasting possibly one of the best acquisitions ever in the 

Pharmaceuticals industry (Knoll Pharma in 2001) as well as the successful spin-outs of 

Hospira (HSP, $35.18, NC) in 2003 and AbbVie as recently as January 2013. Whilst the 

‚stump‛ business at Abbott still appears well positioned for future growth even without 

AbbVie, we believe that the next few years are likely to see further value creation for 

shareholders through significant restructuring. 

Over the next two years we expect that management will execute their plan of strong top 

line growth through geographic expansion, new product launches and bolt-on 

acquisitions whilst laying the foundation for the next major restructuring of the group, 

which still contains four separate and distinct segments in Nutrition, Pharmaceuticals, 

Medical Devices and Diagnostics. In our view this will likely be followed by further break 

up of the group, potentially into three pieces. 

Three is better than one – 27% better in the case of Abbott 

We believe that Nutrition and Established Pharmaceuticals will likely be separated into a 

single company once the majority of the planned aggressive margin expansion inside 

Nutrition is completed by 2015. This will likely be complemented by a significant inflexion 

in revenue and operating profit growth within Established Pharmaceuticals as likely 

hundreds of products are cross-licensed into new geographic markets as a result of the 

Solvay and Piramal acquisitions. We would then expect that the Medical Devices and 

Diagnostics businesses would be sold to other players or spun out around the same 

timeline as these industry segments likely consolidate in the future. 

We estimate that the combined Nutrition/ Established Pharmaceuticals business would 

have a market capitalization of circa $44.7bn if it existed as a separate entity today, whilst 

the Medical Devices and Diagnostics businesses could be sold for circa $14.1bn and 

$12.5bn respectively each. On this basis our mean sum of the parts valuation for Abbott is 

$47.81 per share versus the current price of $37.76 and our official Target Price of $46. 

Exhibit 14: 2014E EBITDA margin versus growth (2014E-17E) by division 

35% 

30% 

25% 

20% 

15% 


$1,497m 

Diagnostics 

$1,185m 

Est. Pharma 

$1,684m 

Nutrition 

$1,871m 

10% 

5% 

0% 

0% 5% 10% 15% 20% 

EBITDA CAGR (2014E-2017E) 


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May 28, 2013 

Exhibit 15, Exhibit 16, and Exhibit 17 give a snapshot of our estimates for 2014E revenues, 

EBITDA and EPS split across the four main business segments, which we have used as the 

basis for our sum of the parts calculations. 

Exhibit 15: Estimated 2014E revenue 

contribution split ($m) 

Exhibit 16: Estimated 2014E EBITDA 


Exhibit 17: Estimated 2014E EPS 

contribution split ($ per share) 

Est. Pharma 

$5,928m 

Nutrition 

$7,874m 

Est. Pharma 

$1,684m 

Nutrition 

$1,871m 

Est. Pharma 

$0.70 

Nutrition 

$0.78 

Medical 

Devices 

$6,027m 

Diagnostics 

$5,038m 

Medical 

Devices 

$1,497m 

Diagnostics 

$1,185m 

Medical 

Devices 

$0.62 

Diagnostics 

$0.49 

Source: Jefferies estimates 



Nutrition/ Established Pharma make a nice combo with a juicy valuation of 

circa $44.7bn 

The broad geographic reach of the Nutrition and Established Pharmaceuticals businesses 

with their focus on Emerging Markets in particular make them a perfect combination as a 

stand alone business in our view. Whilst Abbott does not give detailed margin 

information for each individual segment of the business, we estimate that the Nutrition 

and Established Pharmaceuticals businesses are the two most profitable in the group from 

both an EBITDA and EPS perspective (Exhibit 16 and Exhibit 17). We also estimate that 

they are the highest growth opportunities within the group as well (Exhibit 14). 

We expect that management will separate these assets from the remainder of the group 

once Nutrition has completed the majority of the ongoing restructuring, implemented to 

achieve an operating margin target of >20% by 2015 from the lowly historic margins of 

13% back in 2011. During the same time we expect that the Established Pharmaceuticals 

business will enter a new rapid phase of growth and margin expansion as significant 

revenue synergies are achieved through the cross-registration and launches of products 

from the Solvay and Piramal acquisitions. 

We have separately valued each of these assets at $27.6bn for Nutrition (c3.5x sales; 

c14.8x EBITDA; c22.9x earnings) and $17.1bn for Established Pharmaceuticals (c2.9x 

sales; c10.2x EBITDA; c15.7x earnings), which we calculate is c$7.3bn or 16% higher than 

their combined implied valuation within the current Abbott stock price. 

Medical Devices likely to end up as a consolidation target worth $14.1bn 

We would expect that the Medical Devices and Diagnostics units would likely end up as 

consolidation targets or further spin-offs in the event that Nutrition and Established 

Pharma are separated from the group. The Medical Devices business could be a good 

consolidation play for companies looking to broaden their offering to hospitals to try to 

offset the dominant force of Johnson & Johnson in the sector. 

We would expect that such an asset would fetch at least $14.1bn (c2.3x sales; c9.4x 

EBITDA; c14.6x earnings) in this instance. Whilst this is not a particularly attractive 

valuation versus the current group P/E multiple of 14.8x, it would be less than 1% dilutive 

by our estimates and by far offset by the gains from separating Nutrition and Established 

Pharma. 

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Valuation/ Share 

Healthcare 


May 28, 2013 

Diagnostics most likely to be spun out into a $12.5bn market cap entity 

We see few strategic partners for Abbott’s diagnostics business and the most logical way 

to separate it from the Nutrition and Established Pharma businesses may be through an 

IPO. On this basis we would expect it to achieve a market capitalisation of circa $12.5bn 

(2.5x sales; c10.6x EBITDA; c16.4x earnings), which would equate to c1.5% accretion 

versus its implied valuation within the group as it stands today. 

SOTP Valuations yield c27% upside 

Assuming that a ‚real-world‛ sum of the parts for Abbott is achieved by separating the 

business into three entities as described, we estimate that the group is worth circa $47.81 

per share, a c27% premium to the current share price. We have summarised the various 

SOTP valuations for Abbott in this section in Exhibit 18 alongside our more conventional 

P/E relative valuation for the shares of $46 (based on 25-30% 2014E P/E premium to the 

US market). 

Exhibit 18: Summary of share price evaluation by different valuation 

methodologies ($ per share) 

$60 

$50 

$46.00 

$48.86 

$47.48 $47.09 

$40 

$30 

$20 

$10 

$0 

PE REL EV/Sales EV/EBITDA P/E multiple 


The individual SOTP valuations based on EV/Sales, EV/EBITDA and P/E multiples are 

included in this report in Exhibit 20, Exhibit 21 and Exhibit 22. Exhibit 19 summarises 

these as well as providing a comparison of how the average of these valuations for each 

business unit compares to their valuation based on our estimate of earnings on the 

current group multiple. 

Exhibit 19: Summary of share price evaluation by different valuation methodologies ($ per share) 

EV/sales EV/EBITDA P/E SOTP Mean 

Valuation 

Value at Group 

Multiple 

Multiple 

Arbitrage/ 

share 

Nutrition $17.31 $17.62 $17.07 $17.33 $11.53 $5.81 

Diagnostics $7.91 $7.81 $7.86 $7.86 $7.30 $0.56 

Medical Devices $9.46 $8.46 $8.69 $8.87 $9.22 ($0.35) 

Est. Pharma $11.17 $10.57 $10.47 $10.74 $10.37 $0.36 

Non-operating income/(expense) NA NA NA NA ($0.68) NA 

Net cash/ (debt) - 2012A $3.01 $3.01 $3.01 $3.01 NA NA 

Group $48.86 $47.48 $47.09 $47.81 $37.74 $6.38 


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SOTP Valuation Tables 

EV/Sales valuation 

Our EV/Sales valuation for Abbott yields $48.86 on a sum of the parts basis. This 

represents a 29% premium to the current stock price of $37.76. 

Exhibit 20: EV/Sales SOTP valuation summary ($m or $ per share where indicated) 

Sales 

2014E ($m) 

% Sales 

Contribution 

EV/Sales Multiple Implied EV ($m) Valuation per 

share ($) 

Nutrition $7,874m 32% 3.5x $27,560m $17.31 

Diagnostics $5,038m 20% 2.5x $12,594m $7.91 

Medical Devices $6,027m 24% 2.5x $15,068m $9.46 

Est. Pharma $5,928m 24% 3.0x $17,783m $11.17 

Group sales $24,867m 100% $73,006m $45.85 

Net cash/ (debt) - 2012A $4,787m $3.01 

Avg. shares outstanding (2012A) 1,592 

Group EV/Sales (SOTP) valuation $77,793m $48.86 


EV/EBITDA valuation 

Our EV/EBITDA valuation for Abbott yields $47.48 on a sum of the parts basis. This 


Exhibit 21: EV/EBITDA SOTP valuation summary ($m or $ per share where indicated) 

EBITDA 

2014E 

($M) 

EBITDA 

Contribution 

2014E 

EV/EBITDA 

2014 

Implied EV ($m) 

Valuation per 

share ($) 

Nutrition $1,871m 30.0% 15.0x $28,062m $17.62 

Diagnostics $1,185m 19.0% 10.5x $12,441m $7.81 

Medical Devices $1,497m 24.0% 9.0x $13,470m $8.46 

Est. Pharma $1,684m 27.0% 10.0x $16,837m $10.57 

Total EBITDA $6,236m 100.0% $70,809m $44.47 



Group EV/EBITDA (SOTP) Valuation $75,596m $47.48 


P/E Multiple valuation 

Our P/E multiple based valuation for Abbott yields $47.09 on a sum of the parts basis. 

This represents a 25% premium to the current stock price of $37.76. 

Exhibit 22: P/E SOTP valuation summary ($m or $ per share where indicated) 

P/E (SOTP) Summary 

Operating 

Profit 2014E 

Operating 

Margin 2014E 

Net Income 

2014E 

Division 

EPS 

2014E 

P/E multiple 

Valuation per 

share ($) 

Nutrition $1,527m 19% $1,208m $0.78 22.0x $17.07 

Diagnostics $967m 82% $765m $0.49 16.0x $7.86 

Medical Devices $1,221m 82% $966m $0.62 14.0x $8.69 

Est. Pharma $1,374m 82% $1,087m $0.70 15.0x $10.47 

Non-operating income/(expense) ($90m) ($71m) ($0.05) - NA 

Net cash/ (debt) - 2012A $3.01 

Total $5,088m 20.5% $3,954m $2.54 18.5x $47.09 


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May 28, 2013 

Bayer (Buy; PT €98) 

Restructuring continues to look inevitable 

Marijn Dekkers was appointed as CEO at Bayer on 1 st October 2010. He was the first 

external appointee to take the top job in the company’s near 150 year history and his 

arrival caused much speculation as to the implications of the move. He had previously 

been at Thermo Fisher (TMO, $87.22, Buy), where he was known as a deal maker having 

transformed the company with numerous acquisitions into the world’s largest laboratory 

equipment maker. 

As the largest remaining pharmaceuticals/ chemicals conglomerate in Europe, 

expectations focused on the likelihood that Bayer could be broken up, with chemicals 

disposals likely used to help finance pharmaceutical acquisitions. Management 

commentary did not play down the expectations, either. At the time of his appointment 

as CEO, Dr Dekkers had suggested he would like to further build up the Pharmaceuticals 

unit, noting that Bayer could finance a transaction similar in size to the earlier circa €17bn 

Schering AG acquisition. By mid-2011, this had further evolved into a potential ‘merger of 

equals’ for the healthcare unit and the observation that there could be three or four 

companies that might be good strategic options for Bayer. 

Meanwhile on the subject of disposals, at the time of his appointment Dr Dekkers 

commented that he wouldn’t consider shedding either of the CropScience, 

MaterialScience or Healthcare divisions unless they lost their positions of market 

leadership. He noted “We have a leading position in all three areas….we don’t have two 

favourite children and a stepchild” (Bloomberg, 28 th Sept 2010). 

However, by early 2011 the commentary had progressed with recognition that the 

disposal of the MaterialScience division could be used to help finance a larger transaction 

in Healthcare. Dr Dekkers was quoted as saying that it would only be sold if “we wanted 

to do something so big that we had to use it as currency”. He further clarified that “We’ll 

stay with the three strategic groups as long as they are competitive in their particular 

areas”(Financial Times, 22 nd Feb 2011). 

At the recent Meet Management day at Leverkusen in March 2013, it was increasingly 

apparent that the MaterialScience division continues to be positioned apart from the rest 

of the company. In his introduction, Dr Dekkers noted, “Another way to depict our business 

is along the lines of Life Sciences and MaterialScience..….Life Science is, basically, Healthcare 

and CropSciences, which represents human health, animal health and plant health, 

representing 70% of revenue, and MaterialScience 30%......when you look at ….adjusted 

EBITDA for 2012, Life Science is represented at 85% of EBITDA, and MaterialScience 15%. So, 

a significant portion of our financials are driven by our two Life Sciences businesses”. 

Whilst the overall commentary seems to point in the direction of an eventual 

MaterialScience separation, it also seems the transaction will most likely occur as a 

consequence of a larger acquisition within Healthcare. With large healthcare acquisition 

opportunities more elusive than ever, there appears to be little immediate urgency. 

Moreover, following a difficult couple of quarters it’s likely management may want to see 

some clear improvements at MaterialScience to help maximize value before considering 

any disposal options. 

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May 28, 2013 

Significant restructuring options exist and make sense for shareholders 

Exhibit 23 illustrates how the company is dominated by the Pharmaceuticals division, 

which has the highest uEBITDA margins and uEBITDA growth expectations, out of all the 

divisions. This is closely followed by CropScience. 

Exhibit 23: 2012A EBITDA margin versus growth (2014E-17E) by division 

50% 

45% 

40% 

35% 

30% 

25% 

20% 

15% 

Medical Care, 

€749 

Animal Health, 

€457 

Consumer Care, 

€874 

Pharmaceuticals, 

€3,789 

CropScience, 

€2,360 

10% 

5% 

MaterialScience, 

€1,331 

0% 

0% 2% 4% 6% 8% 10% 



Whilst Bayer discloses revenues for its three Consumer sub-divisions (Consumer Care, 

Medical care and Animal Health) it does not disclose their individual uEBITDA margins. 

However, we have been able to make estimates for these based on our knowledge of 

other comparable companies. Within the Consumer division, the OTC focused Consumer 

Care business is expected to deliver the most robust growth, with Animal Health close 

behind reflecting good longer term growth prospects, particularly in emerging markets. 

However, Medical Care (which consists of Diabetes care as well as contrast imaging 

agents and medical devices) is likely to be a significant drag on the overall Consumer 

division growth due to the increasingly challenging conditions within diabetes care. 

Increasing competition is being compounded by austerity measures in Europe and CMS 

reimbursement cutbacks in the US which are pressuring diabetes care margins and 

hampering growth in the short to medium term, despite the attractive longer term 

fundamentals of the diabetes market. Outside Medical Care, MaterialScience has the 

weakest growth/ uEBITDA margin combination. 

Separating both the MaterialScience and the Medical Care operations should leave a 

higher growth, higher margin business behind. However, whilst we have already 

established that MaterialScience is the most likely candidate for disposal, Bayer appears 

more wedded to Medical/Diabetes Care. At the Q1’13 results Wolfgang Plischke 

(Chairman of Bayer Healthcare and Member of the Board) said, “….we are committed to 

this business…we are doing quite well if you compare this with other competitors…. In 

addition….this business is providing quite a significant cashflow for us, which is important for 

our overall performance….”. 

However, this commitment may be more a function of necessity, than desire. In July 2012, 

the Financial Times Deutschland reported ‘sources’ as saying Bayer was in talks to sell its 

blood glucose meter business. However, by December 2012 Reuters reported that Sanofi, 

the last remaining bidder, had pulled out of a deal that could have been valued at around 

$1.5bn. 

page 20 of 92 



Healthcare 


May 28, 2013 


contribution split (€m) 

MaterialScience 

€ 12,134 

Reconciliation, 

€ 1,261 

Core Pharma, 

€ 12,172 




€ 1,331 

Reconciliation, 

-€ 74 

Core Pharma, 

€ 3,789 


contribution split (€ per share) 


€ 0.84 

Core Pharma, 

€ 2.72 

CropScience, 

€ 2,360 

CropScience, 

€ 1.86 


€ 4,301 

CropScience, 

€ 9,584 


€ 1,409 

Medical Care, 

€ 2,628 


€ 458 

Medical Care, 

€ 749 


€ 874 


€ 0.36 

Medical Care, 

€ 0.59 


€ 0.69 




Uncovering Pharma’s hidden value – the conglomerate discount 

When considering the summary valuation table (Exhibit 28), the first observation is that 

the most significant potential upside would come from fully valuing the Core Pharma 

division itself, versus the implied group multiple that it currently trades on. We believe 

that the Pharmaceuticals division suffers from a significant conglomerate discount due to 

the diversified nature of the company and unpredictability of the MaterialScience division. 

We conclude that the valuation upside from separating the MaterialScience division goes 

far beyond the modest 1.8% earnings accretion that could be achieved by using any 

proceeds to repurchase shares. Instead we believe that there is circa 36% valuation upside 

to the group on a sum of the parts valuation on the basis that the Healthcare and 

CropScience divisions reach full valuations when compared to their peers. 

We have valued the Core Pharmaceuticals business at €39bn (c3.2x sales; 10.3x EBITDA; 

c17.3x earnings). This implies that there is circa €12.06 per share upside available from 

fully valuing just the Pharmaceuticals division alone and another €11.84 per share from 

doing the same with the Consumer division. 

Who would be the most likely acquirers? 

With Bayer MaterialScience already holding the global number one or two positions in its 

major business areas (representing between 20% and 40% market shares), anti-trust 

issues would prevent Bayer from selling the business to one of the major competitors. In 

this situation, Bayer would either have to find a chemicals company that wanted to enter 

this market afresh, sell it off piecemeal (which may destroy some of its value), or consider 

floating the business as a stand-alone operation. 

Given the current global economic climate and difficult conditions (pricing / raw material 

costs) within the industry at present, we would not see this as imminent. However, as 

soon as the global economic cycle once again begins to show signs of a sustainable pickup 

we would anticipate the demand for and valuation of more cyclical assets to follow 

suit. At which point this will start to become a far more attractive proposition. 

page 21 of 92 



Healthcare 


May 28, 2013 

Consumer Care also a valuable asset 

Bayer has not given any indications that it may be willing to dispose of its Consumer Care 

business and on that basis we would not expect it to be divested. If anything, Bayer has 

been looking to bolster this area. Whilst it was outbid by Reckitt Benkiser (RB LN, 4850p, 

Hold) in its attempt to acquire Schiff Nutrition, it has recently announced the bolt-on 

acquisition of Steigerwald Arzneimittelwerk GmBH, a privately held pharmacy-only herbal 

medicines company, for an undisclosed amount. Nevertheless, as part of our valuation 

process we note that disposing of this division could generate valuation upside. The 

longer duration nature of these businesses, usually due to high levels of brand 

recognition means there are ready buyers for these assets. A list of potential acquirers 

could include: GlaxoSmithKline, Merck & Co., Pfizer, Sanofi, Johnson & Johnson, Novartis 

and Reckitt Benkiser. 

In the event that this division is not disposed of, it should be noted that (just as with the 

Core Pharma division), disposing of MaterialScience would potentially remove the 

conglomerate discount, allowing the market to attribute a fuller valuation to this division. 

We have valued the Consumer Care operation at up to around €14.2bn (c3.3x sales; 

16.3x EBITDA; c25x earnings), representing €8.32 per share of incremental value over the 

current share price of €84.46 (Exhibit 28). 

Further opportunities remain in Medical Care and Animal Health 

Animal Health remains a highly attractive area of the life science market given the strong 

fundamentals. Increasing global wealth and affluence, particularly in Emerging Markets is 

driving demand for higher protein diets and also leads to increased pet ownership as well 

as spend per pet. Bayer is the fifth largest player in the global Animal Health market, with 

a similar share to the fourth, sixth and seventh players, Eli Lilly, Boehringer and Novartis, 

respectively. 

With all the major players, including Bayer, expressing their intent to increase ownership 

in this space there is little available to acquire. As a result the best way to create value here 

may be to either sell to one of the other players at a significant premium, reflecting the 

available synergies, opportunities and scarcity value, or JV the operations with one of the 

similar sized competitors. With relatively low exposure to the companion animal market, 

either Eli Lilly, Boehringer, Zoetis and Merck & Co. could be ideal partners and a 

combination with either should immediately create synergies and further critical mass. We 

have valued the Animal Health division at circa €5.5bn (c3.9x sales; 12x EBITDA; c18.4x 

earnings), representing €1.99 per share of incremental value over the current share price 

(Exhibit 28). 

Whilst our valuation work suggests there could be at least another €1.53 per share of 

value in Medical Care, releasing value from Medical Care is likely to be more difficult, 

particularly given that Bayer already appears to have tried and failed to sell the Diabetes 

Care business. Nevertheless, in what is becoming an increasingly difficult market it 

remains the case that one way of creating value would be for one player to act as a 

consolidator, stripping out duplicate cost. 

page 22 of 92 



Target Share Price (Euro) 

Healthcare 


May 28, 2013 

SOTP Valuations yield 36% upside and support our upgrade to Buy 

We have carried out sum of the parts valuations utilising EV/Sales, EV/EBITDA and P/E 

calculations. As summarized in Exhibit 27, utilizing ‚real-world‛ valuation multiples, these 

different valuation methodologies provide a valuation range of €111.58 to €118.22 per 

share, with a mean valuation of €115.23 per share. This represents upside of 36%, relative 

to the current share price of €84.46. Our current target price based on valuing the 2014E 

earnings at a 30% to 35% P/E premium relative to the German market is €98. 

We have Upgraded Bayer to Buy from Hold to reflect the positive momentum in the 

Pharmaceuticals and CropScience divisions as well as some of the most significant upside 

potential from restructuring, which we believe could be crystallized over the next 12-24 

months. 


methodologies (€ per share) 

€140 

€120 

€100 

€98.00 

€118.22 €115.90 

€111.58 

€80 

€60 

€40 

€20 

€0 

PE (Market premium/ 

discount) 

EV/Sales (SOTP) EV/EBITDA PE (SOTP) 


Summary of valuation methodologies 

The individual SOTP calculations based on EV/Sales, EV/EBITDA, and P/E multiples are 

shown below in Exhibit 29, Exhibit 30 and Exhibit 31. Exhibit 28 provides a summary of 

these different methodologies, as well as providing a comparison of how the average of 

these valuations for each business unit compares to the valuation based on our estimate 

of earnings on the current group multiple. 

Exhibit 28: Summary of share price evaluation by different valuation methodologies (€ per share) 

Division EV/Sales EV/EBITDA P/E SOTP Mean 

Valuation 


Multiple 

Arbitrage/ 

Share 

Pharmaceuticals €47.10 €48.11 €46.22 €47.15 €35.09 €12.06 

Consumer €34.55 €32.60 €31.90 €33.02 €21.17 €11.84 

Consumer Care €18.20 €16.90 €16.54 €17.22 €8.89 €8.32 

Medical Care €9.53 €9.06 €8.86 €9.15 €7.62 €1.53 

Animal Health €6.82 €6.64 €6.50 €6.65 €4.66 €1.99 

CropScience €32.45 €31.39 €31.61 €31.82 €23.99 €7.83 

MaterialScience €13.21 €12.88 €10.94 €12.34 €10.86 €1.48 

Other charges (Interest expense, etc) NA NA NA NA (€6.65) NA 

Net Debt - Q1 2013E (€9.09) (€9.09) (€9.09) (€9.09) NA NA 

Total €118.22 €115.90 €111.58 €115.23 €84.46 €33.21 


page 23 of 92 



Healthcare 


May 28, 2013 

Based on these valuations, we note that splitting out any of the divisions should generate 

varying degrees of accretion to earnings assuming that the cash raised is reinvested in 

share buybacks at the current share price and no dis-synergies are created. However, the 

single biggest upside is in the Core Pharma division, which highlights the true impact of 

the conglomerate discount the company suffers from. Our expectation is that if the lower 

growth, lower margin MaterialScience division was sold off, the market would be able to 

more accurately value the remaining Healthcare/ Life Sciences businesses at the 

appropriate multiple. Although we do not anticipate this happening until an appropriate 

Healthcare focussed acquisition target becomes available, our valuation work suggests 

that circa €33 per share of value may be created, predominantly from splitting off 

MaterialScience. 


EV/Sales SOTP 

Our EV/Sales valuation for Bayer yields €118.22 on a sum of the parts basis. This 

represents c40% upside to the current share price of €84.46. 

Exhibit 29: EV/Sales SOTP valuation summary (€m or € per share where indicated) 

Division 

Sales 

2014E (€m) 

% Sales 

Contribution 

EV/Sales 

Multiple 

Implied value 

(€m) 

Valuation per 

share (€) 

Core Pharma €12,172m 28% 3.2x €38,950m €47.10 

Consumer €8,338m 19% 3.4x €28,574m €34.55 

Consumer Care €4,301m 10% 3.5x €15,053m €18.20 

Medical Care €2,628m 6% 3.0x €7,883m €9.53 

Animal Health €1,409m 3% 4.0x €5,637m €6.82 

CropScience €9,584m 22% 2.8x €26,835m €32.45 

MaterialScience €12,134m 28% 0.9x €10,920m €13.21 

Reconciliation €1,261m 3% 0.0x €0m €0.00 

Group Sales €43,488m 100% 2.4x €105,279m €127.31 

Net Debt - Q1 2013E (€7,513m) (€9.09) 

Avg. shares outstanding (Q1 2013A) 826.95 

Group EV/Sales (SOTP) valuation €97,766m €118.22 


EV/EBITDA SOTP 

Our EV/EBITDA valuation for Bayer yields €115.90 on a sum of the parts basis. This 

represents c37% upside to the current share price of €84.46. 

Exhibit 30: EV/EBITDA SOTP valuation summary (€m or € per share where indicated) 

Division 

uEBITDA 2014E 

(€m) 

uEBITDA 

Contribution 

2014E 

EV/EBITDA 

2014E 

Implied value 

(€m) 

Valuation per 

share (€) 

Core Pharma €3,789m 39.6% 10.5x €39,788m €48.11 

Consumer €2,080m 21.8% 13.0x €26,958m €32.60 

Consumer Care €874m 9.1% 16.0x €13,978m €16.90 

Medical Care €749m 7.8% 10.0x €7,488m €9.06 

Animal Health €458m 4.8% 12.0x €5,491m €6.64 

CropScience €2,360m 24.7% 11.0x €25,958m €31.39 

MaterialScience €1,331m 13.9% 8.0x €10,649m €12.88 

Group Total (Ex Reconciliation) €9,560m 100.0% 

Reconciliation (€74m) (0.8%) 

Group Total €9,487m 99.2% 10.9x €103,352m €124.98 

Net Debt - Q1 2013E (€7,513m) (€9.09) 

Avg. shares outstanding (Q1 2013A) 826.95 

Group EV/EBITDA (SOTP) valuation €95,839m €115.90 


page 24 of 92 



Healthcare 


May 28, 2013 


Our P/E multiple based valuation for Bayer yields €111.58 on a sum of the parts basis. 

This represents c32% upside to the current share price of €84.46. 

Exhibit 31: P/E SOTP valuation summary (€m or € per share where indicated) 


Division 

2014E CORE 

Adj. Op. Profit 

2014E Adj. 

Op. Profit 

Margin 

2014E Net 

Income 

2014E CORE 

EPS 

2014E P/E 

multiple 

2014E 

Valuation/ 

Share (€) 

Core Pharma €3,760m 31% €2,249m €2.72 17.0x €46.22 

Consumer €2,064m 25% €1,357m €1.64 19.4x €31.90 

Consumer Care €867m 20% €570m €0.69 24.0x €16.54 

Medical Care €743m 28% €488m €0.59 15.0x €8.86 

Animal Health €454m 32% €299m €0.36 18.0x €6.50 

CropScience €2,342m 24% €1,537m €1.86 17.0x €31.61 

MaterialScience €1,321m 11% €696m €0.84 13.0x €10.94 

Other, Non Operating income / (expense) (€426m) (€0.52) 

Net Debt - Q1 2013E (€9.09) 

Total €9,487m 22% €5,413m €6.55 17.0x €111.58 


page 25 of 92 



Healthcare 


May 28, 2013 

Eli Lilly (Hold; PT $49) 

Restructuring option does not compute 

Eli Lilly is our least preferred Large Cap Pharmaceuticals stock based on its lofty P/E 

multiple, significant exposure to patent expiries and challenges over the next few years, 

poor R&D executions and sub-par growth profile. Whilst management has clearly set out 

a growth strategy to try to address these issues by increasing R&D productivity and 

focusing resources on its more productive Animal Health unit as well as on Japan and 

Emerging Markets, the key to its long term success clearly resides with its ability to 

generate growth from new Pharmaceutical products. 

It can be heavily debated as to whether the current valuation is more driven by pipeline 

expectations (there are many key R&D catalysts over the next 12 months) or the dividend 

yield, which is in line with its peers at 3.6%. Regardless, the ability to execute the pipeline 

will likely act as the key driver of valuation going forwards given that success is required 

to sustain the current level of dividend in the future in our view. 

It is sometimes mooted by investors and stock market commentators that management 

could unlock value from the company through a reorganization of the business into its 

Core Pharmaceuticals and Animal Health components. However, our analysis shows that 

this is unlikely to be the case unless the stock undergoes a significant decline in value 

given that the Animal Health business would be unlikely to trade at a significant premium 

to the current Group multiple. Derica Rice, CFO of Eli Lilly, stated at the Q4’12 earnings 

call: 

“We have no intentions of divesting of our Animal Health business. We have been quite 

pleased with it. As you heard earlier, in the fourth quarter, our Animal Health business grew 

about 18%; and for the year, it grew about 21%. And, this is a business that we actually 

anticipate will double over this period we call YZ; and so, we have gotten great returns from 

that business and great benefit to Lilly. We also have received significant synergies between 

our Animal Health business, as well as with our human pharma business, both in terms of 

innovation. Most of our human -- before testing the humans, we run our molecules through 

animal models, and so that's provided a lot of leverage to our Animal Health business. Then, 

in addition to that, we also get leverage and synergies through our manufacturing and 

corporate overhead base. So, for now, we are pleased with our Animal Health business, and 

we see this being a long mainstay, in terms of mix -- our portfolio mix” 

We estimate that the Core Pharma business would have a valuation of circa $44.5bn if it 

existed as a separate entity today, whilst the Animal Health businesses could be spun out 

or sold for circa $8.0bn. On this basis our mean sum of the parts valuation for Eli Lilly is 

$48.29 per share versus the current price of $54.14 and our Target Price of $49. 

We have upgraded Eli Lilly to Hold from Underperform as, even though it has been the 

worst performing US Large Cap Pharmaceuticals stock year to date, we do not see 

enough downside over the next 3-6 months to justify an Underperform rating. 

Furthermore we believe that the 2013E dividend yield of 3.6% will protect it to a degree 

for now. We also see positive headline risk from ramucirumab in breast cancer over the 

summer, though we believe that the detailed data expected to be presented at the San 

Antonio Breast Cancer Symposium in December will show that the product is unlikely to 

gain approval in this indication. Eli Lilly remains our least preferred stock within the entire 

Large Cap Pharmaceuticals group. 

page 26 of 92 



Healthcare 



May 28, 2013 


30% 

20% 

Core Pharma 

$4,166m 

Animal Health 

$515m 

10% 

0% 

-5% 0% 5% 10% 15% 



Exhibit 33, Exhibit 34 and Exhibit 35 give a snapshot of our estimates for 2014E revenues, 





Animal 

Health 

$2,304m 



Animal 

Health 

$515m 



Animal 

Health 

$0.29 

Core 

Pharma 

$16,826m 

Core 

Pharma 

$4,166m 

Core 

Pharma 

$2.32 




Animal Health worth circa $8.0bn as a spin or sale 

We would expect that any divestment of the Animal Health business would be achieved 

through a trade sale to another industry player, potentially, Zoetis, Bayer, Novartis, Sanofi, 

Boehringer and Merck. A spin-out would also be a possibility, though we suspect that a 

trade sale would achieve the highest valuation. Sanofi, Bayer and Boehringer would be 

the most logical buyers in our view given their lower exposure to medicinal feed 

additives. 

We would expect that such a transaction would would fetch circa $8.0bn (c3.5x sales; 

c15.6x EBITDA; c26.0x earnings) and would be most likely to be executed in 2014 or 

beyond if the R&D pipeline were to materially disappoint over the next 12 months. On 

this basis, we estimate that a trade sale of Animal Health would be c3% accretive to Lilly if 

the net proceeds were used to repurchase its own shares. 

page 27 of 92 




Healthcare 


May 28, 2013 

SOTP Valuations yield c11% downside 

Assuming that Eli Lilly separated its Animal Health business from the rest of the group, we 

calculate a mean sum of the parts valuation of $48.29 per share, a c11% discount to the 

current share price. We have summarised the various SOTP valuations used for Eli Lilly in 

this section in Exhibit 36 alongside our more conventional P/E relative valuation for the 

shares (based on assuming a 30-40% 2014E P/E premium to the US market). 



$60 

$50 

$40 

$49.00 

$50.70 $49.69 

$44.48 

$30 

$20 

$10 

$0 

PE REL EV/ sales EV/ EBITDA P/E multiple 



included in this report in Exhibit 38, Exhibit 39 and Exhibit 40. 

Exhibit 37 summarises these as well as providing a comparison of how the average of 

these valuations for each business unit compares to their valuation based on our estimate 




Valuation 


Multiple 

Multiple 

Arbitrage/ 

share 

Core Pharma $43.15 $41.97 $37.14 $40.75 $47.04 ($6.29) 

Animal Health $7.38 $7.55 $7.17 $7.37 $5.81 $1.55 

Non-operating income/ (expense) NA NA NA NA $1.29 NA 

Net cash/ (debt) - Q1 2013A $0.17 $0.17 $0.17 $0.17 NA NA 

Group $50.70 $49.69 $44.48 $48.29 $54.14 ($4.73) 


page 28 of 92 



Healthcare 


May 28, 2013 



Our EV/Sales valuation for Eli Lilly yields $50.70 on a sum of the parts basis. This 

represents a 6% discount to the current stock price of $54.14. 


Sales 

2014E ($m) 

% Sales 

Contribution 


share ($) 

Core Pharma $16,826m 88% 2.8x $47,112m $43.15 

Animal Health $2,304m 12% 3.5x $8,063m $7.38 

Group Sales $19,129m 100% $55,175m 

Net cash/ (debt) - Q1 2013A $185m $0.17 

Avg. shares outstanding (Q1 2013A) 1,092 




Our EV/EBITDA valuation for Eli Lilly yields $49.69 on a sum of the parts basis. This 

represents a 8% discount to the current stock price of $54.14. 


EBITDA 

2014E($m) 

EBITDA 

Contribution 

2014E 

EV/EBITDA 

2014 


Valuation per 

share ($) 


Animal Health $515m 11% 16.0x $8,239m $7.55 

Implied Share price $4,681m $54,066m $49.52 

Net cash/ (debt) - Q1 2013A $185m $0.17 


Group EV/EBITDA (SOTP) valuation $54,251m $49.69 



Our P/E multiple based valuation for Abbott yields $44.48 on a sum of the parts basis. 

This represents a 18% discount to the current stock price of $54.14. 



Operating 

Profit 2014E 

Operating 

Margin 2014E 

Net Income 

2014E 

Division 

EPS 

2014E 

P/E multiple 

Valuation per 

share ($) 

Core Pharma $3,132m 19% $2,506m $2.32 16.0x $37.14 

Animal Health $387m 17% $310m $0.29 25.0x $7.17 

Non-operating income/ (expense) $89m $71m $0.07 20.6x NA 

Net cash/ (debt) - Q1 2013A $0.17 

Total $3,519m 18% $2,887m $2.67 16.6x $44.48 


page 29 of 92 



Healthcare 



May 28, 2013 

GlaxoSmithKline (Hold; PT 1,900p) 

Restructuring already underway 

GlaxoSmithKline’s management has been active in divesting non-core businesses in the 

recent past (e.g. Australian brands, non-Core OTC brands), has signaled further 

divestments are in process (Lucozade and Ribena brands), and discussed potential future 

options for the newly formed Global Established Products portfolio and ViiV joint venture. 

We have been impressed with management's willingness to consider major restructuring 

of the business. Our mean sum of the parts valuation for GlaxoSmithKline is 1,817p per 

share versus the current price of 1,749p and our official Target Price of 1,900p. 

Global Established Products present potential divestment opportunities 

GlaxoSmithKline remains one of the more diversified companies within our coverage 

universe with circa 32% of revenues and 25% of its EBITDA being derived from nonpharmaceutical 

healthcare operations. We believe management will be under some 

pressure/ expectation to maximize shareholder value with Global Established Products 

following signaling to the market that all options will be considered for this 

underperforming unit. Global Established Products is likely margin dilutive and a drag on 

growth by our estimates and could provide significant shareholder value if packaged and 

divested in subunits. 

We see the Vaccines business as being too large and well-integrated with the Core 

Pharma business to be considered as a spin-off. Furthermore the business performs well in 

our view with EBITDA margins and growth comparable to that of the Core Pharma 

business. 

The potential to monetize ViiV is something that management has stated as an option in 

the long-run. This would be dependent on the sales trajectory for new product 

dolutegravir. With the current marketed products in decline, we would expect further JVs 

or in-licensing deals to diversify the business before an IPO, although this may not be 

necessary for a trade sale. 

Consumer Health has already gone through a cycle of divestments (with Lucozade and 

Ribena in process), and is emerging as a growth driver. We would not expect significant 

further actions to be taken, though this remains a possibility. 


80% 

70% 

ViiV, £920m 

60% 

50% 

40% 

30% 

Global Established 

Products, £806m 

Vaccines, £1,395m 

Core Pharma , 

£5,639m 

20% 

10% 

Consumer Health, 

£1,099m 

0% 

-5% -3% -1% 1% 3% 5% 7% 9% 11% 



page 30 of 92 



Healthcare 


May 28, 2013 

Exhibit 42, Exhibit 43, Exhibit 44 give a snapshot of our estimates for 2014E revenues, 

EBITDA and EPS split across five business segments, which we have used as the basis for 

our sum of the parts calculations. 


contribution split (£m) 

Consumer 

Health, 

£5,745m 

ViiV, 

£1,431m 

Global 

Established 

Products, 

£2,977m 


contribution split (£m) 

Consumer 

Health, 

£1,099m 

ViiV, 

£920m 

Global 

Established 

Products, 

£806m 


contribution split (p per share) 

Consumer 

Health, 

16p 

ViiV, 13p 

Global 

Established 

Products, 

11p 

Vaccines , 

£3,917m 

Core 

Pharma , 

£14,583m 

Vaccines, 

£1,395m 

Core 

Pharma , 

£5,639m 

Vaccines, 

20p 

Core 

Pharma , 

80p 




Consumer Health could fetch circa £17.4bn, but seems unlikely following 

recent re-alignment with the group strategy 

GlaxoSmithKline has been active in divesting non-core OTC brands over the last two 

years. In February 2011, management announced its intention to divest its non-core 

Consumer Health OTC products to realise value for shareholders and simplify the business 

by enabling it to focus on priority brands and markets. Over a 13 month period, this was 

achieved through three trade sales split along different geographies. US and Canadian 

non-core OTC brands were sold to Prestige Brands Holdings (PBH, $29.09, NC) for 

£426m, generating net cash proceeds of approximately £242m. European brands were 

sold to Omega Pharma (private) for £391m, generating net cash proceeds of 

approximately £310m. International markets brands were sold to Aspen (APN-JSE, 

ZAR212, NC) for £164m, generating net cash proceeds of approximately £135m. Total 

sales for the OTC brands were approximately £370m in 2011. The total gross cash 

proceeds from the divestment of these products were £981m and the net cash proceeds 

were approximately £690 million. This implies a sales multiple of 2.7x. 

In April 2013, management completed a strategic review of nutritional drinks brands 

Lucozade and Ribena and concluded that the growth potential of these brands, 

particularly outside the ‘core’ Western markets, could be better leveraged by companies 

with existing category presence and infrastructure in these regions. As a result, 

GlaxoSmithKline has decided to pursue the divestment of these brands, subject to the 

realisation of appropriate value for shareholders. Management has referred to these 

brands as being UK or European centric, and lacking a link with the Group strategy or 

Pharmaceuticals business. 

GlaxoSmithKline has not reported full year Lucozade and Ribena sales since 2009, at 

which point the brands generated combined sales of £536m. If this was put on a 2.7x 

sales multiple (similar to what was achieved for the non-core OTC brands), it would imply 

a valuation of £1.45bn. Given the nature of these brands, the 2014E EV/Sales multiple 

may be in the range of those for Coca-Cola (KO, $42.24, NC) or Pepsi Co (PEP, $82.58, 

NC), which are c4.1x and c2.1x respectively. 

page 31 of 92 



Healthcare 


May 28, 2013 

The opportunity for further divestments of individual underperforming or non-core 

Consumer Health brands may be limited after the Lucozade and Ribena disposal and 2012 

non-core OTC disposals (which eliminated over 100 brands). 

We would not expect a wholesale divestment for GlaxoSmithKline’s Consumer Health 

business. Following the recent and planned divestments, the remaining business appears 

to be in-line with management strategy for the Group. While European Pharmaceutical 

growth has been a drag on Group growth, we expect the European Consumer Health 

business to perform well following the divestments, with this segment being accretive to 

the Group’s growth rate moving forward (12A-17E sales CAGR of 7% versus 5% for the 

Group). 

Based on our mean valuation across the SOTP methodologies (Exhibit 46) of 354p, we 

would expect any trade sale of Consumer Health to generate c.£17.4bn. This would 

represent a 2014E sales multiple of 3.0x, EBITDA multiple of 15.8x, and P/E Multiple of 

22.9x. 

IPO route seems logical for ViiV, but not for a number of years 

ViiV is a joint venture between GlaxoSmithKline (76.5% shareholding), Pfizer (13.5%) and 

Shionogi & Co (10%, 4507 JP, ¥2,094, Buy). We expect ViiV to return to sales growth 

from 2014E driven by the launch of integrase inhibitor dolutegravir for HIV. We would 

expect GlaxoSmithKline will wait for several years for the sales growth trajectory of 

dolutegravir and its combination/ reformulations programs to be determined before any 

re-structuring or divestment action is taken. At the Q1’13 results call, Andrew Witty (CEO) 

commented: 

“ViiV, of course, is moving into potentially a very interesting growth phase with the potential 

approval of dolutegravir later in the year. And as a consequence, our view of that business 

will be very largely dictated by what we believe to be the medium-term growth prospects, not 

just from dolutegravir, but also from the follow-on programs, and particularly, the longacting 

programs, which are looking very exciting, actually……….I think the ViiV business 

judgments we need to let some water flow under the bridge around what the real growth 

profile of that will be over the next few years.” 

With many of the base business products in ViiV already in decline, we would expect 

further JVs or in-licensing deals to diversify the business before an IPO, although this may 

not be necessary for a trade sale. Based on our mean valuation across the SOTP 

methodologies (Exhibit 46) of 195p, we would expect any IPO or trade sale of ViiV to 

generate c.£9.6bn. This would represent a 2014E sales multiple of 6.7x, EBITDA multiple 

of 10.4x, and P/E Multiple of 15.1x. 

Global Established Products could generate c.£7bn 

During 2013 GlaxoSmithKline plans to create a Global Established Products portfolio of its 

pharmaceutical tail products, which is expected to include over 50 brands with annual 

sales of around £3bn. The portfolio will be co-ordinated by a distinct team focused on 

driving increased efficiencies and value across this portfolio, including in manufacturing, 

and better coordination of tendering and procurement opportunities. Sales of these 

products will be reported separately from 1 January 2014. 

The establishment of this unit is part of a broader strategy to separate GlaxoSmithKline 

internally into newly launched products, mature large products, and Global Established 

Products. From management commentary at the Q1’13 results, the initial logic behind 

this strategy is for resource allocation, both between these segments and within them in 

order to maximize internal efficiencies and drive as much value out of each segment. 

However, this also creates optionality regarding a potential future divestment of Global 

Established Products as described by Andrew Witty below at the Q1’13 results: 

page 32 of 92 



Healthcare 


May 28, 2013 

“How we choose to execute that optionality remains to be defined, but I would expect that 

you will start to see the focus that we are making on this portfolio -- I think you should expect 

to start to see some things happen as a consequence of that relatively sooner than later. But, 

whether or not we go all the way into something like a ViiV-type structure; and then, whether 

we went all the way to some sort of flotation, I think, is an unanswered question. But, I am 

very happy to have the option opened up as a consequence of this decision.” 

A wholesale divestment of this unit may be difficult because of its diversity of brands and 

geographies. We would expect any divestments to be on a piecemeal basis, such as 

individual brands, therapy areas, or geographies. The type of acquirer may depend on the 

size, constituent and geography of the unit, but could include local Speciality 

Pharmaceuticals or Large-cap Pharmaceuticals players. At the Q1’13 results, Andrew Witty 

commented: 

“In terms of the established products business, there are buyers out there. Whether there are 

buyers out there for a single block like this is a different question, but there will be buyers and 

there are buyers out there for elements of it. One of the interesting questions for the people 

who are going to be focusing on this is, are there elements of this business which would be 

better on the outside of the Company than the inside? 

And, I think I would encourage you to think not just that this is now -- because we've called 

out as a block, that all actions, going forward, will only apply to the block. It may very well 

be that the focus we are giving to the block reveals that there are sub-segments where we 

want to do something different from other sub-segments, and I would just encourage you to 

think that way.” 

GlaxoSmithKline has been down this route in the recent past with the £172m divestment 

of Australian pharmaceutical ‘tail’ products to Aspen (a South African company with a 

large Southern Hemisphere presence) in August 2012 (£121m net of transaction fees and 

tax). These brands generated £83 million in 2011 and approximately £31 million in 

H1’12, suggesting sales multiples of 2.1x and 2.8x (assuming annual 2012 sales of 

£62m), respectively. As with the newly formed division as a whole, these Australian tail 

products have gradually declined over recent years due to local market price reductions 

and generic competition. 

It is also possible that Global Established Products could be used in a Joint Venture with 

other Large Cap Pharmaceutical companies seeking to maximise efficiencies (for example, 

Merck & Co., Sanofi, Pfizer, Novartis), as suggested by Andrew Witty at the Q1’13 results: 

“This type of business is extremely amenable to ViiV-type structures, rather than necessarily 

straight disposal-type structures. And, you could imagine that different companies will have 

broadly similar goals of trying to drive efficiencies and synergies through these sorts of tail 

businesses. So, it may be that those sorts of options have more legs on them than, again, a 

huge big-block sale.” 

Based on our mean valuation across the SOTP methodologies (Exhibit 46) of 145p, we 

would expect any trade sale of Global Established Products to generate c£7.1bn. This 

would represent a 2014E sales multiple of 2.4x, EBITDA multiple of 8.9x, and P/E Multiple 

of 12.8x. 

page 33 of 92 



Target Share Price (GBPp) 

Healthcare 


May 28, 2013 

SOTP Valuation yields c4% upside 

Assuming that a ‚real-world‛ sum of the parts for GlaxoSmithKline is achieved by 

divesting Consumer Health, ViiV and Global Established Products via IPOs or trade sales, 

we estimate that the group is worth circa 1,817p per share, a c4% premium to the current 

share price of 1,749p. We have summarised the various SOTP valuations for 

GlaxoSmithKline in this section in Exhibit 45 alongside our more conventional P/E relative 

valuation for the shares (based on 25-30% 2014E P/E premium to the UK market). 


methodologies (p per share) 

2,000 

1,800 

1,600 

1,400 

1,200 

1,000 

800 

600 

400 

200 

0 

1,900p 1,875p 1,786p 1,791p 

PE (Market 

premium/ discount) 

EV/EBITDA EV/Sales (SOTP) PE (SOTP) 








We note that the Consumer Health, Vaccines and ViiV units would all be expected by us to 

be value creating if separated from the group assuming minimal dis-synergies and the use 

of the proceeds to repurchase shares at the current price. However, we think that there 

would be significant dis-synergies in separating the Vaccines business from the group and 

it is a very unlikely path for management to go down at this time. 

Exhibit 46: Summary of share price evaluation by different valuation methodologies (p per share) 

EV/Sales EV/EBITDA P/E SOTP Mean valuation Value at 

Group 

Multiple 

Multiple 

Arbitrage/ 

share 

Pharmaceuticals 1,191p 1,353p 1,252p 1,265p 1,216p 50p 

Global Established Products 152p 148p 137p 145p 152p (7p) 

Core Pharma 1,039p 1,205p 1,116p 1,120p 1,064p 57p 

Vaccines 319p 312p 315p 316p 263p 52p 

Consumer Health 386p 336p 342p 354p 207p 147p 

ViiV 204p 187p 195p 195p 173p 22p 

Other charges (Interest expense, etc.) NA NA NA NA (110p) NA 

Net cash/ (debt) - Q1'2013 (314p) (314p) (314p) (314p) NA NA 

Group 1,786p 1,875p 1,791p 1,817p 1,749p 271p 


page 34 of 92 



Healthcare 


May 28, 2013 


EV/Sales 

Our EV/Sales valuation for GlaxoSmithKline yields 1,786p on a sum of the parts basis. This 

represents a 2% premium to the current stock price of 1,749p. 

Exhibit 47: EV/Sales SOTP valuation summary (£m or p per share where indicated) 

Sales 2014E (£m) 

% Sales 

Contribution 

EV/Sales Multiple 

Implied value 

(£m) 

Implied Share 

Price (p) 

Pharmaceuticals £17,561m 61% 3.3x £58,485m 1,191p 

Global Established Products £2,977m 10% 2.5x £7,443m 152p 

Core Pharma £14,583m 51% 3.5x £51,042m 1,039p 

Vaccines £3,917m 14% 4.0x £15,667m 319p 

Consumer Health £5,745m 20% 3.3x £18,959m 386p 

ViiV £1,431m 5% 7.0x £10,018m 204p 

Group Sales £28,654m 100% £103,129m 

Net Debt - Q1'13A -£15,406m -314p 


Group EV/Sales (SOTP) valuation £87,723m 1,786p 


EV/EBITDA 

Our EV/EBITDA valuation for GlaxoSmithKline yields 1,875p on a sum of the parts basis. 

This represents a 7% premium to the current stock price of 1,749p. 

Exhibit 48: EV/EBITDA SOTP valuation summary (£m or p per share where indicated) 

EBIDTA 

EBITDA 2014E 

(£m) 

EBITDA 

Contribution 

2014E 

EV/EBITDA 

2014 

Implied value 

(£m) 

Implied Share 

Price (p) 

Pharmaceuticals £6,445m 65.4% 10.3x £66,467m 1,353p 

Global Established Products £806m 8.2% 9.0x £7,258m 148p 

Core Pharma £5,639m 57.2% 10.5x £59,210m 1,205p 

Vaccines £1,395m 14.2% 11.0x £15,346m 312p 

Consumer Health £1,099m 11.1% 15.0x £16,483m 336p 

ViiV £920m 9.3% 10.0x £9,196m 187p 

Total EBITA £9,859m 100% £107,493m 2,188p 

Net Debt - Q1'13A -£15,406m -314p 

Implied Market Cap 92,087 


Group EV/EBITDA (SOTP) valuation £92,087m 1,875p 



Our P/E multiple based valuation for GlaxoSmithKline yields 1,791p on a sum of the parts 

basis. This represents a 2% premium to the current stock price of 1,749p. 

Exhibit 49: P/E SOTP valuation summary (£m or p per share where indicated) 

P/E (SOTP) Summary CORE Op. Profit 

2014E 

Operating 

Margin 2014E 

Net income 

2014E 

CORE EPS 2014E P/E multiple Valuation/ 

Share (p) 

Pharmaceuticals £5,807m 33% £4,449m 91p 13.7x 1,252p 

Global Established Products £727m 24% £557m 11p 12.0x 137p 

Core Pharma £5,081m 35% £3,893m 80p 14.0x 1,116p 

Vaccines £1,257m 32% £963m 20p 16.0x 315p 

Consumer Health £990m 17% £759m 16p 22.0x 342p 

ViiV £829m 58% £635m 13p 15.0x 195p 

Others (net financial income) -£508m - -£387m -8p - NA 

Net cash/ (debt) - Q1'2013 - - - - - -314p 

Total £8,883m 31% £6,419m 131p 1,791p 


page 35 of 92 



Healthcare 


May 28, 2013 

Johnson & Johnson (Hold; PT $97) 

Conglomerate premium neuters restructuring 

options 

Johnson & Johnson management pride themselves in being the largest diversified 

healthcare company with nearly 250 operating companies. The company has enjoyed a 

conglomerate premium to the US market for most of the last decade, trading at a 10-20% 

premium. However the historical premium range is being challenged at present as it 

trades at a premium of only 4% at present. Whilst diversification has helped the company 

weather various economic cycles, we have seen some action from management to focus 

the Group’s activities recently, as is evident from the announcement on 20 th January that 

they have initiated a strategic review of the Ortho Clinical Diagnostic business. We believe 

the management will make a decision to either divest the business to a suitable buyer or 

separate it as a stand-alone unit through an IPO by the end of 2013. 

Other than the Ortho Clinical Diagnostics unit we see few obvious candidates for further 

restructuring given management’s previous communications that this is unlikely. We see 

the Consumer Health business as an attractive spin-out option, which could potentially 

occur once all the manufacturing issues have been remedied and profitability has been 

restored to normal. Based on our sum of the-parts analysis the Consumer Health business 

could deliver significant upside of c$8.22 per share if proceeds from a separation were 

used to repurchase shares. However, our analysis also implies that the stump 

Pharmaceuticals/ MD&D businesses might offset some of these gains as they potentially 

fall in value by c$5.68 per share on a combined basis once some of the conglomerate 

premium is lost. 

Our mean sum of the parts valuation for Johnson & Johnson is $91.38 per share versus 

the current price of $86.82 and our official Target Price of $97. 

Divesting laggards to focus on growth units 

The implementation of Medical Device Tax as part of the Affordable Care Act in addition 

to the ongoing economic pressures within developed countries leading to a steady 

decline in the physician office visits has put pressure on the diagnostics industry. This is 

easily apparent within the Ortho Clinical Diagnostics business unit, which has been 

declining steadily since 2009 and declined by a further 3% operationally in 2012. 

Furthermore, it is one of the smallest businesses within the Group context at the EBITDA 

level (Exhibit 50). 

Consumer Healthcare has been the other drag on the group since the start of 

manufacturing issues in 2009, though its recovery is expected to drive an above group 

average growth rate at the EBITDA level. With recent successes from the pipeline, the Core 

Pharma business is expected to grow at a decent rate over the next few years despite 

headwinds from several LOEs. The acquisition of Synthes is also expected to aid the 

growth of the Medical Devices unit that makes up circa 30% of Group EBITDA. 

page 36 of 92 



Healthcare 



May 28, 2013 


50% 

40% 

30% 

20% 

10% 

Ortho Clinical 

Diagnostics 

$336m 

Core Pharma 

$11,509m 


$8,169m 

Diagnostics 

$1,249m 


$4,333m 

0% 

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 




EBITDA and EPS split across the five business segments, which we have used as the basis 

for our sum of the parts calculations. 



Consumer 

Health 

$15,438m 

Diagnostics 

$5,742m 

Ortho 

Clinical 

Diagnostics 

$1,980m 



Consumer 

Health 

$2,763m 

Diagnostics 

$1,249m 

Ortho 

Clinical 

Diagnostics 

$336m 



Consumer 

Health 

$0.66 

Diagnostics 

$0.30 

Ortho 

Clinical 

Diagnostics 

$0.08 

Medical 

Devices 

$22,140m 

Core 

Pharma 

$28,698m 

Medical 

Devices 

$8,169m 

Core 

Pharma 

$11,509m 

Medical 

Devices 

$1.96 

Core 

Pharma 

$2.76 




Ortho Clinical Diagnostics could fetch $3.5bn 

Management announced initiation of a strategic review of the business unit on 20 th 

January. We believe the management could make a decision regarding the route of 

divestment potentially by the year end, if not earlier. We would expect that the 

divestment could be achieved through a trade sale to another industry player, potentially, 

Abbott, Bayer, Novartis, or Roche, though FTC issues may be an issue in many cases. We 

believe that such an asset could fetch circa $3.5bn (c1.8x sales; c10.5x EBITDA; 5.8x 

earnings). 

page 37 of 92 



Healthcare 



May 28, 2013 

Consumer could potentially go the IPO route for an estimated $51bn 

Consumer Health could potentially be divested through a public offering as a stand alone 

company. The business unit generated $16bn in sales in 2008 growing at high singledigit 

rate before the start of the OTC product manufacturing issues. Once the 

manufacturing issues are resolved the business could potentially get to a mid-single-digit 

growth rate. A trade sale could be another potential route, though we expect that antitrust 

and taxation issues might prevent this. We would expect that such an asset would 

would be worth at least $51bn (c3.3x sales; c18.5x EBITDA; c27.5x earnings) as a stand 

alone entity. 

On this basis, we estimate that such a transaction would be c9% accretive to Johnson & 

Johnson if the net proceeds were used to repurchase its own shares. However, our 

analysis also implies that the stump Pharmaceuticals/ MD&D businesses might offset 

some of these gains as they potentially fall in value by c$5.68 per share on a combined 

basis once some of the conglomerate premium is lost. 


Assuming that a ‚real-world‛ sum of the parts for Johnson & Johnson is achieved by 

selling its Ortho Clinical Diagnostics business and spinning off Consumer Health via an 

IPO, we estimate that the group is worth circa $91.38 per share, a c5% premium to the 

current share price. We have summarised the various SOTP valuations for Johnson & 

Johnson in this section in Exhibit 54 alongside our more conventional P/E relative 

valuation for the shares (based on a 10-15% 2014E P/E premium to the US market). 



$100 

$90 

$80 

$70 

$60 

$50 

$40 

$30 

$20 

$10 

$0 

$97.00 


$90.26 $92.03 $91.86 

PE REL EV/sales EV/EBITDA P/E multiple 


included in this report in Exhibit 56, Exhibit 57 and Exhibit 58. Exhibit 55 summarises 

these as well as providing a comparison of how the average of these valuations for each 

business unit compares to their valuation based on our estimate of earnings on the 

current group multiple. We note that the Ortho Clinical Diagnostics and Consumer Health 

units would be expected by us to be value creating if separated from the group assuming 

minimal dis-synergies and the use of the proceeds to repurchase shares at the current 

price. 

page 38 of 92 



Healthcare 


May 28, 2013 



Valuation 


Multiple 

Multiple 

Arbitrage/ 

share 

Core Pharma $37.14 $40.26 $38.65 $38.68 $40.08 ($1.40) 

Medical Devices $24.78 $25.72 $27.43 $25.98 $28.45 ($2.47) 

Consumer Health $18.90 $17.40 $17.23 $17.84 $9.62 $8.22 

Diagnostics $6.03 $5.46 $5.39 $5.63 $4.35 $1.28 

Ortho Clinical Diagnostics $1.39 $1.18 $1.13 $1.23 $1.17 $0.06 

Non-operating income/(expense) NA NA NA NA $3.14 NA 

Net cash/ (debt) - Q1 2013A $2.02 $2.02 $2.02 $2.02 NA NA 

Group $90.26 $92.03 $91.86 $91.38 $86.82 $5.68 




Our EV/Sales valuation for Johnson & Johnson yields $90.26 on a sum of the parts basis. 



Sales 

2014E ($m) 

% Sales 

Contribution 


share ($) 


Medical Devices $22,140m 30% 3.2x $70,848m $24.78 

Consumer Health $15,438m 21% 3.5x $54,031m $18.90 

Diagnostics $5,742m 8% 3.0x $17,226m $6.03 

Ortho Clinical Diagnostics $1,980m 3% 2.0x $3,961m $1.39 

Group Sales $73,997m 100% $252,247m $88.24 

Net cash/ (debt) - Q1 2013A $5,776m $2.02 





Our EV/EBITDA valuation for Johnson & Johnson yields $92.03 on a sum of the parts basis. 



EBITDA 

2014E 

($M) 

EBITDA 

Contribution 

2014E 

EV/EBITDA 

2014 


Valuation per 

share ($) 

Core Pharma $11,509m 47.9% 10.0x $115,087m $40.26 

Medical Devices $8,169m 34.0% 9.0x $73,521m $25.72 

Consumer Health $2,763m 11.5% 18.0x $49,735m $17.40 

Diagnostics $1,249m 5.2% 12.5x $15,617m $5.46 

Ortho Clinical Diagnostics $336m 1.4% 10.0x $3,364m $1.18 


Net cash/ (debt) - Q1 2013A $5,776m $2.02 

Implied Market Cap 

$263,100m 




page 39 of 92 



Healthcare 


May 28, 2013 



Operating 

Profit 2014E 

Operating 

Margin 2014E 

Net Income 

2014E 

Division 


Our P/E multiple based valuation for Johnson & Johnson yields $91.86 on a sum of the 

parts basis. This represents a 6% premium to the current stock price of $86.82. 

EPS 

2014E 

P/E multiple 

Valuation per 

share ($) 


Medical Devices $6,876m 31% $5,494m $1.96 14.0x $27.43 

Consumer Health $2,326m 15% $1,858m $0.66 26.0x $17.23 

Diagnostics $1,052m 18% $840m $0.30 18.0x $5.39 

Ortho Clinical Diagnostics $283m 14% $226m $0.08 14.0x $1.13 

Non-operating income/(espense) $764m - $611m $0.22 - NA 

Net cash/ (debt) – Q1 2013A - - - - - $2.02 

Total $20,224m 27% $16,769m $5.98 15.4x $91.86 


page 40 of 92 



Healthcare 


May 28, 2013 

Merck & Co. (Buy; PT $54) 

Under Pressure To Act; Upgrade to Buy from Hold 

Merck & Co.’s management are likely to come under increasing pressure to divest some 

of its non-Pharmaceutical businesses as the company underperforms its main peer, Pfizer, 

which has followed a more aggressive pathway in this regard. We see some specific 

opportunities in Consumer and Animal Health that in aggregate could generate c$23.4bn 

of pre-tax cash through a disposal and IPO respectively. If net cash proceeds were used to 

repurchase shares we estimate that these transactions would be circa 6% accretive to 

earnings. Whilst the divestments might be slightly accretive to the group EBITDA margin, 

they might negatively impact the growth of the remaining group entity to a minor 

degree. 

Whilst these transactions may make sense for shareholders in the short term, we sense 

that management are currently unwilling to pursue this course of action. However, if the 

Pharmaceuticals business continues to disappoint in R&D through 2013, we suspect that 

insurmountable pressure to change this strategy would likely ensue on a 2014 timeframe. 

Our mean sum of the parts valuation for Merck & Co. is $54.30 per share versus the 

current price of $47.16 and our official Target Price of $54. Merck & Co. continues to 

have one of the most attractive yields in the US Large Cap Pharmaceuticals universe at 

3.7% versus the sector average of 3.3%. Based on our valuation and belief that pressure 

to increase returns to shareholders will lead to divestments we have raised our PT to $54 

from $48 and raised our rating to Buy from Hold. 

Consumer and Animal Health present potential divestments 

Merck & Co. is one of the more diversified companies within our coverage universe with 

circa 26% of revenues and 22% of its EBITDA being derived from non-pharmaceutical 

healthcare operations. With management under some pressure to replicate the asset 

disposals made at Pfizer recently, we see a couple of specific opportunities in Consumer 

Health and Animal Health. Both businesses are relatively small within the group context at 

the EBITDA level (Exhibit 14) and are margin dilutive on a group basis by our estimates. As 

recently as the Q1’13 analyst call, CEO Ken Frazier stated: 

“I will start with my thoughts on consumer. My thoughts about the critical mass issue really 

have not changed. I think that continues to be an issue that we have to look at. And as I've 

said before, we periodically assess our business strategy based on the fit and the business 

opportunity that we see. As I said in my earlier comments, we believe that this quarter our 

business diversity actually helped us, it was complementary, it contributed to the top- and the 

bottom-line growth that we need to have. But as always, we have to look at all of our 

portfolio and make assessments about what is the best way to create shareholder value going 

forward” 

We see the Vaccines business as being too large and well-integrated with the 

Pharmaceuticals business to be considered as a spin-off. Furthermore the business 

performs well in our view with comparable margins to the Pharmaceuticals business and 

decent growth prospects for the future. 

page 41 of 92 



Healthcare 



May 28, 2013 


50% 

45% 

40% 

35% 

30% 

25% 

20% 

Core Pharma 

$12,857m 

Animal Health 

$993m 

Vaccines 

$2,068m 


$629m 

15% 

10% 

5% 

0% 

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 








Consumer 

Health 

$2,162m 

Vaccines 

$5,759m 

Animal 

Health 

$3,771m 



Vaccines 

$2,068m 

Consumer 

Health 

$629m 

Animal 

Health 

$993m 



Vaccines 

$0.49 

Consumer 

Health 

$0.15 

Animal 

Health 

$0.23 


Core 

Pharma 

$32,714m 


Core 

Pharma 

$12,857m 


Core 

Pharma 

$3.03 

Consumer could fetch circa $9.4bn in a heated auction 

We would expect that any divestment of the Consumer Health business would be 

achieved through a trade sale to another industry player, potentially, GlaxoSmithKine, 

Pfizer, Johnson & Johnson, Bayer, Reckitt Benckiser [RB LN, 4,850p, Hold], Novartis or 

Sanofi. We would expect that such an asset would be highly sought after by such 

companies and would fetch at least $9.4bn (c4.4x sales; c15x EBITDA; c22.1x earnings) in 

a heated auction. 

On this basis, we estimate that such a transaction would be circa 2-3% accretive to Merck 

& Co. if the net proceeds were used to repurchase its own shares. 

page 42 of 92 



Healthcare 

Valuation/Share 


May 28, 2013 

IPO route seems logical for Animal Health; We estimate $14.1bn valuation 

Animal Health could logically go down the IPO route, given the trail already blazed by 

Pfizer with Zoetis. A trade sale could be another potential route, though we expect that 

anti-trust and taxation issues might prevent this, just as likely occurred with Zoetis. 

Potential acquirers could include Eli Lilly, Bayer, Novartis, GlaxoSmithKline and Johnson & 

Johnson, in our view. 

We estimate that Merck Animal Health could be worth circa $14.1bn (c3.7x sales; c14.2x 

EBITDA; c21.0x earnings) if separatated as a spin off or sold to another company. On this 

basis, we estimate that such a transaction would be circa 3-4% accretive to Merck & Co. if 

the net proceeds were used to repurchase its own shares. 


Assuming that a ‚real-world‛ sum of the parts for Merck & Co. is achieved by selling its 

Consumer Health business and spinning or selling off Animal Health, we estimate that the 

group is worth circa $54.30 per share, a c15% premium to the current share price. We 

have summarised the various SOTP valuations for Merck in this section in Exhibit 63 

alongside our more conventional P/E relative valuation for the shares (based on 0-5% 

2014E P/E premium to the US market). 



$60 

$50 

$54.00 $53.74 $55.33 $53.85 

$40 

$30 

$20 

$10 

$0 








We note that the Consumer Health, Vaccines and Animal Health units would all be 

expected by us to be value creating if separated from the group assuming minimal dissynergies 

and the use of the proceeds to repurchase shares at the current price. However, 

as already described, we think that there would be significant dis-synergies in separating 

the Vaccines business from the group and it is a very unlikely path for management to go 

down at this time. 

page 43 of 92 



Healthcare 


May 28, 2013 



Valuation 


Multiple 

Multiple 

Arbitrage/ 

share 

Core Pharma $37.24 $39.72 $37.94 $38.30 $38.86 ($0.56) 


Vaccines $7.49 $7.40 $7.32 $7.40 $6.25 $1.15 

Animal Health $4.91 $4.20 $4.69 $4.60 $3.00 $1.60 


Net cash/ (debt) - 2012A $0.94 $0.94 $0.94 $0.94 NA NA 

Group $53.74 $55.33 $53.85 $54.30 $47.15 $3.36 




Our EV/Sales valuation for Merck & Co. yields $53.74 on a sum of the parts basis. This 



Sales 

2014E ($m) 

% Sales 

Contribution 

EV/Sales 

Multiple 


Valuation per 

share ($) 



Vaccines $5,759m 13% 4.0x $23,034m $7.49 

Animal Health $3,771m 8% 4.0x $15,084m $4.91 

Group Sales $44,405m 100% $162,345m $52.80 






Our EV/EBITDA valuation for Merck & Co. yields $55.33 on a sum of the parts basis. This 



EBITDA 

2014E 

($M) 

EBITDA 

Contribution 

2014E 

EV/EBITDA 

2014 


Valuation per 

share ($) 

Core Pharma $12,857m 77.7% 9.5x $122,143m $39.72 

Consumer Health $629m 3.8% 15.0x $9,432m $3.07 

Vaccines $2,068m 12.5% 11.0x $22,752m $7.40 

Animal Health $993m 6.0% 13.0x $12,907m $4.20 






page 44 of 92 



Healthcare 


May 28, 2013 


Our P/E multiple based valuation for Merck & Co. yields $53.85 on a sum of the parts 

basis. This represents a 19% premium to the current stock price of $47.16. 



Operating Operating Margin Net Income 2014E 

Profit 2014E 

2014E 

Division 

EPS 

2014E 

P/E multiple 

Valuation per 

share ($) 


Consumer Health $549m 25% $427m $0.15 20.0x $2.97 

Vaccines $1,806m 31% $1,405m $0.49 15.0x $7.32 

Animal Health $867m 23% $674m $0.23 20.0x $4.69 

Non-operating income/ (expense) ($677m) - ($642m) ($0.22) - NA 

Net cash/ (debt) - 2012A - - - - - $0.94 

Total $14,447m 33% $10,597m $3.68 14.6x $53.85 


page 45 of 92 



Healthcare 



May 28, 2013 

Novartis (Buy; PT CHF88) 

Significant Trapped Value Waiting To Be Released 

We have a long held view that there is significant trapped value within Novartis and that it 

could begin to be released through asset disposals as soon as H2’13. Novartis was one of 

the most proactive companies at diversifying its revenue base ahead of its patent cliff, 

which centers around Diovan. We see five specific assets, namely the Roche bearer share 

stake, Vaccines, Diagnostics, OTC Consumer Health and Animal Health that could be ripe 

for disposals or spin-offs over the next 2-3 years. Whilst these businesses could be worth 

up to $45bn (c25% of Group market capitalization) if sold or spun-out, they represent 

only c10% of our 2014E CORE EPS. 

We believe that management is already headed towards this direction and that the recent 

departure of Chairman Vasella does nothing but facilitate the acceleration of this 

inevitable process. We calculate that if the net cash proceeds from all of these potential 

disposals were used to repurchase shares we estimate that these transactions would be 

circa 14% accretive to earnings. Whilst the divestments might be slightly accretive to the 

group EBITDA margin, they would also likely negatively impact the growth of the 

remaining group entity to a minor degree. 

We believe that engaging in just one of these disposals, such as the Roche stake or the 

Vaccines business, would ‚release the flood gates‛ on investor sentiment over the 

potential for further disposals across the group to be made. 

Our mean sum of the parts valuation for Novartis is CHF84.59 per share versus the current 

price of CHF71.25 and our official Target Price of CHF88. 

Divisional satellites waiting to break orbit 

Exhibit 68 illustrates how Novartis’ Core Pharmaceuticals and Alcon units dwarf the 

smaller satellite businesses in Sandoz (split into oral solids and ‚Difficult To Make‛ (DTM) 

products), Consumer Health (split into OTC and Animal Health) and Vaccines & 

Diagnostics. However, we understand that Sandoz, the largest and most synergistic of 

these divisions, is very unlikely to be separated from the group and therefore we have not 

considered it further in this regard other than showing its SOTP valuation on a straight 

market comparable basis. 


50% 

45% 

40% 

35% 

30% 

25% 

20% 

15% 

10% 

5% 

$9,923m 


Alcon 

$4,282m 

Sandoz (Bio/DTM), 

$1,398m 

Diagnostics, $147m 

Animal Health, $223m 


$334m 

Sandoz (oral), $466m Vaccines, $63m 

0% 

-10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 



page 46 of 92 



Healthcare 


May 28, 2013 

We believe that the Vaccines, OTC Consumer and Animal Health units are the most logical 

divestment opportunities for Novartis over the next few years. We also expect that 

Novartis could receive an attractive offer for its bearer share stake in Roche by as soon as 

H2’13, should Roche wish to pursue a share repurchase program. We note that Joe 

Jimenez also recently commented at the Q1’13 result call that: 

“Now, you did mention the change of Chairman and changes in the Company. And what 

I've said previously is that the strategy of the Company is sound, that we are a science-based 

company, we're focused on innovation. And we are focused in high-growth segments of 

healthcare. So while the strategy, I don't anticipate the strategy of the Company to move, the 

way that we execute that and the way that that looks could potentially change as we 

evaluate our portfolio, as we evaluate the market as we evaluate a lot of things over the next 

24 and 36 months”……………..and……………..“Just in terms of the Roche stake when you -- to 

define strategic value, first, to have a 33% voting stake in one of the great companies in terms 

of healthcare or Pharma, would mean that for that company to issue shares to do something, 

they would have to have the agreement of Novartis, so there's an element of strategy when 

you think about the let's say, freedom to operate that is valuable. I've also said that you 

can't re-create that stake in the market today, so to me, it has value that is beyond the 

market price. And so that doesn't mean we would never exit it. What it does mean is that the 

value created, whether it's dollars or whether it's something else would have to compensate 

Novartis shareholders for that value and the fact that it's not just the market price.” 

We understand that in terms of specifics, management need to remain tight-lipped until 

Chairman Reinhardt joins in August. We would expect a strategic and portfolio review 

during H2’13 after which we believe the Vaccines business could be targeted for sale 

during 2014, whilst timing of the OTC and Animal Health disposals would be more likely 

to be on a 2015 timeframe at the earliest given the recent manufacturing issues. 



Vaccines, 

$1,731 

Sandoz 

(biosimilars & 

DTM), $4,773 

Sandoz (oral 

solids), $4,773 

Diagnostics, 

$488 

Consumer 

Health, $3,155 

Animal 

Health, $1,352 



Vaccines, $63 

Sandoz 


DTM), $1,398 

Sandoz (oral 

solids), $466 

Diagnostics, 

$147 

Consumer 

Health, $334 


$223 



Diagnostics, 

$0.05 

Vaccines, $0.02 

Sandoz 


DTM), $0.46 

Sandoz (oral 

solids), $0.15 

Consumer 

Health, $0.11 


$0.07 

Roche, $0.32 

Alcon, $4,282 

Alcon, 

$11,147 

Pharma, 

$32,213 


$9,923 

Alcon, $1.40 


$3.23 




page 47 of 92 



Healthcare 


May 28, 2013 

Roche Bearer Shares could be disposed of as soon as H2’13 

We have previously published extensive reports on the rational and potential structure of 

a disposal of the Roche Bearer share stake by Novartis to Roche (see our note ‚Buy or Buy 

Back‛, 27 th September, 2012). We continue to believe that Roche could pay a substantial 

premium for the stake of circa 30%, valuing it at c$18.8bn versus the current market 

valuation of $14.5bn or implied valuation within Novartis of $10.8bn. On this basis, we 

estimate that such a transaction would be circa 4.3% accretive to Novartis if the net 

proceeds were used to repurchase its own shares. 

Vaccines could fetch circa $6.9bn in a heated auction 

We would expect that any divestment of the Vaccines business would be achieved 

through a trade sale to another industry player, with Pfizer and Merck & Co. being the 

most likely acquirers given their lower exposure to Flu and meningitis vaccines compared 

to Sanofi and GlaxoSmithKline. Johnson & Johnson could also have significant interest in 

this asset as they have little exposure to mainstream vaccines, other than through their 

acquisition of Crucell in 2011. We would expect that bidding for this business would be 

very competitive, given the potential use of offshore cash to acquire it. 

On this basis we value the Vaccines unit at $6.9bn (c4.0x EV/Sales). Given that profit 

expectations are currently almost non-existent it is not realistic to attempt valuing the 

business on either a EV/EBITDA or P/E multiples. We feel that this is the correct approach 

as most of the infrastrucutre would be removed if bought by an acquirer, who would in 

turn be much more focused on the revenues on offer. We estimate that such a transaction 

would be circa 3.3% accretive to Novartis if the net proceeds were used to repurchase its 

own shares. 

OTC Consumer also looks like a prime disposal target after it recovers 

We would expect that the most logical route for a divestment of Novartis’ OTC Consumer 

Health business would be through a trade sale to another industry player, potentially, 

GlaxoSmithKline, Pfizer, Johnson & Johnson, Bayer, Reckit Benckiser, Merck & Co. or 

Sanofi. Timing would likely not be before 2015 as the unit is still recovering revenues and 

margins following the recent manufacturing issues at its Lincoln plant. 

We would expect that such an asset would be highly sought after by such companies and 

would fetch at least $12.6bn (c4.0x sales) in a competitive auction. With profitability of 

the division still severely impacted by the Lincoln problems it is not practical to attempt 

valuing the business on either a EV/EBITDA or P/E multiples at present. On this basis, we 

estimate that such a transaction would be circa 4.3% accretive to Novartis if the net 

proceeds were used to repurchase its own shares. 

Animal Health disposal could likely follow the same timeline as OTC 

Whilst other larger players such as Sanofi, Eli Lilly and Merck & Co. might be better suited 

to pursue the IPO route for their Animal Health businesses, we believe that the greatest 

value for Novartis’ unit might be through a trade sale due to its smaller size. With a strong 

focus in parasiticides, we believe that the most logical acquirers could include Eli Lilly, 

Boehringer Ingelheim, Merck and Zoetis. 

We estimate that Novartis’ Animal Health could be worth c5.4bn (c4x sales) if sold to 

another industry player. With profitability also impacted by the problems at Lincoln, we 

view a sales multiple as the most logical way to currently value the business. On this 

basis, we estimate that such a transaction could be circa 1.6% accretive to Novartis if the 

net proceeds were used to repurchase its own shares. 

page 48 of 92 



Healthcare 

Valuation/Share (CHF) 


May 28, 2013 

SOTP Valuations yield circa 19% upside 


calculations. As summarized in Exhibit 72, utilizing ‚real-world‛ valuation multiples, these 

different valuation methodologies provide a valuation range of CHF83.67 to CHF85.26 

per share, with a mean valuation of CHF84.59 per share. This represents an upside of 

c19%, relative to the current share price of CHF71.25. 


methodologies (CHF per share) 

CHF100 

CHF90 

CHF80 

CHF70 

CHF60 

CHF50 

CHF40 

CHF30 

CHF20 

CHF10 

CHF0 

CHF88.00 

CHF84.86 CHF83.67 CHF85.26 

PE (REL) EV/Sales (SOTP) EV/EBITDA P/E (SOTP) 




shown below in Exhibit 74, Exhibit 75 and Exhibit 76. Exhibit 73 provides a summary of 

these different methodologies, as well as a comparison of how the average of these 

valuations for each business unit compares to the valuation based on our estimate of 

earnings on the current group multiple. 

Based on these valuations, we note that splitting out any of the divisions already 

highlighted above should generate varying degrees of earnings accretion, assuming that 

the cash raised is reinvested in share buybacks at the current share price and no dissynergies 

are created. Nevertheless, the single biggest valuation increase could come from 

Alcon, which appears to be undervalued on the group multiple, reflecting a degree of 

conglomerate discount. This lower multiple is likely to be partly the result of the 

difficulties currently being encountered within the Vaccines and Consumer businesses. 

Our valuation work suggests that if Alcon’s value was fully reflected in the rating, it could 

be worth circa $59bn (5.3x sales, 13.8x EBITDA, 17.6x earnings), representing circa 

CHF4.62 per share upside to the share price. On the assumption Alcon is not going to be 

disposed of, this incremental value would likely only materialise if other underperforming 

assets are disposed of so allowing a fuller multiple to be attributed to the group as a 

whole. 

page 49 of 92 



Healthcare 


May 28, 2013 

Exhibit 73: Summary of share price evaluation by different valuation methodologies (CHF per share) 


Valuation 

Value at 

Group 

Multiple 

Multiple 

Arbitrage / 

Share 

Pharmaceuticals CHF43.00 CHF41.63 CHF42.14 CHF42.26 CHF41.36 CHF0.90 

Alcon CHF21.26 CHF22.87 CHF23.48 CHF22.53 CHF17.92 CHF4.62 

Sandoz Oral Solids CHF2.73 CHF1.78 CHF1.72 CHF2.07 CHF1.96 CHF0.11 

Sandoz Biosimilars & DTM CHF6.37 CHF5.86 CHF6.36 CHF6.20 CHF5.83 CHF0.37 

Consumer (OTC) CHF4.81 *CHF4.81 *CHF4.81 CHF4.81 CHF1.39 CHF3.42 

Consumer (Animal Health) CHF2.06 *CHF2.06 *CHF2.06 CHF2.06 CHF0.93 CHF1.13 

Vaccines CHF2.64 *CHF2.64 *CHF2.64 CHF2.64 CHF0.28 CHF2.37 

Diagnostics CHF0.47 CHF0.50 CHF0.54 CHF0.50 CHF0.61 (CHF0.11) 

Roche Bearer shares ^CHF7.19 ^CHF7.19 ^CHF7.19 CHF7.19 CHF4.11 CHF3.09 

Other charges (Interest expense, etc) NA NA NA NA (CHF3.15) NA 

Net Debt - Q1 2013E (CHF5.69) (CHF5.69) (CHF5.69) (CHF5.69) NA NA 

Total CHF84.86 CHF83.67 CHF85.26 CHF84.59 CHF71.23 CHF15.90 

* Valuation based on EV/sales multiple as 2014E EBITDA & earnings are unsuitable for valuation purposes. 

^ Roche bearer shares valued at 30% premium to market value 



EV/Sales SOTP 

Our EV/Sales valuation for Novartis produces a CHF84.86 per share valuation, on a sum of 

the parts basis. This represents a c19% premium to the current share price of CHF71.25. 

Exhibit 74: EV/Sales SOTP valuation summary ($m, $ or CHF per share where indicated) 

Division 

Sales 

2014E ($m) 

EV/Sales 

Multiple 

Implied value ($m) 

Valuation per 

share (CHF) 

Pharmaceuticals $32,213m 3.5x $112,746m CHF43.00 

Alcon $11,147m 5.0x $55,735m CHF21.26 

Sandoz (oral solids) $4,773m 1.5x $7,159m CHF2.73 

Sandoz (biosimilars & DTM) $4,773m 3.5x $16,704m CHF6.37 

Vaccines & Diagnostics (Vaccines) $1,731m 4.0x $6,925m CHF2.64 

Vaccines & Diagnostics (Diagnostics) $488m 2.5x $1,221m CHF0.47 

Consumer Health (OTC) $3,155m 4.0x $12,622m CHF4.81 

Consumer Health (Animal Health) $1,352m 4.0x $5,409m CHF2.06 

Group Sales $59,632m $218,519m CHF83.35 

Roche stake (at 30% market premium) $18,858m CHF7.19 

Net Debt - Q1 2013E ($14,909m) (CHF5.69) 

Average shares outstanding (Q1 2013A) 2,441 

Group EV/Sales (SOTP) valuation $222,469m CHF84.86 


page 50 of 92 



Healthcare 


May 28, 2013 

EV/EBITDA SOTP 

Our EV/EBITDA valuation for Novartis produces a CHF83.67 per share valuation, on a sum 

of the parts basis. This represents a c17% premium to the current share price of 

CHF71.25. 

Exhibit 75: EV/EBITDA SOTP valuation summary ($m, $ or CHF per share where indicated) 

EBITDA 

2014E 

($M) 

EBITDA 

Contribution 

2014E 

EV/EBITDA 

2014 

Implied value 

($m) 

Valuation per 

share (CHF) 

Pharmaceuticals 9,923 58.9% 11.0x $109,148m CHF41.63 

Alcon 4,282 25.4% 14.0x $59,948m CHF22.87 

Sandoz (oral solids) 466 2.8% 10.0x $4,659m CHF1.78 

Sandoz (biosimilars & DTM) 1,398 8.3% 11.0x $15,374m CHF5.86 

Vaccines & Diagnostics (Vaccines) 63 0.4% *NA *$6,925m *CHF2.64 

Vaccines & Diagnostics (Diagnostics) 147 0.9% 9.0x $1,319m CHF0.50 

Consumer Health (OTC) 334 2.0% *NA *$12,622m *CHF4.81 

Consumer Health (Animal Health) 223 1.3% *NA *$5,409m *CHF2.06 

Total (ex-Corporate) 16,835 100% 

Corporate 

Total EBITDA $16,835m 100% $215,404m CHF82.16 

Roche stake (at 30% market premium) $18,858m CHF7.19 

Net Debt - Q1 2013E ($14,909m) (CHF5.69) 

Average shares outstanding (Q1 2013A) 2,441 

Group EV/EBITDA (SOTP) valuation $219,353m CHF83.67 




Our P/E multiple based valuation for Novartis produces a CHF85.26 per share valuation, 

on a sum of the parts basis. This represents a c20% premium to the current share price of 

CHF71.25. 

Exhibit 76: P/E SOTP valuation summary ($m, $ or CHF per share where indicated) 


Division 

Net Income 

2014E 

CORE EPS 

2014E 

P/E multiple 

CORE Adj. 

Op. Profit 

2014E 

Adj. 

Operating 

Margin 

2014E 

Valuation 

per share 

($) 

Valuation 

per share 

(CHF) 

Pharmaceuticals $9,111m 28% $7,745m $3.23 14.0x $45.26 CHF42.14 

Alcon $3,932m 35% $3,356m $1.40 18.0x $25.22 CHF23.48 

Sandoz Oral Solids $428m 9% $368m $0.15 12.0x $1.84 CHF1.72 

Sandoz Biosimilars & DTM $1,283m 27% $1,091m $0.46 15.0x $6.83 CHF6.36 

Consumer (OTC) $307m 10% $261m $0.11 *NA *$5.17 *CHF4.81 

Consumer (Animal Health) $205m 15% $174m $0.07 *NA *$2.22 *CHF2.06 

Vaccines $58m 3% $52m $0.02 *NA *$2.84 *CHF2.64 

Diagnostics $135m 28% $115m $0.05 12.0x $0.58 CHF0.54 

Roche stake (at 30% market premium) $0m $769m $0.32 $7.73 CHF7.19 

Other charges (Interest expense, etc) $0m ($476m) ($0.25) NA 

Net Debt - Q1 2013E 

(CHF5.69) 

Total $15,458 26% $13,454 $5.57 $97.68 CHF85.26 



page 51 of 92 



Healthcare 


May 28, 2013 

Pfizer (Buy; PT $33) 

Breaking up is hard to do 

Pfizer has been one of the most proactive companies in the Large Cap Pharmaceuticals 

sector at delivering shareholder returns through cost saving, financial engineering and 

restructuring. The shares have been rewarded for this and investors have become hooked 

on restructuring in particular as the medicine to cure all its ills. The base business is still 

heavily weighed down by patent expiries over the next few years and although R&D 

productivity appears to have increased in recent years our revenue estimates remain flat 

between 2012A and 2017E. 

Pfizer has previously considered restructuring its Core Pharma business into two pieces – 

an ‚Innovative Core‛ and a ‚Value Core‛. The first iteration of considering this strategy 

concluded that this was not an option and instead Pfizer management proceeded to 

pursue two significant disposals, selling the Nutrition business to Nestle (NESN VX, 

CHF67.70, Buy) and partially divesting the Animal Health business (Zoetis) through an 

Initial Public Offering. 

Recently, management indicated that they were once again considering restructuring the 

Core Pharmaceuticals business. Management also stated that it would take about three 

years to conclude as to whether and how the Innovative Core (which we refer to as the 

Core Pharma business) and Value Core (which we refer to as Established Pharma) 

businesses are to be separated. Consumer Healthcare, which is the smallest of all the 

remaining business units, could also (or instead of Established Pharma) potentially be 

separated through a trade sale in our view. 

Whilst these transactions might make sense to investors, the practicalities of separating 

the Established Pharmaceuticals business from the Core Pharma business could be 

extremely problematic, leading to significant dis-synergies. The two businesses currently 

use common manufacturing facilities and sales infrastructure. Furthermore, the Core 

Pharma business ‚feeds‛ the Established Pharma business once its products experience 

LOEs in the major marketing territories, which would theoretically come to an end if the 

two were separated, making the future growth of the Established Pharma business 

questionable. Ian Read, Pfizer’s Chairman and CEO stated at the Q1’13 earnings call: 

Well, on separating the business, we already have separated the management in the US and 

in developed markets. The key question that we're looking at is in our BRIC-MT and our 

emerging markets that are very successful and growing aggressively, what would we need to 

do to separate out, and what would be the dynamics of that, of separating out, and what 

portfolio would we separate out so as to create an innovative core and a value core, and how 

would we allocate capabilities and assets within that. This is not a sort of trivial undertaking 

in an organization that's already performing so well. And then the second part would be, 

clearly on the manufacturing side we would want to try and identify plants that are purely of 

a value or established products co-type plants, and there have to be independencies, and you 

look at that, and then you also have to look at the tax issues as you do that. So this is, we 

believe, worth doing. I believe it's worth creating that separation internally, because I think it 

brings focus and management focus, and will improve the performance of those two 

businesses. But it's something that we're doing carefully, given that it's a sort of a 

reorganization, or a potential reorganization of emerging markets that is being so successful 

as is, but certainly that's some of the considerations as we go to look at this 

separation………………… So the underlying thesis of this is that we have an innovative core, 

which is focused on science and focused on selling and delivering education in a certain way, 

and would have an exciting pipeline that would drive substantial growth, and certain 

shareholders would have an appeal for that type of investment. And then we would have a 

page 52 of 92 



Healthcare 



May 28, 2013 

value company which has substantial cash flows, large dividend capacity, big brands in 

emerging markets, more of a traditional selling model, also with branded generics. But also 

we want to take time, as we go through the next couple of years, to see how do we 

strengthen both of those segments. We're strengthening innovative core with a pipeline. We 

also want to look at how do we strengthen the value business at the same time.” 

Frank D’Amelio, Pfizer’s CFO, also added: 

“I think what I'll add to what Ian said is, when we talk about the three years, it's really a 

path that's similar to what we did -- if we were to do it, a path that's similar to like the 

Animal Health path, where basically it's a path that we're doing it ourselves, and we set 

ourselves up in a position to be able to do whatever kind of optionality we want on a 

standalone basis. But that's what we think about when we talk about the three years.” 

Our sum of the parts valuation for Pfizer on the basis that it would be able to achieve 

separate identities and valuations for each of the key business segments is $31.87 per 

share versus the current price of $29.04 and our official Target Price of $33. Hence, given 

the significant issues facing making further moves in this direction it would seem to be a 

huge distraction without much reward. 

The only caveat to this would be if the Established Pharmaceuticals business were able to 

sustain at least flat revenues going forward, management could position valuation 

around a dividend yield. Based on using a sector average payout ratio of 50% on 2014E 

earnings and assuming a 4% yield, we believe that the Established Pharmaceuticals unit 

could achieve a valuation of $6.63. Unfortunately this is almost identical to the $6.12 

assumed in our mean sum of the part valuation based on 2.8x 2014E sales/ 8.5x 2014E 

EBITDA/ 12.8x 2014E EPS and does not help to support the argument for separating the 

businesses at present. 


70% 

60% 

50% 

Core Pharma 

$15,330m 

40% 

30% 

20% 

Est. Pharma 

$5,238m 


$873m 

Animal Health 

$1,506m 

10% 

0% 

-15% -10% -5% 0% 5% 10% 15% 



page 53 of 92 



Healthcare 


May 28, 2013 






Animal 

Health 

$4,864m 

Consumer 

Health 

$3,911m 



Animal 

Health 

$1,506m 

Consumer 

Health 

$873m 



Animal 

Health 

$0.14 

Consumer 

Health 

$0.09 

Vaccines 

$1,995m 

Vaccines 

$0.20 

Vaccines 

$4,325m 

Est. 

Pharma 

$15,810m 

Core 

Pharma 

$26,810m 

Est. 

Pharma 

$5,238m 

Core 

Pharma 

$15,330m 

Est. Pharma 

$0.53 

Core 

Pharma 

$1.55 




Animal Health spin out completion marginally improves 2014E EPS by c1.1% 

Management spun out circa 20% of Animal Health business as Zoetis in Q1’13. The 

market has responded positively to the Zoetis IPO with the stock price appreciating by 

c29% since the initial public offering price of $26 per share. Management recently 

announced that the remaining portion of Zoetis held by the company will be offered to 

investors through a share exchange offer at a 7% discount. The current offer is expected 

to close by 19 th June 2013. Assuming a 7% discount, we estimate the completion of the 

Animal Health spin out will be worth c$12.5bn against the market capitalisation of Pfizer, 

or c6% of its market capitalisation. However, once the lost earnings of Zoetis are 

accounted for we estimate this transaction will only be circa 1.1% accretive to EPS in 

2014E. 

Consumer could fetch circa $13.2bn 

We would expect that a divestment of the Consumer Health business could be achieved 

through a trade sale to another industry player, potentially, GlaxoSmithKine, Merck & 

Co., Johnson & Johnson, Bayer, Reckitt Benckiser, Novartis or Sanofi. We expect that such 

a transaction would fetch at least $13.0bn (c3.4x sales; c15.1x EBITDA; c22.8x earnings). 

On this basis, we estimate that such a transaction would be circa 2-3% accretive to Pfizer 

if the net proceeds were used to repurchase its own shares. 


Assuming that a ‚real-world‛ sum of the parts for Pfizer is achieved by selling its 

Consumer Health business, completing the spin out of the Animal Health business and 

achieving separation of the Innovative and Value Cores within Pharmaceuticals, we 

estimate that the group is worth circa $31.87 per share, a c10% premium to the current 

share price. We have summarised the various SOTP valuations for Pfizer in this section in 

Exhibit 81 alongside our more conventional P/E relative valuation for the shares of $33, 

based on a 0-5% 2014E P/E premium to the US market. 

page 54 of 92 




Healthcare 


May 28, 2013 



$40 

$30 

$33.00 

$30.19 

$33.05 

$32.35 

$20 

$10 

$0 








We note that the Consumer Health and Animal Health units would all be expected by us 

to be value creating if separated from the group assuming minimal dis-synergies and the 

use of the proceeds to repurchase shares at the current price. However, as already 

described, we believe that there would be significant dis-synergies in separating the 

Established Pharma business from the group and it is a questionable strategy for 

management to follow, or for investors to assume will occur at this time. 



Valuation 


Multiple 

Multiple 

Arbitrage/ 

share 

Core Pharma $18.44 $21.09 $20.17 $19.90 $19.61 $0.29 

Est. Pharma $5.87 $6.12 $6.36 $6.12 $6.70 -$0.58 

Vaccines $2.97 $3.02 $3.03 $3.01 $2.55 $0.46 

Animal Health *$1.71 *$1.71 *$1.71 $1.71 $1.39 $0.32 



Net cash/ (debt) - Q1 2013A ($0.69) ($0.69) ($0.69) ($0.69) NA NA 

Group $30.19 $33.05 $32.35 $31.87 $29.04 $1.19 

*Note: Animal Health valuation is assumed to be 80% of current Zoetis market cap at a discount of 7% as announced 


page 55 of 92 



Healthcare 


May 28, 2013 



Our EV/Sales valuation for Pfizer yields $30.19 on a sum of the parts basis. This represents 

a 4% premium to the current stock price of $29.04. 


Sales 

2014E ($m) 

% Sales 

Contribution 


share ($) 


Est. Pharma $15,810m 28% 2.7x $42,686m $5.87 

Vaccines $4,325m 8% 5.0x $21,625m $2.97 

Animal Health $4,864m 9% *NA $12,447m *$1.71 


Group Sales $55,719m 100% $224,496m $30.88 

Net cash/ (debt) - Q1 2013A -$5,031m -$0.69 



*Note: Animal Health valuation is assumed to be 80% of current Zoetis market cap at a 7% discount 



Our EV/EBITDA valuation for Pfizer yields $33.05 on a sum of the parts basis. This 



EBITDA 

2014E 

($M) 

EBITDA 

Contribution 

2014E 

EV/EBITDA 

2014 


Valuation per 

share ($) 


Est. Pharma $5,238m 21% 8.5x $44,521m $6.12 

Vaccines $1,995m 8% 11.0x $21,949m $3.02 

Animal Health $1,506m 6% *NA $12,447m *$1.71 

Consumer Health $873m 4% 15.0x $13,094m $1.80 

Total EBITDA $24,942m 100% $245,306m $33.75 

Net cash/ (debt) - Q1 2013A -$5,031m -$0.69 






Our P/E multiple based valuation for Pfizer yields $32.35 on a sum of the parts basis. This 




Operating 

Profit 2014E 

Operating 

Margin 2014E 

Net Income 

2014E 

Division 

EPS 

2014E 

P/E multiple 

Valuation per 

share ($) 


Est. Pharma $4,856m 31% $3,472m $0.53 12.0x $6.36 

Vaccines $1,850m 43% $1,323m $0.20 15.0x $3.03 

Animal Health $1,396m 29% $998m $0.14 *NA *$1.71 

Consumer Health $809m 21% $579m $0.09 20.0x $1.77 

Non-operating income/(expense) ($1,594m) - ($1,310m) ($0.20) - NA 

Net cash/ (debt) - Q1 2013A - - - - - -$0.69 

Total $23,123m 41% $15,222m $2.31 14.0x $32.35 



page 56 of 92 



Healthcare 


May 28, 2013 

Roche (Buy; PT CHF285) 

Conglomerate premium makes restructuring 

unlikely 

Roche consists of two main divisions, Pharmaceuticals and Diagnostics, between which 

the actual level of synergy is frequently debated in financial markets. The majority of the 

value in the company has been derived from the success of the relatively focused Pharma 

operations in developing predominantly biologic products for the treatment of oncology, 

auto-immune or other difficult to treat conditions. 

The diagnostics division could theoretically exist as a stand-alone entity. However, the 

drive towards personalized medicine and the continuing growth in the use of companion 

diagnostics to correctly target novel treatments, which in turn helps raise their success 

rate, firmly links the Diagnostics division with the Core Pharma business in the eyes of 

management. 

Diagnostics itself has historically been split into five business units: Professional 

Diagnostics, Diabetes Care, Molecular Diagnostics, Applied Science and Tissue 

Diagnostics. In recent times, increasing competition and reimbursement pressures have 

taken their toll on both the Applied Science and Diabetes Care units. This resulted in the 

recent announcement that the Applied Science unit will be dissolved from the end of 

2013 and its functions split between the Molecular and Professional diagnostics divisions. 

Recent press speculation that Roche might also look to sell off the Diabetes Care unit 

seems unlikely for a number of reasons. Roche is already the leading global player in 

Diabetes care, accounting for almost a third of the market. Whilst a potential buyer might 

want to merge this business into its own operations and strip cost out, it would only be 

feasible for other major players, which would likely run into anti-trust issues. Furthermore, 

Bayer appears to have already tried to sell its business, unsuccessfully, at the end of 2012. 

Bayer has about a 14% share of the Diabetes market and newswires suggested no buyers 

could be found at an agreeable valuation. 

Specific commentary on the matter from Roche highlights the fundamental attractiveness 

of the diabetes market and the cashflow generated by the division. At the Q4’12 results 

Roland Diggelmann (Diagnostics COO) said, “….on diabetes care, which continues to be a 

very attractive market…..that has 370 million patients worldwide, patient population 

growing in both the developed and the emerging markets, and also a business with a strong 

cash flow. We have a good, strong portfolio in this area. We want to continue to provide 

differentiated solutions ……..some integrated solutions.……We have already restructured 

parts of the business……and we continue to look at our cost base as we go forward to adjust 

to the new realities in the marketplace.” 

Other major players in the Diabetes Care market include Lifescan (Johnson & Johnson), 

c26% market share; Bayer, c14% and Abbott c14%. 

page 57 of 92 



Healthcare 



May 28, 2013 

Exhibit 86: 2012A EBITDA margin versus growth (2014E-17E) by division 

70% 

60% 

50% 

40% 

30% 


CHF18,028m 

20% 

10% 

Diagnostics, CHF2,416m 

0% 

-2% 0% 2% 4% 6% 8% 10% 



Exhibit 87 to Exhibit 89 highlight the dominance of the Pharmaceuticals division, both in 

terms of profit contribution and in being the main engine of growth. However, 

management continues to believe that the Diagnostics business has strategic value in the 

future of Roche’s ability to compete in companion diagnostics beyond its relatively 

modest earnings contribution to the group. 


contribution split (CHFm) 


contribution split (CHFm) 


contribution split (CHF per share) 

Diagnostics 

CHF10,774m 

Diagnostics 

CHF2,416m 

Diagnostics 

CHF2.00 


CHF36,985m 


CHF18,028m 


CHF14.95 






calculations. As summarized in Exhibit 90 the different methodologies yield a range of 

share price valuations from CHF276.14 per share based on EV/Sales and up to CHF284.67 

based on P/E multiples, with a mean valuation of CHF280.08. This represents potential 

upside of between 9% and 12%, versus the current share price of CHF253.10. Our current 

target priced based on valuing the 2014E earnings at a 25% to 30% P/E relative premium 

to the Swiss market is CHF285. 

page 58 of 92 



Valuation/Share (CHF) 

Healthcare 


May 28, 2013 


methodologies (CHF per share) 

300 

250 

CHF285.00 

CHF276.14 CHF279.44 CHF284.67 

200 

150 

100 

50 

0 

PE (REL) EV/Sales (SOTP) EV/EBITDA P/E Multiple 




shown below in Exhibit 92, Exhibit 93 and Exhibit 94. As can be seen in Exhibit 91, which 

provides a summary of the different methodologies used, we believe that separating the 

Diagnostics division from the rest of the business would actually be dilutive to 

shareholders as it would be unlikely to achieve the group multiple as a standalone entity. 

For this reason, as well as management’s general aversion to any kind of restructuring we 

believe that separation of the Diagnostics division is highly unlikely. Instead we believe 

that Roche is more likely to add further businesses to both its Pharmaceuticals and 

Diagnostics divisions. We see AbbVie as a logical ‚bolt-on‛ to the Pharmaceuticals division 

to create another major business outside of oncology, whilst management also appear to 

be actively pursuing various strategies to add additional sequencing platforms to the 

Diagnostics division. 

Exhibit 91: Summary of share price evaluation by different valuation methodologies (CHF per share) 


Valuation 


Multiple 

Arbitrage / 

Share 

Pharmaceuticals CHF259.55 CHF263.58 CHF269.03 CHF264.05 CHF243.68 CHF20.37 

Diagnostics CHF28.98 CHF28.26 CHF28.04 CHF28.43 CHF32.66 (CHF4.23) 

Other charges (Interest expense, etc) NA NA NA NA (CHF23.24) NA 

Net Debt - 2012A (CHF12.40) (CHF12.40) (CHF12.40) (CHF12.40) NA NA 

Total CHF276.14 CHF279.44 CHF284.67 CHF280.08 CHF253.10 CHF16.14 


page 59 of 92 



Healthcare 


May 28, 2013 



Our EV/Sales valuation for Roche yields CHF276.14 on a sum of the parts basis. This 

represents c9% upside to the current share price of CHF253.10. 

Exhibit 92: EV/Sales SOTP valuation summary (CHFm or CHF per share where indicated) 

Division 

Exhibit Sales 

2014E (CHFm) 

% Sales 

Contribution 

EV/Sales Multiple 

Implied EV 

(CHFm) 

Valuation per 

share (CHF) 

Pharmaceuticals CHF36,985m 77% 6.0x CHF221,908m CHF259.55 

Diagnostics CHF10,774m 23% 2.3x CHF24,781m CHF28.98 

Group Sales CHF47,759m 100% CHF246,689m CHF288.53 

Net Debt - 2012A (CHF10,599m) (CHF12.40) 

Average shares outstanding (2012A) 855.0 

Group EV/Sales (SOTP) valuation CHF236,090m CHF276.14 



Our EV/EBITDA valuation for Roche yields CHF279.44 on a sum of the parts basis. This 

represents c10% upside to the current share price of CHF253.10. 

Exhibit 93: EV/EBITDA SOTP valuation summary (CHFm or CHF per share where indicated) 

EBITDA 

2014E 

(CHFm) 

EBITDA 

Contribution 

2014E 

EV/EBITDA 

2014 

Implied value 

(CHFm) 

Valuation per 

share (CHF) 

Pharmaceuticals CHF 18,028 88.2% 12.5x CHF225,351 CHF263.58 

Diagnostics CHF 2,416 11.8% 10.0x CHF24,160 CHF28.26 

Total CHF 20,444 100% CHF 249,512 

Net Debt - 2012A (CHF10,599) (CHF12.40) 

Average shares outstanding (2012A) 855 

Group EV/EBITDA (SOTP) valuation CHF 238,913 CHF279.44 



Our P/E multiple based valuation for Roche yields CHF284.67 on a sum of the parts basis. 

This represents c12% upside to the current share price of CHF253.10. 

Exhibit 94: P/E SOTP valuation summary (CHFm or CHF per share where indicated) 


Division 

2014E CORE 

Adj. Op. Profit 

2014E Adj. Op. 

Profit Margin 

2014E Net 

Income 

2014E CORE 

EPS 

2014E P/E 

multiple 

2014E 

Valuation/ 

Share (CHF) 

Pharmaceuticals CHF16,512m 45% CHF12,786m CHF14.95 18.0x CHF269.03 

Diagnostics CHF2,213m 21% CHF1,714m CHF2.00 14.0x CHF28.04 

Other charges (Interest expense, etc) (CHF1,219m) (CHF1.43) NA 

Net Debt - 2012A 

(CHF12.40) 

Total CHF18,725m 39% CHF13,280m CHF15.52 CHF284.67 


page 60 of 92 



Healthcare 



May 28, 2013 

Sanofi (Buy; PT €100) 

Hidden Value, But Little Pressure To Act 

With Sanofi set to return to sustained double-digit earnings growth from Q4’13, we see 

little pressure for management to embark on re-structuring or disposals beyond perhaps 

Western European Established Products. Each of the non-pharmaceutical divisions are key 

parts of management’s growth strategy, being identified growth drivers which form part 

of the company’s long-term guidance. In addition, none of the non-pharmaceuticals 

divisions are sub-scale in our view and all contribute towards earnings growth in a 

meaningful way. 

There remains the possibility for specific disposals of sub-segments of these divisions 

(either by product type, therapy area, or geography). A sub-segment of the 

Pharmaceuticals division we have termed ‚Western European Established Products‛ is a 

possible divestment or Joint Venture opportunity and consists of Western European tail 

products which were recently mentioned by management as an area they are considering 

strategic options for. 

Restructuring options exist, but no need to exploit them 

We see Animal Health and the Vaccines businesses as being assets which are set to 

perform well, with comparable margins to Core Pharmaceuticals and double digit EBITDA 

CAGR (2014E-2014E). In addition the Vaccines business is too large and well-integrated 

with the Pharmaceuticals business to be considered as a spin-off. With below Group 

estimated EBITDA margins and growth, Generics and Consumer Health business units 

may be seen as viable divestment options. However both divisions remain integral to 

management’s strategy for diversified growth drivers, benefit from switching of products 

from the Core Pharma sub-segment post-LOE (e.g. Allegra to Consumer; Lovenox to 

generics) and the Generics business may be slightly dilutive if sold (0.3% by our 

estimates). 


60% 

50% 

40% 

30% 

20% 

Western European 

Established 

Products, € 967m 


€ 1,036m 

Animal health, 

€ 891m 

Generics, € 594m 

Core pharma, 

€ 8,693m 

Vaccines, € 1,630m 

10% 

0% 

-10% -5% 0% 5% 10% 15% 



page 61 of 92 



Healthcare 


May 28, 2013 


EBITDA and EPS split across six business segments, which we have used as the basis for 

our sum of the parts calculations. 



Animal 

health , 

€ 2,385m 

Vaccines, 

€ 4,728m 

Generics, 

€ 1,988m 

Consumer 

Health, 

€ 3,361m 

Western 

European 

Established 

Products, 

€ 3,481m 



Animal 

health, 

€ 891m 

Vaccines, 

€ 1,630m 

Generics, 

€ 594m 

Consumer 

Health, 

€ 1,036m 

Western 

European 

Established 

Products, 

€ 967m 


contribution split (€ per share) 

Animal 

health, 

€ 0.45 

Vaccines, 

€ 0.83 

Generics, 

€ 0.30 

Consumer 

health, 

€ 0.52 Western 

European 

Established 

Products, 

€ 0.49 

Core 

Pharma, 

€ 20,852m 

Core 

Pharma, 

€ 8,693m 

Core 

Pharma, 

€ 4.40 




Consumer Health is more likely an acquirer than divestment option 

Although we estimate the Consumer Health EBITDA margin to be below the group 

average (31% vs. 37.5% in 2014E), EBITDA growth is expected to be strong 2014E-2017E 

(7.7% CAGR). Sanofi completed the takeover of Chattem in March 2010, significantly 

increasing its Consumer Health presence in the US. The acquisition cost was c.$1.9bn, 

with Chattem recording sales in 2009 of $463m (sales multiple of 4.1x). More recently, 

Sanofi has bolstered the division with bolt-on acquisitions. For example, in January 2013, 

Sanofi Consumer Health division completed the acquisition of the global rights to the 

Rolaids brand from McNeil (part of Johnson & Johnson). 

We would not expect any significant divestments from the Consumer Health division. 

However, based on our mean valuation across the SOTP methodologies (Exhibit 100) of 

€10.82, we would expect any trade sale of Consumer Health to generate c.€14.3bn. This 

would represent a 2014E sales multiple of 4.2x, EBITDA multiple of 13.8x, and P/E 

Multiple of 20.8x. 

Western European Established Products could be divested or form a JV 

Sanofi management has recently commented about exploring options with Western 

European tail products. This follows Pfizer’s and GlaxoSmithKline’s moves to separately 

report tail products in Established Products business units and talk openly about potential 

divestment options in the future. 

Sanofi view Emerging Market ‚Other Rx Drugs‛ as growth drivers, but see possible 

options for Western European Other Rx Drugs which are essentially tail products declining 

rapidly due to austerity measures and increased generic utilization. Although we would 

not expect any action in the short-term, Sanofi is exploring options with Western 

European tail products to enhance shareholder value. On the Q1’13 results call, 

Christopher Viehbacher (CEO) stated: 

“it [European tail products] is clearly dilutive to growth, and so we are looking at options 

about what we might do… I think there are a number of moves that one could potentially 

make, and if we could find a way that enhances shareholder value on that then we'll do so. 

So, yes, we are open to it but haven't found really quite yet exactly how to do this in a 

shareholder enhancing way.” 

page 62 of 92 



Healthcare 

Valuation Per Share (Euros) 


May 28, 2013 

Western European ‚Other Rx Drugs‛ generated sales of €4.5bn in 2012A, but have been 

declining rapidly. We expect a sales CAGR of -10% 2012A-2017E. If this was formed into a 

separate Western European Established Products business unit, several options would be 

available for Sanofi management. 

As described by GlaxoSmithKline management recently, Established Products businesses 

would be amenable to a Joint Venture structure where efficiencies could be maximised. 

We could see such a deal in Western Europe being established between a number of 

Large-Cap Pharmaceuticals players, including Sanofi and GlaxoSmithKline. Alternatively, 

trade sales of Individual brands, therapy areas or geographies within the Western 

European Established Products business is also a possibility. Such brands could be 

attractive for local European Speciality Pharmaceuticals companies. A wholesale 

divestment through a trade sale or IPO of a Western European Established Products 

business seems unlikely to us. 

Based on our mean valuation across the SOTP methodologies (Exhibit 100) of €5.94, we 

would expect any trade sale of Western European Established Products to generate 

c.€7.8bn. This would represent a 2014E sales multiple of 2.2x, EBITDA multiple of 8.1x, 

and P/E Multiple of 12.2x. We note that based on our estimates such a transaction might 

be slightly dilutive if achieved (-0.3%). 

SOTP Valuations yield c.21% upside 

Assuming that a ‚real-world‛ sum of the parts for Sanofi is achieved by divesting its 

Consumer Health, Animal Health, Vaccines and Western European Established Products 

businesses we estimate that the group is worth circa €102 per share, a c21% premium to 

the current share price. We have summarised the various SOTP valuations for Sanofi in 

this section in Exhibit 99 alongside our more conventional P/E relative valuation for the 

shares (based on 30-35% 2014E P/E premium to the French market). 


methodologies (€ per share) 

120 

100 

€ 100.00 € 102.24 € 103.59 € 101.19 

80 

60 

40 

20 

0 

PE (Market 

premium/ discount) 

EV/Sales (SOTP) EV/EBITDA PE (SOTP) 




included in this report in Exhibit 101, Exhibit 102, and Exhibit 103. 



of earnings on the current Group multiple. 

page 63 of 92 



Healthcare 


May 28, 2013 

We note that the Consumer Health, Animal Health and Vaccines units would all be 

expected by us to be value creating if separated from the group assuming minimal dissynergies 

and the use of the proceeds to repurchase shares at the current price. However, 

we think that there would be significant dis-synergies in separating the Vaccines business 

from the Group and it is a very unlikely path for management to go down at this time. In 

addition, Consumer Health and Animal Health are core growth drivers for management. 

Exhibit 100: Summary of share price evaluation by different valuation methodologies (€ per share) 

EV/Sales EV/EBITDA P/E SOTP Mean 

Valuation 

Value at 

Group 

Multiple 

Multiple 

Arbitrage/ 

share 

Pharmaceuticals €85.95 €87.12 €86.03 €86.37 €70.78 €15.59 

Generics €3.32 €3.60 €3.61 €3.51 €3.72 (€0.21) 

Consumer health €10.19 €11.77 €10.49 €10.82 €6.49 €4.32 

Western European Established Products €6.07 €5.86 €5.88 €5.94 €6.06 (€0.13) 

Core Pharma €66.38 €65.88 €66.05 €66.10 €54.50 €11.60 

Animal health €8.13 €8.44 €8.12 €8.23 €5.59 €2.65 

Vaccines €14.33 €14.20 €13.21 €13.92 €10.22 €3.70 

Others (net financial income, etc.) NA NA NA NA (€2.07) NA 

Net Debt - 2012A (€6.18) (€6.18) (€6.18) (€6.18) NA NA 

Group €102.24 €103.59 €101.19 €102.34 €84.51 €21.93 



EV/Sales 

Our EV/Sales valuation for Sanofi yields €102.24 on a sum of the parts basis. This 

represents a 21% premium to the current stock price of €84.51. 

Exhibit 101: EV/Sales SOTP valuation summary (€m or € per share where indicated) 

Sales 

2014E (€m) 

% Sales 

Contribution 

EV/Sales 

Multiple 

Implied value 

(€m) 

Implied Share 

Price (€) 

Pharmaceuticals division € 29,683m 81% 3.8x € 113,405m € 85.95 

Generics € 1,988m 5% 2.2x € 4,375m € 3.32 

Consumer Health € 3,361m 9% 4.0x € 13,443m € 10.19 

Western European Established Products € 3,481m 9% 2.3x € 8,007m € 6.07 

Core Pharma € 20,852m 57% 4.2x € 87,580m € 66.38 

Animal health € 2,385m 6% 4.5x € 10,734m € 8.13 

Vaccines € 4,728m 13% 4.0x € 18,911m € 14.33 

Group Sales € 36,796m 100% € 143,049m 

Net Debt - 2012A -€ 8,150m -€ 6.18 

Average shares outstanding (2012A) € 1,319 

Group EV/Sales (SOTP) valuation € 134,899m € 102.24 


page 64 of 92 



Healthcare 


May 28, 2013 

EV/EBITDA 

Our EV/EBITDA valuation for Sanofi yields €103.59 on a sum of the parts basis. This 

represents a 23% premium to the current stock price of €84.51. 

Exhibit 102: EV/EBITDA SOTP valuation summary (€m or € per share where indicated) 

EBITDA 2014E 

(€m) 

EBITDA 

Contribution 

2014E 

EV/EBITDA 

2014 

Implied EV (€m) 

Valuation per 

share ($) 

Pharmaceuticals € 11,290m 81.7% 10.2x € 114,953m € 87.12 

Generics € 594m 4.3% 8.0x € 4,751m € 3.60 

Consumer Health € 1,036m 7.5% 15.0x € 15,537m € 11.77 

Western European Established Products € 967m 7.0% 8.0x € 7,734m € 5.86 

Core Pharma € 8,693m 62.9% 10.0x € 86,932m € 65.88 

Animal health € 891m 6.5% 12.5x € 11,137m € 8.44 

Vaccines € 1,630m 11.8% 11.5x € 18,743m € 14.20 

Total EBITDA € 13,810m 100% € 144,832m € 110 

Net Debt - 2012A -€ 8,150m -€ 6.18 

Implied Market Cap 136,682 

Average shares outstanding (2012A) 1,319 

Group EV/EBITDA (SOTP) valuation € 103.59 



Our P/E multiple based valuation for Sanofi yields €101.19 on a sum of the parts basis. 

This represents a 20% premium to the current stock price of €84.51. 

Exhibit 103: P/E SOTP valuation summary (€m or € per share where indicated) 


Business Op. 

Profit 

Operating 

Margin 2014E 

Business net 

income 

Business EPS 

(€) 

P/E multiple 

Valuation/ 

Share (€) 

Pharmaceuticals € 10,292m 34.7% € 7,490m € 5.72 15.0x € 86.03 

Generics € 541m 27.2% € 394m € 0.30 12.0x € 3.61 

Consumer health € 944m 28.1% € 687m € 0.52 20.0x € 10.49 

Western European Established Products € 881m 25.3% € 641m € 0.49 12.0x € 5.88 

Core Pharma € 7,925m 38.0% € 5,767m € 4.40 15.0x € 66.05 

Animal health € 812m 34.1% € 591m € 0.45 18.0x € 8.12 

Vaccines € 1,486m 31.4% € 1,081m € 0.83 16.0x € 13.21 

Others (net financial income) -€ 301m - -€ 219m -€ 0.17 - NA 

Net cash/ (debt) - 2012A - - - - - -€ 6.18 

Group € 12,590m 34.2% € 8,943m € 6.83 € 101.19 


page 65 of 92 



PE Relative to Local Market (%) 

Healthcare 


May 28, 2013 

Appendix I: Valuation Tables and Charts 

Exhibit 104: Summary valuation tables for European Pharmaceuticals coverage 

Company P/E P/E P/E P/E P/E P/E Dividend Dividend Dividend Dividend Dividend Dividend 

2012A 2013E 2014E 2015E 2016E 2017E Yield Yield Yield Yield Yield Yield 

(x) (x) (x) (x) (x) (x) 2012A 2013E 2014E 2015E 2016E 2017E 

AstraZeneca 7.6 10.3 11.4 11.1 10.7 10.8 5.4% 5.4% 5.4% 5.4% 5.4% 5.4% 

Bayer 15.8 14.8 12.9 11.4 10.0 8.9 2.1% 2.3% 2.5% 2.7% 2.8% 3.0% 

GlaxoSmithKline 15.7 14.8 13.3 12.7 11.1 9.6 4.2% 4.5% 4.7% 4.9% 5.3% 5.7% 

Novartis 14.2 14.6 13.3 11.9 11.1 10.0 3.2% 3.3% 3.6% 4.0% 4.4% 4.9% 

Novo Nordisk 24.9 20.6 18.6 16.5 14.6 13.1 1.9% 2.3% 2.5% 2.8% 3.2% 3.5% 

Roche 18.8 17.4 16.3 15.0 13.5 12.1 2.9% 3.1% 3.3% 3.6% 4.0% 4.5% 

Sanofi 13.8 15.1 12.4 10.7 9.2 8.1 3.3% 3.3% 4.0% 4.7% 5.4% 6.2% 

Pan Euro Sector (wtd) 16.2 15.7 14.2 12.9 11.6 10.4 3.2% 3.4% 3.7% 4.0% 4.4% 4.8% 

Pan Euro Sector (u/wtd) 15.8 15.4 14.0 12.7 11.5 10.4 3.3% 3.5% 3.7% 4.0% 4.4% 4.7% 

Company PE rel to PE rel to PE rel to PE rel to PE rel to PE rel to PE rel to PE rel to PE rel to PE rel to PE rel to PE rel to 

Local Mkt Local Mkt Local Mkt Local Mkt Local Mkt Local Mkt Sector Sector Sector Sector Sector Sector 

2012A (%) 2013E (%) 2014E (%) 2015E (%) 2016E (%) 2017E (%) 2012A (%) 2013E (%) 2014E (%) 2015E (%) 2016E (%) 2017E (%) 

AstraZeneca 59 83 101 106 108 115 47 65 80 86 92 104 

Bayer 141 120 119 116 108 100 98 94 91 88 87 85 

GlaxoSmithKline 122 120 118 122 112 102 97 95 94 98 96 92 

Novartis 83 92 93 93 90 85 88 93 93 93 95 96 

Novo Nordisk 127 122 130 131 128 125 154 131 131 127 126 126 

Roche 110 110 114 116 110 103 116 111 114 116 117 116 

Sanofi 107 118 110 105 95 88 85 96 87 83 79 78 

Pan Euro Sector (wtd) 107 110 111 112 106 100 - - - - - - 

Pan Euro Sector (u/wtd) 107 109 112 113 108 103 - - - - - - 

Company EV/EBITDA EV/EBITDA EV/EBITDA EV/EBITDA EV/EBITDA EV/EBITDA EV/Sales EV/Sales EV/Sales EV/Sales EV/Sales EV/Sales 

2012A 2013E 2014E 2015E 2016E 2017E 2012A 2013E 2014E 2015E 2016E 2017E 

(X) (X) (X) (X) (X) (X) (X) (X) (X) (X) (X) (X) 

AstraZeneca 6.6 8.1 9.0 8.6 8.2 8.0 2.5 2.7 2.8 2.8 2.8 2.7 

Bayer 9.3 8.6 7.5 6.5 5.5 4.6 1.9 1.8 1.6 1.4 1.2 1.1 

GlaxoSmithKline 11.3 11.2 10.5 10.2 9.2 8.1 3.9 3.8 3.6 3.5 3.2 2.9 

Novartis 11.6 11.7 10.8 9.8 9.2 8.3 3.4 3.2 3.0 2.9 2.7 2.5 

Novo Nordisk 16.2 14.7 13.3 12.2 11.3 10.7 6.7 6.2 5.7 5.3 5.0 4.8 

Roche 12.1 11.3 10.6 9.6 8.6 7.5 5.0 4.8 4.5 4.2 3.8 3.4 

Sanofi 9.3 10.1 8.5 7.5 6.6 5.9 3.5 3.5 3.2 3.0 2.8 2.5 

Pan Euro Sector (wtd) 11.2 11.0 10.1 9.3 8.4 7.5 4.0 3.8 3.6 3.4 3.1 2.9 

Pan Euro Sector 10.9 10.8 10.0 9.2 8.4 7.6 3.8 3.7 3.5 3.3 3.1 2.9 


Exhibit 105: P/E relative against local domestic stock market in 2014E and 2017E for Large Cap European 


35 

30 

25 

20 

15 

10 

5 

0 

-5 

-10 

-15 

-20 

NOVO 

2014 

BAYN 

2014 

GSK 

2014 

ROG 

2014 

SAN 

2014 

AZN 

2014 

NOVN 

2014 

NOVO 

2017 

AZN 

2017 

ROG 

2017 

GSK 

2017 

BAYN 

2017 

SAN 

2017 

NOVN 

2017 


page 66 of 92 



PE Relative to Local Market (%) 

Healthcare 


May 28, 2013 

Exhibit 106: Summary valuation tables for US Pharmaceuticals coverage 

Company P/E P/E P/E P/E P/E P/E Dividend Dividend Dividend Dividend Dividend Dividend 

2012A 2013E 2014E 2015E 2016E 2017E Yield Yield Yield Yield Yield Yield 

(x) (x) (x) (x) (x) (x) 2012A 2013E 2014E 2015E 2016E 2017E 

Abbott 21.7 18.2 14.8 12.2 10.5 9.1 na 1.5% 1.8% 2.1% 2.4% 2.7% 

AbbVie* na 14.6 14.2 11.9 10.0 8.5 na 3.5% 3.6% 4.2% 5.0% 5.9% 

Bristol-Myers 23.8 25.9 23.0 21.2 18.4 14.9 2.9% 3.0% 3.0% 3.1% 3.2% 3.2% 

Johnson & Johnson 17.0 15.8 14.3 13.3 13.1 12.2 2.8% 3.0% 3.3% 3.6% 3.8% 4.0% 

Eli Lilly 16.0 14.0 20.0 18.9 15.6 19.2 3.6% 3.6% 3.6% 3.6% 3.6% 3.6% 

Merck & Co. 12.3 13.7 12.8 12.1 11.0 10.4 3.6% 3.7% 3.9% 4.2% 4.6% 5.0% 

Pfizer 13.3 13.0 12.5 12.1 11.9 11.0 3.0% 3.3% 3.7% 4.0% 4.4% 5.0% 

Zoetis 31.0 23.4 19.7 18.1 15.7 13.7 0.0% 0.8% 0.9% 1.0% 1.1% 1.3% 

US Sector (wtd) 15.1 15.7 14.9 13.8 12.7 11.9 2.6% 3.1% 3.4% 3.7% 4.0% 4.3% 

US Sector (u/wtd) 19.3 17.3 16.4 15.0 13.3 12.4 2.6% 2.8% 3.0% 3.2% 3.5% 3.9% 

Company PE rel to PE rel to PE rel to PE rel to PE rel to PE rel to PE rel to PE rel to PE rel to PE rel to PE rel to PE rel to 

Local Mkt Local Mkt Local Mkt Local Mkt Local Mkt Local Mkt Sector Sector Sector Sector Sector Sector 

2012A (%) 2013E (%) 2014E (%) 2015E (%) 2016E (%) 2017E (%) 2012A (%) 2013E (%) 2014E (%) 2015E (%) 2016E (%) 2017E (%) 

Abbott 133 119 108 98 89 81 na 116 99 89 82 77 

AbbVie* na 95 103 96 85 76 na 93 95 86 79 71 

Bristol-Myers 145 169 167 170 156 133 148 164 154 153 144 125 

Johnson & Johnson 104 103 104 107 111 109 106 101 96 96 103 103 

Eli Lilly 97 91 146 151 133 171 99 89 134 137 123 162 

Merck & Co. 75 89 93 97 93 93 77 87 86 87 86 87 

Pfizer 81 85 91 97 101 98 83 82 84 87 94 93 

Zoetis 189 153 143 146 134 123 193 149 132 131 123 116 

US Sector (wtd) 92 103 109 111 108 106 - - - - - - 

US Sector (u/wtd) 118 113 119 120 113 111 - - - - - - 

Company EV/EBITDA EV/EBITDA EV/EBITDA EV/EBITDA EV/EBITDA EV/EBITDA EV/Sales EV/Sales EV/Sales EV/Sales EV/Sales EV/Sales 

2012A 2013E 2014E 2015E 2016E 2017E 2012A 2013E 2014E 2015E 2016E 2017E 

(X) (X) (X) (X) (X) (X) (X) (X) (X) (X) (X) (X) 

Abbott 10.2 9.7 7.9 6.4 5.1 4.1 2.5 2.3 2.0 1.7 1.4 1.2 

AbbVie* na 10.8 10.5 9.0 7.5 6.3 3.9 4.3 4.1 3.7 3.3 2.9 

Bristol-Myers 16.0 21.7 19.2 18.2 16.3 13.5 4.6 5.0 4.7 4.8 4.4 3.9 

Johnson & Johnson 11.3 10.0 9.2 8.5 8.2 7.6 3.5 3.2 3.0 2.7 2.6 2.4 

Eli Lilly 9.7 9.7 12.8 12.3 10.8 13.1 2.8 2.7 3.1 3.0 2.7 2.7 

Merck & Co. 8.1 9.1 8.5 8.3 7.8 7.6 3.0 3.2 3.2 3.1 3.0 3.0 

Pfizer 8.4 9.1 9.0 8.7 8.7 8.2 3.8 4.0 4.0 3.9 3.8 3.6 

Zoetis 15.4 15.2 12.8 11.6 10.0 8.5 3.9 4.3 4.0 3.6 3.2 2.9 

US Sector (wtd) 9.5 10.8 10.3 9.6 8.9 8.3 3.5 3.6 3.5 3.3 3.1 2.9 

US Sector (u/wtd) 11.3 11.9 11.3 10.4 9.3 8.6 3.5 3.6 3.5 3.3 3.1 2.8 

Note: ABBV pro forma EPS/ DPS have not been disclosed for 2010-12 so we do not provide comparable multiples or yields Source: 

Thomson One DataStream, Jefferies estimates 

Exhibit 107: P/E relative against local domestic stock market in 2014E and 2017E for US Pharmaceuticals 

80 

60 

40 

20 

0 

-20 

-40 

BMY 

2014 

LLY 

2014 

ZTS 

2014 

ABT 

2014 

JNJ 

2014 

ABBV 

2014 

MRK 

2014 

PFE 

2014 

LLY 

2017 

BMY 

2017 

ZTS 

2017 

JNJ 

2017 

PFE 

2017 

MRK 

2017 

ABT 

2017 

ABBV 

2017 


page 67 of 92 



Local market PE Relative (2014E EPS) 

Healthcare 


May 28, 2013 

Exhibit 108: Key industry groupings based on strategy, valuation, growth and size of business 

1.8 

1.6 

BMY 

1.4 

1.2 

1.0 

0.8 

AZN 

LLY 

MRK 

PFE 

JNJ 

ROG 

NOVN 

GSK 

SAN 

NOVO 

ABBV 

ZTS 

ABT 

0.6 

-8% -6% -4% -2% +0% +2% +4% +6% +8% +10% +12% +14% +16% +18% +20% 


Pharma-focused Diversified Mega-merger 

Specialized 

Note: Bubble size is relative to 2012E revenues in US$ based on average 2011 exchange rates 

Source: DataStream, Jefferies estimates 

page 68 of 92 



Healthcare 


May 28, 2013 

Appendix II: Updated Company Models 

We have included updated income statements for all companies on which we have 

changed our earnings estimates as part of this update. 

Abbott 

Exhibit 109: Annual income statement for Abbott, 2012A-2017E (US$ millions) 

(US$) millions 2012A 2013E 2014E 2015E 2016E 2017E Incr. abs. 

'12A-'17E 

CAGR 

'12A-'17E 

Nutrition 6,466 6,991 7,874 8,939 9,993 11,171 4,705 12% 

Diagnostics 4,291 4,641 5,038 5,449 5,848 6,276 1,985 8% 

Medical Devices 5,496 5,637 6,027 6,430 6,896 7,337 1,842 6% 

Established Pharmaceuticals 5,121 5,330 5,802 6,258 6,759 7,310 2,189 7% 

Other sales 120 122 126 130 134 138 18 3% 

Net sales 21,494 22,722 24,867 27,206 29,629 32,232 10,738 8% 

Cost of products sold 9,580 10,152 10,945 11,795 12,765 13,855 

Gross profit 11,914 12,570 13,922 15,411 16,864 18,377 6,463 

R&D 1,459 1,423 1,503 1,578 1,657 1,740 

SG&A 6,730 6,867 7,331 7,771 8,237 8,731 

Operating income 3,725 4,280 5,088 6,062 6,970 7,906 4,181 16% 

EBITDA 5,358 5,356 6,236 7,269 8,226 9,204 3,845 

Net interest expense 107 110 108 100 91 80 

Net forex (gain) loss (24) 50 - - - - 

Other (income) expense, net (36) (18) (18) (18) (18) (18) 

Earnings before taxes 3,678 4,137 4,999 5,979 6,897 7,844 4,166 16% 

Taxes 912 869 1,045 1,244 1,427 1,616 

Tax rate 24.8% 21.0% 20.9% 20.8% 20.7% 20.6% 

Net income 2,766 3,269 3,954 4,736 5,469 6,229 3,462 18% 

Diluted EPS 1.74 2.07 2.54 3.08 3.60 4.14 19% 

Shares outstanding 1,592 1,578 1,557 1,538 1,521 1,505 

Dividend per share na 0.56 0.67 0.79 0.91 1.03 

Margin Analysis 

Cost of products sold 2012A 2013E 2014E 2015E 2016E 2017E 

Gross margin 44.6% 44.7% 44.0% 43.4% 43.1% 43.0% -159bps 

R&D 55.4% 55.3% 56.0% 56.6% 56.9% 57.0% 159bps 

SG&A 6.8% 6.3% 6.0% 5.8% 5.6% 5.4% -139bps 

Operating margin 31.3% 30.2% 29.5% 28.6% 27.8% 27.1% -422bps 

EBITDA margin 17.3% 18.8% 20.5% 22.3% 23.5% 24.5% 720bps 

Pretax margin 24.9% 23.6% 25.1% 26.7% 27.8% 28.6% 362bps 

Net margin 17.1% 18.2% 20.1% 22.0% 23.3% 24.3% 722bps 

Payout ratio 12.9% 14.4% 15.9% 17.4% 18.5% 19.3% 645bps 

na 27.0% 26.2% 25.7% 25.3% 25.0% na 

% YoY Change 

Net sales 2012A 2013E 2014E 2015E 2016E 2017E 

Cost of products sold 6% 9% 9% 9% 9% 

Gross profit 6% 8% 8% 8% 9% 

R&D 6% 11% 11% 9% 9% 

SG&A -2% 6% 5% 5% 5% 

Operating income 2% 7% 6% 6% 6% 

EBITDA 15% 19% 19% 15% 13% 

Earnings before taxes 0% 16% 17% 13% 12% 

Net income 12% 21% 20% 15% 14% 

Diluted EPS 18% 21% 20% 15% 14% 

Shares outstanding 19% 23% 21% 17% 15% 

Dividend per share -1% -1% -1% -1% -1% 


page 69 of 92 



Healthcare 


May 28, 2013 

Bayer 

Exhibit 110: Group income statement for Bayer, 2012A-2017E (€m) 

(€ millions) 2012A 2013E 2014E 2015E 2016E 2017E Increment 

absolute 

'12A-'17E 

Group Revenues 39,759 40,962 43,488 45,788 48,149 50,465 10,706 5% 

YoY growth (%) +9% +3% +6% +5% +5% +5% 

Cost of Goods Sold (19,059) (18,679) (19,701) (20,649) (21,583) (22,486) (3,427) 

as % of Revenues 48% 46% 45% 45% 45% 45% 

CAGR 

'12A- 

'17E 

Gross Profit 20,700 22,283 23,787 25,139 26,566 27,979 7,279 6% 

as % of Revenues 52% 54% 55% 55% 55% 55% 

Selling expenses (9,987) (10,092) (10,644) (11,156) (11,661) (12,149) (2,162) 

as % of Revenues 25% 25% 24% 24% 24% 24% 

R&D (3,013) (2,994) (3,158) (3,310) (3,460) (3,604) (591) 

as % of Revenues 8% 7% 7% 7% 7% 7% 

General Administration expenses (1,866) (1,926) (2,031) (2,129) (2,225) (2,318) (452) 

as % of Revenues 5% 5% 5% 5% 5% 5% 

Non-Operating Result (712) (665) (366) 50 550 1139 1851 

Core EBIT 6,999 7,220 7,800 8,315 8,917 9,532 2,533 6% 

YoY growth (%) 9% 3% 8% 7% 7% 7% 

Operating Margin 17.6% 17.6% 17.9% 18.2% 18.5% 18.9% +128bps 

EBITDA before special items 

(Underlying) 

8,284 8,662 9,487 10,151 10,904 11,668 3,384 7% 

YoY growth (%) 9% 5% 10% 7% 7% 7% 

Margin (%) 21% 21% 22% 22% 23% 23% +229bps 

CORE PBT 6,214 6,555 7,434 8,366 9,467 10,671 4,457 11% 

YoY growth (%) 11% 5% 13% 13% 13% 13% 

Income taxes (reported) (752) (1,268) (1,444) (1,668) (1,932) (2,221) (1,469) 

Tax Rate (%) 23.2% 24.8% 24.0% 24.0% 24.0% 24.0% 

CORE Tax adjustment (Special Items) (1,024) (433) (425) (425) (425) (425) 599 

Income tax (for CORE earnings) (1,776) (1,701) (1,869) (2,093) (2,357) (2,646) (870) 

Tax Rate (%) (CORE PBT) 28.6% 25.9% 25.1% 25.0% 24.9% 24.8% 

CORE Adjusted Net Income 4,420 4,739 5,413 6,121 6,958 7,873 3,453 12% 

YoY growth (%) 11% 7% 14% 13% 14% 13% 

WA Basic No. Shares (m) 826.9 826.9 826.9 826.9 826.9 826.9 0 

Potential convertible shares 0.0 0.0 0.0 0.0 0.0 0.0 0 

Adj. WA No. Shares (m) 826.9 826.9 826.9 826.9 826.9 826.9 0 

EPS Reported (Continuing operations) 2.95 4.52 5.35 6.20 7.21 8.32 5.37 

YoY growth (%) (1%) 53% 18% 16% 16% 15% 

CORE EPS 5.34 5.73 6.55 7.40 8.41 9.52 4.18 12% 

YoY growth (%) 11% 7% 14% 13% 14% 13% 

Dividend per Ordinary (Authorised) 1.80 1.95 2.10 2.25 2.40 2.55 0.75 

YoY growth (%) 9% 8% 8% 7% 7% 6% 


page 70 of 92 



Healthcare 


May 28, 2013 

Exhibit 111: Group cash flow statement for Bayer, 2012A-2017E (€m) 

(€ millions) 2012A 2013E 2014E 2015E 2016E 2017E 

Income after taxes 2,493 3,850 4,573 5,281 6,118 7,033 

Income taxes 752 1,268 1,444 1668 1932 2221 

Non-operating result 712 665 366 (50) (550) (1,139) 

Income taxes paid or accrued (1,560) (1,125) (909) (1,018) (1,147) (1,288) 

Depreciation & amortization 2,967 2,726 2,938 3,087 3,239 3,387 

Changes in pension provisions (542) (124) 0 0 0 0 

Gains/Losses on retirement of noncurrent assets (219) (12) 0 0 0 0 

Non-cash effects of inventory work-down 0 0 0 0 0 0 

Gross cash flow 4,603 7,248 8,413 8,967 9,592 10,215 

Changes in inventories (674) 95 (413) (331) (336) (327) 

Changes in trade accounts receivable (452) (1,027) (459) (456) (463) (456) 

Changes in trade accounts payable 539 (376) 185 180 187 182 

Changes in other working capital, other non-cash items 520 921 0 0 0 0 

Net cash provided by operating activities 4,536 6,860 7,725 8,360 8,980 9,613 

Purchase of PP&E and intangible assets (1,929) (2,054) (1,739) (1,740) (1,829) (1,917) 

Cash inflows from sales of property, plant, equipment and other assets 227 27 0 0 0 0 

Cash inflows from divestitures 178 17 0 0 0 0 

Cash inflows from noncurrent financial assets (261) 56 0 0 0 0 

Cash outflows for acquisitions less acquired cash (466) (122) 0 0 0 0 

Interest and Dividends received 104 275 637 1017 1495 2060 

Cash inflows from current financial assets 1329 (2) 0 0 0 0 

Net Cash from Investing Activities (818) (1,803) (1,102) (723) (334) 143 

Capital contributions 0 0 0 0 0 0 

Dividends payments and withholding tax on dividend (1,366) (1,490) (1,613) (1,737) (1,861) (1,985) 

Issuances of debt 1,309 267 - - - - 

Retirements of debt (3,254) (376) 0 0 0 0 

Interest paid including interest-rate swaps (793) (847) (1,036) (1,035) (1,035) (1,035) 

Interest received from interest-rate swaps 325 0 0 0 0 0 

Cash outflows for the purchase of additional interests in subsidiaries (3) 0 0 0 0 0 

Net cash Flow from Financing (3,782) (2,428) (2,649) (2,772) (2,896) (3,020) 

Change in cash and cash equivalents (64) 2,629 3,974 4,865 5,750 6,737 

Cash and cash equivalents at the beginning of the period 1,770 1,699 4,325 8,298 13,164 18,913 

Changes due to scope of Consolidation 0 0 0 0 0 0 

Other Adjustments and Exchange Differences (7) (4) 0 0 0 0 

Cash and cash equivalents at end of period 1,699 4,325 8,298 13,164 18,913 25,650 

Net financial Debt (7,025) (4,669) (695) 4,170 9,920 16,656 


page 71 of 92 



Healthcare 


May 28, 2013 

Exhibit 112: Group balance sheet for Bayer, 2012A-2017E (€m) 

(€ millions) 2012A 2013E 2014E 2015E 2016E 2017E 

Goodwill 9,293 9,411 9,411 9,411 9,411 9,411 

Other intangible assets 9,464 8,599 7,525 6,452 5,396 4,358 

Property, plant and equipment 9,863 10,412 10,287 10,013 9,659 9,227 

Investments accounted for using the equity method 284 224 224 224 224 224 

Other financial assets 1,324 1,282 1,282 1,282 1,282 1,282 

Other receivables 541 472 472 472 472 472 

Deferred taxes 1,581 1,562 1,562 1,562 1,562 1,562 

Total Noncurrent Assets 32,350 31,962 30,763 29,416 28,006 26,536 

Inventories 6,980 6,950 7,363 7,694 8,030 8,357 

Trade Accounts Receivable 7,431 8,539 8,999 9,455 9,918 10,374 

Other financial assets 856 629 629 629 629 629 

Other receivables 1,648 1,470 1,470 1,470 1,470 1,470 

Claims for income tax refunds 376 404 404 404 404 404 

Cash and cash equivalents 1,695 4,323 8,297 13,162 18,912 25,648 

Assets held for sale/ disc. ops. 0 0 0 0 0 0 

Total Current Assets 18,986 22,315 27,162 32,814 39,363 46,883 

Total Assets 51,336 54,277 57,925 62,230 67,369 73,419 

Capital stock of Bayer AG 2,117 2,117 2,117 2,117 2,117 2,117 

Capital reserves of Bayer AG 6,167 6,167 6,167 6,167 6,167 6,167 

Other reserves 10,185 12,590 15,550 19,094 23,351 28,399 

Equity attributable to Bayer AG stockholders 18,469 20,874 23,834 27,378 31,635 36,683 

Equity attributable to non-controlling interest 100 105 105 105 105 105 

Net Equity 18,569 20,979 23,939 27,483 31,740 36,788 

Provisions for pensions and other post-employment benefits (9,373) (9,388) (9,388) (9,388) (9,388) (9,388) 

Other provisions (1,986) (1,890) (1,890) (1,890) (1,890) (1,890) 

Financial liabilities (6,962) (5,066) (4,251) (3,751) (3,251) (2,751) 

Other liabilities (409) (374) (374) (374) (374) (374) 

Deferred taxes (938) (829) (829) (829) (829) (829) 

Total Noncurrent Liabilities (19,668) (17,547) (16,732) (16,232) (15,732) (15,232) 

Other provisions (4,844) (5,821) (6,323) (6,905) (7,600) (8,420) 

Financial liabilities (2,570) (4,486) (5,301) (5,801) (6,301) (6,801) 

Trade accounts payable (4,295) (3,909) (4,094) (4,274) (4,461) (4,642) 

Income tax liabilities (72) (85) (85) (85) (85) (85) 

Other liabilities (1,318) (1,450) (1,450) (1,450) (1,450) (1,450) 

Liabilities on assets held for sale/ Disc. Ops. 0 0 0 0 0 0 

Total Current Liabilities (13,099) (15,751) (17,254) (18,514) (19,897) (21,398) 

Total Equity and Liabilities 51,336 54,277 57,925 62,230 67,369 73,419 


page 72 of 92 



Healthcare 


May 28, 2013 

Eli Lilly 

Exhibit 113: Eli Lilly annual income statement, 2012A-2017E (US$) 


'12A-'17E 

CAGR 

'12A-'17E 

Pharmaceuticals 19,934 19,732 16,011 16,548 18,027 17,813 (2,121) -2% 

Animal health 2,036 2,133 2,304 2,465 2,637 2,822 786 7% 

Collaboration revenue 633 677 814 992 1,181 1,362 729 17% 

Net sales 22,603 22,542 19,129 20,006 21,845 21,997 (606) -1% 

COGS 4,797 4,890 4,745 5,071 5,782 6,523 1,726 6% 

Gross profit 17,807 17,653 14,384 14,934 16,063 15,474 (2,332) -3% 

SG&A 7,514 7,038 6,005 6,305 6,621 6,886 (628) -2% 

R&D 5,278 5,507 4,860 4,860 4,957 5,056 (222) -1% 

Operating income 5,015 5,107 3,519 3,769 4,485 3,532 (1,483) -7% 

EBITDA 6,477 6,317 4,681 4,887 5,569 4,595 (1,882) -7% 

Other income/(deductions) (114) 81 89 89 87 89 203 

Pretax income 4,901 5,188 3,608 3,858 4,572 3,621 (1,280) -6% 

Taxes 1,117 972 722 849 1,006 779 (339) -7% 

Tax Rate 22.8% 18.7% 20.0% 22.0% 22.0% 21.5% -129bps 

Net income 3,784 4,216 2,887 3,009 3,566 2,843 (941) -6% 

DILUTED EPS $3.39 $3.86 $2.67 $2.84 $3.44 $2.80 ($0.59) -4% 

Diluted shares outstanding 1,117 1,092 1,080 1,059 1,038 1,015 

Dividend per share $1.96 $1.96 $1.96 $1.96 $1.96 $1.96 0% 

Margin Analysis 2012A 2013E 2014E 2015E 2016E 2017E 

COGS 21.2% 21.7% 24.8% 25.3% 26.5% 29.7% +843 bps 

Gross margin 78.8% 78.3% 75.2% 74.7% 73.5% 70.3% -843 bps 

SG&A 33.2% 31.2% 31.4% 31.5% 30.3% 31.3% -194 bps 

R&D 23.4% 24.4% 25.4% 24.3% 22.7% 23.0% -36 bps 

Operating margin 22.2% 22.7% 18.4% 18.8% 20.5% 16.1% -613 bps 

EBITDA margin 28.7% 28.0% 24.5% 24.4% 25.5% 20.9% -777 bps 

Pretax margin 21.7% 23.0% 18.9% 19.3% 20.9% 16.5% -522 bps 

Net margin 16.7% 18.7% 15.1% 15.0% 16.3% 12.9% -382 bps 

Dividend payout ratio 57.8% 50.8% 73.3% 69.0% 57.0% 70.0% +1,218 bps 

YOY % Change 2012A 2013E 2014E 2015E 2016E 2017E 

Net sales -7% 0% -15% 5% 9% 1% 

Gross profit -7% -1% -19% 4% 8% -4% 

Operating income -21% 2% -31% 7% 19% -21% 

EBITDA -16% -2% -26% 4% 14% -17% 

Pretax income -20% 6% -30% 7% 19% -21% 

Net income -23% 11% -32% 4% 19% -20% 

DILUTED EPS -23% 14% -31% 6% 21% -19% 

Diluted shares outstanding 0% -2% -1% -2% -2% -2% 


page 73 of 92 



Healthcare 


May 28, 2013 

Exhibit 114: Eli Lilly cash flow statement, 2012A-2017E (US$) 

(US$) millions 2012A 2013E 2014E 2015E 2016E 2017E 

Net income (GAAP) 4,089 4,216 2,887 3,009 3,566 2,843 

Depreciation & amortization 1,462 1,210 1,162 1,118 1,084 1,063 

Net change in deferred taxes 126 - - - - - 

Change in oper. assets and liabilities (51) 181 564 (372) (546) (39) 

Other (321) - - - - - 

Net cash from operating 5,305 5,607 4,613 3,755 4,104 3,867 

Net capital expenditures (883) (900) (873) (862) (925) (978) 

Net change in short-term investments 375 - - - - - 

Net changes in long-term investments (3,263) - - - - - 

Other 938 - - - - - 

Net cash from investing (2,833) (900) (873) (862) (925) (978) 

Cash dividends paid (2,187) (2,140) (2,116) (2,076) (2,034) (1,990) 

Net change in common shares (721) (1,100) (1,000) (1,000) (1,000) (1,000) 

Net change in short-term debt (11) - - - - - 

Net change in long-term debt (1,501) - - - - - 

Net cash from financing (4,420) (3,240) (3,116) (3,076) (3,034) (2,990) 

Effect of exchange rates 44 - - - - - 

Net increase in cash (1,904) 1,467 624 (183) 145 (101) 

Cash at beginning of period 5,923 4,019 5,486 6,109 5,926 6,071 

Cash at end of period 4,019 5,486 6,109 5,926 6,071 5,970 

Breakdown of Net cash/(debt) 

Cash and Cash equivalents 4,019 5,486 6,109 5,926 6,071 5,970 

Short term investments 1,666 1,666 1,666 1,666 1,666 1,666 

Short term debt (12) (12) (12) (12) (12) (12) 

Net short term cash/(debt) 5,673 7,139 7,763 7,580 7,725 7,623 

Long term debt (5,519) (5,519) (5,519) (5,519) (5,519) (5,519) 

Net cash/(debt) at end of period 153 1,620 2,243 2,060 2,206 2,104 


page 74 of 92 



Healthcare 


May 28, 2013 

Exhibit 115: Eli Lilly summary balance sheet, 2012A-2017E (US$) 

(US$) millions 2012A 2013E 2014E 2015E 2016E 2017E 

Cash and short-term investments 5,684 7,151 7,775 7,592 7,737 7,635 

Net receivables 3,888 3,644 3,162 3,417 3,748 3,643 

Inventories 2,644 2,760 2,609 2,821 3,212 3,475 

Inventory days 193 193 193 193 193 193 

Other current assets 822 822 822 822 822 822 

Current assets 13,039 14,377 14,368 14,653 15,519 15,575 

Net property, plant and equipment 7,760 7,451 7,162 6,906 6,748 6,663 

Other assets 13,600 13,600 13,600 13,600 13,600 13,600 

Total Assets 34,399 35,427 35,130 35,159 35,867 35,838 

Short-term debt 12 12 12 12 12 12 

Payables 5,639 5,691 5,623 5,718 5,894 6,012 

Other current liabilities 2,739 2,739 2,739 2,739 2,739 2,739 

Current liabilities 8,390 8,442 8,374 8,469 8,645 8,763 

Long-term debt 5,519 5,519 5,519 5,519 5,519 5,519 

Other liabilities 5,716 5,716 5,716 5,716 5,716 5,716 

Total Liabilities 19,625 19,677 19,609 19,705 19,881 19,998 

Shareholders' Equity 14,774 15,750 15,521 15,454 15,986 15,839 

Total Liabilities and SE 34,399 35,427 35,130 35,159 35,867 35,838 


page 75 of 92 



Healthcare 


May 28, 2013 


Exhibit 116: : GlaxoSmithKline: Summary Income Statement (GBP in millions) 2012A-2017E 

(£) millions 2012A 2013E 2014E 2015E 2016E 2017E Incr. abs. 

12A-17E 

CAGR 

12A-17E 

Core Pharma 16,622 17,093 17,561 17,678 18,795 20,324 3,702 4% 

Vaccines 3,325 3,561 3,917 4,255 4,602 4,914 1,589 8% 

ViiV 1,374 1,336 1,431 1,593 1,782 1,928 554 7% 

Consumer Health 5,110 5,425 5,745 6,074 6,388 6,719 1,609 6% 

Turnover 26,431 27,415 28,654 29,601 31,567 33,885 7,454 5% 

Cost of sales (7,109) (7,739) (8,028) (8,357) (8,934) (9,579) (2,470) 6% 

Gross profit 19,322 19,676 20,625 21,244 22,633 24,305 4,983 5% 

SG&A (7,905) (8,145) (8,488) (8,828) (9,181) (9,548) (1,643) 4% 

R&D (3,485) (3,542) (3,617) (3,726) (3,837) (3,952) (467) 3% 

Royalty income 306 356 363 370 378 385 79 5% 

CORE Operating profit 8,238 8,344 8,883 9,061 9,993 11,190 2,952 6% 

CORE Net finance expense (724) (563) (508) (488) (467) (437) 287 -10% 

Share of after-tax profits from assoc. & JVs 29 60 62 64 66 68 39 18% 

CORE EBITDA 9,109 9,319 9,859 10,039 10,975 12,180 3,071 6% 

CORE Profit before Taxation 7,543 7,840 8,437 8,637 9,591 10,821 3,277 7% 

Taxation (1,838) (1,914) (2,018) (2,022) (2,198) (2,425) (587) 6% 

Tax rate 24.4% 24.4% 23.9% 23.4% 22.9% 22.4% (0) -2% 

CORE Profit after Taxation 5,705 5,926 6,419 6,615 7,393 8,395 2,690 8% 

Profit attributable to non-controlling interests 235 293 319 332 374 424 189 13% 

CORE Profit attributable to shareholders 5,470 5,633 6,101 6,283 7,020 7,971 2,501 8% 

CORE EPS 111.4p 117.9p 131.1p 138.0p 157.4p 182.1p 70.6p 10% 

Weighted average shares - basic 4,912 4,783 4,656 4,555 4,463 4,380 (532) -2% 

DPS 74p 78p 82p 86p 92p 100p 26p 6% 


Cost of sales 26.9% 28.2% 28.0% 28.2% 28.3% 28.3% 

Gross margin 73.1% 71.8% 72.0% 71.8% 71.7% 71.7% 

R&D 13.2% 12.9% 12.6% 12.6% 12.2% 11.7% 

SG&A 29.9% 29.7% 29.6% 29.8% 29.1% 28.2% 

Core Operating profit margin 31.2% 30.4% 31.0% 30.6% 31.7% 33.0% 

EBITDA margin 34.5% 34.0% 34.4% 33.9% 34.8% 35.9% 

Core pretax margin 28.5% 28.6% 29.4% 29.2% 30.4% 31.9% 

CORE Profit attributable to shareholders margin 21.6% 21.6% 22.4% 22.3% 23.4% 24.8% 

Dividend Payout Ratio 66.5% 66.2% 62.6% 62.3% 58.5% 54.9% 

% YOY Change 2012A 2013E 2014E 2015E 2016E 2017E 

Turnover -3% 4% 5% 3% 7% 7% 

Cost of sales -2% 9% 4% 4% 7% 7% 

Gross profit -4% 2% 5% 3% 7% 7% 

R&D -6% 2% 2% 3% 3% 3% 

SG&A -1% 3% 4% 4% 4% 4% 

CORE Operating profit -6% 1% 6% 2% 10% 12% 

CORE EBITDA -5% 2% 6% 2% 9% 11% 

CORE Profit before Taxation -6% 4% 8% 2% 11% 13% 

CORE Profit attributable to shareholders -5% 3% 8% 3% 12% 14% 

CORE EPS -3% 6% 11% 5% 14% 16% 

Dividend per Share -1% 5% 5% 5% 7% 9% 

Weighted average shares - basic -2% -3% -3% -2% -2% -2% 


page 76 of 92 



Healthcare 


May 28, 2013 

Johnson & Johnson 

Exhibit 117: Annual income statement for Johnson & Johnson, 2012A-2017E (US$ millions) 


'12A-'17E 

CAGR 

'12A-'17E 

Consumer 14,447 14,821 15,438 16,093 16,765 17,439 2,992 3.8% 

Pharmaceutical 25,351 27,061 28,008 28,588 28,032 28,095 2,744 2.1% 

Med Devices & Diagnostics 27,426 29,010 29,862 30,974 32,161 33,458 6,032 4.1% 

Pharma Pipeline - 239 690 1,180 1,418 2,500 2,500 n/a 

Net sales 67,224 71,107 73,997 76,835 78,375 81,492 14,268 3.9% 

Cost of products sold 21,658 22,630 23,331 24,206 24,970 26,051 4,393 

Gross profit 45,566 48,477 50,667 52,629 53,405 55,441 9,875 

R&D 7,665 8,052 8,208 8,373 8,540 8,711 1,046 

SM&A 20,869 21,616 22,235 22,902 23,589 24,296 3,427 

Operating income 17,032 18,809 20,224 21,355 21,276 22,434 5,402 5.7% 

EBITDA 20,698 22,690 24,027 25,163 25,089 26,251 5,553 4.9% 

Interest (income) expense, net 468 452 436 408 372 330 -138 

Other (income) expense, net (1,650) (830) (1,200) (1,200) (1,200) (1,200) 450 

Earnings (loss) before taxes 18,214 19,187 20,988 22,147 22,104 23,305 5,091 5.1% 

Taxes 3,869 3,857 4,219 4,452 4,444 4,685 816 

Tax rate 21.2% 20.1% 20.1% 20.1% 20.1% 20.1% 

Net income 14,345 15,330 16,769 17,694 17,660 18,619 4,274 5.4% 

Diluted EPS - - - - - - 

Avg. diluted shares 5.10 5.39 5.98 6.41 6.50 6.95 6.4% 

Dividend per share 2,813 2,844 2,804 2,759 2,717 2,677 

2.40 2.62 2.89 3.15 3.29 3.46 7.6% 

Margin Analysis 

Cost of products sold 2012A 2013E 2014E 2015E 2016E 2017E 


R&D 67.8% 68.2% 68.5% 68.5% 68.1% 68.0% 25bps 

SM&A 11.4% 11.3% 11.1% 10.9% 10.9% 10.7% -71bps 




Net margin 27.1% 27.0% 28.4% 28.8% 28.2% 28.6% 150bps 

Payout ratio 21.3% 21.6% 22.7% 23.0% 22.5% 22.8% 151bps 

47.1% 48.7% 48.3% 49.2% 50.6% 49.8% 

% YoY Change 2012A 2013E 2014E 2015E 2016E 2017E 

Net sales 3% 6% 4% 4% 2% 4% 

Cost of products sold 7% 4% 3% 4% 3% 4% 

Gross profit 2% 6% 5% 4% 1% 4% 

R&D 2% 5% 2% 2% 2% 2% 

SM&A 0% 4% 3% 3% 3% 3% 

Operating income 5% 10% 8% 6% 0% 5% 

EBITDA 7% 10% 6% 5% 0% 5% 

Earnings (loss) before taxes 5% 5% 9% 6% 0% 5% 

Net income 3% 7% 9% 6% 0% 5% 

Diluted EPS 2% 6% 11% 7% 1% 7% 

Avg. diluted shares 1% 1% -1% -2% -2% -1% 

Source: Company data, Jefferies estimates 

page 77 of 92 



Healthcare 


May 28, 2013 

Merck & Co. 

Exhibit 118: Merck & Co. annual income statement, 2012A-2017E (US$ millions) 

($) millions 2012A 2013E 2014E 2015E 2016E 2017E Incr. abs. 

'12A-'17E 

CAGR 

'12A-'17E 

Net sales 47,268 44,287 44,405 45,150 46,326 47,162 (106) 0% 

COGS 11,386 11,084 10,857 11,002 11,226 11,962 576 

Gross profit 35,882 33,203 33,548 34,148 35,100 35,200 (682) 0% 

SG&A 12,414 11,717 11,100 11,100 10,879 10,439 (1,975) 

R&D 7,912 7,999 8,001 8,081 8,161 8,243 331 

Operating income 15,556 13,487 14,447 14,967 16,061 16,519 962 1% 

EBITDA 17,474 15,587 16,547 17,067 18,161 18,619 

Equity (income) from affiliates (641) (489) (119) (40) (28) (25) 616 

Other (income)/expense, net 621 633 796 734 731 733 112 

Pretax income 15,576 13,343 13,770 14,273 15,357 15,811 234 0% 

Taxes 3,701 2,963 3,058 3,170 3,411 3,511 

Tax rate 24% 22% 22% 22% 22% 22% (155)bps 

Net income 11,743 10,270 10,597 10,988 11,831 12,184 441 1% 

Non controlling interest 132 109 115 115 115 115 

Diluted EPS 3.82 3.45 3.68 3.91 4.31 4.53 3% 

wt. avg dil. shares outstanding 3,075 2,976 2,877 2,812 2,749 2,688 

Dividend per share 1.68 1.76 1.86 2.00 2.16 2.36 7% 


COGS 24.0% 25.0% 24.5% 24.4% 24.2% 25.4% 135bps 

Gross margin 75.9% 75.0% 75.5% 75.6% 75.8% 74.6% (128)bps 

SG&A 26.3% 26.5% 25.0% 24.6% 23.5% 22.1% (413)bps 

R&D 16.7% 18.1% 18.0% 17.9% 17.6% 17.5% 74bps 

Operating margin 32.9% 30.5% 32.5% 33.1% 34.7% 35.0% 211bps 



Net margin 24.8% 23.2% 23.9% 24.3% 25.5% 25.8% 99bps 

Dividend payout ratio 44.6% 50.6% 50.5% 51.2% 50.2% 52.1% 

% YOY Change 2012A 2013E 2014E 2015E 2016E 2017E 

Net sales -2% -6% 0% 2% 3% 2% 

Gross profit -2% -7% 1% 2% 3% 0% 

Operating income 0% -13% 7% 4% 7% 3% 

EBITDA -2% -11% 6% 3% 6% 3% 

Pretax income 1% -14% 3% 4% 8% 3% 

Net income 0% -13% 3% 4% 8% 3% 

Diluted EPS 1% -10% 7% 6% 10% 5% 

wt. avg dil. shares outstanding -1% -3% -3% -2% -2% -2% 


page 78 of 92 



Healthcare 


May 28, 2013 

Exhibit 119: Merck & Co. cash flow statement, 2012A-2017E (US$ millions) 

($) millions 2012A 2013E 2014E 2015E 2016E 2017E 

Net income (Non-GAAP) 11,743 10,270 10,597 10,988 11,831 12,184 

GAAP Adjustment (5,444) (4,269) (4,000) (4,000) (4,000) (4,000) 

Net income (GAAP) 6,299 6,001 6,597 6,988 7,831 8,184 

Depreciation and amortization 6,978 5,954 4,881 4,129 3,539 3,064 

Equity income from affliates (642) (489) (119) (40) (28) (25) 

Dividends and distr. from equity affliates 291 5 - - - - 

Deferred income taxes 669 (71) - - - - 

Share based compensation 335 310 307 307 301 289 

In-process research & development 200 30 - - - - 

Other reconciliation charges 28 326 - - - - 

Accounts receivable 349 64 (105) (209) (203) (134) 

Inventories (482) 203 (30) (131) (128) (452) 

Trade accounts payable (302) (215) 12 36 36 129 

Accrued and other current liabilities (717) - - - - - 

Income taxes payable (34) 127 0 79 116 11 

Noncurrent liabilities (1,747) 755 146 464 453 299 

Other changes in assets & liabilities (1,203) 69 80 112 128 160 

Net cash from operating activities 10,022 13,068 11,769 11,735 12,045 11,524 

Capital expenditures (1,954) (1,924) (1,894) (1,921) (1,960) (2,088) 

Purchase of securities and other investments (12,841) (4,010) - - - - 

Proceeds from sales of securities & investments 7,783 3,161 - - - - 

Other 207 47 - - - - 

Net cash from investing activities (6,805) (2,726) (1,894) (1,921) (1,960) (2,088) 

Net change in short-term debt 624 880 - - - - 

Proceeds from issuance of debt 2,562 - - - - - 

Payments on debt (22) (1,931) - - - - 

Purchase of treasury stock (2,591) (7,180) (4,000) (4,000) (4,000) (4,000) 

Proceeds from exercise of options 1,310 92 - - - - 

Cash dividends paid (5,236) (5,201) (5,352) (5,624) (5,938) (6,343) 

Other 86 (1) - - - - 

Net cash from financing activities (3,267) (6,841) (9,352) (9,624) (9,938) (10,343) 

Effect of exchange rates (30) (194) - - - - 

Net change in cash (80) 3,307 523 190 147 (907) 

Cash at beginning of period 13,531 13,451 16,759 17,282 17,471 17,618 

Cash at end of period 13,451 16,759 17,282 17,471 17,618 16,711 

Total investments 9,995 10,946 10,946 10,946 10,946 10,946 

Total debt (20,569) (25,900) (25,900) (25,900) (25,900) (25,900) 

Net Cash/ (Debt) 2,877 1,805 2,328 2,517 2,664 1,757 


page 79 of 92 



Healthcare 


May 28, 2013 

Exhibit 120: Merck & Co. balance sheet, 2012A-2017E (US$ millions) 

($) millions 2012A 2013E 2014E 2015E 2016E 2017E 

Cash and equivalents 13,451 16,759 17,282 17,471 17,618 16,711 

Short-term investments 2,690 2,998 2,998 2,998 2,998 2,998 

Accounts receivable 7,672 7,901 8,006 8,215 8,418 8,552 

Inventories 6,535 6,570 6,600 6,731 6,860 7,312 

Prepaid expenses, taxes, and 

other current assets 

4,509 4,484 4,484 4,484 4,484 4,484 

Current assets 34,857 38,712 39,370 39,900 40,378 40,057 

Investments 7,305 7,948 7,948 7,948 7,948 7,948 

Net property, plant and 

equipment 

Goodwill and intangible 

assets 

16,030 15,846 15,710 15,618 15,574 15,659 

41,217 37,564 34,713 32,597 31,062 30,001 

Other 6,723 7,004 6,816 6,549 6,276 6,012 

Total Assets 106,132 107,074 104,557 102,612 101,238 99,678 

Short-term debt 4,315 4,736 4,736 4,736 4,736 4,736 

Accounts payable 1,753 1,869 1,881 1,917 1,954 2,082 

Income taxes payable 1,200 1,202 1,202 1,281 1,397 1,408 

Dividends payable 1,343 1,407 1,487 1,599 1,727 1,887 

Accrued and other current 

liabilities 

9,737 9,569 9,569 9,569 9,569 9,569 

Current liabilities 18,348 18,783 18,875 19,102 19,382 19,682 

Long-term debt 16,254 21,164 21,164 21,164 21,164 21,164 

Deferred taxes and 

16,067 17,631 17,777 18,241 18,694 18,992 

noncurrent liabilities 

Minority interest 2,443 2,577 2,577 2,577 2,577 2,577 

Total Liabilities 53,112 60,155 60,393 61,084 61,817 62,415 

Common stock 1,788 1,788 1,788 1,788 1,788 1,788 

Other paid-in capital 40,646 40,727 40,727 40,727 40,727 40,727 

Retained earnings 39,985 40,762 42,007 43,371 45,265 47,106 

Other comprehensive income (4,682) (4,629) (4,629) (4,629) (4,629) (4,629) 

Treasury stock (24,717) (31,729) (35,729) (39,729) (43,729) (47,729) 

Shareholder's Equity 53,020 46,919 44,164 41,528 39,422 37,263 

Total Liabilities and SE 106,132 107,074 104,557 102,612 101,238 99,678 


page 80 of 92 



Healthcare 


May 28, 2013 

Pfizer 

Exhibit 121: Pfizer annual income statement, 2012A-2017E (US$m) 

($) millions 2012A 2013E 2014E 2015E 2016E 2017E Incr. abs. 

'12A-'17E 

CAGR 

'12A-'17E 

Pharmaceuticals 51,214 48,270 46,945 47,271 47,045 49,008 -2,206 -0.9% 

Other Non-Pharma 7,772 8,259 8,774 9,311 9,838 10,371 2,599 5.9% 

Net sales 58,986 56,529 55,719 56,582 56,882 59,379 393 0.1% 

COGS 10,994 10,849 10,485 10,902 11,475 12,209 1,215 

Gross profit 47,992 45,680 45,234 45,680 45,408 47,170 -822 

SI&A 16,281 15,931 15,612 16,081 16,242 16,729 448 

R&D 7,346 6,841 6,499 6,369 6,241 6,366 -980 

Operating income 24,365 22,908 23,123 23,230 22,925 24,075 -290 -0.2% 

EBITDA 26,471 25,143 24,942 25,152 24,847 25,997 -473 -0.4% 

Adj. non op. (inc.)/exp. 1,036 1,063 1,594 1,435 1,393 1,364 328 

Pretax income 23,330 21,845 21,529 21,795 21,532 22,711 -618 -0.5% 

Taxes 6,824 6,123 6,136 6,211 6,137 6,473 -351 

Tax rate 29.3% 28.0% 28.5% 28.5% 28.5% 28.5% -75bps 

Minority interest and d/c ops 29 126 171 185 212 244 216 

Net income 16,477 15,596 15,222 15,398 15,183 15,995 -482 -0.6% 

DILUTED EPS $2.19 $2.23 $2.30 $2.38 $2.39 $2.57 3.3% 

Diluted shares outstanding 7,395 6,702 6,548 6,408 6,281 6,167 

Dividends per share $0.88 $0.97 $1.08 $1.17 $1.29 $1.44 10.4% 


COGS 18.6% 19.2% 18.8% 19.3% 20.2% 20.6% 


SI&A 27.6% 28.2% 28.0% 28.4% 28.6% 28.2% +57bps 

R&D 12.5% 12.1% 11.7% 11.3% 11.0% 10.7% -173bps 


EBITDA margin 44.9% 44.5% 44.8% 44.5% 43.7% 43.8% -109bps 

Pretax margin 39.6% 38.6% 38.6% 38.5% 37.9% 38.2% -130bps 

Net margin 27.9% 27.6% 27.3% 27.2% 26.7% 26.9% -100bps 

Dividend Payout ratio 39.7% 42.9% 47.0% 49.1% 53.6% 56.0% 

YOY % Change 2012A 2013E 2014E 2015E 2016E 2017E 

Net sales -12% -4% -1% 2% 1% 4% 

COGS -16% -1% -3% 4% 5% 6% 

Gross profit -12% -5% -1% 1% -1% 4% 

SI&A -16% -2% -2% 3% 1% 3% 

R&D -13% -7% -5% -2% -2% 2% 

Operating income -8% -6% 1% 0% -1% 5% 

EBITDA -5% -5% -1% 1% -1% 5% 

Pretax income -10% -6% -1% 1% -1% 5% 

Net income -9% -5% -2% 1% -1% 5% 

Diluted EPS -5% 2% 3% 3% 1% 7% 

Diluted shares outstanding -6% -9% -2% -2% -2% -2% 


page 81 of 92 



Healthcare 



May 28, 2013 

Hold: 1900p Price Target 

Scenarios 

Target Investment Thesis 

• Limited top-line growth in 2013E (JEFe 

1% CER, guidance 1% CER). 

• Buyback of JEFe £2bn (guidance £1bn- 

£2bn) helps support EPS growth. 

• Uncertainties regarding respiratory 

franchise will remain an overhang. 

• Our 2013E CORE EPS forecast (+2.7% at 

CER) is below management guidance 

(CER CORE EPS growth of 3%-4%). 

• 2014 CORE EPS: 131.1p; Target 

Multiple: 14.5 x; Target Price 1900p. 

Upside Scenario 

• Stronger top-line growth possibly due 

to an improvement in European 

pricing trends and slower than 

expected generic/ pricing erosion of 

the tail. 

• Operating Margin increases further 

helped by higher than expected cost 

savings. 

• Positive progress in the pipeline. 

• 2013 Target Multiple: 16.0x; Target 

Price: 2100p. 

Downside Scenario 

• Weaker top-line growth as European 

Advair generics appear earlier than 

expected and tail erodes faster. 

• Operating Margin squeezed due to 

genericisation of high margin sales 

and only limited availability of cost 

savings. 

• Late-stage pipeline failures (e.g. 

MAGE-A3 and/ or darapladib. 

• 2013 Target Multiple: 13.0x Target 

Price: 1700p. 

THE LONG VIEW 

Long Term Analysis 

1 Year Forward P/E 

Long Term Financial Model Drivers 

Other Considerations 


(2012A-17E) 

LT Earnings CAGR +10% 

Organic Revenue Growth +5% 

Acquisition Contribution 0% 

Core Operating Margin Expansion 

/ (Contraction) 

+190bps 

GlaxoSmithKline is already through its 

patent cliff as well as the Avandia 

withdrawal and a drop in H1N1 related 

sales. However pricing pressure in Europe 

has delayed any significant return to sales 

growth to date. Uncertainties regarding 

pipeline clinical and regulatory risk, as 

well as pricing/ generic competition for its 

largest product (Advair) in Europe are set 

to remain a feature through 2013. 

Peer Group 

Group P/Es (2014E) 

EPS Growth (12-17E) vs. P/E (‘14E) 

Recommendation / Price Target 

Ticker Rec. PT 

GSK Hold 1900p 

AZN Hold 3700p 

NOVN Buy CHF88 

ROG Buy CHF285 

SASY Buy €100 

Source: Thomson Reuters, Jefferies estimates 


Catalysts 

• Q2’13 – Dabrafenib (BRAF) US regulatory 

decision in metastatic melanoma (likely 

May/ June). 

• Q3’13 – Trametinib (MEK) US regulatory 

decision in metastatic melanoma (PDUFA 

3 rd of September). 

• Q3’13 – Dolutegravir US regulatory 

decision in HIV (Priority review; PDUFA 

17th Aug). 

• H2’13 – MAGE-A3 and darapladib Phase III 

page 82 of 92 

data. 

Company Description 

GlaxoSmithKline was formed in 2001 through the merger of Glaxo Wellcome and 

SmithKline Beecham to form one of the World's largest Pharmaceuticals companies with 

approximately 7% market share globally. The company primarily operates in the fields of 

Pharmaceuticals, Vaccines and Consumer Health. 



Healthcare 


May 28, 2013 

AstraZeneca 

Hold: 3700p Price Target 

Scenarios 


• Our assumptions are in line with 

management’s FY13 revenue guidance of 

• Revenues benefit from slower generic erosion 

to key products including Pulmicort respules 

mid to high single digit (CER) decline (JEFe - and therapeutic substitution of Crestor 

7.5%) 

• Operating Margin benefits from higher sales 

• CORE EPS to decline significantly more than with maintained operational costs. 

revenues (JEFe-27%). 

• Share buyback halted to maximize cash 

• Operating cost expenditure reflects 

continued spend in R&D and promotional 

effort behind key products. 

• Target PE Multiple: 12.3x; Target Price 

3700p, yielding c5% 


• Brilinta launch accelerates reflecting increased 

promotional effort. 

• Surplus cash deployed into accretive 

acquisitions and positive R&D updates help 

expand multiple. 

• 2014 Target PE Multiple: 13.3x; Target Price: 

4000p 


• Revenues hit by rapid generic erosion 

of the top line and increasing 

therapeutic substitution for Crestor. 

• Margins squeezed by genericisation of 

high margin sales and limited cost 

savings as focus remains on long term. 

• Yield support and confidence in 

dividend likely to become more 

important for share price than multiple. 

• 2013 Target PE Multiple: 11.3x Target 

Price: 3400p 

THE LONG VIEW 





(2012E-17E) 

LT Earnings CAGR -7% 

Organic Revenue Growth -4% 


Operating Margin Expansion -505bp 


With Seroquel IR genericising and Nexium 

and Crestor generics on the horizon, the 

loss of high-margin sales will compress 

operating margins. At least maintaining 

operational spending will compound this 

as new management look to the long 

term. With cash only likely spent on boltons, 

recovery is some time away, but 

could be rewarding for those with a 2-3 

year horizon. Meanwhile shares should be 

supported by a 5% yield. 

Peer Group 


EPS Growth (11A-16E) vs. P/E (‘13E) 







SASY Buy €100 



Catalysts 

• Q2 2013 Olaparib and selumetinib 

data at ASCO 

• Q2 2013 More Fostamatinib Phase III 

(OSKIRA 2 & 3) studies readout in RA 

• Mid 2013 Onglyza (SAVOR) outcome 

study data expected. 

• Q4 2013 Lesinurad Phase III data in 

gout read out. 

• Q4 2013 Potential Forxiga US reg dec 

following ‘mid-year’ re-filing 

page 83 of 92 


AstraZeneca was formed in April 1999 when the UK-based Zeneca merged with Sweden's 

Astra AB, creating a company with 2011 revenues of $33.6bn. AstraZeneca is an almost 

pure play Pharma/Biologics/Vaccines company, with only minor interests in other 

healthcare areas such as patient care (Aptium), which accounts for less than 1% of group 

sales. AstraZeneca also has a significant joint venture with Merck & Co. from which the 

latter receives substantial royalties on a number of significant products including Prilosec 

and Nexium. 



Healthcare 


Bayer 

May 28, 2013 

Buy: €98 Price Target 

Scenarios 


• Our 2013E Group sales and CORE EPS 

forecasts are broadly in-line with 

management guidance. 

• We are confident of growth in the 

Pharmaceuticals division and CropScience 

continues to benefit from strong 

commodity prices. MaterialScience cost 

and price pressures should now be 

stabilizing. 

• 2014 CORE EPS: €6.55; Target Multiple: 

15.0x; Target Price €98. 


• Weaker-than-expected commercial 

performance for competitors (Pradaxa and 

Eliquis) raises Xarelto expectations. 

• Economic recovery delivers upside to 

current MaterialScience expectations. 

• Company moves forward with 

restructuring, separating MaterialScience. 

• New launches surprise on the upside 

(Eylea, Stivarga, Xofigo, Riociguat) 

• 2014 Target Multiple: 16.5x; Target Price: 

€108. 


• Weaker-than-expected Xarelto growth 

• Economic weakness continues to hold 

MaterialScience back, below current 

assumptions. 

• CropsScience weakens below current 

expectations after commodity prices peak 

out. 


€88. 

THE LONG VIEW 





2012A-17E Revenue CAGR 5.0% 

2012A-17E CORE EPS CAGR 12.2% 


2012A-17E Operating Margin 

Expansion / (Contraction) 

+229bps 

MaterialScience still faces a degree of 

uncertainty from the current economic 

environment, but as this improves it 

should become an important positive 

driver. CropScience expects further 

growth in 2013. Pharmaceuticals is 

pressured by Betaseron competition and 

Yaz generics, but new and recently 

launched products should offset this. 


Peer Group 


5Yr EPS CAGR (11A-16E) vs. P/E (‘14E) 



BAYN Buy €98 

AZN Hold 3,700p 

GSK Hold 1,900p 



SAN Buy €100 



Catalysts 

• Q2’13: Regorafenib EU reg dec in mCRC. 

• H2’13 : Lemtrada regulatory decisions in 

US and Europe for MS (co-promotion with 

Sanofi). 

• Q4’13: Alpharadin regulatory decision in 

Europe for HRPC bone metastases. 

• Q4’13: Riociguat US reg dec in CTEPH / 

PAH (priority review) 


The Bayer Group is a global enterprise with core competencies in the fields of healthcare 

(pharmaceuticals and consumer), crop science and high-tech materials. Bayer HealthCare, 

a subsidiary of Bayer AG, is one of the world's leading, innovative companies in the 

healthcare and medical products industry and is based in Leverkusen, Germany. 

page 84 of 92 



Healthcare 


May 28, 2013 

Roche 

Buy: CHF285 Price Target 

Scenarios 


• Forecasts for 2013 are in line with 

guidance which looks for Revenue growth 

in line with 2012 (JEFe +4%) and CORE EPS 

to grow ahead of sales (JEFe +10%) at 

constant exchange rates. 

• Main product growth helps offset 

accelerating declines in Pegasys and 

Lucentis. 

• 2014 Target Multiple: 18.4x; Target Price 

CHF. 


• Stronger growth in 2013 due to strong 

Kadcyla launch and Perjeta uptake. Pegasys 

sees slower erosion from lower than 

anticipate warehousing ahead of all oral 

regimes launching. 

• Operating Margin expands further due to 

cost savings and operational gearing. 

• Positive data for PD-L1 and GA101 vs 

Rituxan. 


CHF300 


• Aggressive warehousing of Hep C patients 

leads to rapid erosion of Pegasys sales. 

Lucentis erosion accelerates due to Eylea 

competition. Kadcyla launch disappoints. 

• Operating Margin squeezed due to loss of 

high-margin sales with lower-thanexpected 

cost savings. 

• Emerging threats to Avastin and Herceptin 

(ramucirumab, PD1, biosimilars). 

• 2014 Target Multiple: 17.4x Target Price: 

CHF270 

THE LONG VIEW 

Long-Term Analysis 



Long-Term Financial Model Drivers 

(2012A-17E) 

LT Earnings CAGR 

(underlying) 

+9% 

Organic Revenue Growth +4% 

Operating Margin Expansion / 

(Contraction) 

+470bps 


Over the next five years we expect Roche to 

produce solid top-line growth. However, the 

EPS growth rate will temporarily slow, 

predominantly in 2014E, as Pegasys and 

Lucentis are both pressured by increasing 

competition, whilst Xeloda and Valcyte 

genericise. Nevertheless, we expect the 

company will use its strengthening balance 

sheet to bridge the gap before strong 

underlying fundamentals once again take 

over as the driver of growth 

Peer Group 


Earnings Growth (12-17E) vs. P/E (‘14E) 







SAN Buy €100 



Catalysts 

• Q2’13 ASCO further detail on GA101 and 

PD-L1 

• Q2’13 EU decision for Erivedge in 

advanced BCC 

• H2’13 EU regulatory decision for Kadcyla 

• H2’13 US & EU regulatory decision for 

GA101 (obinutuzumab) in CLL 

• Q4’13 Phase II PCSK9 LDL lowering data 


Roche is a global healthcare company. The Group operates through two divisions: 

Pharmaceuticals and Diagnostics. The Pharmaceuticals division develops prescription drugs 

through its discovery operations at Roche, Genentech and Chugai. Its Diagnostic segment 

provides products and services in all fields of medical testing, and is the global leader. 

Roche has a controlling interest and fully consolidates sales from Chugai in which it has a 

61.5% stake. 

page 85 of 92 



Healthcare 


Merck & Co. 

May 28, 2013 

Buy: $54.00 Price Target 

Scenarios 


• We expect flat top-line growth 

(2012A-17E CAGR) combined with 

cost savings and financial engineering 

to deliver earnings growth of +3.5% 

(2012A-17E CAGR). 

• We expect shares to trade on a circa 

0% -5% premium to the 2014 US 

market PE multiple with a 

corresponding value of $54.00. 


• Better-than-expected growth of key 

drivers such as Januvia and Isentress 

• Better-than-expected R&D execution 

and product launches for suvorexant, 

odanacatib, anti-PD-1 and Hep C 

• Potential restructuring of Consumer 

and Animal Health 

• Based on this scenario, we expect the 

shares to trade at 15% premium to the 

2013 US market PE multiple with a 

corresponding value of $58.00. 


• Worse-than-expected growth of key 

drivers such as Januvia franchise and 

Isentress 

• R&D portfolio failures and poorly 

executed launches, e.g. suvorexant, 

odanacatib, anti-PD-1 and Hep C 

• If this scenario is achieved we expect 

the shares to trade at a 10% discount 

to the 2013 US market PE multiple 

with a corresponding value of 

$46.00. 

THE LONG VIEW 






2012A-17E Revenues CAGR +0.0% 

2012A-17E Earnings CAGR +3.5% 

Management is under pressure to deliver 

shareholder value and improve top line 

growth. With the initiation of share 

repurchases the angst of the investors is 

quelled at least in the short-term. If 

pipeline does not deliver and top line does 

not grow the management could be 

forced to divest certain businesses such as 

Consumer and Animal Health which can 

unlock some of the shareholder value. 

Peer Group 

Group P/Es 

Earnings Growth vs P/E 



MRK Buy $54.00 

ABT Buy $45.00 

ABBV Buy $54.00 

BMY Buy $53.50 

JNJ Hold $97.00 

LLY Hold $49.00 



PFE Buy $33.00 

Catalysts 

• Incretin safety workshop 12 th -13 th 

June. 

• Suvorexant FDA regulatory decision 

Q3 ‘13. 

• FDA AdCom panel to review 

sugammadex application 18 th July. 

• HepC portfolio data Q4’13. 


Merck & Co. can trace its roots back to 1891 when the US subsidiary of the German 

Pharmaceuticals company E. Merck first began trading. From the company’s early exploits 

in the field of antibiotics, anti-inflammatory medicines and vaccines, amongst others, 

combined with a series of significant mergers and acquisitions, it is now one of the largest 

Pharmaceutical companies in the world with brand names including Zocor, Zetia, Vytorin 

and Januvia. Merck became one of the largest US pharmaceutical companies with the 

acquisition of Schering-Plough in 2009 and recorded $47bn in sales in 2012. 

page 86 of 92 



Healthcare 


Eli Lilly 

May 28, 2013 

Hold: $49.00 Price Target 

Scenarios 


• We assume loss of Cymbalta in late 

2013 and Alimta in early 2017 to 

generics will drive flat revenues 

2012A-17E 

• We expect income funds to become 

increasingly cautious on the quality of 

the yield, given the high payout ratio. 

• Company fails to meet longer term 

margin targets 


• Strong, positive Phase III breast cancer 

data for ramucirumab in Q4 2013. 

• Company prevails in the Alimta patent 

challenge (in court August 2013) 

• Company can meet longer term 

margin targets 

• Shares could trade on a yield support 

of 3.5% with a valuation of $56.00. 


• Inability to maintain a well-covered 

dividend payment in the mid-term. 

• Key late stage pipeline 

disappointment. 

• In this scenario, we expect shares to 

trade at a dividend yield support of 

circa 4.5% equivalent to around 

$44.00. 

THE LONG VIEW 

• Target price of $49 per share is based 

on yield support around 4.0% 






2012A-17E Revenues CAGR -0.5% 

2012A-17E Earnings CAGR -3.7% 

Management‘s current strategy includes 

organic growth through pipeline delivery 

and growth from Animal Health, Japan 

and Emerging markets. Stock price 

currently reflects pipeline catalysts and 

yield support. As yield approaches the 

sector average, reliance on pipeline 

delivery would increase. However pipeline 

efficacy has lately been less than robust 

with no sign of near-term inflection. 

Peer Group 

Group P/Es 

Earnings Growth vs P/E 



LLY Hold $49.00 

ABBV Buy $54.00 

BMY Buy $53.50 

JNJ Hold $97.00 

MRK Buy $54.00 

PFE Buy $33.00 



Catalysts 

• Further Phase III data/details from 

dulaglutide AWARD program.at ADA 

Q2’13 

• Empagliflozin Phase III headline data 

and presentation at ADA Q2’13 

• Ramucirumab Phase III data/details in 

breast cancer at SABCS Q4’13 

• Analyst Day (3 rd Oct) 


Eli Lilly and Company was founded in 1876 in Indiana. Lilly discovers, develops, 

manufactures and sells pharmaceutical products and also has an Animal Health business 

segment. In 2012, Eli Lilly generated group net sales of $22.6bn. 

page 87 of 92 



Healthcare 


May 28, 2013 


Abbott Laboratories (Abbott) is engaged in discovery, development, manufacture, and sale of diversified lines of healthcare products. The 

Company operates in four segments: Pharmaceutical Products, Diagnostic Products, Nutritional Products and Vascular Products. 

AbbVie is a research-based specialty biopharmaceuticals company with a broad portfolio of medicines, including leadership in immunology 

and virology, and a pipeline of breakthrough therapies. 

AstraZeneca was formed in April 1999 when the UK-based Zeneca merged with Sweden's Astra AB, creating a company with 2011 revenues 

of $33.6bn. AstraZeneca is an almost pure play Pharma/Biologics/Vaccines company, with only minor interests in other healthcare areas such 

as patient care (Aptium), which accounts for less than 1% of group sales. AstraZeneca also has a significant joint venture with Merck & Co. 

from which the latter receives substantial royalties on a number of significant products including Prilosec and Nexium. 

The Bayer Group is a global enterprise with core competencies in the fields of healthcare (pharmaceuticals and consumer), crop science and 

high-tech materials. Bayer HealthCare, a subsidiary of Bayer AG, is one of the world's leading, innovative companies in the healthcare and 

medical products industry and is based in Leverkusen, Germany. 

Bristol-Myers Squibb Company was incorporated under the laws of the state of Delaware in August 1933 under the name of Bristol-Myers 

Company. In 1989, Bristol-Myers Company changed its name as a result of a merger. The company is engaged in the discovery, development, 

licensing, manufacturing, marketing, distribution and sale of pharmaceutical products. 

Eli Lilly and Company was founded in 1876 in Indiana. Lilly discovers, develops, manufactures, and sells pharmaceutical products and also 

has an animal health business segment. 

GlaxoSmithKline was formed in 2001 through the merger of Glaxo Wellcome and SmithKline Beecham to form one of the World's largest 

Pharmaceuticals companies. The company primarily operates in the fields of Pharmaceuticals, Vaccines and Consumer Health. 

Johnson & Johnson is engaged in the research and development, manufacture and sale of a range of products in the healthcare field. The 

Company operates in three business segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. 

Merck is a global research-driven company that discovers, manufactures, and markets a broad range of innovative products to improve human 

and animal health. The company merged with Schering-Plough & Co. in 2009. 

Novartis was formed in 1996 from the merger of Sandoz and Ciba-Geigy. Since then, a variety of acquisitions and non-healthcare related 

disposals have created a global diversified healthcare company. Its business areas now spread outside the core branded pharmaceuticals into 

ophthalmics, generics, consumer healthcare and vaccines & diagnostics. 

Novo Nordisk is a pharmaceuticals company focusing on diabetes care and biopharmaceuticals. It is a market leader in insulin therapy in both 

the human insulins and insulin analogues segment. The Biopharmaceutical division focuses on haemostasis management, growth hormone 

therapy and hormone replacement therapy. 

Pfizer Inc. is a research-based, global pharmaceutical company that was incorporated in Delaware in 1942 and discovers, develops, 

manufactures and markets leading prescription medicines for humans and animals. In 2009 the company acquired Wyeth. 

Roche is a global healthcare company. The Group operates through two divisions: Pharmaceuticals and Diagnostics. The Pharmaceuticals 

division develops prescription drugs through its discovery operations at Roche, Genentech in the US and Chugai in Japan. Its diagnostic 

segment provides products and services in all fields of medical testing, and is the global leader. Roche has a controlling interest and fully 

consolidated sales from Chugai in which it has a 61.5% stake. 

Sanofi was created through the acquisition of Aventis by Sanofi-Synthelabo in 2004. Since then, a variety of acquisitions have created a global 

diversified healthcare company. Sanofi's business is comprised of three main segments namely Pharmaceuticals, Vaccines, and Animal Health. 

Zoetis, Inc. is a global leader in the discovery, development, manufacture and commercialization of animal health medicines and vaccines, 

with a focus on both livestock and companion animals. Zoetis represents the largest animal health business in the world, with over $4.2bn 

in revenue in 2011. 

Analyst Certification 

page 88 of 92 



Healthcare 


May 28, 2013 

I, Jeffrey Holford, PhD, ACA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject 

security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific 

recommendations or views expressed in this research report. 

I, Ian Hilliker, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and 

subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations 

or views expressed in this research report. 

I, Terence McManus, PhD, certify that all of the views expressed in this research report accurately reflect my personal views about the subject 

security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific 

recommendations or views expressed in this research report. 

I, Swayampakula Ramakanth, PhD, MBA, certify that all of the views expressed in this research report accurately reflect my personal views about the 

subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the 

specific recommendations or views expressed in this research report. 

Registration of non-US analysts: Ian Hilliker is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is not registered/ 

qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore may 

not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances 

and trading securities held by a research analyst. 

Registration of non-US analysts: Terence McManus, PhD is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is 

not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and 

therefore may not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public 

appearances and trading securities held by a research analyst. 

As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receives 

compensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research as 

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of reports are published at irregular intervals as appropriate in the analyst's judgement. 

Jefferies Group LLC is advising Bristol Myers Squibb on its business combination with Reckitt Benckiser Group Plc regarding Latin American licenses 

Company Specific Disclosures 

For Important Disclosure information on companies recommended in this report, please visit our website at https://javatar.bluematrix.com/sellside/ 

Disclosures.action or call 212.284.2300. 

Meanings of Jefferies Ratings 

Buy - Describes stocks that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period. 

Hold - Describes stocks that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period. 

Underperform - Describes stocks that we expect to provide a total negative return (price appreciation plus yield) of 10% or more within a 12-month 

period. 

The expected total return (price appreciation plus yield) for Buy rated stocks with an average stock price consistently below $10 is 20% or more within 

a 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated stocks with an average stock price 

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NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/ 

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regulations prohibit certain types of communications, including investment recommendations. 

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the investment merits of the company are provided. 

Valuation Methodology 

Jefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected total 

return over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of market 

risk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF, 

P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns, 

and return on equity (ROE) over the next 12 months. 

Conviction List Methodology 

1. The aim of the conviction list is to publicise the best individual stock ideas from Jefferies Global Research 

2. Only stocks with a Buy or Underperform rating are allowed to be included in the recommended list. 

page 89 of 92 



Healthcare 


May 28, 2013 

3. Stocks are screened for minimum market capitalisation and adequate daily turnover. Furthermore, a valuation, correlation and style screen 

is used to ensure a well-diversified portfolio. 

4. Stocks are sorted to a maximum of 30 stocks with the maximum country exposure at around 50%. Limits are also imposed on a sector basis. 

5. Once a month, analysts are invited to recommend their best ideas. Analysts’ stock selection can be based on one or more of the following: 

non-Consensus investment view, difference in earnings relative to Consensus, valuation methodology, target upside/downside % relative 

to the current stock price. These are then assessed against existing holdings to ensure consistency. Stocks that have either reached their 

target price, been downgraded over the course of the month or where a more suitable candidate has been found are removed. 

6. All stocks are inserted at the last closing price and removed at the last closing price. There are no changes to the conviction list during 

the month. 

7. Performance is calculated in US dollars on an equally weighted basis and is compared to MSCI World AC US$. 

8. The conviction list is published once a month whilst global equity markets are closed. 

9. Transaction fees are not included. 

10. All corporate actions are taken into account. 

Risk which may impede the achievement of our Price Target 

This report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, the 

financial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions based 

upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance of 

the financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, and 

income from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financial 

and political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates may 

adversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities such 

as ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk. 

Other Companies Mentioned in This Report 

• Abbott Laboratories (ABT: $37.76, BUY) 

• AbbVie (ABBV: $45.44, BUY) 

• AstraZeneca PLC (AZN LN: p3,428.00, HOLD) 

• Bayer AG (BAYN GR: €84.46, BUY) 

• Bristol-Myers Squibb (BMY: $47.40, BUY) 

• Eli Lilly & Co. (LLY: $54.14, HOLD) 

• GlaxoSmithKline Plc (GSK LN: p1,749.50, HOLD) 

• Johnson & Johnson (JNJ: $86.82, HOLD) 

• Merck & Co. (MRK: $47.16, BUY) 

• Novartis AG (NOVN VX: CHF71.25, BUY) 

• Novo Nordisk (NOVOB DC: DKK967.50, HOLD) 

• Pfizer, Inc. (PFE: $29.04, BUY) 

• Roche (ROG VX: CHF253.10, BUY) 

• Sanofi (SAN FP: €84.51, BUY) 

• Zoetis, Inc. (ZTS: $33.46, BUY) 

Distribution of Ratings 

IB Serv./Past 12 Mos. 

Rating Count Percent Count Percent 

BUY 771 46.95% 146 18.94% 

HOLD 742 45.19% 92 12.40% 

UNDERPERFORM 129 7.86% 2 1.55% 

Other Important Disclosures 

Jefferies Equity Research refers to research reports produced by analysts employed by one of the following Jefferies Group LLC (“Jefferies”) group 

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at Suite 2201, 22nd Floor, Cheung Kong Center, 2 Queen’s Road Central, Hong Kong. 

page 90 of 92 



Healthcare 


May 28, 2013 

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