A Financial Review: Pharmaceuticals Industry

PHARMACEUTICALS INDUSTRYTeam 12 Birdman Sachs

AGENDA

OVERVIEW OF COMPANIES

BUSINESS ANALYSIS AND FINANCIAL HIGHLIGHTS

RATIO ANALYSIS AND COMPARISON

RISK ANALYSIS AND MARKET PERFORMANCE

INVESTMENT CONSIDERATIONS AND RECOMMENDATIONS

GSK MRK NVS

COMPANY OVERVIEW

GSK

MRK

NVS

Offices in 115 countries

$44.4B Revenues

$128.41Bn Market Cap

89,000 Employees

$44.03B Revenues

$160.38Bn Market Cap

#2 Sales Worldwide

$57.9B Revenues

$217.32Bn Market Cap

Share

GSK

GSK CORPORATE GOVERNANCE

Institutions FundsOthers

ExecutiveNon-Executive

20%80%

67%33%

Ownership Board Profile

Board Experience

20%

27%53%

84%

GSK BUSINESS ANALYSIS AND FINANCIAL HIGHLIGHTS

Quality of Sales (09’-13’)

>1%US EU

PH VC HC

Operating Profits and Cost Analysis (09’-13’)

(1) 30% growth in Immuno-inflamation

products (2) 20% growth in

Antibacterial Vaccines (3) 36% decline in

Combivir

19.1%

SALE

SN

et In

com

e

GEO

UN

IT

High R&D ROI Royalty

IncomeTax

Incentives

(1) 1% increase in core operating profit (2) 1.6% Increase in

COGS (3) R&D ROI 14%

GSK BUSINESS ANALYSIS AND FINANCIAL HIGHLIGHTS

Operating Cash (09’-13’)

02000400060008000

2009 2010 2011 2012 2013

7.2B 7.8B 6.8B 4.3B 6.9B

Free Cash Flow (09’-13’)

01500300045006000

2009 2010 2011 2012 2013

6.0B 5.2B 5.0B 2.8B 5.3B

Capital Expenditures (09’-13’)

0475950

14251900

2009 2010 2011 2012 2013

1.9B 1.6B 1.3B 1.5B 1.7B

GSK BUSINESS ANALYSIS AND FINANCIAL HIGHLIGHTS

Financial Structure

Equity Debt

Dividends

Trends and Future Growth

3.1B 3.2B 3.6B 4.0B 3.9B

‘09 ‘10 ‘11 ‘12 ‘13

EPS 4% 8%

Products

+

+

MRK

MRK CORPORATE GOVERNANCE

Institutions FundsOthers

ExecutiveNon-Executive

50%50%

84%16%

Ownership Board Profile

Board Experience

16%

42%42%

76%

BUSINESS ANALYSIS AND FINANCIAL HIGHLIGHTS

Quality of Sales (09’-13’)

8%EM DM

PH CC

Operating Profits and Cost Analysis (09’-13’)

(1) Januvia went down

(2)Emerging markets grew by 2%

(3) CAGR sales of 14.3%

28.6%

SALE

SN

et In

com

e

GEO

UN

IT

$2.3B Acquisition

Cost

Low level of Productivity

Increased COGS

(1) Acquisition of AZ Electronics Material

MRK

BUSINESS ANALYSIS AND FINANCIAL HIGHLIGHTS

Operating Cash (09’-13’)

0325065009750

13000

2009 2010 2011 2012 2013

3.4 10.9 12.3 10 10.4

Free Cash Flow (09’-13’)

0500

100015002000

2009 2010 2011 2012 2013

1.5 1.7 1.7 2 1.9

Capital Expenditures (09’-13’)

0275055008250

11000

2009 2010 2011 2012 2013

MRK

1.9 9.1 10.7 8.1 8.5

BUSINESS ANALYSIS AND FINANCIAL HIGHLIGHTS

Financial Structure

Equity Debt

Dividends

Trends and Future Growth

3.5B 4.9B 4.8B 5.2B 5.3B

‘09 ‘10 ‘11 ‘12 ‘13

MRK

Products+

Higher Risk— Continued decrease in efficiency and

profitability

NVS

NVS CORPORATE GOVERNANCE

Institutions FundsOthers

ExecutiveNon-Executive

27%73%

80%20%

Ownership Board Profile

Board Experience

18%

44%38%

10%

BUSINESS ANALYSIS AND FINANCIAL HIGHLIGHTS

Quality of Sales (09’-13’)

4%EM DM

Growth Products PH

Operating Profits and Cost Analysis (09’-13’)

(1) Zometa and Diovan grew by 7%

(2) $8 Billion increase in sales

5%

SALE

SO

pera

ting

Inco

me

GEO

UN

IT

Increased margins

Low level of Productivity

Focused Innovation

(1)R&D expense goes down by 8%

NVS

R&D Cost Management

BUSINESS ANALYSIS AND FINANCIAL HIGHLIGHTS

Operating Cash (09’-13’)

1300013500140001450015000

2009 2010 2011 LTM LTM

14 14.3 14.2 13.2 13.2

Free Cash Flow (09’-13’)

0900

180027003600

2009 2010 2011 LTM LTM

2.2 2.4 3.1 3.6 3.6

Capital Expenditures (09’-13’)

0300060009000

12000

2009 2010 2011 LTM LTM

NVS

11.9 12 11 9.6 9.6

BUSINESS ANALYSIS AND FINANCIAL HIGHLIGHTS

Financial Structure

Equity Debt

Dividends

Trends and Future Growth

4.5B 5.5B 6.1B 6.2B 6.2B

‘09 ‘10 ‘11 ‘12 ‘13

NVS

Market Share

+ PH business

MID-HIGH SINGLE DIGIT GROWTH

CN RUS+DOUBLE

DIGIT GROWTH

NVSMRKGSK

RATIO ANALYSIS

NVSMRKGSK RATIO ANALYSIS

GSK MRK NVS Industry AverageCurrent Ratio 1.1X 2.1X 1.2X 1.7X

Quick Ratio 0.7X 1.4X 0.7X 1.2X

0

0.55

1.1

1.65

2.2

GSK MRK NVS Industry

LIQUIDITY

Quick Ratio

Current Ratio

NVSMRKGSK RATIO ANALYSIS

GSK MRK NVS Industry TA Turnover 0.6X 0.4X 0.5X 0.6XFA Turnover 3.0X 2.8X 3.4X 5.8XAR Turnover 4.9X 5.7X 5.9X 2.9X

INVT Turnover 1.9X 2.4X 2.8X N/A

0

1.5

3

4.5

6

GSK MRK NVS Industry

ASSET MANAGEMENT

FA Turnover

AR Turnover

TA Turnover

INVT Turnover

NVSMRKGSK RATIO ANALYSIS

GSK MRK NVS Industry AverageTotal D/E 2.7X 0.4X 0.3X 0.8X

Total D/C 0.7X 0.3X 0.2X 0.4X

TIE Ratio 10.4X 15X 22X 13.4X

0

7.5

15

22.5

30

GSK MRK NVS Industry

DEBT MANAGEMENT

Total D/C

TIE Ratio

Total D/E

NVSMRKGSK RATIO ANALYSIS

GSK MRK NVS Industry ROA 11.7% 6.3% 8.0% 8.6%ROE 60.9% 11.2% 14.3% 26.1%BEP 16.7% 8.4% 8.6% N/A

EBIT Margin 29.3% 22.6% 17.5% 23.6%

0

17.5

35

52.5

70

GSK MRK NVS Industry

PROFITABILITY

ROE

BEP

ROA

EBIT Margin

INDUSTRY SPECIFIC NUMBERS

PHASE I 27 4

PHASE II 46 19 27

NVSMRKGSK

PHASE III 31 16 23

N/A

INDUSTRY SPECIFIC NUMBERS

REGISTERED 11 7

APPROVED 8 3 2

NVSMRKGSK

4

MARKET PERFORMANCE

NVSMRKGSK

MARKET PERFORMANCE

PE: 15.65X PE: 37.81X PE: 21.88XNVSMRKGSK

5-year movement

MARKET PERFORMANCE

5-year Return

0

30

60

90

120

0 1.25 2.5 3.75 5

98.42%

78.75%

55.45%

118%105%

GSKMRKNVS DJIA S&P

RISK ANALYSIS

!Regulation and

Currency Exchanges

Intellectual Property and Production

Reputation

INVESTMENT CONSIDERATION

!-R&D Cost

Management -Strong Profitability

-High amounts of debt

-Weak Europe Sales -High P/E (GSK might

be overvalued already)

Pros Cons

Shor

t -Te

rm

-Strong Pipeline Products

-Strong US Sales -High Dividend Yield

-High amounts of LT debt

-Pricing Pressure from Generic Competition

Long

-Ter

m

GSK

BUY

Recommendation

INVESTMENT CONSIDERATION

-Post integration-acquisition potential

-Lower margins -Decline in Sales

-Lower FCF -High P/E (MRK might be overvalued by the

market)

Pros Cons

Shor

t -Te

rm

-Increasing demand in Emerging Markets -High Dividend Payout Ratio

-Weak Product Development -High COGS -Poor Cost

Management -Pricing pressure from generic competitionLo

ng -T

erm

MRK

Recommendation

HOLD

INVESTMENT CONSIDERATION

-Strong Price Momentum

-Increase in Sales -Good Inventory

Management

-Lower FCF -Under Leveraged

Pros Cons

Shor

t -Te

rm

-Better Capital Structure

-Better Debt Management

-Strong Operating Profit

!-High COGS

-Pricing pressure from generic competition

Long

-Ter

m

NVS

Recommendation

BUY

END OF PRESENTATION

APPENDIX: INDUSTRY OVERVIEW

!Industry value from $359 to

$476B (up 33%) by 2020

Major patent conflicts, stricter

measures, healthcare law

Growing generic

competition ($400M)

Fundamentals: Business depends on research, product development and patent applications

Challenges: Established companies are now focused on distribution efficiency, return on investments and pricing

pressures