Pair Trade: Long Roche - Short Novartis

Tuesday, October 9th 2012

Investment Case

Technical Comment

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Company Description

Analysts Recommendations:

Source: Bloomberg

Roche Holding (ROG VX) H1 2012 was solid. Key drugs and Emerging

markets showed significant growth in Q2 2012. At its investor day, Roche

reiterated its debt reduction plan. The company indicated that it does not

intend to complete large-scale M&A. Smaller-sized opportunities are

preferred. This could underpin Roche’s ability to return incremental cash to

shareholders. The latest IMS sales released at the end of September

suggests that Q3 could have been another good quarter for Roche´s US

Business.

Restructuring benefits (further productivity measures), a well-diversified

Pharma portfolio, emerging market growth and late stage pipeline news

flow (new products are expected to be launched and several clinical trials

are on a late-stage) seem to support Roche stock price.

Novartis (NOVN VX): The US patent expiry of Novartis’ Diovan has occurred

on September 21st

. Mylan received approval for their generic. Novartis

should apply a high price reduction to maintain market share. This was

expected and created uncertainty on the company’s 2012-2014 growth

trajectory.

The company is focused in long-term value creation. This seems the right

strategy. At the end of September, Novartis reported positive phase III for

Relaxin (for Acute Heart Failure) earlier than expected by the market.

However, near-term, the market will probably wait for higher visibility

regarding:

Investment decisions behind new products in Pharma;

Novartis’ post-Diovan margins.

The ROG VX/NOVN VX has a current ratio of 3.13. We will define as our

target a 3.39. We will use as a stop-loss 2.97.

Market Price Data

Roche Holding (ROG VX)

Last Price (CHF) 183.20

YTD Change 15.08%

Mkt Cap (CHF bn) 158.806

Novartis (NOVN VX)

Last Price (CHF) 58.5

YTD Change 8.85%

Mkt Cap (CHF bn) 158.177

Source: Bloomberg

Next Report Date

Roche 3Q Sales October 16th

Novartis 3Q Results October 25th

Source: Bloomberg

Market Multiples

P/E 2013 CAGR EPS DY 2013

Est. 2013/11 Est. Est.

Roche Holding 12.14 10.74% 4.47%

Novartis 11.35 -0.70% 4.10%

Source: Bloomberg