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Rating Action:

Moody's affirms Novartis' A1 rating; stable outlook

26 Nov 2019

Paris, November 26, 2019 -- Moody's Investors Service has today affirmed the A1 long-term ratings of Swiss multinational pharmaceutical maker Novartis AG (Novartis) and its guaranteed subsidiaries. Concurrently, Moody's has also affirmed the company's P-1 short term ratings. The affirmation follows the company's announcement on 24 November of plans to acquire The Medicines Company, which is developing Inclisiran - a potential cholesterol lowering drug, for approximately $9.7 billion. The outlook on the ratings is stable.

"Acquiring The Medicines Company will strengthen Novartis' cardiovascular franchise, however, it comes at a high price," says Knut Slatten, a Moody's Vice President and lead analyst for Novartis. "Owning The Medicines Company also comes with a degree of risk because Inclisiran's true market potential is unlikely to be known until 2024, and Novartis will also have to convince payors about the drug's value proposition".

Affirmations:

..Issuer: Novartis AG

.... Issuer Rating, Affirmed A1

.... Issuer Rating, Affirmed P-1

....Senior Unsecured Regular Bond/Debenture, Affirmed A1

..Issuer: Novartis Capital Corporation

....Senior Unsecured Regular Bond/Debenture, Affirmed A1

..Issuer: Novartis Finance Corporation

....Senior Unsecured Commercial Paper, Affirmed P-1

..Issuer: Novartis Finance S.A.

....Senior Unsecured Regular Bond/Debenture, Affirmed A1

..Issuer: Novartis Securities Investment Ltd

....Senior Unsecured Commercial Paper, Affirmed P-1

Outlook Actions:

..Issuer: Novartis AG

....Outlook, Remains Stable

..Issuer: Novartis Capital Corporation

....Outlook, Remains Stable

..Issuer: Novartis Finance S.A.

....Outlook, Remains Stable

..Issuer: Novartis Securities Investment Ltd

....Outlook, Remains Stable

RATINGS RATIONALE

On 24 November 2019, Novartis announced that it would buy The Medicines Company in a transaction worth $9.7 billion. The transaction -- which is expected to close in the first quarter of 2020 - will be financed with a mix of cash at hand and new long term debt.

The acquisition makes strategic sense as it will contribute to a further strengthening of Novartis' cardiovascular franchise. The acquired lead asset -- Inclisiran -- belongs to a new class of cholesterol lowering drug and will complement Novartis' existing cardiovascular franchise. Moody's understands that there will be only a limited need to hire additional field forces.

Inclisiran will be filed with US Food and Drug Administration (FDA) for regulatory approval before year-end. A filing in the European Union is expected to take place during the first quarter of 2020. Underpinned by the drug candidate's solid clinical profile from previously undertaken phase III studies, Moody's would expect the drug to reach the market in 2021.

Whereas Inclisiran does display a number of advantages -- including a solid clinical profile and a superior convenience profile -- Moody's nonetheless considers that the acquisition comes with a degree of risk attached to it. This is because the drug's true potential will not be known until the results of a long-term cardiovascular outcome trial -- expected to be finalized by 2024 -- is released. The ability to demonstrate a meaningful reduction in cardiovascular events will be essential for Inclisiran in order to become a multibillion blockbuster in our view. Novartis also foresees a slow ramp-up in sales until 2024. Secondly, Moody's notes that Novartis will also have to overcome the hurdles that competing drugs, such as Amgen Inc.'s (Baa1 stable) Repatha and Sanofi's (A1 stable) Praluent have faced in terms of reimbursement and commercial access more broadly. Moody's considers commercial access to be the key risk in the transaction, however, the rating agency also considers that this risk, one of the key social risks for pharmaceutical companies globally, is partly mitigated by Novartis' commitment to price the drug within the existing bands of cost effectiveness.

The A1 rating of Novartis continues to reflect the company's (1) large scale, with leading positions in pharmaceuticals and generics; (2) still-strong business diversification, with limited product concentration, despite the spinoff of Alcon Inc. (Alcon, Baa2 stable); (3) pipeline — which is one of the strongest in the industry — with several blockbuster candidates across several therapeutic areas; (4) strong cash flow generation capabilities; and (5) buffer stemming from the store of value represented by Novartis' equity stake in Roche Holding AG (Roche, Aa3 stable).

However, these factors are balanced against (1) a financial policy that has grown more shareholder friendly over time; (2) an increasing exposure to innovative pharma, which carries a higher risk profile overall; (3) some exposure to patent expiries (ie Afinitor, Gilenya); and (4) a degree of event risk as Novartis will continue to seek acquisitions to strengthen its pharmaceutical franchise. Like other pharmaceutical companies, Novartis faces rising exposure to regulatory and legislative efforts aimed at reducing drug prices. These are fueled in part by demographic and societal trends that are pressuring government budgets because of rising healthcare spending.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Moody's expectations that Novartis will maintain its leverage ratio -- defined as Moody's (adjusted) gross debt/ EBITDA - below 2.5x. Moreover, the stable outlook also factors in that Novartis will gradually accelerate its EBITDA growth allowing for free cash flows to the amount of $5 billion or higher. The stable outlook continues to leave some headroom for bolt-on acquisitions, however, financial flexibility within the A1 rating category has diminished with the acquisition of the Medicines Company announced in November 2019. The stable outlook does not factor in substantial share buyback programmes beyond the roughly $1 billion Novartis is undertaking to mitigate dilution from employee participation programs.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward pressure on the rating is unlikely to materialise in the near term. Over time, an upgrade to Aa3 would require Novartis to maintain a solid business profile, including diversification, and a retrenchment towards a less shareholder-friendly financial policy. Quantitatively, an upgrade to Aa3 would require a (gross) debt/EBITDA below 2x on a sustainable basis with a cash flow from operations (CFO)/debt ratio in the high 40s.

The A1 rating could come under pressure should Novartis' adjusted gross leverage move above 2.5x or if the cash flow from operations/debt ratio were to fall below 40% on a sustainable basis. A deviation from these metrics could be accommodated provided that Novartis maintains a cash/debt ratio at around 20%.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Pharmaceutical Industry published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Knut Slatten
Vice President - Senior Analyst
Corporate Finance Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Jeanine Arnold
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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