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Rating Action:

Moody's affirms Novartis' A1 rating; stable outlook

05 Nov 2021

Paris, November 05, 2021 -- Moody's Investors Service (Moody's) has today affirmed the A1 long-term ratings and P-1 short-term ratings of Swiss pharmaceutical company Novartis AG (Novartis) and its guaranteed subsidiaries, following the announcement by Novartis that it would sell to Roche Holding AG (Roche) the 53.3 million Roche shares that it held for a consideration of USD20.7 billion (CHF19 billion). The outlook on all ratings is stable.

A full list of affected ratings is provided at the end of the press release.

RATINGS RATIONALE

The affirmation of the A1 rating reflects Moody's expectation that, despite the cash injection that will initially strengthen the company's financial profile, the proceeds from the transaction will be mostly directed to investments, including acquisitions, or to shareholder returns, in line with Novartis' capital allocation strategy. Therefore, Moody's does not expect that over time the transaction will alter Novartis' financial profile materially. The affirmation assumes no change to Novartis' financial strategy and policies. Moody's regards financial strategy and risk management as a governance consideration under its ESG framework.

On 4 November 2021, Novartis announced that it would sell the 53.3 million Roche shares that it has held since May 2001 to Roche for a price of USD388.99 (CHF356.93) per share, representing a total cash inflow for Novartis of USD20.7 billion (CHF19 billion). With the sale of its stake in Roche, Novartis will no longer receive dividend payments which amounted to CHF480 million in 2020.

Novartis' A1 rating continues to reflect its large scale and leading position in pharmaceuticals and generics; limited product concentration and a degree of diversification provided by its presence in generics; a solid pipeline, with several blockbuster candidates across different therapeutic areas; and strong cash flow generation.

The A1 rating also takes into account Novartis' increasing exposure to innovative pharma, which carries higher overall risk; some exposure to patent expiries, notably Gilenya (multiple sclerosis) and Tasigna (oncology); and a degree of event risk because Novartis will continue to seek acquisitions to strengthen its pharmaceutical franchise.

RATIONALE FOR THE OUTLOOK

The stable outlook reflects Moody's expectation that over time the transaction proceeds will be allocated to investments or shareholder returns, leaving Novartis' financial profile broadly unchanged.

LIQUIDITY

Novartis' liquidity is excellent, supported by cash and cash equivalents amounting to USD7.2 billion as of 30 September 2021, access to a USD6.0 billion multiyear credit facility and solid FCF generation of about USD4 billion annually. Novartis has two US commercial paper (CP) programmes and a Japanese CP programme. The US CP programmes are backed by the company's USD6 billion five-year committed credit facility maturing in September 2024.

ESG CONSIDERATIONS

Novartis faces high industry-wide social risks related to policy risk, litigation exposure, and high manufacturing compliance standards. The company's very good product and geographic diversity, and its presence in generics, which is less exposed to litigation and pricing risks, helps mitigate these risks. Novartis has moderate exposure to environmental considerations, and it has strong corporate governance practices, a successful track record and generally conservative financial policies. The transaction will not materially affect our assessment of Novartis' corporate governance.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

An upgrade of the rating would require Novartis to maintain a solid business profile, and good product diversification, and return towards a more conservative financial policy. Quantitatively, an upgrade to Aa3 would require Moody's-adjusted gross debt/EBITDA below 2.0x and Moody's-adjusted cash flow from operations/debt in the high-40s in percentage terms, on a sustained basis.

The rating could be downgraded if Novartis' Moody's-adjusted gross debt/EBITDA stays above 2.5x for a prolonged period or its Moody's-adjusted cash flow from operations/debt fails to improve towards 40% over time. A deviation from these metrics could be somewhat accommodated if Novartis maintains cash/debt at least around 20%.

LIST OF AFFECTED RATINGS

Affirmations:

..Issuer: Novartis AG

....LT Issuer Rating, Affirmed A1

....ST Issuer Rating, Affirmed P-1

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

..Issuer: Novartis Capital Corporation

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

..Issuer: Novartis Finance Corporation

....BACKED Commercial Paper, Affirmed P-1

..Issuer: Novartis Finance S.A.

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

..Issuer: Novartis Securities Investment Ltd

....BACKED 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

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Pharmaceutical Industry published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1062755. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Headquartered in Basel, Switzerland, Novartis AG is one of the world's largest pharmaceutical companies. In 2020, Novartis generated USD49 billion of revenue through two business lines: the Innovative Medicines division (about 80% of revenue) and the Sandoz generics division (about 20%).

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

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