Bear Stearns: Novartis, Serono, Speedel

Key Points from the Bear Stearns Healthcare Conference

Novartis (NOVN.VX, SFr70.20, Outperform)

Thomas Ebeling, CEO of Novartis Pharma, presented at the Bear Stearns Healthcare conference yesterday.
Key points and incremental insights are as follows:

Strategy: Novartis said it has no plans for big acquisitions: in view of the seven potential launches in the coming two years no big acquisition would be advisable€. Instead the focus will be on further licensing deals to ensure growth ahead of the market, even during transition years in 2012/2013. Novartis aims to source circa 30% of its R&D projects externally.

Operating margin: Despite upcoming launch costs, Novartis hopes to keep the pharma margin flat in 2007 (vs. 2006) and hopes to see an improvement from the second half of 2008 onwards.

CML: So far Sprycel has had a minimal impact on Glivec. Indeed, there is anecdotal evidence that patients switched by physicians to Sprycel are being switched back to Glivec due to side effects.
Tasigna (referred to internally at Novartis as €˜Super-Glivec€™) will have full phase II data at ASH 2006. Novartis hopes to conduct two head-to-head trials versus Glivec to start in the coming 12 months to evaluate Tasgna€™s potential to move into earlier therapy.

Hypertension: Novartis sees a fast uptake of Exforge, ahead of the uptake of Rasilez, but ultimately expects Rasilez to become larger than Exforge. Novartis expects Rasilez to become the next gold standard therapy in hypertension as we approach the end of the life-cyle of the current gold standard, Diovan. To achieve that goal, fixed dose combinations (expected in 2010) and outcome studies (expected in 2011) are key. For optimal positioning Novartis will have separate sales forces for Rasilez and Diovan.

Diabetes: Novartis defines Galvus' competitive profile as follows:
· Superior efficacy to Januvia (Merck & Co.)
· Superior safety to TZDs
Novartis expects the TZD€™s to generate a prescription market share of 18%-20% by 2010. Novartis provided no timelines on a Galvus/metformin fixed dose combination but claimed to be not far behind Merck.

Flu Vaccine: Novartis declined to provide a number for how many million doses of flu vaccine can be shipped, as there is insufficient visibility on whether the FDA will approve all batches.


Serono (SEO.VX, SFr863.50, Peer Perform)

Fereydoun Firouz, President of Serono Inc., and Dr Paul Lammers, Chief Medical Officer, Serono Inc., presented at the Bear Stearns Healthcare conference yesterday on behalf of the company.

MS Franchise: A focus of discussion was the MS franchise. Key take-aways were as follows:

Serono does not view the launch of Tysabri as a threat to Rebif: the Tysabri label restricts its use to the second line, whereas Rebif is a first-line therapy.

Interestingly, Serono stated that it believes there have been some issues with the reimbursement of Tysabri, restricting its uptake. When questioned if this would have any implications for the reimbursement of oral cladribine should it be approved, Serono implied that the issues were related to the side-effect profile for Tysabri, which should not be an issue for cladribine as the side-effect profile is very well known and is not associated with PML.

Serono remains very enthusiastic about oral cladribine and reiterated that it stands to be the first oral MS therapy. The CLARITY trial is recruiting well and we should expect the data in Q4 2008. If approved, cladribine would represent a paradigm shift for MS therapy. However, the company also stated that neurologists remain interested in combination therapy for MS and in the longer term we may see combination therapy with cladribine and Rebif. A phase II looking at the safety of a Rebif and cladribine combination is planned should cladribine monotherapy prove successful.


Speedel (SPPN.S-SFr167) - Outperform
More Than a One-Trick Pony?

We are initiating coverage of Speedel at the September 6, 2006 closing price of SFr167 with an Outperform rating and 2007 price target of SFr220. Speedel has an impressive and diversified late-stage pipeline and appears to be going beyond the €˜one-drug company€™ stage relatively quickly.

CURRENT VALUATION DRIVEN BY RASILEZ. Speedel was responsible for the phase I/II development of Novartis€™ renin inhibitor, Rasilez. Novartis steered Rasilez through Phase III trials and has now filed it with the FDA. Upon launch (expected early 2007) Speedel will receive royalty payments representing the first sustainable company revenues.

SPP301 REMAINS UNDERAPPRECIATED. Next up should be SPP301, now in phase III for diabetic nephropathy, a multi-billion dollar market. If successful, SPP301 should be worth more than Rasilez. In our view, not only does Speedel€™s current valuation not fully reflect SPP301€™s potential, but a phase III interim analysis and partnering deal expected in 2007 could also drive significant earnings upgrades.

COMPELLING VALUATION AND CATALYSTS TO DRIVE PERFORMANCE. Our year-end 2007 price target of SFr220 represents >30% upside from current levels and our sensitivity analysis has demonstrated significant potential for further upside. Over a three- to nine-month timeframe, we expect several key pieces of newsflow that could lead to earnings upgrades and drive outperformance of the stock.

We note that Speedel should be viewed as a high-risk investment: our base case assumes the FDA will approve Rasilez and we forecast that the company will run out of cash in 2008 but assume it will be successful in raising additional capital as required.
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