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COMPANY NOTE
Target Estimate Change UK Healthcare Pharmaceuticals September 12, 2013 AstraZeneca PLC (AZN LN) Price target 2,850.00p Respiratory Market 2025: Too Little, Too Late Key Takeaway
AstraZeneca does not look well equipped to deal with the evolving respiratory
market, which will see pressure from new entrants, treatment modalities and
the increasing presence of value brands and generics. Whilst Symbicort may
benefit from potential aggressive price action from GlaxoSmithKline on Advair,
its own new products come too late to the market in our view and at a time
Market Data
when competition and the impact of generics will be severe.
3,544.50p - 2,786.00p Proprietary survey and market model predicts constriction of AZN's respiratory
Total Entprs. Value (MM): franchise: We have published a "deep dive" report on the respiratory market today
Market Cap. (MM): based on our proprietary physician survey and interviews. This is an important part of Insider Ownership: AstraZeneca's business with Symbicort being one of the few major long duration assets as well as with respect to the recent acquisition of Pearl. The conclusions from our work Institutional Ownership: are worrisome for AstraZeneca, whose respiratory portfolio does not look well equipped to Shares Out. (MM): deal with competitive forces in the near to mid term. As a result we have lowered our EPS estimates by 3%-12% across 2014E-17E and our estimates are now 6%-7% below consensus during 2014E-16E.
Survey points to increasing competitive pressure: Our survey indicates that the new
once-daily LABA/ ICS combination, Breo, is expected to drive increasing share of the US
COPD market for GlaxoSmithKline. In addition, the likely launch of GSK's once daily LABA/
LAMA, Anoro Ellipta, along with others such as Novartis' QVA149 (Ultibro), will add further
pressure. Whilst AstraZeneca could launch its own recently acquired PT003 twice daily
Jeffrey Holford, PhD, ACA *
LABA/ LAMA in 2016, it may not be competitive and Symbicort will see intense pressure in an increasingly fragmented market. The expectation that we will see multi-source US Advair (212) 336-7409 [email protected] generics as soon as 2017 only worsens the increasingly bleak outlook for Symbicort.
Ian Hilliker §
Still waiting on the sidelines as valuation looks challenging: With increasing risk
44 (0) 20 7029 8672 [email protected] Terence McManus, PhD §
that we see income funds rotate out of the more dividend focused Pharmaceuticals stocks as visibility on tapering rises, we find valuation on AstraZeneca increasingly challenging. Our 44 (0) 20 7029 8274 [email protected] below consensus estimates in the mid term are concerning to us and we reiterate our Hold Swayampakula Ramakanth, PhD, MBA *
rating with a lowered PT of 2,850p.
(212) 336-7054 [email protected] David Gu, PhD *
Valuation: Our target price of 2,850p is calculated by placing our 2013E DPS estimate
(212) 336-7459 [email protected] on a c6.0-6.5% yield. Risks: Product LOEs; cost saving; acquisitions; R&D; manufacturing;
reimbursement; product safety/ litigation/ withdrawal.
§ Jefferies International Limited Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have a conflictof interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 15 to 18 of this report.
Target Estimate Change September 12, 2013 Hold: 2850p Price Target
Scenarios
Target Investment Thesis Downside Scenario  Our assumptions are in line with  Revenues benefit from slower generic erosion  Revenues hit by rapid generic erosion management's FY13 revenue guidance of to key products including Nexium and of the top line and increasing mid to high single digit (CER) decline (JEFe - therapeutic substitution of Crestor therapeutic substitution for Crestor.  Operating Margin benefits from higher sales  Margins squeezed by genericisation of  CORE EPS to decline significantly more than with maintained operational costs. high margin sales and limited cost revenues (JEFe-22%).  Brilinta launch eventually accelerates reflecting savings as focus remains on long term.  Share buyback halted to maximize cash increased promotional effort.  Yield support and confidence in  Operating cost expenditure reflects  Surplus cash deployed into accretive dividend likely to become more continued spend in R&D and promotional acquisitions and positive R&D updates help important for share price than multiple. effort behind key products. expand multiple.  2014 Target PE Multiple: 9.1x; Target  2014 Target PE Multiple: 10.3x; Target Price  2014 Target PE Multiple: 12.6x; Target Price: Price: 2530p, yielding c7% 2850p, yielding c6.25% Long Term Analysis
1 Year Forward P/E
Long Term Financial Model Drivers Other Considerations With Seroquel IR generic and Nexium and LT Earnings CAGR
Crestor generics on the horizon, the loss Organic Revenue Growth of high-margin sales will compress Acquisition Contribution operating margins. At least maintaining Operating Margin Expansion operational spending compounds this as new management looks to the long term. With cash only likely spent on bolt-ons, recovery is some time away. With Fed easing appearing on the horizon, stocks valued on yield may become increasingly Source: DataStream, Jefferies estimates susceptible to rotation into cyclicals Peer Group
Group P/Es (2014E) EPS Growth (12A-17E) vs. P/E (‘14E) Recommendation / Price Target Source: Thomson Reuters, Jefferies estimates Source: Thomson Reuters, Jefferies estimates Catalysts
Company Description
AstraZeneca was formed in April 1999 when the UK-based Zeneca merged with Sweden's
Q3 2013 Phase I data for PD-L1
Astra AB, creating a company with 2011 revenues of $33.6bn. AstraZeneca is an almost (MEDI4736) at ESMO (30 Sept). pure play Pharma/Biologics/Vaccines company, with only minor interests in other H2 2013 Brilinta sales inflection
healthcare areas such as patient care (Aptium), which accounts for less than 1% of group begins to emerge. sales. AstraZeneca also has a significant joint venture with Merck & Co. from which the Q4 2013 Lesinurad Phase III data in
latter receives substantial royalties on a number of significant products including Prilosec Q4 2013 Potential Forxiga US reg dec
following ‘mid-year' re-filing.
Jeffrey Holford, PhD, ACA, Equity Analyst, (212) 336-7409, [email protected]
Please see important disclosure information on pages 15 - 18 of this report.
Target Estimate Change September 12, 2013 Deep Dive on Respiratory Drives Major Updates To Estimates We have published the results of a 52 US based Pulmonologists survey and detailed inhaled maintenance Respiratory market model today in a separate note entitled: ‚Respiratory Market 2025: Taking A Deep Breath And A Deep Dive‛. As one of the world's leading Respiratory market players (14% of the Global market value in 2012A), much of the dynamics within this market will have material consequences for AstraZeneca. Key conclusions
AstraZeneca should see slowing growth for its respiratory franchise from 2014E as
Symbicort volume is pressured by in-class competitors (Breo for COPD in the US, value
brands and potentially generics ex-US), and new class launches (LABA/ LAMA class). We
expect AstraZeneca to increase the price of Symbicort in the US, following expected
Advair price increases by GlaxoSmithKline (GSK LN, 1,629p, Hold), which should ensure
franchise value growth through to 2016E. Volume pressure in the US and ex-US, and price
pressure ex-US will likely push the franchise into decline from 2016E, with the launch of
Novartis' LABA/ ICS QMF149 further adding to the pressure on the franchise.
We see significant pressure on Symbicort revenues should a substitutable generic of Advair launch in the US by 2017E, compounded by reference pricing pressure from non-substitutable LABA/ ICS generics in Europe from 2014E. Whilst the launch of AstraZeneca's LABA/ LAMA PT003 will provide a new leg to the franchise, this will be a comparatively late entrant to the class in 2016E. Revising our company model to reflect this and other fine tuning, including updated FX, lowers our Group revenue expectations by 0% to 7% and our CORE EPS numbers by 0% to 12% over the forecast period. We have cut our PT for AstraZeneca to 2,850p from 3,200p and reiterate our Hold rating. AstraZeneca expected to be buffeted by external forces and late entry with its
own new products
AstraZeneca has done well to gain significant market share with Symbicort despite its late
market entrance and inferior MDI device in the US (according to surveyed
pulmonologists). Over the mid-term we expect some of the market share for the LABA/
LAMA drug class to come from the LABA/ ICS class in COPD, as suggested by our survey.
We expect AstraZeneca to enter the market with a LABA/ LAMA (PT003) in 2016E,
therefore over the near-term some market share will be lost to GlaxoSmithKline in the US
and ex-US and Novartis (NOVN VX, CHF71.35, Buy) ex-US.
Exhibit 1: JEFe company modeled sales for AstraZeneca, 2009A-2020E
02009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Total respiratory franchise (all inhaled, oral, and injectable classes) Source: Jefferies estimates, company data Jeffrey Holford, PhD, ACA, Equity Analyst, (212) 336-7409, [email protected]
Please see important disclosure information on pages 15 - 18 of this report.
Target Estimate Change September 12, 2013 AstraZeneca has a MABA in Phase II development, for which we expect the ultimate utility to be within a MABA/ ICS fixed dose combination to produce LABA/ LAMA/ ICS triple therapy. In addition, AstraZeneca's Pearl unit has a triple combination product, termed PT010 in development (glycopyrrolate, formoterol fumarate and an ICS, in a MDI device). We expect AstraZeneca to be well positioned to launch a triple-therapy around the same time as GlaxoSmithKline, although we expect GlaxoSmithKline to employ a dry-powder inhaler with once-daily dosing which would be superior to Peal's MDI according to surveyed pulmonologists. Exhibit 2: Global sales of key AstraZeneca inhaled respiratory products,
2008A-2025E
Symbicort (LABA/ ICS) PT003 (LABA/ LAMA) Source: Jefferies estimates, company data We expect AstraZeneca's inhaled respiratory franchise (key products) to peak at $3.7bn in 2015E, followed by a slow decline through to 2018E. Our new expectations are $1.8bn lower than our previous expectation in 2018E, but in-line with consensus expectations. Exhibit 3: AstraZeneca inhaled key respiratory combination Exhibit 4: AstraZeneca inhaled key respiratory combination
products franchise, JEFe vs. consensus
products franchise, new vs. old
AZN consensus (Symbicort, PT003) JEFe previous expectations (Symbicort, PT003 [risk-adjusted]) JEFe current expectations (Symbicort, PT003 [risk-adjusted]) JEFe current expectations (Symbicort, PT003 [risk-adjusted]) Source: Jefferies estimates, company data, EvaluatePharma Source: Jefferies estimates, company data Jeffrey Holford, PhD, ACA, Equity Analyst, (212) 336-7409, [email protected]
Please see important disclosure information on pages 15 - 18 of this report.
Target Estimate Change September 12, 2013 Late development of new products likely to see Symbicort highly exposed to
competitors in the US
We expect Symbicort volume to be pressured by the introduction of the LABA/ LAMA
class, and the introduction of GlaxoSmithKline's Breo Ellipta (LABA/ ICS) in the US for
COPD. Symbicort is expected to lose 11% of its US COPD LABA/ ICS market share in five
years due to the presence of Breo Ellipta according to surveyed pulmonologists. We
expect GlaxoSmithKline to increase the price of Advair over the next few years to stimulate
switching to Breo Ellipta in the US. We expect AstraZeneca to follow this pricing trend in
the US, helping to offset volume losses. We would expect significant volume pressure for
Symbicort in the US (especially on new patients) once an Advair generic becomes
available in 2017E, in our opinion.
Exhibit 5: US key inhaled respiratory market volume
Exhibit 6: US key inhaled respiratory market value ($m) for
(prescriptions) for AZN franchise
AZN franchise
02008A 2010A 2012A 2014E 2016E 2018E 2020E 2022E 2024E 02008A 2010A 2012A 2014E 2016E 2018E 2020E 2022E 2024E Symbicort (LABA/ ICS) PT003 (LABA/ LAMA) Symbicort (LABA/ ICS) PT003 (LABA/ LAMA) Source: Jefferies estimates Source: Jefferies estimates
Ex-US franchise similarly exposed, but with softer generic pressures
Underlying demand for AstraZeneca's products outside of the US is expected by us to be
driven by increasing adoption of combination products and COPD/ asthma awareness in
the Emerging Markets. This will likely be offset by increased novel branded products (e.g.
QMF149), value brands (e.g. Flutiform) and generic competition (e.g. Sandoz) ex-US.
AstraZeneca's Symbicort may also come under pressure from some switching from LABA/
ICSs' to Novartis' and GlaxoSmithKline's LABA/ LAMAs' ex-US over the near term.
As with GlaxoSmithKline, we expect significant ex-US value loss for the AstraZeneca inhaled respiratory franchise (key products) due to reference pricing and other price pressure generated by the introduction of value brands and generics. Jeffrey Holford, PhD, ACA, Equity Analyst, (212) 336-7409, [email protected]
Please see important disclosure information on pages 15 - 18 of this report.
Target Estimate Change September 12, 2013 Exhibit 7: Ex-US key inhaled respiratory market volume
Exhibit 8: Ex-US key inhaled respiratory market value ($m)
(prescription equivalents) for AstraZeneca
for AstraZeneca
2008A 2010A 2012A 2014E 2016E 2018E 2020E 2022E 2024E 2008A 2010A 2012A 2014E 2016E 2018E 2020E 2022E 2024E Symbicort (LABA/ ICS) PT003 (LABA/ LAMA) Symbicort (LABA/ ICS) PT003 (LABA/ LAMA) Source: Jefferies estimates Source: Jefferies estimates We expect global AstraZeneca (key products) volume growth to increase at a CAGR of 1% 2012A–25E. Supported by price increases in the US, we expect global value growth at a CAGR of 1% 2012A-25E. Exhibit 9: Global key inhaled respiratory market volume
Exhibit 10: Global key inhaled respiratory market value
(prescription equivalents) for AZN franchise
($m) for AZN franchise
2008A 2010A 2012A 2014E 2016E 2018E 2020E 2022E 2024E 2008A 2010A 2012A 2014E 2016E 2018E 2020E 2022E 2024E Symbicort (LABA/ ICS) PT003 (LABA/ LAMA) Symbicort (LABA/ ICS) PT003 (LABA/ LAMA) Source: Jefferies estimates Source: Jefferies estimates Jeffrey Holford, PhD, ACA, Equity Analyst, (212) 336-7409, [email protected]
Please see important disclosure information on pages 15 - 18 of this report.
Target Estimate Change September 12, 2013 Financial Models and Catalysts Exhibit 11: AstraZeneca key changes to forecasts
(US$) millions
'12A-'17E
Net Sales
Sales growth (%)
JEFe vs. Cons.
Cons. Sales est. JEFe vs. Cons. Sales CORE EPS (Diluted)
EPS growth (%)
JEFe vs. Cons.
JEFe vs. Cons. CORE EPS Source: Jefferies estimates, company data Exhibit 12: Jefferies 2013 Estimates versus management guidance
Metric
JEF Estimate
2013 Guidance
A mid to high single digit decline at CER Core Gross Margin Some decline for 2013 (82.4% in FY 2012) CORE Operating Costs (CORE SG&A + CORE R&D) increase at low-mid single digit range vs 2012 at CER CORE Other Income Significantly below $600m (following Pulmicort Respules genericisation) To decline significantly more than revenue (based on New CORE 2012 EPS of $6.87) Source: Jefferies estimates, company data Jeffrey Holford, PhD, ACA, Equity Analyst, (212) 336-7409, [email protected]
Please see important disclosure information on pages 15 - 18 of this report.
Target Estimate Change September 12, 2013 Exhibit 13: Jefferies revenue estimates versus consensus for Exhibit 14: Jefferies EPS estimates versus consensus for
AstraZeneca, 2012A-2017E
AstraZeneca, 2012A-2017E
Source: Jefferies estimates, FactSet, company data Source: Jefferies estimates, FactSet, company data Exhibit 15: AstraZeneca quarterly net sales, 2012A vs.
Exhibit 16: AstraZeneca quarterly earnings, 2012A vs.
Source: Jefferies estimates, FactSet, company data Source: Jefferies estimates, FactSet, company data Jeffrey Holford, PhD, ACA, Equity Analyst, (212) 336-7409, [email protected]
Please see important disclosure information on pages 15 - 18 of this report.
Target Estimate Change September 12, 2013 Exhibit 17: Consensus 2014E earnings and PE premium
Exhibit 18: Historical PE relative to UK market on 1-year
relative to the UK market for AstraZeneca
forward Consensus earnings for AstraZeneca
Premium to UK Market PE Consensus Earnings (USD) Source: Jefferies estimates, FactSet, company data Source: Jefferies estimates, FactSet, company data Exhibit 19: Summary catalyst calendar for Novartis
Q3 results
Q4 results
Q1 results
EU reg dec for metformin FDC First Phase III Gout data (CLEAR Generics launch - IV on 1st Jan; Oral tablet from 27th May 2014 (US ‘mid-year' re-file following 1 & 2, LIGHT, CRYSTAL) Phase II data in 2nd line NSCLC EU reg. dec. for Quad Flu (PDUFA 11 Jan 2014) Phase II Asthma data (anti IL-5R) Japanese reg.dec. if filed Q2'13; Phase III weekly suspension PEGASUS-TIMI 54 Outcomes Phase II data in asthma and ulcerative colitis data (DURATION-NEO 1 & 2) study phase III data Anti-PD-L1 Phase I data in Solid US reg.dec. in rare forms of Japanese reg. dec Phase II melanoma data Tumours at ESMO (30th Sept) lipodystrophy (priority review Nexium OTC
granted 4th June) US reg dec for OTC use Phase II data in CKD Phase II data in Psoriatic Benralizumab (MEDI-563) (Pfizer licensed w'wide rights)
Arthritis and Asthma Phase II COPD data (anti IL-5R) Phase II (SHINE) data due in Phase II data in RA Phase II data in COPD Phase II data due in SLE Phase II persistant asthma data SGRM Phase II data in COPD Phase II data in Parkinson's Phase II data in MDD Phase II data due in SLE Phase II data due in ESRD Source: Jefferies estimates, company data Jeffrey Holford, PhD, ACA, Equity Analyst, (212) 336-7409, [email protected]
Please see important disclosure information on pages 15 - 18 of this report.
Target Estimate Change September 12, 2013 Exhibit 20: AstraZeneca revenue breakdown, 2012A-2017E (US$ millions)
Product sales
2017E Increment
absolute '12A-'17E
'12A-'17E
Total Sales
Brilinta/Brilique Local Anesthetics 229 192 171 154 138 122 Seloken/Toprol-XL Non seasonal flu 37 118 132 165 190 198 Other marketed products
Total Marketed Products
Pipeline
Source: Jefferies estimates, company data Jeffrey Holford, PhD, ACA, Equity Analyst, (212) 336-7409, [email protected]
Please see important disclosure information on pages 15 - 18 of this report.
Target Estimate Change September 12, 2013 Exhibit 21: AstraZeneca pipeline revenue breakdown, 2012A-2017E (US$ millions)
Product sales
Increment
absolute
'12A-'17E
Pipeline
Q- LAIV (MEDI-3250) Naloxegol (NKTR-118) Olaparib (BRCA ovarian) AZD1722 (RDX5791) Mavrilimumab (CAM-3001) benralizumab (MEDI-563) tralokinumab (CAT-354) Sifalimumab (MEDI-545) Source: Jefferies estimates, company data Jeffrey Holford, PhD, ACA, Equity Analyst, (212) 336-7409, [email protected]
Please see important disclosure information on pages 15 - 18 of this report.
Target Estimate Change September 12, 2013 Exhibit 22: AstraZeneca annual income statement, 2012A-2017E (US$ millions)
($) millions
2017E Increment
absolute '12A-'17E
'12A-'17E
Net sales
27,973 25,913 24,006 23,493 22,626 21,796
Gross profit
23,041 21,211 19,939 19,717 19,278 18,754
(4,241) (4,197) (4,204) (4,204) (4,204) (4,204) (8,389) (8,487) (8,220) (8,055) (7,748) (7,303) Operating profit
11,159 8,866 7,522 7,450 7,301 7,209
10,666 8,888 7,197 7,187 7,096 7,052
Net Finance Expense Profit before Tax
10,693 8,428 7,084 7,015 6,872 6,784
(2,030) (1,929) (1,558) (1,508) (1,443) (1,425) Profit after Tax
8,663 6,499 5,525 5,507 5,429 5,359
Non-controlling interest Net Profit
8,633 6,484 5,485 5,467 5,389 5,319
Weighted avg. shares Dividend per share
Margin Analysis
Operating margin Dividend payout ratio % YoY Change
Operating profit Profit before Tax Profit after Tax Weighted avg. shares Source: Jefferies estimates, company data Jeffrey Holford, PhD, ACA, Equity Analyst, (212) 336-7409, [email protected]
Please see important disclosure information on pages 15 - 18 of this report.
Target Estimate Change September 12, 2013 Exhibit 23: AstraZeneca cashflow statement, 2012A-2017E (US$ millions)
($) millions
Profit before Tax (CORE) GAAP adjustment total Profit before Tax (Reported) Finance income and expense Depreciation, amortisation and impairment Increase in working capital and short term provisions Other non-cash movements Cash generated from operations
Net cash from operating activities
Movement in short term investments and fixed deposits Purchase of property, plant and equiment Acquisitions of business operations Disposal of property, plant and equipment Payments made by subsidiaries to non-controlling interests Net cash from investing activities
Proceeds from issue of share capital Repurchases of shares Raising (Repayment) of loans Movement in derivative financials instruments Movement in short term borrowings Net cash from financing activities
Net change in cash and cash equivalents
Amounts reclassified as held for sale Effect of exchange rates Cash and equivalents at start of period (incl. overdrafts) Cash at end of period
Breakdown of Net cash/(debt)
Cash and Cash equivalents Short term investments and derivatives Net short term cash/(debt)
Long term investments Net cash/(debt) at the end of the period
Source: Jefferies estimates, company data Jeffrey Holford, PhD, ACA, Equity Analyst, (212) 336-7409, [email protected]
Please see important disclosure information on pages 15 - 18 of this report.
Target Estimate Change September 12, 2013 Exhibit 24: AstraZeneca balance sheet, 2012A-2017E (US$ millions)
($) millions
Cash and short-term investments Trade and other receivables Other investments Derivative financial instruments Income tax receivable Current assets
Property, plant and equipment Intangible assets Derivative financial instruments Other investmens Deffered tax assets Total Assets
Interest-bearing loans and borrowings Trade and other payables Derivative financial instruments Income tax payable Current liabilities
(13,903)
(15,889)
(13,785)
(13,725)
(12,185)
(11,844)
Interest-bearing loans and borrowings Deferred tax liabilities Retirement benefit obligations Total Liabilities
(29,588)
(30,922)
(28,596)
(28,561)
(26,880)
(26,507)
Share premium account Retained earnings Non-controlling interests Total equity
Total Liabilities and SE
Source: Jefferies estimates, company data Jeffrey Holford, PhD, ACA, Equity Analyst, (212) 336-7409, [email protected]
Please see important disclosure information on pages 15 - 18 of this report.
Target Estimate Change September 12, 2013 AstraZeneca was formed in April 1999 when the UK-based Zeneca merged with Sweden's Astra AB, creating a company with 2011 revenuesof $33.6bn. AstraZeneca is an almost pure play Pharma/Biologics/Vaccines company, with only minor interests in other healthcare areas suchas patient care (Aptium), which accounts for less than 1% of group sales. AstraZeneca also has a significant joint venture with Merck & Co.
from which the latter receives substantial royalties on a number of significant products including Prilosec and Nexium.
I, Jeffrey Holford, PhD, ACA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject
security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific
recommendations or views expressed in this research report.
I, Ian Hilliker, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and
subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations
or views expressed in this research report.
I, Terence McManus, PhD, certify that all of the views expressed in this research report accurately reflect my personal views about the subject
security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific
recommendations or views expressed in this research report.
I, Swayampakula Ramakanth, PhD, MBA, certify that all of the views expressed in this research report accurately reflect my personal views about the
subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the
specific recommendations or views expressed in this research report.
I, David Gu, PhD, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and
subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations
or views expressed in this research report.
Registration of non-US analysts: Ian Hilliker is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is not registered/
qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore may
not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances
and trading securities held by a research analyst.
Registration of non-US analysts: Terence McManus, PhD is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is
not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and
therefore may not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public
appearances and trading securities held by a research analyst.
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For Important Disclosure information on companies recommended in this report, please visit our website at Meanings of Jefferies Ratings
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The expected total return (price appreciation plus yield) for Buy rated stocks with an average stock price consistently below $10 is 20% or more withina 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated stocks with an average stock priceconsistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. For Underperformrated stocks with an average stock price consistently below $10, the expected total return (price appreciation plus yield) is minus 20% within a 12-month period.
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Jeffrey Holford, PhD, ACA, Equity Analyst, (212) 336-7409, [email protected]
Please see important disclosure information on pages 15 - 18 of this report.
Target Estimate Change September 12, 2013 Jefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected totalreturn over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of marketrisk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF,P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns,and return on equity (ROE) over the next 12 months.
Conviction List Methodology
1. The aim of the conviction list is to publicise the best individual stock ideas from Jefferies Global Research 2. Only stocks with a Buy or Underperform rating are allowed to be included in the recommended list.
3. Stocks are screened for minimum market capitalisation and adequate daily turnover. Furthermore, a valuation, correlation and style screen is used to ensure a well-diversified portfolio.
4. Stocks are sorted to a maximum of 30 stocks with the maximum country exposure at around 50%. Limits are also imposed on a sector basis.
5. Once a month, analysts are invited to recommend their best ideas. Analysts' stock selection can be based on one or more of the following: non-Consensus investment view, difference in earnings relative to Consensus, valuation methodology, target upside/downside % relativeto the current stock price. These are then assessed against existing holdings to ensure consistency. Stocks that have either reached theirtarget price, been downgraded over the course of the month or where a more suitable candidate has been found are removed.
6. All stocks are inserted at the last closing price and removed at the last closing price. There are no changes to the conviction list during 7. Performance is calculated in US dollars on an equally weighted basis and is compared to MSCI World AC US$.
8. The conviction list is published once a month whilst global equity markets are closed.
9. Transaction fees are not included.
10. All corporate actions are taken into account.
Risk which may impede the achievement of our Price Target
This report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, thefinancial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions basedupon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance ofthe financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, andincome from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financialand political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates mayadversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities suchas ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk.
Other Companies Mentioned in This Report
• Bayer AG (BAYN GR: €83.35, BUY)• GlaxoSmithKline Plc (GSK LN: p1,619.00, HOLD)• Merck & Co. (MRK: $48.14, BUY)• Novartis AG (NOVN VX: CHF71.10, BUY)• Roche (ROG VX: CHF237.90, BUY)• Sanofi (SAN FP: €72.32, BUY) Jeffrey Holford, PhD, ACA, Equity Analyst, (212) 336-7409, [email protected]
Please see important disclosure information on pages 15 - 18 of this report.
Target Estimate Change September 12, 2013 Distribution of Ratings
IB Serv./Past 12 Mos.
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Please see important disclosure information on pages 15 - 18 of this report.
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Please see important disclosure information on pages 15 - 18 of this report.

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