Citi Downgrades Novartis Following SAG Investigation

Citi has downgraded Novartis AG (ADR) NVS to Neutral from Buy on SAG investigation.

Analyst Andrew Baum reported, "The ongoing action of the formidable State Attorney General (SAG) of the Southern District of NY, Preet Bharara, casts a reputational shadow over the incumbent Novartis Chairman and CEO, who both had operational responsibilities at Novartis during the alleged period of widespread kickbacks."

Further Details

"Similar to GlaxoSmithKline plc (ADR) GSK before it, Novartis faces a high probability of significant fines (in excess of $2 billion) as well as an additional punitive Corporate Integrity Agreement providing material risk to already lowered consensus Entresto (cardiovascular) estimates," analyst Baum wrote in a note to clients.

The analyst cut his 2025 Entresto estimate to $2 billion from $10 billion.

Related Link: Novartis Shares Downgraded, Leerink Says "Consensus Still Way Too High"

The State Attorney General alleges "Novartis allowed kickbacks or inducements to prescribers of their cardiovascular drug through a stream of round table and education events, typically at restaurants," Baum elaborated.

The analyst continued, "The provision of nine years' worth of records and salesmen testimony could indeed generate sufficient evidence to ensure a successful prosecution. The highest individual payment under the FCA was a $2 billion settlement from GSK in 2012 in relation to extensive off-label promotion over a prolonged period.

"Much more importantly, the DoJ imposed a strict CIA on GSK that continues to negatively impact the performance of GSK primary care portfolio, including the newly launched respiratory products (Breo and Anoro).

"We think the issuance of a GSK-like CIA to Novartis would likely severely impact Novartis' earnings and valuation outlook given the important anticipated contribution of future Entresto revenues (cardiovascular disease)," Baum noted.

"It is possible that Novartis's decision to delay aggressive marketing of Entresto in the US was related to the ongoing SAG investigation," Baum added.

More Favorable Names

The analyst prefers Buy-rated AstraZeneca plc (ADR) AZN, Roche Holding Ltd. (ADR) RHHBY and Novo Nordisk A/S (ADR) NVO in the EU.

In the United States, he prefers Bristol-Myers Squibb Co BMY and Eli Lilly and Co LLY.

At time of writing, Novartis AG (ADR) was down 2.42 percent at $71.36.