Novartis AG
Annual Report 2015

Plain-text annual report

Annual Report 2015 OUR MISSION Our mission is to discover new ways to improve and extend people’s lives. We use science-based innovation to address some of society’s most challenging healthcare issues. We discover and develop breakthrough treatments and find new ways to deliver them to as many people as possible. We also aim to provide a shareholder return that rewards those who invest their money, time and ideas in our company. PHOTO ESSAYS BRINGING HEALTHCARE HOME Switzerland’s well-developed network of home healthcare workers is helping cope with an aging population. p STORY STARTS ON PAGE 13 FIGHTING THE BIGGEST KILLER OF YOUNG CHILDREN PRIMING THE BODY’S OWN DEFENSES AGAINST CANCER An army of health workers is guarding Bangladeshi children from the deadly scourge of pneumonia. p STORY STARTS ON PAGE 23 Scientists are developing a new personalized T-cell therapy that could alter the course of cancer care. p STORY STARTS ON PAGE 43 THE CHALLENGE OF REVERSING THE RISE IN OBESITY IMPROVING ACCESS TO HEALTHCARE IN RURAL VIETNAM MAKING CLEAR VISION A PERSONAL MISSION A weight reduction program in one US state is helping tackle the growing problem of obesity. p STORY STARTS ON PAGE 75 The rise of chronic disease will require getting more medicines to more people in less-developed countries. p STORY STARTS ON PAGE 109 Volunteer surgeons are bringing the gift of sight to some of the world’s poorest people. p STORY STARTS ON PAGE 139 Novartis Annual Report 2015 | 1 CONTENTS 02 04 06 08 14 16 18 19 24 34 44 52 62 62 64 67 76 78 79 85 97 110 114 120 129 130 133 140 172 245 CHAIRMAN’S LETTER CHIEF EXECUTIVE OFFICER’S LETTER KEY PERFORMANCE INDICATORS – CONSOLIDATED HIGHLIGHTS 2015 AT A GLANCE STRATEGIC OVERVIEW Our Environment Our Strategy Our Culture and Values Our Portfolio PERFORMANCE Performance Summary Division Performance INNOVATION Innovation Overview Pipeline CORPORATE RESPONSIBILITY Managing Corporate Responsibility Innovation in Access Expanding Access to Medicines Doing Business Responsibly CORPORATE GOVERNANCE REPORT Letter from the Chairman Summary of Our Corporate Governance Approach Our Shares and Our Shareholders Our Board of Directors Our Management COMPENSATION REPORT Compensation Committee Chairman’s Introduction 2015 Executive Committee Compensation System 2015 Executive Committee Compensation 2015 Board Compensation System 2015 Board Compensation Compensation Governance FINANCIAL REPORT 2015 Operating and Financial Review Novartis Group Consolidated Financial Statements Financial Statements of Novartis AG OTHER INFORMATION 260 Key Dates 2016, Contact Information and Forward-Looking Statements A LIFE DEDICATED TO FIGHTING MALARIA Nurse Agnes Akoth has spent three decades on the front line against this deadly disease in Kenya. p STORY STARTS ON PAGE 61 Cover image: Dr. Chang As Xinh, 37, updates records in his office at a community hospital in northeast Vietnam. Dr. Xinh is one of just 15 doctors who deliver medical care to more than 40 000 mostly ethnic H’mong people here. 2 | Novartis Annual Report 2015 CHAIRMAN’S LETTER Our strategic focus on science-based innovation continues to generate strong results Joerg Reinhardt Dear shareholder, In 2015, Novartis completed a portfolio transformation to focus on three leading divisions, strengthen our pharmaceuticals operation, and leverage our new services organization to improve productivity and profitability. We also achieved important milestones in developing our pipeline and enhancing access to healthcare. We believe these steps position us well to navigate the challenging healthcare environ ment and sustainably grow sales, profits and dividends. Our strategic focus on science-based innovation continues to generate strong results. We launched a series of new products, including breakthrough therapies such as heart failure med- icine Entresto and psoriasis treatment Cosentyx. The effectiveness of our products gives us the confidence to explore pay-for- performance pricing models, which can offer economic benefits to healthcare systems and build trust with our customers. At the same time, we broadened our research and development pipeline, particularly in the areas of immuno-oncology and neuroscience. Experimental compounds in both areas have the potential to change the practice of medicine, and we are striving to be among the leaders in the fields of oncology and neurology. We appointed a new President of the Novartis Institutes for Bio Medical Research, who will start in early 2016, and we continue to attract leading scientists. This will reinforce our own research efforts, as well as our collaborations with other research institutions. As the healthcare landscape evolves, we will continue to work with technology leaders. For exam- ple, we have entered into partnerships to investigate new opportunities in the realm of gene editing and at the intersection of information technology and healthcare. These research areas may transform aspects of healthcare and disrupt conventional business models. We are pre- pared to embrace and benefit from these changes. As a healthcare leader, we also have a responsibility to help improve access to medicines and healthcare for patients around the world. As part of our long- standing corporate responsibility activities, last year we launched the Novartis Access portfolio. It is designed to provide affordable, CHAIRMAN’S LETTER Novartis Annual Report 2015 | 3 OUR STRATEGIC APPROACH Our mission is to discover new our goal to lead in growing We are committed to patients, ways to improve and extend areas of healthcare, focusing associates, healthcare partners people’s lives. on pharmaceuticals, eye care and society at large to improve By focusing on science-based and generics. access to healthcare and essential medicines as we aspire to become innovation to deliver better To support the pursuit of our a trusted leader in changing the outcomes for patients around the strategy, we foster a corporate practice of medicine. world, we have established a culture of high ethical standards strong competitive position. Our and promote innovation, quality, For more detail on our strategy, approach serves the interests of collaboration, performance, see page 16. our shareholders and reinforces courage and integrity. + 4 % Proposed dividend increase per share (CHF) 2015: 2.70 2014: 2.60 high-quality medicines to address the rising burden of noncommunicable diseases such as diabetes and breast cancer in developing countries. Besides delivering needed medicines, this social business model aims to support healthcare systems and help manage the rising cost of care and its economic consequences. Additionally, we continue to evolve our corporate governance and are dedicated to enhancing interactions with our stakeholders. The Board of Directors is fully committed to this task. We aim to reinforce our diversity and safeguard our independence in the interest of Novartis and our shareholders. This will help us be a trusted healthcare partner guided by integrity and open to dialogue and collaboration. All of these efforts make us confident that we can continue to strengthen our market position in 2016. I thank you for the confidence you have placed in our company and am pleased to be able to propose a dividend increase of 4% to CHF 2.70 at the next Annual General Meeting. Sincerely, Joerg Reinhardt Chairman of the Board of Directors 4 | Novartis Annual Report 2015 CHIEF EXECUTIVE OFFICER’S LETTER Novartis has leading positions in innovative pharmaceuticals, generics and eye care with the innovation power and global scale necessary to compete effectively in a changing world Joseph Jimenez Dear shareholder, Novartis made strong progress in 2015. We completed a major portfolio trans- formation, reinforced our lead in innovation, and delivered solid financial per for- mance. I’m convinced we have a strong foundation for growth in a world where the population is aging and healthcare systems need to deliver quality care more cost-effectively. Sales grew 5% in constant currencies (cc) to USD 49.4 billion, in our continuing operations. Core operating income, which excludes certain exceptional items, rose 10% (cc) to USD 13.8 bil- lion. Our core margin improved 1.3 percentage points (cc) to 27.9%. Results were driven by strong performance in our Pharmaceuticals and Sandoz Divisions, which helped offset disappointing performance in our Alcon Division. Sales of our growth products rose 17% and accounted for 34% of net sales, underscoring our continued success in renewing our product portfolio and offsetting the impact of patent ex pi- rations. In emerging markets, sales growth slowed to 7% in 2015, as some economies cooled. But we believe the slowdown is temporary and we remain focused on the long-term potential for these markets. We finalized a portfolio transformation that has improved our competitive position. Novartis is now a more focused company with leading positions in innovative pharmaceuticals, generics and eye care. As a company we have the innovation power and global scale necessary to com- pete effectively in a changing world. Novartis Business Services (NBS), our new cross-divisional services organization, ramped up in 2015 and played a critical role in identifying additional synergies across our businesses that are yielding important productivity gains. These gains produced overall savings of USD 3.2 billion last year, with the biggest savings of USD 1.7 billion coming from procure- ment efforts. NBS now has about 9 500 employees worldwide, with five global service centers scaling up. I expect NBS to continue driving productivity gains and cost savings across Novartis. CHIEF EXECUTIVE OFFICER’S LETTER Novartis Annual Report 2015 | 5 STRENGTHENING OUR LEAD IN INNOVATION Novartis has a long heritage as We also strengthened our pipeline, Finally, we appointed a capable new a leader in innovation and we leveraging our strong position in leader for our research organization strengthened our position in 2015. cancer by adding depth in immuno- to succeed Mark Fishman, who is oncology and boosting options for retiring and whose leadership and Our development teams delivered new combination therapies. And we are scientific prowess will be missed. His medicines with significant potential exploring new technologies that will successor, Jay Bradner, is a physician health benefits for millions of patients, enable us to address unmet medical and a scientist with strong business including Entresto for heart failure; need being driven by dramatic acumen and a passion for advancing Cosentyx for psoriasis and other demographic shifts, such as diseases research through collaboration. illnesses; and Zarxio, the first biosimilar associated with aging, addressed approved under new rules in the US. through regenerative medicine. For more detail on innovation, These products help underpin our future. see page 44. 5 % Rise in net sales1 (cc) We made further strides in areas that we hope reinforce the trust that our customers and society place in us. Although we know there is more work to do, we continued to make excellent progress on quality, with 98% of 192 regulatory inspections worldwide in 2015 yielding good or acceptable findings. We are taking steps to reinforce our culture of integrity by, for instance, modifying incentives for sales forces and changing some promotional practices. 10 % Increase in core operating income1 (cc) As we focus on improving health outcomes for patients by leveraging medical science, we are also advancing the creative use of new digital technology and data analysis to help healthcare systems deliver real-world outcomes with our therapies. This will enable us to improve value and reduce waste in the system. In this time of increased scrutiny on drug prices, we under- stand that patients and healthcare systems need to get good value for what they spend on treatments. 20 Major approvals in key markets In 2016 we plan to take further steps to improve our effectiveness and efficiency as an organi- zation, supporting future growth and innovation. We have a solid plan to return Alcon to growth by focusing the business, strengthening its foundation and investing for growth. At the Group level we plan to centralize our manufacturing across divisions and create more shared services to lower our cost base. And we are integrating some of our drug development functions to enhance innovation even further, while increasing efficiency. I’d like to thank Novartis associates for continuing to deliver strong results during a period of significant changes in our company. I also extend thanks to our shareholders for their continued support. Sincerely, Joseph Jimenez Chief Executive Officer 1 Continuing operations 6 | Novartis Annual Report 2015 KEY PERFORMANCE INDICATORS CONSOLIDATED HIGHLIGHTS Financial KEY FIGURES1 (in USD millions, unless indicated otherwise) Net sales to third parties from continuing operations Operating income from continuing operations    Return on net sales (%) Net income from continuing operations Net income/loss from discontinued operations 2 Net income 2 Basic earnings per share3 (USD) from continuing operations Basic earnings per share2,3 (USD) from discontinued operations Total basic earnings per share2,3 (USD) Core operating income from continuing operations    Core return on net sales (%) Core net income from continuing operations Core earnings per share3 (USD) from continuing operations Free cash flow from continuing operations Free cash flow SHARE INFORMATION Share price at year-end (CHF) ADR price at year-end (USD) Dividend4 (CHF) Payout ratio5 based on continuing operations (%) Payout ratio5 (%) 2015 49 414 8 977 18.2 7 028 10 766 17 794 2.92 4.48 7.40 13 790 27.9 12 041 5.01 9 259 9 029 2015 86.80 86.04 2.70 93 37 2014 52 180 11 089 21.3 10 727 – 447 10 280 4.39 – 0.18 4.21 14 473 27.7 12 653 5.19 10 934 10 762 2014 92.35 92.66 2.60 62 65 % Change Constant currencies 5 – 2 – 18 91 – 17 94 10 9 10 USD – 5 – 19 – 34 73 – 33 76 – 5 – 5 – 3 – 15 – 16 % Change – 6 – 7 4 FURTHER DETAIL On our performance, see page 24 On our financial report, see page 138 1 This Annual Report includes non-IFRS financial measures such as core results, 2 Net income from discontinued operations and net income of the Group include constant currencies and free cash flow. Novartis believes that investor understanding of the Group’s performance is enhanced by disclosing these non-IFRS measures. Core measures exclude items that can vary significantly from year to year, such as the impact of certain significant exceptional and other items related to disposals and acquisitions, as well as other exceptional items over a USD 25 million threshold. Constant currency calculations have the goal of eliminating exchange rate effects so that an estimate can be made of underlying changes in the consolidated income statement excluding the impact of fluctuations in exchange rates. Free cash flow is an indicator of the Group’s ability to operate without additional borrowing or the use of existing cash. Further details of non-IFRS measures, including reconciliation tables, can be found starting on page 165. exceptional divestment gains. Continuing and discontinued operations are defined on page 147. 3 2015 weighted average number of shares outstanding: 2 403 million (2014: 2 426 million) 4 Dividend 2015: proposal to shareholders for approval at the Annual General Meeting on February 23, 2016 5 Payout ratio 2015 is calculated by converting into USD the proposed total gross dividend amount in CHF at the CHF-USD exchange rate of December 31, 2015 based on an estimated number of shares outstanding on dividend payment date and dividing it by the USD consolidated net income from continuing operations and net income attributable to shareholders of Novartis AG in the Group’s 2015 consolidated financial statements. KEY PERFORMANCE INDICATORS CONSOLIDATED HIGHLIGHTS Novartis Annual Report 2015 | 7 Innovation KEY FIGURES 1 Projects entering portfolio 2,3 Ongoing Phase III programs 4 US FDA breakthrough therapy designations 5 Major submissions (US, EU, JP) 6 Major approvals (US, EU, JP) 6,7    New molecular entity (NME) approvals 8 Social8 ACCESS Total patients reached (millions)    Patients reached through access programs (millions) People reached through training, health education and service delivery (millions) 2015 2014 25 37 0 14 20 6 2015 972 66 12 13 37 2 15 14 4 2014 939 72 10 Top 20 global burden of disease conditions addressed by products and pipeline 9 100% 100% PEOPLE Full-time equivalent positions / headcount 10 Turnover: % voluntary / % overall Women in management: % of management11 / % of Board of Directors Associate nationalities / associate nationalities in management 11 Lost-time injury and illness rate (per 200 000 hours worked) 12 ETHICS Misconduct cases reported / allegations substantiated 13 Regulatory inspections without major findings (%) ENVIRONMENTAL SUSTAINABILITY Greenhouse gas emissions, total Scope 1 and Scope 2 (1 000 t) 14 Water discharge (million m3) 118 700 / 122 966 117 809 / 122 113 7.3 / 13.5 7.0 / 13.0 41 / 27 40 / 18 144 / 109 147 / 109 0.11 0.12 1 299 / 755 1 547 / 1 131 98.4 97.9 1 350.7 16.6 1 361.9 17.0 FURTHER DETAIL On innovation, see page 44 FURTHER DETAIL On social, see page 62 1 Includes Pharmaceuticals, Sandoz biosimilars and Alcon ophthalmic pharmaceuticals only 8 Continuing operations 9 As defined by the US-based Institute for Health Metrics and Evaluation, excluding 2 Includes clinical Phase ll programs only, post proof of concept. First patient, first injuries visit (FPFV) has occurred. Also include small molecules, biologics; new fixed-dose combinations of existing active pharmaceutical ingredients (APIs); and new target indications, defined as new disease or new line of treatment (e.g., first- vs. second-line). Counted by indication and not compound 3 This number has been adjusted due to an internal reporting errror. In 2014, we 10 Headcount reflects the total number of associates in our payroll systems. Full-time equivalent adjusts headcount for associates working less than 100%. All data as of December 31 11 Management defined locally 12 Data include Novartis associates and third-party personnel managed by Novartis reported it as 30. associates 4 Includes projects with FPFV in a Phase III study but not yet filed in US, EU or Japan 5 Therapies under development by Novartis designated as breakthrough therapies by the US Food and Drug Administration 6 Includes small molecules, biologics; new fixed-dose combinations of existing APIs; and new target indications, defined as new disease or new line of treatment (e.g., first- vs. second-line) 13 Reporting has changed from assessing cases to assessing allegations. Because one case can have more than one allegation, the assessment per allegation is higher than the previously reported assessment per case. Furthermore, numbers are based on the date a misconduct case is reported, whereas previously they were based on the date a misconduct case was assigned for investigation. 2014 data have been restated following the new methodology. 7 This number has been adjusted due to an internal reporting errror. In 2014, we 14 Scope 1: combustion and process, and vehicles; Scope 2: purchased energy reported it as 13. 8 | Novartis Annual Report 2015 2015 AT A GLANCE Who we are Novartis is a global healthcare company based in Basel, USD 15 trillion. Governments and health insurers are increas- Switzer land, with roots dating back more than 150 years. We ingly searching for ways to keep spending in check. They are provide healthcare solutions that address the evolving needs focusing on the value they receive, based on tangible benefits of patients and societies worldwide. Novartis products are for patients and healthcare systems. available in more than 180 countries and they reached nearly These developments validate our focus on innovation and 1 billion people globally in 2015. About 123 000 people of global scale, and underscore the need for collaboration to rein- 144 nationalities work at Novartis around the world. force our know-how in areas of emerging science and technology. FURTHER DETAIL FURTHER DETAIL Visit www.novartis.com/about-us On our environment, see page 14 Our environment Our strategy The world’s rapidly growing and aging population is driving We believe Novartis is well prepared for a world with a growing, changes in healthcare, presenting both new opportunities and aging population and evolving healthcare needs. Our mission, new challenges for Novartis. The global population will increase vision and strategy support the creation of long-term value for by more than 1 billion people by 2030, projects the United our company, our shareholders and society. Nations, with most of that growth occurring in developing coun- Our mission is to discover new ways to improve and extend tries. People over age 60 are the fastest-growing population people’s lives. Our vision is to be a trusted leader in changing segment, expected to add 500 million people and reach 1.4 bil- the practice of medicine. Our strategy is to use science-based lion by 2030. innovation to deliver better outcomes for patients and to lead These factors are behind increasing demand for health- in growing areas of healthcare. care worldwide. If current growth rates continue, healthcare We maintain strong investment in research and development spending will likely more than double by 2025, exceeding focused on areas of unmet medical need. 180 + Countries where Novartis products are available 972 m Patients reached AGING POPULATIONS 2015–2030 (in millions) 1 402 1 216 1 046 901 +56% 49.4 bn 208.3 bn Net sales (USD) Market capitalization1 (USD) 2015 2020 2025 2030 Population aged 60+ 1 As of December 31, 2015; excluding treasury shares Source: United Nations projections 2015 AT A GLANCE Novartis Annual Report 2015 | 9 Our values Strong values define our culture and help us execute the SUPPORTING OUR DIVISIONS Novartis strategy in line with our mission and vision. We updated values across our organization in 2015. They describe the Novartis Institutes for BioMedical Research professional behavior we expect from employees: innovation, The Novartis Institutes for BioMedical Research (NIBR) is the quality, collaboration, performance, courage and integrity. innovation engine of Novartis, focused on discovering new Our portfolio LEADING DIVISIONS drugs that can change the practice of medicine. Novartis Business Services Novartis Business Services (NBS) consolidates support services across Novartis divisions, helping drive efficiency, Transactions completed in 2015 focus Novartis on industry- standardization and simplification. Its role in generating leading divisions with innovation power and global scale: productivity gains supports our continued investment in phar maceuticals, eye care and generics. Novartis acquired research and development, and underpins strong financial Glaxo SmithKline’s (GSK) oncology products, solidifying our results. position as a global leader in cancer treatments. We also merged our Over-the-Counter business into a joint venture with GSK, and sold our Vaccines and Animal Health businesses. FURTHER DETAIL On our strategy, see page 16 On our culture and values, see page 18 On our portfolio, see page 19 On NIBR, see page 19 On NBS, see page 19 LEADING DIVISIONS Pharmaceuticals Develops innovative patented medicines Alcon Offers the world’s widest spectrum of eye care products Sandoz A leader in the growing generic medicines industry 10 | Novartis Annual Report 2015 2015 AT A GLANCE continued Performance highlights FINANCIAL Novartis delivered solid performance in continuing operations items. Our core operating income from continuing operations in 2015, supported by our growth products,1 productivity gains, in 2015 was USD 13.8 billion (–5%, +10% cc). Core operating and strength in our Pharmaceuticals and Sandoz Divisions. income margin grew 1.3 percentage points in constant cur- These factors helped counter a stronger US dollar, economic rencies due to higher sales and enhanced productivity. How- slowdowns in key emerging markets, and weakness in our ever, that gain was offset by 1.1 percentage points of negative Alcon eye care division. impact from currency exchange rates, resulting in a margin of Net sales were USD 49.4 billion, a 5% decline from 2014 27.9% of net sales. in reported terms, but up 5% measured in constant curren- Core net income from continuing operations was USD cies (cc). Operating income was USD 9.0 billion (–19%, –2% 12.0 bil lion (–5%, +9% cc), and core EPS was USD 5.01 (–3%, cc), down mainly due to the amortization of the new oncology +10% cc). assets in the Pharmaceuticals Division. Operating income mar- gin was 18.2% of net sales. Net income from continuing oper- INNOVATION ations was USD 7.0 billion, down 34% (–18% cc), mainly due Research and development efforts in 2015 yielded 20 major to an exceptional USD 0.4 billion charge in the current year and approvals and 14 major submissions. A key approval during exceptional gains of USD 1.2 billion in the prior year. Earnings the year in the US and EU was Entresto (formerly LCZ696) to per share (EPS) from continuing operations were USD 2.92, treat heart failure. We received approval in the US and EU for down 33% (–17% cc). Cosentyx for psoriasis, as well as approval in Europe to treat Total net income rose 73% to USD 17.8 billion, mainly due psoriatic arthritis and ankylosing spondylitis. Tafinlar + Mekinist, to gains from our portfolio transformation. the first combination therapy approved for metastatic mela- Total free cash flow in 2015 of USD 9.0 billion declined noma, also received approval in the US and EU. 16%, primarily due to the negative impact of currency exchange Additionally, Sandoz extended its leadership in biosimilars rates. with US approval for Zarxio (filgrastim), the first biosimilar We also present our core results, which exclude the impact under a new regulatory framework. In eye care, we launched of significant disposals, acquisitions and other exceptional three new intraocular lens products under the AcrySof brand for patients undergoing cataract surgery. 1 Growth products are products launched in 2010 or later, or products with exclusivity until at least 2019 in key markets (EU, US, Japan), except Sandoz, which includes only products launched in the last 24 months. 2 In constant currencies and for continuing operations FINANCIAL INNOVATION SOCIAL 5 % Rise in net sales2 9.0 bn 200 + Total free cash flow (USD) Projects in clinical development 10 % 73 % Increase in core operating income2 Increase in total net income (in USD) 8.9 bn Research and development spend (USD) 66 m Patients reached through access programs 100 % Of top 20 conditions causing the global disease burden addressed by our portfolio 2015 AT A GLANCE Novartis Annual Report 2015 | 11 Governance and compensation SOCIAL Novartis made additional progress on corporate governance. In 2015, we launched Novartis Access, focused on the afford- The Board of Directors’ Research & Development Committee ability and availability of 15 on- and off-patent medicines to met four times to evaluate the effectiveness and competitive- treat chronic illnesses in developing countries. The portfolio ness of our R&D organi zation, reinforcing the Board’s focus is offered to governments and other public-sector healthcare on innovation. providers for USD 1 per treatment per month. It launched in We increased diversity on our Board. Nancy C. Andrews, Kenya and Ethiopia, with plans to expand to about 30 countries. a medical researcher, dean of the Duke University School of Also in 2015, the Novartis Malaria Initiative concluded a Medicine and vice chancellor for academic affairs at Duke partnership with charity Malaria No More, which enabled University in the US, joined last February. Two more Board public donations of malaria treatments for children in Africa. candidates were nominated for election at the Annual General Sandoz launched a new program in Ethiopia to improve Meeting of Shareholders in 2016. maternal and child health and to reduce mortality associated We further reinforced our corporate governance frame- with childbirth. Alcon supported 552 medical missions, reach- work, implementing all remaining rules related to the Minder ing more than 390 000 patients with eye conditions. Initiative, in cluding binding shareholder votes on aggregate Novartis also adopted new environmental sustainability compensation for the Board and Executive Committee of targets for 2020, including commitments to further cut green- Novartis, and a non-binding vote on the Compensation Report. house gas emissions. Moreover, we voluntarily adopted an We introduced annual elections of the Chairman of the Board, internal price of USD 100 per ton of carbon dioxide we emit, all Board members and Compensation Committee members. providing an added incentive to investments that will reduce 2015 was a year of stability and refinement for our com- emissions. pensation system. Our approach is designed to align pay with To reinforce our culture of ethics, Novartis began pursuing business strategy and shareholder interest through a rigorous new ways of engaging healthcare professionals, while adjust- performance management process. ing promotional practices. FURTHER DETAIL On our performance, see page 24 NET SALES BY GEOGRAPHICAL REGION Research and (total 57 920) development efforts in 2015 yielded 20 major approvals and 14 major submissions FURTHER DETAIL On governance, see page 76 On compensation, see page 110 NET SALES BY DIVISION 2015 NET SALES FROM CONTINUING OPERATIONS BY DIVISION (total XXX XXX) (in USD millions, growth in % cc1 and divisional share of net sales) Pharmaceuticals 30 445 / 6% 62% Alcon 9 812 / – 1% 20% Sandoz 9 157 / 7% 18% 1 In constant currencies 12 | Novartis Annual Report 2015 STRATEGIC OVERVIEW STRATEGIC OVERVIEW STRATEGIC OVERVIEW Novartis Annual Report 2015 | 13 CONTENTS 14 OUR ENVIRONMENT 16 OUR STRATEGY 18 OUR CULTURE AND VALUES 19 OUR PORTFOLIO PHOTO ESSAY Bringing healthcare home Bianca Wuersch climbs into a four-seat gondola and sets a bag of medical supplies on the seat beside her as the cable car jerks to life, swaying up a steep mountainside toward a remote Alpine community. Gondola rides and hard-to-reach homes are all part of a typical day’s work for Ms. Wuersch, an energetic 34-year-old nurse who provides home healthcare to elderly clients in a rural part of central Switzerland. p CONTINUED ON PAGE 21 14 | Novartis Annual Report 2015 OUR ENVIRONMENT Strong demographic and economic trends continue to transform societies worldwide and shape the future of healthcare. These trends are opening opportunities for Novartis, while at the same time raising new challenges. The world’s population is rapidly growing care spending, based on tangible benefits for and aging. According to the United Nations patients and healthcare systems, rather than (UN), the global population reached 7.3 bil- simply paying for products and services. This lion in 2015 – an increase of about 1 billion is driving a shift toward measurement of health people in the last 12 years. Moreover, the outcomes for patients as a means of identify- latest UN projections indicate the world will ing the most effective treatments. Payors add more than 1 billion people within the next increasingly seek evidence of health outcomes 15 years, with most of that growth occurring and aim to make payments based on them. in developing countries. A contributing factor For instance, the US Department of Health is increasing longevity. Those over the age of and Human Services in 2015 announced plans 60 represent the fastest-growing segment of to tie 90% of all Medicare payments to the the population – a segment that is expected quality or value of care by 2018. Other coun- to climb by 500 million people by 2030, tries such as France are also moving quickly, reaching 1.4 billion. asking for real-world evidence of effectiveness In addition, the ongoing rapid movement as part of a process to periodically re-evaluate of people from rural to urban areas is im pact- prices and reimbursement for prescription ing lifestyles, including diet and physical drugs. Developed markets such as Europe and activity. This population shift and increasing the US likely will embrace this trend at a faster longevity are both contributing to a rise in rate than Japan and developing markets. chronic illnesses such as diabetes, cancer and In addition, the overall pace of innovation heart disease in developed and developing in the healthcare industry continues to gather countries alike. Globally, chronic diseases speed. For instance, the US Food and Drug account for about 63% of all deaths. They Administration in 2015 approved 45 new drug likely will account for 70% by 2025, according compounds, versus 41 in 2014 and 27 in 2013. to the World Health Organization. We believe these developments validate Taken together, these factors are likely to our strategy of focusing on science-based drive increasing demand for healthcare world- innovation to deliver better outcomes for wide. If growth in healthcare spending were to patients. These trends underline the need to continue at the current pace, global outlays maintain our research and development efforts could more than double by 2025 to USD 15 tril- in pursuit of breakthrough innovation, and to lion. At the same time, economic uncertainty demonstrate better results for patients in every- and tight budgets are prompting many gov- day healthcare settings. ernments and healthcare insurers to look for ways to moderate spending growth. During 2015, these pressures were evident in the INDUSTRY CONSOLIDATION AND NEW ENTRANTS fiscal crisis in Greece, lingering economic These trends are prompting profound shifts malaise in much of Europe, and the slowdown in the competitive landscape. There is ongoing in China. These factors are also contributing consolidation in the pharmaceutical industry. to increased scrutiny on drug pricing by Merger and acquisition activity continued to governments, media and consumers. accelerate in 2015, with announced deals in INNOVATION AND PATIENT HEALTH OUTCOMES the industry totaling about USD 429 billion, up from USD 211 billion in 2014. At the same time, new entrants are look- Against this backdrop, we see an acceleration ing to use their expertise to establish or expand of the trend for governments and insurers to their presence in healthcare. Many are tech- focus on the value they receive for their health- nology companies hoping to benefit as data By 2030, the world population is expected to grow by more than 1 bn By 2030, the number of people worldwide over age 60 is expected to increase by 500 m At current growth rates, by 2025 healthcare spending could double to USD 15 tn STRATEGIC OVERVIEWSTRATEGIC OVERVIEW | OUR ENVIRONMENT Novartis Annual Report 2015 | 15 Looking ahead, we remain convinced we have a sound strategy that will position Novartis to compete today and in the future and data management become increasingly focusing Novartis on leading global divisions important in healthcare. For instance, Verily in growing areas of healthcare: patented (formerly Google Life Sciences) initially focused pharmaceuticals, generic medicines and eye on new types of digital diagnostic devices, care. Our portfolio transformation was a such as the glucose-monitoring contact lens critical move that will help us further pursue for diabetics that our Alcon eye care division our strategy. is a collaborator in developing. It is also work- Looking ahead, we remain convinced we ing to build capabilities in health data man- have a sound strategy that will position Novartis agement. IBM, meanwhile, has acquired med- to compete today and in the future. As we move ical imaging companies and added the forward with the execution of our strategy, artifi cial intelligence capabilities of its Watson we are taking additional steps to reinforce supercomputer to help doctors diagnose and innovation, build capabilities to help us benefi t treat patients. The growing role of health- from the increasing focus on patient health related technology has the potential to add a outcomes, strengthen our culture, and further new digital dimension to the pharmaceutical improve operating effi ciency. industry. This shifting industry landscape under- scores the need to pursue collaborations that FURTHER DETAIL reinforce our know-how in areas of emerging On our performance, see page 24 science and technology. It also highlights the On research and development, see page 44 importance of having scale and innovation On risks, see page 162 power to compete eff ectively in the future. That logic drove our own business portfolio trans- formation, which was completed in 2015, Home healthcare nurse Margrit Locher visits Maria Matter at her rural home in Switzerland to help manage her pain medication. 16 | Novartis Annual Report 2015 OUR STRATEGY Novartis has a sound strategy to navigate a world with a growing, aging population and continuously evolving healthcare needs. Our mission and vision complement our strategy, and together they support the creation of value over the long term for our company, our shareholders and society. The Novartis mission, vision and strategy are OUR VISION all anchored in our company’s long heritage Our vision is to be a trusted leader in changing and tradition of leadership in innovation. We the practice of medicine. believe our mission accurately describes why we exist as a company, while our vision ex- OUR STRATEGY presses an ambitious aspiration to strive for. Our strategy is to use science-based inno- Along with our strategy, they effectively guide vation to deliver better patient outcomes. We our path to the future. aim to lead in growing areas of healthcare. Innovation founded in strong science is at the heart of Novartis OUR MISSION Science-based innovation Our mission is to discover new ways to improve We believe innovation that produces break- and extend people’s lives. through medicines and products will be We use science-based innovation to more important than ever in the healthcare address some of society’s most challenging industry in the coming years. We maintain healthcare issues. We discover and develop substantial investment in research and de - breakthrough treatments and find new ways velopment (R&D) aimed at areas of unmet to deliver them to as many people as possible. medical need. Our product pipeline is fed by We also aim to provide a shareholder return a distinctive research and clinical approach that rewards those who invest their money, that focuses on scientific advances before time and ideas in our company. market potential. Our approach for sustainable growth OUR MISSION OUR VISION OUR STRATEGY OUR VALUES Discover new ways to improve and extend people’s lives Be a trusted leader in changing the practice of medicine Science-based innovation Better patient outcomes Lead in growing areas of healthcare Innovation Quality Collaboration Performance Courage Integrity Long-term value creation STRATEGIC OVERVIEWSTRATEGIC OVERVIEW | OUR STRATEGY Novartis Annual Report 2015 | 17 We aim to develop innovative products in growing areas of healthcare where we can make a real difference Our R&D strategy is to continue reinforcing Lead in growing areas of healthcare therapeutic areas where we are already We aim to develop innovative products in strong – including oncology, cardiovascular, growing areas of healthcare where we can eye care, biosimilars and neuroscience – and make a real diff erence. We focus on patented to expand into new disease areas that we medicines, generic medicines and eye care believe are ripe for innovation, such as immuno- – segments where we have the innovation oncology, aging and regenerative medicine, power and global scale necessary to compete and infectious diseases. eff ectively. At the same time, we are expand- ing our presence in the emerging markets of Better patient outcomes Asia, Africa and Latin America, where there We seek to develop medicines and products is fast-growing demand for access to high- that can produce positive real-world outcomes quality medicines and healthcare. for patients and healthcare providers. The benefi ts can range from improving the cost- eff ectiveness of high-quality care to pro longing FURTHER DETAIL lives. We are developing services and technol- On our innovation, see page 44 o gies to augment the benefi ts of our core products, often in collaboration with health- care providers and technology companies. On a typical day, home health- care worker Sybilla Blumer assists a series of clients in rural communities and farms in the mountains of central Switzerland. We are taking steps to build a culture that supports our people as they face new challenges 18 | Novartis Annual Report 2015 OUR CULTURE AND VALUES Talented and committed people from diverse backgrounds are important for executing our strategy. Equally important is how they execute it. We foster a company culture that supports the success of the enterprise through clear values to guide our people in their work. OUR CULTURE Collaboration The traditional Novartis culture of performance We foster teamwork among our employees to served us well for many years, underpinning efficiently deliver innovative new products to our ability to deliver results. While performance patients and healthcare providers. This capi- remains important, in the context of a rapidly talizes on the diversity and creativity of our evolving healthcare landscape, our sharpened global staff. strategy and the business portfolio trans- formation undertaken in 2015, we are also Performance reshaping our culture. We are taking steps to People at Novartis are known for their focus continue building a culture that strengthens on delivering results – and they often make our people as they face new challenges. extraordinary efforts to achieve their goals. We OUR VALUES aim to reinforce that focus on personal and collective achievement while maintaining high Our values define our culture and help us exe- ethical standards. cute the Novartis strategy in line with our mis- sion and vision. They describe the professional Courage behavior we expect from our employees. We We want our associates to speak out, challenge use six values – which were rolled out across conventional thinking, and stand up for their our company in 2015 – to inform our recruitment ideas. We also want them to have the courage activities, shape employee development pro- to do the right thing in the face of resistance grams, and help guide individual performance or moral dilemmas. They need the fortitude assessments and decisions about bonuses to take smart risks, even when the chance of and other rewards. Comprehensive training failure is high. programs ensure our people are familiar with these values and know how to apply them on Integrity the job. Innovation High performance with integrity is fundamen- tal to the way we operate at Novartis and is critical to maintaining the support of society Innovation founded in strong science is at the and governments. Our Code of Conduct sets heart of Novartis and key for our strategy. We high ethical standards, and comprehensive nurture a culture of innovation by encourag- training ensures our associates know how to ing people to experiment and take smart risks. apply these standards in their work. We also Our aim is to foster creative thinking that leads enforce our code, investigating allegations of to practical solutions to healthcare and busi- wrongdoing and taking decisive corrective ness challenges. action when needed. Quality Delivering high quality is critical to ensuring a reliable supply of important medicines and earning the trust of our customers and society. Our focus on quality excellence includes continuously enhancing our standards, tech- nology and training for our people. STRATEGIC OVERVIEW STRATEGIC OVERVIEW | OUR PORTFOLIO Novartis Annual Report 2015 | 19 OUR PORTFOLIO In 2015, Novartis completed a transformation that focuses our business on divisions with innovation power and global scale: pharmaceuticals, eye care and generics. We also further built our business services group to drive collaboration and effi ciency across divisions. These steps position us for future growth and support our ability to create long-term value. LEADING DIVISIONS SUPPORTING OUR DIVISIONS In 2015, Novartis completed a series of trans- actions that focus our company on industry- Novartis Institutes for BioMedical Research leading divisions. With strong global positions The Novartis Institutes for BioMedical Research in patented medicines, generic medicines and (NIBR), with more than 6 000 scientists and eye care, Novartis has the scale necessary to physicians worldwide, is the innovation engine continue developing new products that respond of Novartis. NIBR focuses on discovering new to changing healthcare needs in markets world- drugs that can change the practice of medicine. wide. Novartis Business Services As part of these transactions, Novartis acquired Novartis Business Services (NBS) consolidates GlaxoSmithKline’s (GSK) oncology products, support services across Novartis divisions, solidifying our position as a global leader in helping drive effi ciency, standardization and cancer treatments. Novartis and GSK also simplification. NBS includes six service merged their over-the-counter businesses domains: fi nancial reporting and accounting into a joint venture that is one of the world’s operations, human resources services, infor- largest consumer healthcare companies, mation technology, procurement, product 36.5% owned by Novartis. At the same lifecycle services, and real estate and facility time, Novartis sold our Vaccines business, management. NBS has about 9 500 associ- ex cluding our infl uenza business, to GSK. ates. Its role in generating productivity gains Our infl uenza vaccines business was sold to supports our continued investment in research CSL Limited and our Animal Health business and development, and underpins strong fi nan- was sold to Eli Lilly. cial results. FURTHER DETAIL On NIBR and innovation, see page 44 Our divisions PHARMACEUTICALS ALCON EYE CARE SANDOZ GENERICS We develop innovative, We provide products that We are a leader in patent-protected medicines and are at the forefront of development and commercialization in oncology, primary care and specialty medicines. enhance quality of life the growing generics by helping people see industry, off ering more better and we off er the than 1 000 diff erent world’s widest spectrum types of high- quality, of eye care products. aff ordable medicines across a broad range of therapeutic areas. 20 | Novartis Annual Report 2015 2 1 3 2 1 Healthcare worker Sybilla Blumer walks to the mountain home of a client in the hamlet of Wiesenberg, Switzerland. 2 Ms. Blumer helps manage medication for Walter Imboden following an operation on his toe. 3 Nurse Margrit Locher assists Jobst von Buddenbrock in his mountain home near Stans, Switzerland. 4 Bianca Wuersch arrives at the home of Rene-Marcel Hagenbach to help with the fit of his new prosthetic leg. 4 3 Novartis Annual Report 2015 | 21 p CONTINUED FROM PAGE 13 The people Ms. Wuersch cares for include a 72-year-old man whose leg was recently amputated, a 75-year-old who needs help with his Parkinson’s medication, and a group of elderly nuns living in an isolated monastery. She is one of more than 100 home caregivers working for a local chapter of Spitex, a nonprofit organization that provides home care in Switzerland. Home care plays an important role in Switzerland, which like so many countries has a rapidly aging population and is looking at care options for growing ranks of elderly. The pro- portion of people over the age of 60 in Switzerland is pro jected to surpass 30% by 2030, up from about one-fourth today. Switzerland is building on a long tradition of home care. Spitex affiliates typically receive some support from local or regional governments. And health insurance also picks up at least part of the cost for Spitex services. For Ms. Wuersch and her colleagues, the day starts with a staff meeting at 7 a.m. in the Spitex office next to the local hospital in the town of Stans. Then they shoulder their bags of equipment and head off on their rounds. Many of the local Spitex chapter’s nearly 800 clients live in rural communities and remote farms reachable by narrow mountain roads or small gondolas that sometimes serve a single household. In winter when the area becomes blanketed with snow, Spitex workers occasionally use snowshoes to reach some remote homes. Spitex staff provide medical or household help, keep tabs on people living in isolated places, and provide a measure of companionship. For instance, one of Spitex worker Margrit Locher’s clients lives alone and suffers from dementia. Ms. Locher knows he can be moody, so she checks the mailbox on the way to his house to see if he has had the energy to collect the post. “I can always tell if he’s in a good way,” she says. She helps wash his feet, changes a bandage and chats with him before heading off to her next client. Later Ms. Locher goes to the home of Maria Matter, 79, who is receiving pain medication for an injury suffered when she fell out of a tree while gathering plums. Spitex workers visit regularly to change her morphine patch and manage her medication. While Ms. Locher is there, they step outside to admire Ms. Matter’s rose garden. Spitex workers chat and joke with clients during visits. But they must also keep an eye on the clock, for each service they provide has an allotted time – often 30 minutes or less. And they don’t want to get behind on their schedules. 4 5 Home care plays an important role in Switzerland, which like so many countries has a rapidly aging population and is looking at care options for growing ranks of elderly 22 | Novartis Annual Report 2015 PERFORMANCE PERFORMANCE PERFORMANCE Novartis Annual Report 2015 | 23 CONTENTS 24 25 26 28 29 31 PERFORMANCE SUMMARY Financial Performance Innovation Performance Quality People Corporate Responsibility 34 DIVISION PERFORMANCE 34 36 38 Pharmaceuticals Alcon Sandoz PHOTO ESSAY Fighting the biggest killer of young children In a poor district of the Bangladeshi capital Dhaka, a small army of yellow- robed health workers is engaged in a constant battle against the world’s biggest killer of young children. Pneumonia causes around 2 million child deaths per year globally and the burden is especially heavy in a country like Bangladesh, where a third of the population is aged 14 or below. p CONTINUED ON PAGE 40 24 | Novartis Annual Report 2015 PERFORMANCE SUMMARY Novartis delivered solid performance in continuing operations in 2015, while also successfully completing a major portfolio transformation. Sales and core operating income increased, measured in constant currencies. Our innovation efforts continued to yield important new treatments in areas such as heart failure and cancer, helping rejuvenate our portfolio and underpin growth. We also made progress in the areas of people management and quality, and we launched a new program to boost access to medicines in developing countries. KEY FIGURES1 (in USD millions, unless indicated otherwise) Net sales to third parties from continuing operations Operating income from continuing operations    Return on net sales (%) Net income from continuing operations Net income/loss from discontinued operations 2 Net income 2 Basic earnings per share3 (USD) from continuing operations Basic earnings per share2,3 (USD) from discontinued operations Total basic earnings per share2,3 (USD) Core operating income from continuing operations    Core return on net sales (%) Core net income from continuing operations Core earnings per share3 (USD) from continuing operations Free cash flow from continuing operations Free cash flow 2015 49 414 8 977 18.2 7 028 10 766 17 794 2.92 4.48 7.40 13 790 27.9 12 041 5.01 9 259 9 029 2014 52 180 11 089 21.3 10 727 – 447 10 280 4.39 – 0.18 4.21 14 473 27.7 12 653 5.19 10 934 10 762 % Change USD – 5 – 19 – 34 73 – 33 76 – 5 – 5 – 3 – 15 – 16 Constant currencies 5 – 2 – 18 91 – 17 94 10 9 10 NET SALES, OPERATING INCOME, CORE OPERATING INCOME,1 RESEARCH & DEVELOPMENT, MARKETING & SALES FROM CONTINUING OPERATIONS AS % OF NET SALES 2015 NET SALES FROM CONTINUING OPERATIONS BY GEOGRAPHICAL REGION (% of net sales and in USD millions) NET SALES BY GEOGRAPHICAL REGION (total 57 920) NET SALES BY DIVISION (total XXX XXX) 51.9 51.1 51.9 52.2 49.4 United States 37% / 18 079 Canada and Latin America 9% / 4 335 Asia / Africa / Australasia 21% / 10 528 % of net sales 35 30 25 20 15 10 2011 2012 2013 2014 2015 Europe 33% / 16 472 Net sales (USD billion) Core operating income1 Operating income Research & Development Marketing & Sales 1 This Annual Report includes non-IFRS financial measures such as core results, constant currencies and free cash flow. Novartis believes that investor understanding of the Group’s performance is enhanced by disclosing these non-IFRS measures. Core measures exclude items that can vary significantly from year to year, such as the impact of certain significant exceptional and other items related to disposals and acquisitions, as well as other exceptional items over a USD 25 million threshold. Constant currency calculations have the goal of eliminating exchange rate effects so that an estimate can be made of underlying changes in the consolidated income statement excluding the impact of fluctuations in exchange rates. Free cash flow is an indicator of the Group’s ability to operate without additional borrowing or the use of existing cash. Further details of non-IFRS measures, including reconciliation tables, can be found starting on page 165. 2 Net income from discontinued operations and net income of the Group include exceptional divestment gains. Continuing and discontinued operations are defined on page 147. 3 2015 weighted average number of shares outstanding: 2 403 million (2014: 2 426 million) PERFORMANCE PERFORMANCE | PERFORMANCE SUMMARY Novartis Annual Report 2015 | 25 5 % Increase in net sales1 (cc) compared to 3% in 2014 10 % Increase in core operating income1 (cc) compared to 7% in 2014 27.9 % Core margin in 2015, a slight increase compared to 2014, despite strong negative impact from currency exchange rates FINANCIAL PERFORMANCE rency exchange rates, yielding a core margin Novartis had solid operating performance in of 27.9% of net sales, a slight increase com- continuing operations in 2015, supported by pared to 2014. the success of our growth products,2 ongoing Core net income from continuing opera- efforts to improve our productivity, and strength tions was USD 12.0 billion (–5%, +9% cc), and in our Pharmaceuticals and Sandoz Divisions. core EPS was USD 5.01 (–3%, +10% cc). These factors helped counter headwinds from a stronger US dollar, economic slowdowns in Growth key emerging markets, and weakness in our Across our divisions, our portfolio of growth Alcon eye care division. products continued to support performance The Group’s underlying business continues in 2015. Sales of growth products increased to grow, with expanding core margins, after 17% to USD 16.6 billion, or 34% of net sales, backing out the effects of currency exchange demonstrating our ability to renew our product rates and exceptional items. portfolio and helping offset the impact of patent Net sales were USD 49.4 billion, a 5% de- ex pi rations. In our Pharmaceuticals Division, cline from 2014 in reported terms, but up 5% sales of growth products increased 33% (cc) measured in constant currencies (cc). Oper- and accounted for 44% of net sales, up from ating income was USD 9.0 billion (–19%, –2% 36% in 2014. cc), down mainly due to the amortization of Pharmaceutical growth products in 2015 new oncology assets in the Pharmaceuticals included Gilenya (USD 2.8 billion, +21% cc), Division. Operating income margin was 18.2% our oral therapy for multiple sclerosis; Tasigna of net sales. Net income from continuing oper- (USD 1.6 billion, +16% cc), a treatment for chronic ations was USD 7.0 billion, down 34% (–18% myeloid leukemia; and Afinitor (USD 1.6 bil- cc), mainly due to an exceptional USD 0.4 bil- lion, +10% cc), a treatment for several types lion charge in the current year and exceptional of cancer. gains of USD 1.2 billion in the prior year. Earn- Although overall Alcon performance lagged ings per share (EPS) from continuing opera- in 2015, some products continued to do well. tions were USD 2.92, down 33% (–17% cc). Alcon saw continued growth in sales of its inno- Total net income was USD 17.8 billion, up vative Dailies Total1 contact lenses, as well as 73% from 2014, due to gains from our portfolio double-digit growth in glaucoma fixed-dose transformation. combination products and Systane for dry eye. Total free cash flow in 2015 of USD 9.0 bil- Sales of disposable cataract and vitreoretinal lion declined 16%, mainly due to the negative surgical supplies also grew. impact of currency exchange rates. In the Sandoz Division, sales of biophar- To help investors track the underlying maceuticals, including biosimilar follow-on health of our business, we also present core versions of complex biologic drugs, rose 39% results, which exclude the impact of disposals, (cc) to USD 772 million globally. acquisitions and other significant exceptional Efforts to expand in emerging growth mar- items. Our core operating income from con- kets2 such as those in Asia, Africa and Latin tinuing operations in 2015 was USD 13.8 bil- America continued to deliver results, although lion (–5%, +10% cc). Core operating income growth moderated as overall economic activ- margin grew 1.3 percentage points in constant ity slowed in China, Brazil, India and elsewhere. currencies due to higher sales and improved Net sales in emerging markets rose 7% (cc) to productivity. However, that was offset by 1.1 per- USD 12.4 billion, led by Turkey, up 14% (cc), centage points of negative impact from cur- and Brazil, up 12% (cc). 1 Continuing operations 2 Growth products are products launched in 2010 or later, or products with exclusivity until at least 2019 in key markets (EU, US, Japan), except Sandoz (launched in the last 24 months). Emerging growth markets are all markets except the US, Canada, Western Europe, Japan, Australia and New Zealand. 1.7 bn Procurement savings (USD), vs. 1.6bn (USD) in 2014 26 | Novartis Annual Report 2015 PERFORMANCE SUMMARY continued Productivity Brazil, and announced the downsizing of a Last year Novartis continued to find synergies Pharmaceuticals Division site in Ringaskiddy, across divisions in our ongoing effort to im prove Ireland. To date, 25 sites in our continuing productivity. Total productivity gains reached operations have been or are being restruc- USD 3.2 billion in 2015, 6% of net sales. tured or divested. These steps help us balance Novartis Business Services (NBS), the cross- production capa city and further increase effi- divisional services organization that ramped ciency. up last year, played a key role in achieving this result. NBS continues to scale up the INNOVATION PERFORMANCE off shoring of services to global service cen- We made significant progress in research and ters, while outsourcing selected services to development in 2015, with 20 major approv- third parties. als in key markets and 14 major submissions. The biggest savings came from our pro- curement efforts, through which we saved more Cardiovascular than USD 1.7 billion on goods and services, or Novartis had notable success during the year about 8% of the spending managed by Novartis with the approval in the US and EU of Entresto procurement organizations. (formerly LCZ696) to treat chronic heart fail- An ongoing effort begun in 2010 to optimize ure with reduced ejection fraction, a condition our global manufacturing network continues where the heart muscle does not contract to yield results. In 2015, we announced plans effectively and less oxygen-rich blood is to exit Sandoz manufacturing sites in Frank- pumped around the body. Entresto is the first furt and Gerlingen, Germany, as well as in new drug in decades to treat this form of heart Turbhe, India. We also closed a Pharmaceuti- failure. It is also the only heart failure drug to cals Division facility in Resende, Brazil, divested show a significant mortality benefit in a head- an Alcon site in Kaysersberg, France, as well to-head trial against the existing best treat- as a pharmaceutical site in Taboão da Serra, ment, enalapril. CONTRIBUTION OF GROWTH PRODUCTS1 (continuing operations net sales in USD millions, % of continuing operations net sales) 2011 2012 2013 2014 2015 51 939 51 080 51 869 52 180 49 414 26% 30% 33% 33% 34% Established products Growth products (in % of continuing operations net sales) 1 Since 2010, to demonstrate the rejuvenation of our portfolio, we have separately reported the net sales and growth rate of our newer products. During the years 2010 through 2012, these included products launched in 2007 or later (except for Sandoz products, which were included only if launched within the preceding one to two years). Beginning in 2013, we moved to a slightly different definition of “growth products,” which included products launched within the preceding five years, or products with exclusivity in key markets (EU, US, Japan) for at least the next four years (except for Sandoz products, which were included only if launched within the preceding two years). PERFORMANCE PERFORMANCE | PERFORMANCE SUMMARY Novartis Annual Report 2015 | 27 20 Major regulatory approvals as well as 14 major submissions Novartis received approval in the US and EU for Entresto (LCZ696) to treat heart failure Oncology Eye care New cancer drugs gained regulatory approval In 2015, we received approval for and launched in 2015. Zykadia, for patients with non-small three new intraocular lens (IOL) products under cell lung cancer, was approved in the EU, a year the AcrySof brand portfolio for patients under- after its US approval. The treatment is from a going cataract removal surgery: the AcrySof new class of medicines known as anaplastic IQ PanOptix trifocal IOL was approved in the lymphoma kinase (ALK) inhibitors. EU and the AcrySof IQ ReSTOR +2.5 Diopter In September, Novartis received EU approval IOL was approved in the US, both to address for Tafinlar + Mekinist, the first combination near, intermediate and distance vision. We therapy approved for patients with unresect- also launched the UltraSert delivery system able or metastatic melanoma with a BRAF V600 preloaded with the AcrySof IQ Aspheric Mono- mutation – the most aggressive form of skin focal IOL in the US and Europe. cancer and one associated with low survival rates. This approval followed two Phase III trials Biosimilars in which the Tafinlar + Mekinist combination Sandoz received FDA approval in March for showed significant overall survival benefit. Zarxio (filgrastim), the first biosimilar approved The US Food and Drug Administration (FDA) in the US under the new biosimilar pathway approved the Tafinlar + Mekinist combination created in the Biologics Price Competition and in late 2015. Innovation Act of 2009. The drug, which stim- The FDA and the European Commission ulates white blood cell production in some also approved our first-in-class multiple cancer patients undergoing chemotherapy, is myeloma drug Farydak (panobinostat), shown called Zarzio in Europe and is a biosimilar to in trials to boost progression-free survival by Neupogen® from Amgen. The FDA and the about 7.8 months. European Medicines Agency accepted an We also reached major development application for etanercept, a biosimilar to milestones during the year with promising Amgen’s Enbrel® for several autoimmune pipeline products, including CTL019 in non- diseases, including rheumatoid arthritis and Hodgkin’s lymphoma, a difficult-to-treat psoriatic arthritis. The FDA also accepted an disease. CTL019, a personalized cell therapy application for pegfilgrastim, a biosimilar to for cancer, is being developed with the Amgen’s Neulasta®, used against infections in University of Pennsylvania in the US. patients receiving chemotherapy. Immunology and dermatology In early 2015, we received approval in the US and EU for Cosentyx to treat moderate-to- severe plaque psoriasis. Cosentyx is the first approved human monoclonal antibody that selectively binds to circulating interleukin-17A, which plays an important role in driving the body’s immune response in several disorders. In total, 50 countries have approved Cosentyx for the treatment of moderate-to-severe plaque psoriasis. In November, Cosentyx was approved in Europe for the treatment of psoriatic arthritis and ankylosing spondylitis and we received FDA approval in January 2016. 28 | Novartis Annual Report 2015 PERFORMANCE SUMMARY continued 98.4 % Regulatory inspections without major findings in 2015, underscoring our continued progress on quality QUALITY a majority of the issues. We also intensified Our company’s focus on quality continued to efforts to ensure accurate documentation yield steady improvement in 2015, although across our company’s Indian manufacturing more work remains to be done, particularly in the operations. area of record-keeping – which is now the focus The FDA’s action gave added impetus to of a major training and awareness program. an educational and training program to raise Regulatory agencies carried out 192 employees’ understanding of the importance inspections of Novartis facilities worldwide last of correct data handling. This began with the year, with 98.4% resulting in a good or accept- launch of an e-learning course to demonstrate able outcome, slightly above the level achieved how data ultimately define the quality, safety in 2014. Additionally, in September the FDA and efficacy of the medicines and devices on closed out the May 2013 Warning Letter issued which patients depend. to our Sandoz site in Unterach, Austria. In 2015, this training was rolled out to These continuing strong inspection out- 45 000 employees across every function in comes reflect our company’s comprehensive our company that is subject to health authority review of quality standards to ensure they are regulations, followed by more in-depth courses applied consistently across all divisions and for around 450 internal auditors and managers are updated based on feedback from health of data systems. authority inspections. This program is being supplemented by In 2015, Novartis took a further step by the appointment of more than 100 data qual- creating information-sharing networks for ity champions for all Novartis divisions at experts from our company’s 90 manufactur- regional and local levels, who will be respon- ing sites, covering areas such as medical sible for monitoring potential risks and pre- devices, microbiology and sterility assurance. paring plans to anticipate and prevent them. These networks held six online conferences Our company is also becoming increas- during the year to review lessons from the ingly proactive in quality management. For latest regulatory inspections. example, our Alcon Division has developed a Novartis also continued to strengthen the plan in anticipation of a major revision of med- quality culture at every level of our organiza- ical devices legislation. This reform is aimed tion by, for instance, holding regular quality at improving patient safety and traceability, days at production plants worldwide. Last year and is expected to be endorsed by the Euro- 68 of these events took place, involving a total pean Parliament in 2016. The Alcon initiative of 30 500 employees. The inclusion of quality is designed to ensure that its products, pro- among the six core values on which every cesses and documentation are fully compliant employee is assessed further indicates our com- well before the revised regulations take full pany’s commitment to continual improvement. effect in 2019. Despite this progress, there is still work Additionally, Novartis is one of 18 compa- to do. In October, the FDA issued a Warning nies supporting an FDA initiative to develop Letter to our Sandoz sites in Kalwe and Turbhe industry-wide metrics for assessing manufac- in India. This letter related to documentation turing robustness and commitment to quality. practices in Kalwe and to sterile manufactur- The final guidance is due in 2016 and should ing practices in Turbhe that were identified help maintain drug supply to patients, while during an inspection in August 2014. Novartis encouraging the industry to adopt state-of- took action immediately and has addressed the-art quality management systems. PERFORMANCEPERFORMANCE | PERFORMANCE SUMMARY Novartis Annual Report 2015 | 29 1m + Job applications received in 2015 with 20 000+ hired PEOPLE whether to transfer, between 89% and 98% In 2015, Novartis introduced a number of ini- moved to the new organizations, showing this tiatives to help attract and develop talented process was communicated and managed in people, strengthen our company’s culture, and an equitable way. support our ability to execute our strategy. These To further support our staff’s ability to navi- initiatives contributed to ongoing pro gress in gate these changes, we launched two new online key areas of people management at Novartis. training tools, which were used by more than Organizational design and change management The Novartis portfolio transformation in 2015 resulted in major changes for thousands of employees across 70 countries who left our 3 300 people in 2015. The Pharmaceuticals Division also organized 75 change leadership workshops for managers around the world. Reinforcing talent, capabilities and leadership company, joined it, or took on new roles. This A five-year talent and leadership strategy com plex transition of staff was carefully launched in 2015 aims to make people and planned, with close coordination among culture key drivers of competitive advantage Novartis managers at the corporate, divisional, and business success. It focuses on anticipat- regional and country levels, as well as with man- ing business needs and planning more agers at other companies involved. Novartis effectively, taking a more integrated approach teams managing the transition implemented when managing people and talent, and holding employee relations programs, coordinated com- managers more accountable for supporting pensation and bene fits, and integrated systems the development of their people. This strategy to ensure the seamless transfer of personnel. is designed to ensure that Novartis selects the All the moves were completed successfully best people, then trains, develops and promotes and on schedule, with no disruption to business. them in a way that benefits both our company In countries where employees could decide and employees. PEOPLE PERFORMANCE INDICATORS 1 Full-time equivalent positions / headcount 2 Turnover: % voluntary / % overall Voluntary turnover of superior performers (%) Internal hires / external hires (%) Women in management: % of management3 / % of Board of Directors Associate nationalities / associate nationalities in management 3 Annual training hours per employee 2015 2014 118 700 / 122 966 117 809 / 122 113 7.3 / 13.5 7.0 / 13.0 5.5 5.1 44.8 / 55.2 44.4 / 55.6 41 / 27 40 / 18 144 / 109 147 / 109 27.3 27.0 1 Continuing operations 2 Headcount reflects the total number of associates in our payroll systems. Full-time equivalent adjusts headcount for associates working less than 100%. All data as of December 31 3 Management defined locally 4 500 + Associates attended Novartis universities in Asia, Russia and Africa in 2015, supporting talent development in emerging markets 30 | Novartis Annual Report 2015 PERFORMANCE SUMMARY continued Novartis received more than 1 million job improving the capabilities of our people to applications in 2015 and hired more than meet future business needs. 20 000 staff. To help target the most suitable We also operate training initiatives – such individuals, we created a global staffing orga- as the Novartis universities in Asia, Russia and nization that replaces the previous divisional Africa – to address talent development needs structure and supports greater collaboration in emerging markets. These programs boost across our company. associates’ professional skills and include a Novartis launched an Enterprise Leader- mix of classroom and virtual training, sessions ship Development program to improve suc- with Novartis leaders, mentoring, and presen- cession planning for our company’s most criti- tations by experts in leadership and business. cal executive positions. The CEO and Head of Nearly 20 000 associates have attended since Human Resources also mentor possible can- 2008, including more than 4 500 in 2015. didates for senior leadership roles during an annual retreat – a program that has helped Strengthening the Novartis culture prepare numerous executives for promotion, Novartis rolled out revised Values and Be - including three who subsequently joined the haviors in 2015, reinforcing the culture of our Executive Committee of Novartis (ECN). company. Training programs taught people Through these and other initiatives, we aim to to evaluate their own and others’ behavior have a strong succession plan in place for related to the new values, which are innova- three-quarters of top roles by 2020, up from tion, quality, collaboration, performance, around half today. courage and integrity. These values are now Our leadership development program uses embedded in all aspects of employees’ lives a five-step process to define the skills and at Novartis, from recruitment and develop- experience necessary for each role, identify ment to promotions, performance assessments and evaluate suitable candidates, craft devel- and bonus awards. They are one of the ele- opment plans to bridge any gaps, and ensure ments used to assess people’s performance, that senior managers provide ongoing support from junior associates right up to ECN mem- to program participants. bers. For instance, performance against the Twenty-four executives went through the values became part of the incentive framework development program in 2015, and another 25 for our sales forces starting in 2016. were identified for 2016. In addition, the ECN and Our new values have been well received. divisional leadership teams hold regular talent In an employee survey, 82% of respondents reviews to support people development. We also described the values as memorable and 84% established regional talent boards made up of said the values give clear guidance that governs senior business and human resources leaders their behavior at work. to identify and develop senior managers at the Novartis continues to make progress in the country level in 2016. Our goal is to apply the area of diversity and inclusion (D&I), as well. same approach to all management positions. Last year the percentage of women in manage- Novartis recently decided to create a global ment increased slightly to 41%, while the num- learning organization to provide training in ber of nationalities represented in management partnership with leading business schools. The grew to 109. In 2015, Novartis broadened the programs will offer everything from general scope of responsibility for the Global Head of business and management training for a broad Diversity and Inclusion. A global D&I strategy, selection of employees, to targeted executive to be rolled out in 2016, aims to drive business leadership development. They are central to and scientific innovation through D&I. PERFORMANCEPERFORMANCE | PERFORMANCE SUMMARY Novartis Annual Report 2015 | 31 15 On- and off-patent medicines included in the new Novartis Access program that focuses on affordability and availability in developing countries Also in 2015, our US affiliate Novartis NCDs are growing in low- and middle- Pharmaceuticals Corporation (NPC) became income countries, confronting these countries the first organization to be recognized for with a double disease burden of chronic and the second year in a row by DiversityInc mag- infectious diseases. Against this background, azine as the best company in the country for in 2015 we launched a new program, Novartis diversity. Operational excellence Access. It focuses on the affordability and availability of 15 on- and off-patent medicines addressing four key NCDs: cardiovascular dis- In 2015, Novartis began a major project to eases, diabetes, respiratory illnesses and breast merge 21 learning, performance and talent cancer. A first in the industry, the portfolio is systems into a single talent platform that will offered as a basket to governments and other further expand our integrated human resources public-sector healthcare providers at a price approach. This is a five-year, multimillion- dollar of USD 1 per treatment per month. It was investment that will enable Novartis to man- launched in Kenya and Ethiopia, and we have age and develop staff more efficiently, and plans to expand to about 30 countries in a few better anticipate and plan for future needs. years, depending on demand. Our social ventures, which are innovative CORPORATE RESPONSIBILITY business models to reach more patients in Expanding access to healthcare rural areas in the developing world, continued Last year, we pursued a combination of their expansion. In 2015, they reached 7.6 mil- approaches – philanthropy, zero-profit initia- lion people through more than 168 000 health tives and social ventures – to expand access education sessions in India, Kenya, Vietnam to our medicines for both infectious and non- and Indonesia – which is 12% more sessions communicable diseases (NCDs). than in 2014. In addition, nearly 593 000 Fatima takes her 6-month-old son Foysal, who has pneumonia, for treatment in Dhaka, the capital of Bangladesh. Novartis launched a series of multiyear activities that aim to sharpen our culture of ethics 32 | Novartis Annual Report 2015 PERFORMANCE SUMMARY continued people received diagnosis and treatment. The protection activities. The ECN also approved our total number of people who attended health first-ever internal carbon price, set at USD 100 camps and followed up to see a doctor was per ton of carbon dioxide emitted. This will be more than 980 000. used to select and prioritize capital projects In 2015, the Novartis Malaria Initiative that will most cost-effectively enable reduc- concluded a successful partnership with tions in greenhouse gas emissions. global charity Malaria No More on the Power In 2015, we also put in place a corporate of One campaign, a global digital fundraising volunteering platform through which Novartis campaign enabling the broad public to donate Group company associates can register malaria treatments for children in Africa. a potential corporate responsibility (CR) pro- Zambia received its 3 millionth pediatric malaria ject idea or sign up to become a corporate treatment in April, and 600 000 treatments volunteer. Additionally, we established a were sent to Kenya to support clinics there. USD 1 million Health Education & Capa bilities We also renewed our pledge with the World Fund to provide financial support for internal Health Organization (WHO) to extend our dona- projects focused on capability building, health tion of multidrug therapy medicines to treat education and disease awareness, mainly in leprosy through the year 2020. This five-year Africa. agreement includes treatments worth more Our efforts to run a responsible business than USD 40 million, with an additional amount garnered significant recognition in 2015. We of USD 2.5 million to support the WHO in han- were included in: dling the donation and logistics. Overall, the — Corporate Knights’ 2016 Global 100 program is expected to reach about 1.3 mil- Most Sustainable Corporations in the lion patients during the next five years. World Index Furthermore, in March, Sandoz launched — DiversityInc’s “Top 50 Companies for a new program in Ethiopia called New Life & Diversity” list (NPC) New Hope to improve maternal and child health — Fortune’s “World’s Most Admired and to reduce mortality associated with child- Companies” list, ranking as the second- birth. Sandoz sponsored four Basic Emergency highest pharmaceutical company Obstetric and Newborn Care trainings for 80 — Fortune’s “Change the World” list, mid wives, impacting the care of approximately ranking among the top 10 companies 40 000 pregnant women in the Addis Ababa area. that are “doing well by doing good” Also in 2015, Alcon supported 552 medi- — Major CR-related indices, including the cal missions, reaching more than 390 000 Dow Jones Sustainability Index and the patients with eye conditions, and restoring sight FTSE4Good for nearly 35 000 patients through cataract sur- gery. Through the US Patient Assistance pro- Commitment to integrity and compliance gram, Alcon provided more than 7 800 patients In 2015, we took concrete steps to increase with the eye care medications they needed. transparency and strengthen our ethical busi- ness practices, even as we dealt with ethical Doing business responsibly issues. In June, the ECN approved our company’s new We launched a series of comprehensive, environmental sustainability targets for 2020, multiyear activities that aim to sharpen our which will further reinforce our environmental ethical culture. They include new approaches PERFORMANCEPERFORMANCE | PERFORMANCE SUMMARY Novartis Annual Report 2015 | 33 to engaging healthcare professionals, as well Cases of misconduct as a reduction in promotional practices. Sales At Novartis, we take allegations of any inappro- forces were informed about these changes in priate behavior very seriously, and we actively 2015, and the initiatives will be rolled out pro- investigate these allegations and take appro- gressively worldwide through 2016 and beyond. priate disciplinary action. Associates can report suspected misconduct to the Business Prac- Integrity and compliance training tices Office (BPO). In 2015, the BPO investigated All Novartis Group company associates must 1 299 reported cases; 755 were substantiated, complete compliance training. A global, cross- including 343 that resulted in dismissals or divisional compliance training curriculum is resignations. The majority of cases investigated developed yearly; divisions, functions and coun- by the BPO involved fraud, such as fraudulent tries then add any specific training for their expense reporting and pro fessional practices own associates as required. violations. In 2015, four online courses were rolled In November, NPC settled litigation in the out: Code of Conduct, Anti-Bribery, Conflict Southern District of New York related to NPC’s of Interest, and an Adverse Event Reporting interactions with specialty pharmacies. re fre sher course. In Japan, our subsidiary Novartis Pharma Moreover, all newly hired associates world- K.K. received a business suspension order, wide were required to complete an onboarding as well as a business improvement order and e-training called Compliance@Novartis. This instruction from Japanese health authorities comprehensive course covered 17 subject for failures to promptly report cases where areas and was sent to all new hires four weeks patients experienced adverse effects while after the start of their employment. taking our medicines. A field research assistant carries out routine checks to screen for pneumonia, the leading cause of death among young children worldwide. 34 | Novartis Annual Report 2015 DIVISION PERFORMANCE Pharmaceuticals Our Pharmaceuticals Division maintained its innovation momentum in 2015. Major approvals and launches included Entresto for heart failure; Cosentyx for psoriasis, psoriatic arthritis and ankylosing spondylitis; and a combination of Tafinlar + Mekinist for BRAF V600+ metastatic melanoma. Growth products contributed 44% of division net sales, underscoring our ongoing ability to rejuvenate our product portfolio. Our Pharmaceuticals Division develops inno- the acquisition of GSK’s oncology portfolio, vative medicines to help people live longer with among other exceptional items. a better quality of life. Within Pharma ceuticals, Core operating income, which excludes we are focused on the areas of Oncology, certain exceptional items, was USD 9.4 billion Neuroscience, Retina, Immunology and Derma- (–1%, +14% cc), helped by our ongoing efforts tology, Respiratory, Cardio-Metabolic, and Cell to improve productivity and control costs. Core and Gene Therapies. PERFORMANCE operating income margin improved by 2.4 per- centage points in constant currencies. How- ever, that was offset by 1.4 percentage points Pharmaceuticals delivered net sales of of negative impact from currency exchange USD 30.4 billion (–4%, +6% in constant curren- rates, yielding a core margin of 30.9% of net cies, or cc) as increased volumes, including sales. from the oncology portfolio acquired from Highlights in 2015 included regulatory GlaxoSmithKline (GSK) in 2015, countered the approval in the US and EU for Entresto (formerly impact of greater generic competition, which LCZ696) for chronic heart failure; Farydak for reduced sales by 7.0 percentage points. multiple myeloma; and Tafinlar + Mekinist, the Growth products generated USD 13.5 bil- first combination therapy for metastatic mela- lion of division net sales, growing 33% (cc) com- noma. Cosentyx, which was successfully launched pared to last year. These products – which include in the US and EU in 2015 to treat psoriasis, also Gilenya, Tasigna, Ultibro, the combination of received approval in Europe to treat psoriatic Tafinlar + Mekinist, Jakavi, Revolade and Cosentyx arthritis and ankylosing spondylitis. – contributed 44% of division net sales, com- pared to 36% in 2014. Oncology Sales in emerging grow th markets Oncology sales rose 15% (+24% cc) to USD 13.5 increased 9% (cc) to USD 7.8 billion. bil lion, boosted by the newly acquired portfo- Operating income was USD 7.6 billion lio from GSK and continued growth in our exist- (–10%, +5% cc) and included the effects of ing products. By brand, growth drivers included 2015 NEWS HIGHLIGHTS In July, the FDA approved Entresto for the treatment of heart failure with reduced ejection fraction, followed by EU approval in November. In October, Novartis acquired Admune Therapeu tics and signed licensing agreements with XOMA and Palobio farma to expand its immuno- oncology R&D program. In November, Novartis received European approval for Cosentyx to treat patients with ankylosing spondylitis and psoriatic arthritis. This followed approval for psoriasis in January. KEY FIGURES (in USD millions, unless indicated otherwise) PHARMACEUTICALS NET SALES BY FRANCHISES PHARMACEUTICALS 2015 NET SALES BY FRANCHISE (total 32 214) % Changes in USD (in USD millions and growth in % cc1) ALCON NET SALES BY FRANCHISES (total 10 496) % Changes in USD % Change 2015 2014 USD cc 1 Oncology 13 476 / 24% Net sales 30 445 31 791 – 4 Operating income 7 597 8 471 – 10 6 5    Return on net sales (%) 25.0 26.6 Core operating income 1 9 420 9 514 – 1 14    Core return on net sales (%) 30.9 29.9 Core Research & Development 1 7 053 6 997 – 1 – 5    As a % of net sales 23.2 22.0 Neuroscience 3 939 / 5% Retina 2 110 / – 3% Immunology and Dermatology 2 137 / 11% Respiratory 1 594 / 17% Net operating assets 30 754 15 125 103 Cardio-Metabolic 1 161 / 9% 1 Constant currencies (cc) and core results are non-IFRS measures. An explanation of non-IFRS measures and reconciliation tables can be found starting on page 165. Established Medicines 6 028 / – 21% PERFORMANCE PERFORMANCE | DIVISION PERFORMANCE Novartis Annual Report 2015 | 35 Afinitor, up 10% (cc) to USD 1.6 billion; Tasigna, Respiratory up 16% (cc) to USD 1.6 billion; and Jakavi, up Respiratory sales were USD 1.6 billion (+1%, 71% (cc) to USD 410 million. +17% cc). We had sales of USD 0.6 billion Neuroscience (+19%, +40% cc) for our portfolio of drugs for chronic obstructive pulmonary disease (COPD), Neuroscience sales were USD 3.9 billion (–4%, including Onbrez Breezhaler/Arcapta Neohaler, +5% cc), with Gilenya rising 12% (+21% cc) to Seebri Breezhaler and Ultibro Breez haler. Sales USD 2.8 billion and more than offsetting de clines of Xolair reached USD 0.8 billion (–3%, +14% in Exelon/Exelon Patch due to generic competition. cc), including as a treatment for chronic hives. Retina Cardio-Metabolic Sales in Retina were USD 2.1 billion (–16%, Entresto was launched in the US in the third –3% cc), driven mainly by lower sales of Lucentis, quarter and full-year sales reached USD 21 million. which faced increased competitive pressure in Galvus sales were USD 1.1 billion (–7%, +8% cc). Japan and some European markets. Established Medicines Immunology and Dermatology Established medicines such as Diovan (USD 1.3 Sales in Immunology and Dermatology were billion, –40% cc) and Exforge (USD 1.0 billion, USD 2.1 billion (0%, +11% cc). Cosentyx made –15% cc) continued to see declines as a result a strong start after launching in February, of generic competition. reaching sales of USD 261 million. Additionally, Zortress/Certican rose 2% (+17% cc) to USD 335 million, and Ilaris increased 19% FURTHER DETAIL (+30% cc), helping offset declines in other See Condensed Financial Report at products primarily stemming from generic www.novartis.com/investors competition. 13.5 bn Sales of growth products such as Gilenya, Tasigna, Ultibro, Jakavi, Tafinlar + Mekinist, Revolade and Cosentyx (USD) 13.5 bn Total Oncology sales, driven by sales of products such as Afinitor, Tasigna, Gleevec/Glivec, Jakavi and the addition of GSK’s portfolio (USD) Rickshaws provide transport for health workers as they search for pneumonia cases in Dhaka, Bangladesh. 36 | Novartis Annual Report 2015 Alcon Alcon, the global leader in eye care, has embarked on a plan to reignite growth and accelerate innovation. Alcon was challenged in 2015 by increased competition across product segments and weaker performance in emerging markets, particularly Asia. Globally, more than 285 million people live Operating income was USD 0.8 billion with vision impairment and blindness. More (–50%, –20% cc). than 80% of vision problems can be prevented, Core operating income, which excludes treated or cured provided patients have access certain items, was USD 3.1 billion (–20%, –7% to treatment. cc), impacted by lower sales, higher spending In a world of rapidly aging populations and (primarily on marketing and sales), investments growing need for eye care, Alcon is well posi- in product development, and increased provi- tioned to continue enhancing quality of life by sions for bad debt in Asia. Core operating income helping people see better. Alcon’s Surgical, margin declined 2.1 percentage points in con- Ophthalmic Pharmaceuticals and Vision Care stant currencies and currency exchange rates businesses offer the world’s widest spectrum had a negative impact of 1.9 percentage points, of eye care products. yielding a core margin of 31.2% of net sales. PERFORMANCE To accelerate growth, we are taking con- certed action on two fronts. For the Surgical Alcon net sales in 2015 were USD 9.8 billion and Vision Care businesses, we have identi- (–9%, –1% in constant currencies, or cc). fied key actions as part of a growth plan. Regionally, sales were flat in Japan and rose They include steps to optimize innovation in in Latin America and the Caribbean. In Europe, intraocular lenses (IOLs) for cataract surgery, the Middle East and Africa, sales rose 1% (cc), prioritizing and investing in the development with strong sales of recently launched contact of promising new products, and improving the lenses, including Dailies Total1 and Air Optix effectiveness of our sales force. Colors, offset by declines in surgical equipment. In addition, we plan to strengthen our oph- Sales in North America declined 3%, mainly thalmic medicines business by transferring due to increased generic competition for some pharmaceutical products from Alcon to our pharmaceutical products and soft surgical Pharmaceuticals Division, combining expertise equipment sales. In Asia and Russia, sales in pharmaceuticals development and mar- declined 5% (cc), driven by a significant market keting with the strong Alcon brand. slowdown, with weak performance in China, India and Southeast Asia. 2015 NEWS HIGHLIGHTS In February, the US FDA approved Pazeo to treat allergy-related itchy eyes. In June, Alcon unveiled AcrySof IQ PanOptix trifocal, an IOL to address near, intermediate and distance vision in cataract patients. In July, Alcon launched UltraSert, a preloaded lens delivery system for use in cataract surgery. PHARMACEUTICALS NET SALES BY FRANCHISES ALCON NET SALES BY FRANCHISES SANDOZ NET SALES BY FRANCHISES (total 32 214) % Changes in USD KEY FIGURES (in USD millions, unless indicated otherwise) (total 10 496) % Changes in USD ALCON 2015 NET SALES BY FRANCHISE (in USD millions and growth in % cc1) (total 10 496) % Changes in USD % Change 2015 2014 USD cc 1 Surgical 3 698 / – 1% Net sales 9 812 10 827 – 9 – 1 Operating income 794 1 597 – 50 – 20    Return on net sales (%) 8.1 14.8 Core operating income 1 3 063 3 811 – 20 – 7    Core return on net sales (%) Core Research & Development 1    As a % of net sales 31.2 909 9.3 35.2 903 – 1 – 4 8.3 Net operating assets 37 927 39 785 – 5 1 Constant currencies (cc) and core results are non-IFRS measures. An explanation of non-IFRS measures and reconciliation tables can be found starting on page 165. Ophthalmic Pharmaceuticals 3 813 / 0% Vision Care 2 301 / – 2% PERFORMANCE PERFORMANCE | DIVISION PERFORMANCE Novartis Annual Report 2015 | 37 9.8 bn Alcon net sales (USD) Surgical Vision Care Surgical franchise sales were USD 3.7 billion Vision Care sales were USD 2.3 billion (–10%, (–9%, –1% cc). Solid sales of cataract and vit- –2% cc). Contact lens sales reached USD 1.7 bil- reoretinal disposable surgical supplies were lion (–8%, +1% cc), with strong sales of inno- offset by competitive pressure on IOL sales, vative lenses, particularly Dailies Total1 and as well as a slowdown in equipment purchases Air Optix Colors, offset by declines in older in the US and emerging markets, particularly products. Sales of contact lens solutions were Asia. Launches in 2015 of our UltraSert pre- USD 0.6 billion (–14%,–8% cc), affected by on- loaded and PanOptix trifocal IOLs in Europe, going market shifts to daily disposable lenses, as well as regulatory approval of UltraSert as well as competitive pressure in the US. pre-loaded IOLs in the US, provide an oppor- tunity to renew growth in this segment. Ophthalmic Pharmaceuticals See Condensed Financial Report at Ophthalmic Pharmaceuticals sales were www.novartis.com/investors FURTHER DETAIL USD 3.8 billion (–9%, 0% cc). In glaucoma products, strong performance of fixed-dose combination products, including Azarga and Simbrinza, was offset by generic competition for monotherapies. Systane eye drops to treat the symptoms of dry eye saw sales grow in the US and Europe, the Middle East and Africa, with softer sales across emerging markets. Sales of allergy, nasal and ear medicines declined, driven by continued generic compe- tition in the US. Mothers wait in a clinic in Dhaka, Bangladesh for treatment for their children, who are suffering from pneumonia. 38 | Novartis Annual Report 2015 Sandoz Sandoz delivered solid growth in 2015 in constant currencies, boosted by strong sales in all key regions and continued success of its leading biopharmaceutical portfolio, which was reinforced by the US launches of Glatopa for multiple sclerosis and biosimilar Zarxio for cancer patients. Sandoz plays an important role in the Novartis which is the first biosimilar approved by the strategy of offering a range of products to US Food and Drug Administration (FDA) under patients and healthcare providers around the new regulations. world. The division has three franchises – Retail Operating income was USD 1.0 billion (–8%, Generics, Biopharmaceuticals and Oncology +1% cc). Core operating income, which ex- Injectables, and Anti-Infectives – and helps cludes certain exceptional items, increased make affordable, high-quality medicines 6% (+17% cc) to USD 1.7 billion. Core operating available to more people. income margin increased 1.5 percentage points PERFORMANCE in constant currencies and currency exchange rates had a positive impact of 0.2 percentage In 2015, Sandoz had net sales of USD 9.2 bil- points, yielding a core margin of 18.1% of net lion (–4%, +7% in constant currencies, or cc, sales. from the prior year), driven by a 15.0 percent- age-point increase in volume, more than off- Retail Generics setting 8.0 percentage points of price erosion. In Retail Generics, Sandoz develops, manu- Performance was driven by strong sales growth factures and markets active ingredients and in the US (+10% cc), Asia Pacific (+13% cc), finished dosage forms of pharmaceuticals. Latin America (+18% cc), and Middle East and This franchise includes the specialty areas Africa (+13% cc). Sales in Western Europe grew of dermatology, respiratory and ophthalmics, 3% (cc), with Germany growing 5% (cc). as well as finished dosage forms of anti- infective Sandoz continued to strengthen its global products sold under the Sandoz name. Retail leadership position in biopharmaceuticals, Generics sales worldwide were USD 7.2 billion which include medicines that are difficult to (–9%, +2% cc). New product launches included develop and manufacture. In June, Sandoz US-authorized generics of our Pharmaceuticals launched Glatopa – the first generic competitor Division’s Exelon Patch and Exforge, as well as to Copaxone® 20 mg – in the US. And in Septem- bivalirudin, an injectable anticoagulant. ber in the US, Sandoz also launched Zarxio, 2015 NEWS HIGHLIGHTS In March, Zarxio (filgrastim) became the first biosimilar approved under new biosimilar rules in the US. In October, Sandoz confirmed the FDA accepted our application for etaner- cept, a biosimilar to Amgen’s Enbrel®, for autoimmune diseases. Acceptance of our application in the EU followed in December. In November, Sandoz announced FDA acceptance of the application for pegfil grastim, a biosimilar to Amgen’s Neulasta®, to fight infection in patients receiving chemotherapy. ALCON NET SALES BY FRANCHISES (total 10 496) % Changes in USD KEY FIGURES (in USD millions, unless indicated otherwise) SANDOZ NET SALES BY FRANCHISES (total 10 496) % Changes in USD SANDOZ 2015 NET SALES BY FRANCHISE (in USD millions and growth in % cc1) Net sales Operating income % Change 2015 2014 USD cc 1 Retail Generics 7 199 / 2% 9 157 9 562 1 005 1 088 – 4 – 8 7 1 Anti-Infectives (partner label/API) 580 / 18%    Return on net sales (%) 11.0 11.4 Core operating income 1 1 659 1 571 6 17    Core return on net sales (%) Core Research & Development 1    As a % of net sales 18.1 776 8.5 16.4 823 8.6 6 – 7 Net operating assets 14 143 15 322 – 8 1 Constant currencies (cc) and core results are non-IFRS measures. An explanation of non-IFRS measures and reconciliation tables can be found starting on page 165. Biopharmaceuticals & Oncology Injectables 1 378 / 39% PERFORMANCE PERFORMANCE | DIVISION PERFORMANCE Novartis Annual Report 2015 | 39 +39 % Increase in sales of biopharma - ceuticals (cc) 1.7 bn Sandoz core operating income, supported by strong sales growth in key markets (USD) Biopharmaceuticals and Oncology Injectables pegfilgrastim, a proposed biosimilar to Amgen’s Neulasta®, used to reduce the chance of in fec- In Biopharmaceuticals, Sandoz develops, tion in cancer patients receiving chemo therapy. manufactures and markets protein- and bio- Sandoz has five biosimilars in Phase III devel- technology-based products known as biosim- opment or registration preparation. ilars, as well as Glatopa. Sandoz also provides Sandoz also develops, manufactures and biotechnology manufacturing services to other markets cytotoxic products for traditional companies. Sales of biopharmaceuticals rose cancer chemotherapy. The Oncology Injectables 25% (+39% cc) to USD 772 million. Sandoz business now includes a portfolio of more than further strengthened its leader ship in bio- 25 products. similars in 2015 with the US approval of Zarxio (filgrastim), used to fight infection in cancer Anti-Infectives patients receiving chemotherapy. Sandoz manufactures pharmaceutical ingre- Sandoz is the global market leader in bio- dients and intermediates – mainly antibiotics similars with three products that continue to – for sale under the Sandoz name and to third- see strong growth in their respective catego- party customers. Total Anti-Infectives sales ries: Omnitrope, a human growth hormone; were USD 1.4 billion, up 9% (cc) driven by a Binocrit, an erythropoiesis-stimulating agent; strong flu season and restored production and filgrastim under the brand names Zarzio capacity after 2014 quality upgrades. Sales of outside the US and Zarxio in the US. We con- finished dosage forms sold under the Sandoz tinued in 2015 to build our portfolio of biosim- name reached USD 860 million. Anti-infectives ilars. The FDA and European Medicines Agency sold to third parties for sale under their own confirmed acceptance of our applications for name reached USD 580 million. etanercept, a proposed biosimilar to Amgen’s Enbrel®, which treats autoimmune diseases such as rheumatoid arthritis and psoriasis. FURTHER DETAIL The FDA also accepted our application for See Condensed Financial Report at www.novartis.com/investors Six-month-old Foysal received treatment for pneumonia at a clinic and hospital in the capital of Bangladesh. 40 | Novartis Annual Report 2015 p CONTINUED FROM PAGE 23 Undernourished children are most at risk from this common lung infection, as are those living in overcrowded communities such as the densely populated Kamalapur area around Dhaka’s main railway station. A team of nearly 60 field research assistants is based there, dedicated to reducing the death toll from what the World Health Organization calls the forgotten pandemic of pneumonia. They are supported by around 30 health workers whose distinctive yellow uniforms identify them as representatives of icddr,b, an organization established 50 years ago in Dhaka as the International Centre for Diarrhoeal Disease Research, Bangladesh. Since then the organization has expanded its focus to include many of the world’s most pressing health concerns, and it now has a global reputation for research into the health challenges faced by developing countries – from infectious diseases to malnutrition and the health effects of climate change. The organization’s activities include both academic re- search and patient care. In the case of pneumonia, the field research assistants visit up to 150 households each week to monitor for signs of the disease. At the same time, they gather data that will increase understanding of the causes, transmission and possible prevention of pneumonia. The yellow-clad health workers join them on home visits and also support the clinical team in caring for patients. Regular monitoring is vital because pneumonia can be treated effectively using appropriate antibiotics such as amoxicillin, but this relies on prompt diagnosis and treatment. All too often, mothers fail to recognize that symptoms such as fever and rapid breathing could indicate their child has the early stages of the disease. When a suspected pneumonia case is identified, the field teams escort the mother and child to the organization’s clinic in Kamalapur, normally traveling by rickshaw – which is the main form of public transport. More severe cases are referred to the organization’s hospital in Dhaka. The global fight against pneumonia is supported by Sandoz, the generics division of Novartis, which supplied millions of tablets of a special child formulation of amoxicillin to help children worldwide. The medicine was given to the United Nations as part of its Every Newborn Action Plan, designed to eliminate preventable deaths among babies. 1 4 The global fight against pneumonia is supported by Sandoz, the generics division of Novartis, which supplied millions of tablets of a special child formulation of amoxicillin to help children worldwide Novartis Annual Report 2015 | 41 2 3 5 1 Health workers travel by rickshaw on their rounds visiting homes to check for possible cases of pneumonia. 2 They interview Fatima, the mother of 6-month-old Foysal, who has symptoms of pneumonia. 3 A blood sample is taken from Foysal at the clinic before he goes to the hospital, where he later recovered, thanks to antibiotics. 4 The medical team, including deputy project coordinator Dr. Kamrun Nahar (left), examines X-rays at the Kamalapur clinic. 5 Fatima takes Foysal to the hospital in a rickshaw. 42 | Novartis Annual Report 2015 INNOVATION INNOVATION INNOVATION Novartis Annual Report 2015 | 43 CONTENTS 44 44 44 45 47 47 48 48 50 51 51 INNOVATION OVERVIEW Drug Discovery Drug Development Oncology Cardiovascular Respiratory Immunology and Dermatology Neuroscience Eye Care Biosimilars Infectious Diseases 52 PIPELINE PHOTO ESSAY Priming the body’s own defenses against cancer Novartis is working with the University of Pennsylvania in the US to develop a new personalized cancer treatment called chimeric antigen receptor T-cell therapy, or CART for short. Much work will be needed to develop this experimental technology, but if researchers are successful, it has the potential to alter the course of cancer care. Researchers take patients’ T-cells, which are white blood cells that help fight infections, and genetically modify them in super-clean laboratories to recognize a protein expressed by cancer cells. Researchers then reinfuse these T-cells into the patients’ blood where they aim to hunt down and eradicate tumor cells. p CONTINUED ON PAGE 59 44 | Novartis Annual Report 2015 INNOVATION OVERVIEW During the past year, we continued to sharpen our research and development strategy and execution. We are prioritizing our most promising new drug candidates and focusing on disease areas where there is patient need and where scientific advances present new opportunities for breakthroughs. Our researchers continue to push the boundaries of science, working to broaden our understanding of diseases, and developing novel medicines and products to address high unmet medical need. We believe innovation that produces break­ Novartis maintains alliances with other through medicines, devices and solutions will research organizations to augment in­house be critical in the healthcare industry in the capabilities, including more than 300 with aca­ coming years as demographic trends increase demic institutions and more than 100 with bio­ pressure on health systems to produce the technology and pharmaceutical organizations. best results at the lowest overall cost. Novartis added 41 new alliances in 2015. To drive innovation at Novartis, in 2015 we One example was in gene editing. Novartis invested USD 8.9 billion in research and devel­ formed collaborations with Intellia Therapeu­ opment for new drugs and medical devices, tics and Caribou Biosciences to develop ex ­ or 18% of net sales. More than 200 research pertise in CRISPR, a technology likened to a and development projects are underway, 137 molecular scalpel for genomes. It enables of them in the Pharmaceuticals Division. researchers to alter the genome of a living cell Our research and development strategy in a specific and reproducible fashion, offering sets clear priorities. We concentrate on thera­ unique opportunities for drug discovery. peutic areas where there is patient need and where scientific advances present new oppor­ DRUG DEVELOPMENT tunities, including oncology, cardiovascular, After a successful proof­of­concept study, new eye care, biosimilars and neuroscience. medicines move into clinical development. We are also exploring new scientific fron­ Development processes at Novartis vary by tiers in areas with great potential for inno­ division because of the different types of prod­ vation, including immuno­oncology, aging ucts involved. In the Pharmaceuticals Division, and regenerative medicine, and infectious in Ophthalmic Pharmaceuticals at Alcon and diseases. at Sandoz for biosimilars, Novartis scientists build development plans with practicing phy­ DRUG DISCOVERY sicians and health authorities. The Novartis Institutes for BioMedical Research Clinical trials can involve large numbers of (NIBR) is the innovation engine of Novartis. patients and can last from two to five years, More than 6 000 NIBR scientists and physicians depending on the indication and patient pop­ worldwide work to discover potentially ground­ ulation. For other products, such as medical breaking therapies, using molecular signaling devices or generic drugs, the process can be pathways – the communication highways inside much shorter. At Alcon, researchers develop cells – as a guide for drug discovery. When new devices and surgical instruments with eye new molecular entities have been qualified for surgeons and research institutes. Development testing in humans, small­scale proof­of­ concept at Sandoz for generics typically involves small studies are conducted to get an early read on clinical studies to show the generic version is a drug’s safety and effectiveness. equivalent to the original branded medicine. More than 80% of compounds in develop­ Even when a proof­of­concept study yields ment at Novartis were discovered internally. a positive result, rigorous prioritization means Likewise, two of the most significant Novartis a therapy may not be developed at Novartis. medicines to receive approval from the US In such cases, we may license the compound Food and Drug Administration in 2015, to another company. For example, in 2015 we Cosentyx for psoriasis, and Entresto for chronic sold three mid­stage experimental therapies heart failure, were in­house discoveries. to Mereo BioPharma Group in exchange for a 8.9 bn Group research and development spending in 2015, amounting to 18% of net sales (USD) 200 + Research and development projects underway at Novartis More than 80% of compounds in development at Novartis were discovered internally INNOVATIONINNOVATION | INNOVATION OVERVIEW Novartis Annual Report 2015 | 45 25 Biological pathways associated with cancer progression under study at Novartis 14 m New cases of cancer worldwide every year, a figure the WHO believes will rise 70% by 2035 19.5% equity investment in Mereo – BPS804 for and mutations of the RAF protein, BRAF, are brittle bones, BCT197 for respiratory ailments, found in about half of all melanomas. The and BGS649 for low testosterone levels in combination of Tafinlar (dabrafenib), targeting obese men. ONCOLOGY BRAF, and Mekinist (trametinib), targeting MEK – another key protein in this pathway – has demonstrated a significant overall survival Cancer remains a serious public health chal­ benefit in two Phase III studies for patients lenge, with 14 million new cases a year and with BRAF V600E/K mutation­ positive meta­ 8.2 million cancer­related deaths annually, static melanoma. according to the World Health Organization This combination was approved in both (WHO). The number of new cancer cases is the EU and the US in 2015. We are also focusing expected to rise about 70% within the next on the study of a triple combination approach two decades – with more than 60% of these with Tafinlar + Mekinist and immuno­ oncology in Africa, Asia and Latin America. therapy. It is a critical time in cancer research and development, with groundbreaking advance­ Hematology ments happening at a rapid pace. We take a We continue to develop treatments for blood holistic approach to oncology research, grow­ cancers. We expanded our portfolio this year ing our presence in targeted treatments and with a new indication for Jakavi in polycythemia investing significantly in immuno­oncology. vera, a disorder of the bone marrow; the Our focus is on five common types of can­ ap proval of Farydak for multiple myeloma; and cer – melanoma, hematology, lung, breast and the addition of Promacta, an oral medicine that renal – with a continued interest in other types increases the number of platelets in the blood. where we see significant unmet medical need. In chronic myelogenous leukemia we are We actively pursue the development of novel studying ABL001, a small molecule designed treatments across our targeted therapy and to inhibit BCR­ABL – an abnormal gene found immuno­oncology portfolios, along with in most patients with the disease. Researchers re vo lu tionary cell therapy treatments such as studying drug resistance found cancer cells chimeric antigen receptor T­cell (CART) tech­ can sometimes reactivate BCR­ABL after nology. Melanoma treatment, enabling them to resume their destructive activity. Because ABL001 has a novel mechanism of action, it may prevent the Data show that combinations of multiple thera­ cancer cells from doing this and becoming pies can lead to better outcomes for patients, resistant to existing drugs. Numerous combi­ short­circuiting cancer’s ability to use an alter­ nation approaches of ABL001 with other native disease pathway and continue grow­ therapies, including immuno­oncology, are ing. In melanoma, we have seen the import­ being explored for future study. ant role the mitogen­activated protein kinase (MAPK) signaling pathway, also known as the RAS­RAF­MEK­ERK pathway, plays in cell proliferation. Mutations in this pathway have the poten­ tial to make normal cells become cancerous, 6 Immuno­oncology programs in clinical trials with five more expected to enter the clinic by the end of 2016 46 | Novartis Annual Report 2015 INNOVATION OVERVIEW continued Lung Immuno-oncology Zykadia (ceritinib) gained EU approval in May Our entry into immuno­oncology is focused for certain patients with anaplastic lymphoma on understanding the mechanisms involved kinase­positive (ALK+) forms of non­small cell in a protective immune response. We have six lung cancer. This is a new option for patients programs in clinical trials and five more whose disease has progressed or who are expected to enter the clinic by the end of 2016. intolerant to an existing therapy, and it specif­ Our portfolio includes programs based on ically targets the genetic makeup of their checkpoint inhibitors for three particular cancer. We are studying additional mutational proteins – PD1, TIM3 and LAG3 – acquired targets using our Tafinlar + Mekinist combina­ from CoStim Pharmaceuticals in 2014. tion therapy and INC280, our c­MET inhibitor. Also in early development is a novel form A recent Phase II study of Tafinlar + Mekinist of small­molecule therapies called cyclic showed the combination approach was effec tive dinucleotides (CDNs). These next­generation in shrinking tumors in patients with non­small cancer immunotherapies target a cell­ signaling cell lung cancer. pathway known as stimulator of interferon We are researching a potential combina­ genes (STING). While checkpoint inhibitors are tion therapy that involves a targeted treatment potent in specific tumor types, preclinical and an immuno­oncology treatment. We have studies with Aduro Biotech indicate CDNs may three combinations with Opdivo®, a PD­1 check­ help the body recognize and fight several point inhibitor, including Zykadia, INC280 and cancers. We are also collaborating with part­ EGF816, as part of a collaboration with Bristol­ ners to develop immuno­oncology and tar­ Myers Squibb Co. Clinical trials began early in geted therapy combinations. 2015 to evaluate their efficacy in treating non­ In October, we added IL­15, adenosine small cell lung cancer. receptor and TGF­beta inhibition programs through the acquisition of Admune Therapeu­ Advanced breast cancer tics as well as licensing agreements with XOMA We are exploring molecules that target the and Palobiofarma. All three will be explored as PI3K/mTOR pathway, including BKM120 and monotherapies and in combination with CART BYL719, to treat advanced breast cancer. We technology, novel checkpoint inhibitors, STING are also identifying other pathways, such as agonists and our portfolio of targeted therapies. through LEE011, a small­molecule inhibitor of cyclin­dependent kinase 4 and 6 (CDK4/6). Cell and gene therapy CDK4 and CDK6 are both components of Novartis is exploring novel therapies to prime a switch that controls the cell cycle. Early data the immune system against tumors or malig­ suggest LEE011 could benefit patients with nancies, including CART technology, being advanced breast cancer in combination with developed with the University of Pennsylvania standard endocrine therapy. in the US. We are also exploring the possibility of This novel therapy takes patients’ white inhibiting multiple pathways simultaneously blood cells and re­engineers them to identify along with endocrine therapy. and destroy specific cancer cells. CTL019 is Renal cell carcinoma in Phase II development for the treatment of relapsed/refractory pediatric acute lympho­ We are examining the role immuno­oncology blastic leukemia (ALL) and diffuse large B­cell can play in the treatment of renal cell carcinoma. lymphoma (DLBCL). Currently, we have an early study of Votrient We continue to work on this revolutionary in combination with Keytruda® (MK3475, a approach to tackling cancer and we are ex ­ PD­1 checkpoint inhibitor) from Merck & Co., panding our trials beyond the US to Europe. and we are exploring the potential of immuno­ We boosted our T­cell processing capacity in oncology and immuno­oncology combinations. 2015, opening a new manufacturing facility in Morris Plains, New Jersey in the US. INNOVATIONINNOVATION | INNOVATION OVERVIEW Novartis Annual Report 2015 | 47 21 % Reduction in heart failure hospitalizations among patients using Entresto in a clinical trial, a clear benefit over existing treatments 26 m + People worldwide living with heart failure CARDIOVASCULAR highlights our commitment to go beyond the Heart failure, which affects more than 26 mil­ pill and ensure the best possible outcomes for lion people worldwide, is a difficult­to­treat patients. chronic condition in which the heart cannot pump enough blood around the body. It is the RESPIRATORY leading cause of hospitalization among adults Some respiratory diseases are so severe over age 65 in the Western world. About 25% patients have to fight for breath while carrying of patients with the disease die within a year out simple tasks. Novartis is developing treat­ of diagnosis and 50% are dead within five years. ments for several respiratory illnesses, includ­ Approval in 2015 in the US and EU of ing chronic obstructive pulmonary disease Entresto, formerly LCZ696, marked a signifi­ (COPD), a life­threatening yet preventable and cant advance for patients with chronic heart treatable lung disease affecting 210 million failure with reduced ejection fraction – when people worldwide and caused mainly by the heart muscle does not contract effectively. smoking and air pollution. A major study showed Entresto reduced In October, we received US approval for the risk of death from cardiovascular causes QVA149 in patients with moderate­to­severe as well as hospitalizations due to heart failure COPD. QVA149 combines two active substances, by 20% and 21%, respectively. LCZ696 is also glycopyrronium bromide and indacaterol. Two being assessed in patients who have heart pivotal studies showed this combination failure with preserved ejection fraction, an other improved lung function compared to the indi­ form of the disease. vidual components. Outside the US, QVA149 Furthermore, a clinical trial studying RLX030 has been marketed as Ultibro Breezhaler, and (serelaxin) in acute heart failure is expected a large study comparing it with the widely used to report in 2017. The study may show whether medicine Seretide® showed Ultibro reduced serelaxin can reduce death and hospitalization the risk of COPD exacerbations. In early 2016, rates for patients who have already experienced Novartis announced a collaboration with Qual­ an episode of acute heart failure. comm to provide patients with real­time access Coronary artery disease is another area of to data on their use of the inhaler used in sev­ high unmet medical need. Despite advances eral Novartis COPD treatments, including in secondary prevention, many patients remain Ultibro Breezhaler. Patients will access the data at high risk of stroke, recurrence of heart transmitted wirelessly by the Qualcomm digital attacks, and cardiovascular death due to monitor via a smartphone and Novartis COPD vascular inflammation. ACZ885 is a selective mobile application. interleukin­1 beta inhibitor currently marketed Asthma remains the most common respi­ for the treatment of auto­inflammatory dis­ ratory disease worldwide and Novartis aims eases. A trial in more than 10 000 patients to expand its portfolio beyond Xolair. A pivotal who previously had a heart attack is under­ trial of QVM149 started in 2015, studying a way. It will determine whether blocking sys­ once­daily combination of drugs called temic inflammation in these patients can long­acting beta agonists and long­acting reduce the risk of further cardiac problems. If muscarinic agents with an inhaled cortico­ positive, it will provide a novel cytokine­based steroid in a single device. therapy for the secondary prevention of cardio­ A Phase III study for QAW039, a potential vascular disease. first­in­class oral anti­inflammatory treatment Novartis is also developing new digital tech­ for asthma, is also underway. This has the nologies to help heart failure patients adhere potential to reduce asthma exacerbations and to their treatment and monitor vital signs. In has a safety profile that may be suitable for November, we launched Heart Partner, a heart children, for whom asthma is the most com­ failure smartphone application for patients mon chronic disease. and caregivers to help manage treatment. This 48 | Novartis Annual Report 2015 INNOVATION OVERVIEW continued Another potential therapy, QGE031 in patient symptoms after one year of treat­ (ligelizumab) is in Phase II trials. It could ment. Cosentyx was approved for both AS and become the first of a new generation of anti­ PsA in Europe in 2015, and in the US in Jan­ IgE antibody treatments for severe asthma, uary 2016. chronic urticaria (hives) and other indications. Work is also underway with QAW039 for IgE (immunoglobulin E) has been implicated atopic dermatitis, the most common form of in mediating many chronic inflammatory and eczema, following a positive proof­of­concept allergic diseases. Data show QGE031 achieved trial in adults with a moderate­to­severe form Cosentyx was shown to be effective for three indications: psoriasis, psoriatic arthritis and ankylosing spondylitis better suppression of IgE than Xolair and that of the disease. deeper IgE suppression translates to superior efficacy in blocking allergic responses in NEUROSCIENCE patients’ skin and lungs. In neuroscience we are studying conditions such as multiple sclerosis (MS), neuropathic IMMUNOLOGY AND DERMATOLOGY pain, sporadic inclusion body myositis (sIBM), Immune system disorders affect hundreds of migraine and Alzheimer’s disease. Disorders millions worldwide and can severely impact of the brain, including forms of dementia and quality of life and even life expectancy. mental illness, affect hundreds of millions We are studying BAF312, or siponimod, in the largest Phase III trial in secondary progressive MS In early 2015, we received approval in the worldwide. US and EU for Cosentyx, a monoclonal human antibody targeting a protein called i nterleukin­ Multiple sclerosis 17A (IL­17A) for the treatment of moderate­ to­ Novartis is studying ways of treating progres­ severe plaque psoriasis in adults. As IL­17A sive forms of MS, which are the most signifi­ stimulates inflammation, we are also pursuing cant source of disability and for which there Cosentyx for use in immune­related disorders are no approved therapies. such as psoriatic arthritis (PsA) and ankylosing We are studying BAF312, or siponimod, a spondylitis (AS), a debilitating chronic condition second­generation selective S1P1/5 receptor that leads to excessive formation of new bone, modulator, in the largest Phase III trial in resulting in spinal damage. A recent Phase III secondary progressive MS. study in AS showed significant improvement Research scientists wear multiple layers of protective clothing as part of a strict anti­contamination protocol at the Novartis cell processing facility in Morris Plains, New Jersey in the US. INNOVATIONINNOVATION | INNOVATION OVERVIEW Novartis Annual Report 2015 | 49 44 m People globally have Alzheimer’s disease or a related dementia We are also working to broaden our port­ Migraine folio of MS treatments. In 2015, we acquired Migraine is a severe headache condition affect­ the remaining rights to ofatumumab, which ing more than 10% of the population world­ we currently market for oncology indications wide. Novartis is collaborating with Amgen on as Arzerra, from GlaxoSmithKline. Ofatumumab potential treatments for this leading cause of is a human monoclonal antibody targeting disability. They include AMG 334, a fully human the CD20 protein and being developed for monoclonal antibody; AMG 301; and poten­ relapsing­ remitting MS. Phase II results show tially another Amgen investigational compound. a significant reduction in the cumulative num­ AMG 334 is in Phase III trials and AMG 301 is ber of new brain lesions in patients with MS, in Phase I trials. and Phase III trials will start in 2016. We see ofatumumab as offering a significant potential Alzheimer’s disease benefit for patients. About 44 million people globally have Alz­ We also continue to explore the IL­17 path­ heimer’s disease or a related dementia. Current way, associated with clinical disease activity treatments manage symptoms but cannot alter in patients with MS, with CJM112. the course of the disease. Once the disease is Neuropathic pain detected, neurological damage to the patient is irreversible and slow decline in memory, Nerve damage caused by physical injury or thinking and reasoning skills results. diseases such as diabetes, MS and shingles We are investigating potential new thera­ can result in a complex chronic pain state pies and studying patients with a genetic risk called neuropathic pain. This condition affects of developing Alzheimer’s, for example in up to 7–8% of the adult population, and 40% partnership with Amgen to develop a BACE of patients do not respond to existing treat­ inhibitor program in Alzheimer’s. This includes ments. We are investigating EMA401, a novel the oral therapy CNP520 (which is also part angiotensin II type 2 receptor (AT2R) antago­ of a major collaborative study with the Banner nist, following our acquisition of Spinifex Alzheimer’s Institute in people with a genetic Pharmaceuticals. EMA401 works in the spinal risk of developing this disease). BACE inhibi­ cord outside the blood brain barrier and tors block an enzyme called beta­secretase may avoid side effects such as dizziness or that is involved in the production of amyloid confusion. Muscle wasting beta, a protein that creates brain plaques, considered to be a major cause of Alzheimer’s. This research will assess the efficacy of CNP520 We are developing BYM338 (bimagrumab) for and of CAD106 in limiting the build­up of patients with sIBM, a rare muscle wasting protein aggregates linked to the emergence of disorder. Currently in Phase III clinical trials Alzheimer’s. CAD106 is an anti­amyloid active for sIBM, we are also studying its potential for immunotherapy that has completed Phase IIa patients with age­related sarcopenia. This de­ trials and is not included in the collaboration generative condition, usually characterized by with Amgen. a significant decrease in muscle mass and increased frailty, affects 30% of those aged 60–70 and more than 50% of people over 80. We are researching early-stage compounds in glaucoma and dry eye, as well as gene therapies for rare and orphan eye diseases 50 | Novartis Annual Report 2015 INNOVATION OVERVIEW continued EYE CARE Ophthalmic pharmaceuticals Alcon, the eye care division of Novartis, is In ophthalmic pharmaceuticals, we address developing innovative products that enhance chronic and progressive eye diseases such quality of life by helping people see better. as glaucoma, dry eye and ocular infections. A According to the WHO, more than 80% of all Phase III clinical trial program is underway for visual impairment can be prevented, treated RTH258, a novel anti­vascular endothelial or cured. We offer a broad portfolio of pro ducts, growth factor (anti­VEGF) agent to treat patients including surgical devices and platforms to with wet AMD. Patients with wet AMD suffer treat cataracts, refractive errors and retinal vision loss when blood vessels grow into the conditions; medicines for chronic diseases eye and damage the retina. We are also re­ such as glaucoma and dry eye; compounds in searching early­ stage compounds in glaucoma development for the potential treatment of and dry eye, as well as gene therapies for rare age­related macular degeneration (AMD); as and orphan eye diseases. well as contact lenses and lens care solutions. We continue to study OAP030, also known Surgical as Fovista®, and E10030, an anti­platelet­ derived growth factor (anti­PDGF) agent from Alcon develops ophthalmic surgical equipment, Ophthotech, as a combination treatment with intraocular lenses (IOLs) and disposable surgi­ an anti­VEGF agent for wet AMD. A Phase III cal equipment to treat cataracts, a clouding program to evaluate this combination is under­ of the natural lens of the eye that is the lead­ way and initial data is expected in 2016. ing cause of preventable blindness worldwide. In addition, Alcon offers equipment to assist Vision care surgeons performing corneal refractive and Alcon is working with Verily, formerly Google vitreoretinal surgical procedures. Life Sciences, on innovations using its “smart Alcon’s most recent innovations in cataract lens” technology to address certain ocular con­ treatment are PanOptix, a new advanced ­ ditions. This “smart lens” technology involves technology IOL that addresses near, inter­ sensors, microchips and other miniaturized mediate and distance vision, as well as the electronics embedded within lenses. UltraSert pre­loaded IOL device that enables The first is a lens to help compensate for surgeons to insert IOLs with more precision the decrease in accommodation of the eye’s and control during surgery, further enhancing natural lens in patients with presbyopia who patient outcomes. We are also in late­stage cannot read without glasses. Patient trials are development of our new next­generation IOL expected to begin in 2016. The “smart lens” polymer material, Clareon, which maintains has the potential to help restore the eye’s nat­ the benefits of our AcrySof platform, including ural autofocus on near objects, either in the refractive and rotational stability, unfolding form of an accommodative contact lens or an characteristics, improved visual outcomes, and IOL as part of refractive cataract treatment. a reduction in glistenings and surface haze. The second area of focus is on a glucose­ sensing lens to help diabetic patients monitor glucose levels via tear fluid in the eye. This work is at pre­proof­of­concept stage. INNOVATIONINNOVATION | INNOVATION OVERVIEW Novartis Annual Report 2015 | 51 6 Additional biosimilar filings planned by Novartis within the next two years 584 000 People die every year from malaria, a disease for which Novartis is developing new compounds BIOSIMILARS Novartis is developing new compounds for Our generics division, Sandoz, is developing malaria, which kills about 584 000 people biosimilars – protein drugs with essentially the worldwide every year. We have two potential same active ingredient as existing biological therapies in Phase II clinical trials, KAE609 drugs that have lost patent protection. Bio­ (cipargamin) and KAF156. Both act against the similars represent an innovative and lower­ two parasites responsible for the majority of cost way of extending patient access to high­ malaria deaths, Plasmodium vivax and the quality medicines for some serious diseases. more virulent Plasmodium falciparum. Current Novartis is a leader with three products on antimalarials, including Coartem, are not the market, including Zarxio, which launched effective against Plasmodium vivax. KAE609 in the US during 2015. It is called Zarzio outside and KAF156 are new classes of compounds the US. We also have a strong pipeline with that treat malaria in different ways from cur­ five biosimilars in oncology and immunology rent therapies, and could help combat grow­ in Phase III development or nearing registra­ ing resistance to existing artemisinin­based tion. Filings were accepted in the US and EU therapies. in November for etanercept, a biosimilar to Another challenge to public health is the Enbrel® for several autoimmune diseases, and growing resistance of bacteria to antibiotics. in the US for pegfilgrastim (Peg G­CSF) for Novartis is working on new antibiotics to treat treating neutropenia associated with chemo­ bacteria that are showing resistance to older therapy. Other biosimilars include rituximab antibiotics derived from penicillin as well as to for rheuma toid arthritis and follicular lym­ carbapenems, a potent antibiotic class typically phoma, a biosimilar to Humira® (adalimumab) used when everything else has failed. for psoriasis, and epoetin alfa for anemia asso­ We are also exploring new treatments for ciated with chronic kidney disease. Novartis viral infections, including respiratory viruses plans an additional six biosimilar filings within such as influenza and respiratory syncytial the next two years. virus (RSV), and viruses that threaten patients with undeveloped or compromised immune INFECTIOUS DISEASES systems, such as those with HIV/AIDS and There is a pressing need for new drugs to tackle those receiving chemotherapy or organ trans­ tropical diseases that can be devastating in plants. developing countries, such as malaria; Chagas disease, a tropical disease that can lead to heart failure; and human African trypanoso­ miasis (HAT), also known as African sleeping sickness, a potentially fatal and difficult­to­treat disease endemic in many sub­Saharan African countries. 52 | Novartis Annual Report 2015 PIPELINE Novartis is consistently rated as having one of the industry’s most respected development pipelines, with more than 200 projects in clinical development, as of December 31, 2015. Many of these projects, which include new molecular entities as well as additional indica­ tions and different formulations for marketed products, are for potentially best­in­class or first­in­class medicines that could significantly advance treatment standards for patients worldwide. This table provides an overview of selected projects in confirmatory development. We use the traditional pipeline model as a platform (e.g., Phase I­III). However, we have tailored the process to be simpler, more flex­ ible and more efficient. GLOSSARY Project/product Project refers to the Novartis reference code (combination of three letters and three numbers) used for projects in development. Product refers to the brand name for a marketed product. Common name Official international non­ proprietary name or generic name for an individual molecular entity as designated by the World Health Organization Glossary continued on page 54 MAJOR DEVELOPMENT PROJECTS Project/product Division Common name Mechanism of action ONCOLOGY ABL001 ASB183 LJM716 PIM447 EGF816 Pharmaceuticals – BCR­ABL inhibitor Pharmaceuticals afuresertib Pharmaceuticals elgemtumab Pharmaceuticals Pharmaceuticals – – AKT inhibitor HER3 mAb3 Pan­PIM inhibitor Epidermal growth factor receptor inhibitor BGJ398 Pharmaceuticals infigratinib Pan­FGF receptor kinase inhibitor Tafinlar + Mekinist Pharmaceuticals dabrafenib + trametinib INC280 BKM120 Pharmaceuticals capmatinib Pharmaceuticals buparlisib BRAF inhibitor + MEK4 inhibitor c­MET inhibitor PI3K5 inhibitor BYL719 Pharmaceuticals alpelisib PI3Kα6 inhibitor Tasigna LCI699 LEE011 Pharmaceuticals nilotinib BCR­ABL inhibitor Pharmaceuticals osilodrostat Aldosterone synthase inhibitor Pharmaceuticals ribociclib CDK4/67 inhibitor PKC412 Pharmaceuticals midostaurin Signal transduction inhibitor Signifor LAR (SOM230) Pharmaceuticals pasireotide Somatostatin analogue Zykadia (LDK378) Pharmaceuticals ceritinib ALK9 inhibitor Votrient Arzerra Afinitor/Votubia (RAD001) Pharmaceuticals pazopanib Angiogenesis inhibitor Pharmaceuticals ofatumumab Anti­CD20 mAb3 Pharmaceuticals everolimus mTOR10 inhibitor Promacta/Revolade Pharmaceuticals eltrombopag Thrombopoietin receptor agonist Jadenu Exjade film­coated tablet (FCT) Pharmaceuticals deferasirox Iron chelator CARDIOVASCULAR AND METABOLISM ACZ885 Pharmaceuticals canakinumab RLX030 Pharmaceuticals serelaxin Anti­interleukin­1ß monoclonal antibody Recombinant form of human relaxin­2 hormone Entresto (LCZ696) Pharmaceuticals valsartan, sacubitril (as sodium salt complex) Angiotensin receptor, neprilysin inhibitor 1 Filings that have received approval in either the US or EU but are awaiting approval in the other market 2 Phase and planned filing dates refer to lead indication in development. 3 Monoclonal antibody 4 Combination of mitogen­activated protein kinase and extracellular signal­regulated kinase 5 Phosphoinositide 3­kinase inhibitor 6 Phosphoinositide 3­kinase alpha inhibitor 7 Cyclin­dependent kinase 4/6 8 Non­steroidal aromatase inhibitor 9 Anaplastic lymphoma kinase 10 Mammalian target of rapamycin 11 Diffuse large B­cell lymphoma INNOVATION INNOVATION | PIPELINE Novartis Annual Report 2015 | 53 Potential indication/disease area Route of administration filing dates 1,2 Planned PHASE l PHASE ll PHASE lll SUBMISSION ≥2020 2018 ≥2020 2016 2018 2016 2019 2016 2017 2016 2016 2016 2017 2016 Oral Oral ≥2020 ≥2020 Intravenous infusion ≥2020 Chronic myeloid leukemia Solid and hematologic tumors Solid tumors Hematologic tumors Solid tumors Solid tumors BRAF V600+ NSCLC,2 BRAF V600+ melanoma (adjuvant), BRAF V600+ colorectal cancer Non­small cell lung cancer Metastatic breast cancer, hormone receptor­positive, aromatase inhibitor resistant/mTOR naïve, 2nd line (+ fulvestrant) [lead indication]; metastatic breast cancer, hormone receptor­ positive, aromatase inhibitor and mTOR inhibitor resistant, 3rd line (+ fulvestrant); solid tumors Hormone receptor­positive, HER2­negative advanced breast cancer (postmenopausal women), 2nd line (+ fulvestrant) [lead indication]; solid tumors Chronic myeloid leukemia treatment­free remission Cushing’s disease Oral Oral Oral Oral Oral Oral Oral Oral Oral Hormone receptor­positive, HER2­negative advanced breast cancer Oral (postmenopausal women), 1st line (+ letrozole) [lead indication]; hormone receptor­positive, HER2­negative advanced breast cancer (premenopausal women), 1st line (+ tamoxifen + goserelin or NSAI8 + goserelin); hormone receptor­positive, HER2­negative advanced breast cancer (postmenopausal women), 1st/2nd line (+ fulvestrant); solid tumors Acute myeloid leukemia [lead indication], aggressive systemic mastocytosis Cushing’s disease ALK9+ advanced non­small cell lung cancer (1st line, treatment naïve),2 ALK9+ advanced non­small cell lung cancer (brain metastases) Renal cell carcinoma (adjuvant) Chronic lymphocytic leukemia (extended treatment),2 chronic lymphocytic leukemia (relapse), non­Hodgkin’s lymphoma (refractory) Oral Long­acting release, intramuscular injection Oral Oral Intravenous infusion US registration EU registration Non­functioning GI and lung neuroendocrine tumors,2 tuberous sclerosis complex seizures, DLBCL11 Oral US registration EU registration Pediatric immune thrombocytopenia Oral/oral suspension US approved Iron overload Oral FCT EU registration US approved EU registration Secondary prevention of cardiovascular events Acute heart failure Subcutaneous injection 2017 Intravenous infusion 2017 Chronic heart failure with preserved ejection fraction,2 post­acute myocardial infarction Oral 2019 PHASE l PHASE l PHASE l PHASE l PHASE ll PHASE ll PHASE ll PHASE ll PHASE lll PHASE lll PHASE lll PHASE lll PHASE lll PHASE lll PHASE lll PHASE lll PHASE lll PHASE lll PHASE lll PHASE lll SUBMISSION SUBMISSION SUBMISSION SUBMISSION 54 | Novartis Annual Report 2015 PIPELINE continued Mechanism of action Specific biochemical interaction with a molecular target such as a receptor or enzyme, through which a drug substance produces its pharmacological effect Potential indication/indications Disease or condition for which a compound or marketed product is in development and is being studied as a potential therapy Route of administration Path by which a medi cinal preparation is administered into the body, such as oral, subcutaneous or intravenous Phase I First clinical trials of a new compound, generally performed in a small number of healthy human volunteers, to assess the clinical safety and tolerability, as well as metabolic and pharmacologic properties of the compound Phase II Clinical studies with patients who have the target disease, with the aim of continuing the Phase I safety assessment in a larger group, assessing the efficacy of the drug in the patient population, and determining the appropriate doses for further evaluation Phase III Large­scale clinical studies with several hundred to several thousand patients, which are conducted to establish the safety and efficacy of the drug­specific indications for regulatory approval. Phase III trials also may be used to compare a new drug against a current standard of care to evaluate the over­ all benefit­risk relationship of the new medicine. Glossary continued on page 56 MAJOR DEVELOPMENT PROJECTS Project/product Division Common name Mechanism of action RESPIRATORY QAX576 Pharmaceuticals – Anti­interleukin­13 monoclonal antibody QMF149 Pharmaceuticals indacaterol, mometasone furoate (in fixed­dose combination) Long­acting beta2­agonist and inhaled corticosteroid QAW039 QVM149 Pharmaceuticals fevipiprant CRTH2 antagonist Pharmaceuticals indacaterol, mometasone furoate, glycopyrronium bromide (in fixed­dose combination) Long­acting beta2­agonist, long­acting muscarinic antagonist and inhaled corticosteroid IMMUNOLOGY AND DERMATOLOGY CJM112 Pharmaceuticals – Anti­interleukin­17 monoclonal antibody QAW039 LJN452 VAY736 Pharmaceuticals fevipiprant CRTH2 antagonist Pharmaceuticals Pharmaceuticals – – FXR agonist Anti­BAFF (B­cell­activating factor) antibody QGE031 Pharmaceuticals ligelizumab Ilaris (ACZ885) Pharmaceuticals canakinumab Cosentyx (AIN457) Pharmaceuticals secukinumab High­affinity anti­IgE monoclonal antibody Anti­interleukin­1ß monoclonal antibody Anti­interleukin­17 monoclonal antibody NEUROSCIENCE CAD106 Pharmaceuticals – Beta­amyloid­protein therapy CNP520 EMA401 OMB157 Pharmaceuticals Pharmaceuticals – – BACE inhibitor Angiotensin ll receptor antagonist Pharmaceuticals ofatumumab Anti­CD­20 monoclonal antibody BAF312 Pharmaceuticals siponimod Gilenya Pharmaceuticals fingolimod Sphingosine­1­phosphate receptor modulator Sphingosine­1­phosphate receptor modulator AMG 334 Pharmaceuticals – Selective CGRP receptor antagonist BYM338 Pharmaceuticals bimagrumab Inhibitor of activin type II receptor CELL AND GENE THERAPY CTL019 Pharmaceuticals tisagenlecleucel­T FCR001 Pharmaceuticals – CD19­targeted chimeric antigen receptor T­cell immunotherapy Inducing stable donor chimerism and immunological tolerance HSC835 Pharmaceuticals – Stem cell regeneration INFECTIOUS DISEASES KAF156 KAE609 EXE844b Pharmaceuticals – Imidazolopiperazines derivative Pharmaceuticals cipargamin PfATP4 inhibitor Alcon finafloxacin Anti­infective 1 Filings that have received approval in either the US or EU but are awaiting approval in the other market 2 Phase and planned filing dates refer to lead indication in development. INNOVATION INNOVATION | PIPELINE Novartis Annual Report 2015 | 55 Potential indication/disease area Route of administration filing dates 1,2 Planned PHASE l PHASE ll PHASE lll SUBMISSION Allergic diseases Asthma Asthma Asthma Immune disorders Atopic dermatitis Non­alcoholic steatohepatitis Primary Sjoegren’s syndrome Chronic spontaneous urticaria/ inducible urticaria Hereditary periodic fevers Subcutaneous injection ≥2020 Inhalation 2018 Oral Inhalation 2019 2018 Subcutaneous injection Oral Oral Subcutaneous injection Subcutaneous injection Subcutaneous injection ≥2020 ≥2020 ≥2020 ≥2020 ≥2020 2016 Ankylosing spondylitis,2 psoriatic arthritis,2 non­radiographic axial spondyloarthritis Subcutaneous injection US registration EU approved Alzheimer’s disease Alzheimer’s disease Neuropathic pain Relapsing multiple sclerosis Secondary progressive multiple sclerosis Intramuscular injection Oral Oral Subcutaneous injection Oral Chronic inflammatory demyelinating polyradiculoneuropathy Oral ≥2020 ≥2020 ≥2020 2019 2019 2017 Migraine Sporadic inclusion body myositis [lead indication], hip fracture, sarcopenia Subcutaneous injection Intravenous infusion 2016 Pediatric acute lymphoblastic leukemia [lead indication], diffuse large B­cell lymphoma Intravenous infusion 2016 Renal transplant Intravenous infusion ≥2020 Stem cell transplantation Intravenous infusion ≥2020 Malaria Malaria Oral Oral 2019 ≥2020 PHASE lll PHASE lll PHASE lll PHASE lll SUBMISSION PHASE lll PHASE lll PHASE lll PHASE lll PHASE ll PHASE ll PHASE ll PHASE ll PHASE ll PHASE ll PHASE ll PHASE ll PHASE ll PHASE ll PHASE ll PHASE ll PHASE ll PHASE ll PHASE ll Otitis media­tympanostomy tube surgery Topical 2016 US PHASE lll 56 | Novartis Annual Report 2015 PIPELINE continued Advanced development Medical device project MAJOR DEVELOPMENT PROJECTS for which a positive proof of concept has been established and studies are being conducted to establish the safety, efficacy or performance to address regulatory requirements for obtain­ ing marketing authorization Submission An application for marketing approval has already been submitted to one or both of the following regulatory agencies: the US Food and Drug Administration (FDA), the European Medicines Agency (EMA). Novartis has not yet received marketing autho­ rization from both regulatory agencies. The application contains comprehensive data and information gathered during human clinical trials and animal studies conducted through the various phases of drug development. Project/product Division Common name Mechanism of action OPHTHALMOLOGY Lucentis Pharmaceuticals ranibizumab OAP030 (Fovista®) Pharmaceuticals pegpleranib Anti­vascular endothelial growth factor (VEGF) monoclonal antibody fragment Aptamer anti­platelet­derived growth factor Jetrea ready­diluted injection RTH258 Ilevro ophthalmic suspension AcrySof IQ ReSTOR Toric 2.5 D IOL AOSept Plus/ Clear Care Plus with HydraGlyde Alcon Alcon Alcon Alcon Alcon AcrySof IQ Aspheric IOL with UltraSert Alcon AcrySof IQ ReSTOR Toric 3.0 D IOL Alcon BIOSIMILARS ocriplasmin Alpha­2 antiplasmin reducer brolucizumab Anti­VEGF single­chain antibody fragment nepafenac (0.3%) Anti­inflammatory – – – – Multifocal, aspheric and cylinder­ correcting intraocular lens Disinfection and cleaning Pre­loaded intraocular lens delivery device Multifocal, aspheric and cylinder­ correcting intraocular lens GP2013 Sandoz rituximab Anti­CD20 antibody GP2017 Sandoz adalimumab TNF­α inhibitor HX575 Sandoz epoetin alfa Erythropoiesis­stimulating agent HX575 s.c. Sandoz epoetin alfa Erythropoiesis­stimulating agent GP2015 Sandoz etanercept TNF­α inhibitor LA­EP2006 Sandoz pegfilgrastim Pegylated granulocyte colony­stimulating factor 1 Filings that have received approval in either the US or EU but are awaiting approval in the other market 2 Phase and planned filing dates refer to lead indication in development. 12 Choroidal neovascularization secondary to conditions other than age­related macular degeneration and pathologic myopia INNOVATION INNOVATION | PIPELINE Novartis Annual Report 2015 | 57 PHASE l PHASE ll PHASE lll SUBMISSION Potential indication/disease area Route of administration filing dates 1,2 Planned Choroidal neovascularization,12 retinopathy of prematurity Intravitreal injection 2016 Neovascular age­related macular degeneration Intravitreal injection 2017 Vitreomacular traction Intravitreal injection 2017 Japan Wet age­related macular degeneration Intravitreal injection ≥2018 Postsurgical macular edema in patients with diabetes Topical Submitted EU 2018 US PHASE lll PHASE lll PHASE lll PHASE lll PHASE lll Cataractous lens replacement with or without presbyopia, and with astigmatism Surgical 2016 US ADVANCED DEVELOPMENT Contact lens care Lens care 2017 Japan ADVANCED DEVELOPMENT Cataractous lens replacement Surgical Submitted Japan ADVANCED DEVELOPMENT SUBMISSION Cataractous lens replacement with or without presbyopia, and with astigmatism Surgical Submitted US ADVANCED DEVELOPMENT SUBMISSION Non­Hodgkin’s lymphoma, chronic lymphocytic leukemia, rheumatoid arthritis, granulomatosis with polyangiitis (also known as Wegener’s granulomatosis), and microscopic polyangiitis and others (same as originator) Intravenous Arthritides (rheumatoid arthritis, ankylosing spondylitis, psoriatic arthritis), plaque psoriasis and others (same as originator) Subcutaneous Anemia in chronic kidney disease, chemotherapy­induced anemia Subcutaneous and and others (same as originator) intravenous US Anemia in chronic kidney disease Subcutaneous Submitted EU (extension nephrology, appproved as Binocrit since 2007) Arthritides (rheumatoid arthritis, ankylosing spondylitis, psoriatic arthritis), plaque psoriasis and others (same as originator) Subcutaneous Submitted US Submitted EU Chemotherapy­induced neutropenia and others (same as originator) Subcutaneous Submitted US PHASE lll PHASE lll PHASE lll SUBMISSION SUBMISSION SUBMISSION 58 | Novartis Annual Report 2015 1 Although results so far are promising, important questions remain, such as managing a potentially serious side effect called cytokine release syndrome, ensuring the safety of the procedure and under stan d - ing why some patients relapse 2 Novartis Annual Report 2015 | 59 3 1 Researchers at the Novartis facility in Morris Plains check on the production process for human T­cells. 2 Dr. Carl June of the University of Pennsylvania developed gene transfer therapy to prime the body’s own immune cells to fight cancer. 3 A technician prepares a container with liquid nitrogen to transport human cells from one part of the facility in Morris Plains to another. 4 CART patient Doug Olson enjoys sailing with his grandchildren. Mr. Olson continues to lead a full life. He is an avid runner and enjoys sailing with his grandchildren. The first CART treatment being developed by Novartis and the University of Pennsylvania is CTL019, a potential therapy for children with acute lymphoblastic leukemia (ALL) for whom all other treatments ultimately failed. In a Phase II clinical trial of pediatric patients, 93% had no detectable cancer after 28 days. Although results so far are promising, important questions remain for Dr. June and Novartis, such as managing a potentially serious side effect called cytokine release syndrome, ensuring the safety of the treatment and understanding why some patients relapse. To expand trials of CART therapy to more patients, in 2015 Novartis began operating a facility in the US state of New Jersey to process much larger numbers of patients’ T­cells. The process of modifying patients’ immune cells is complex, and scaling up the manufacturing of modified T­cells remains a challenge. Inside the facility, logistics experts track the production 3 4 p CONTINUED FROM PAGE 43 Dr. Carl June, director of translational research at the University process on large computer screens, displaying the many of Pennsylvania’s Abramson Cancer Center, is a pioneer in steps required for each patient’s T­cells to be re­engineered. developing CART therapy. His research into gene therapy First, the T­cells are removed from a cancer patient’s blood as a possible treatment for cancer began more than 20 sample. Technicians then use deactivated viruses to insert years ago when he was a scientist in the US Navy, studying genes into the T­cells, enabling them to grow a cancer­hunting potential HIV therapies. Dr. June encountered patients who receptor. These modified cells are multiplied until there are appeared to have benefited from treatment with genetically enough of them for the therapy. Then the cells are prepared re­engineered T­cells, and he believed the same approach for shipment and transported back to the patient’s medical might work in cancer. center, where clinicians infuse the reprogrammed cells. In 1999, Dr. June joined the University of Pennsylvania, Meanwhile, Dr. June and Novartis are also exploring where he and his team began working to develop the first whether CART technology can be effective in treating other, CART therapy for patients with cancer. It took a further decade more common cancers. of study and work to overcome the challenge of producing sufficient quantities of re­engineered T­cells before the therapy was ready for trial and the first small group of leukemia patients could receive the treatment. CART is a radical break from existing cancer therapies, as 69­year­old retiree Doug Olson can attest. Diagnosed at 49 with chronic lymphocytic leukemia, Mr. Olson endured four unsuccessful rounds of chemotherapy until 2010 when, after 14 years of treatment, he became an early patient in Dr. June’s CART trials at the University of Pennsylvania. 60 | Novartis Annual Report 2015 CORPORATE RESPONSIBILITY CORPORATE RESPONSIBILITY CORPORATE RESPONSIBILITY Novartis Annual Report 2015 | 61 CONTENTS 62 62 64 67 Managing Corporate Responsibility Innovation in Access Expanding Access to Medicines Doing Business Responsibly PHOTO ESSAY A life dedicated to fighting malaria About three-quarters of the Kenyan population is at risk for malaria, and all four species of the malaria parasite that infect humans occur in the country. Although there has been substantial pro gress, malaria remains the leading cause of mortality in Kenya, killing an estimated 30 000 people every year, most of them children under 5 years old. p CONTINUED ON PAGE 72 62 | Novartis Annual Report 2015 CORPORATE RESPONSIBILITY CORPORATE RESPONSIBILITY We focus our corporate responsibility work in two key areas: expanding access to healthcare and doing business responsibly. We work to develop innovative products for underserved patients, pioneer new social business approaches in low- and middle-income communities, drive environmental sustainability and operate to high ethical standards. Through our core business – the discovery, devel- Medicine Committee helped facilitate the launch opment and marketing of innovative treatments of Novartis Access – a new, industry-fi rst port- – Novartis has helped prevent and treat dis- folio of medicines to combat noncommunicable eases, ease suff ering and improve quality of life diseases (NCDs). The program was approved for people worldwide. At the same time, we have by the Executive Committee of Novartis (ECN), been working to get these treatments to more which also endorsed our latest set of integrity of the people who need them. Our generics and compliance initiatives, as well as our new division, Sandoz, helps make aff ordable, high- environmental sustainability vision and targets. quality medicines available to more people. We also have an extensive access-to-medicine INNOVATION IN ACCESS program that includes drug donations, selling The challenge of NCDs such as cardiovascu- at cost, social business initiatives and patient lar diseases, diabetes and cancer in the devel- assistance programs. The United Nations’ oping world is increasing. These conditions recently launched Sustainable Development disproportionately aff ect poverty-stricken Goals aim to ensure healthy lives for all. We believe areas. Already today, 28 million people die we can play a key role by fi nding new and inno- each year from these types of diseases in low- vative ways to drive access to our medicines, and middle-income countries – representing particularly in developing countries. nearly 75% of deaths from NCDs globally. Faced with the existing challenge of managing in fec- MANAGING CORPORATE RESPONSIBILITY tious diseases, these countries are now con- Recent changes in the governance of corporate fronted by a double disease burden. Because responsibility (CR) at Novartis started to have chronic illnesses require early de tection and a clearly discernible impact in 2015. The involve- long-term, ongoing treatment, so ciety needs ment of the Governance, Nomination and Cor- new ways to ensure access to medicines to porate Responsibilities Committee of the Novartis treat these diseases in countries where people Board of Directors and a dedicated Access to often have limited access to healthcare. 75 % of deaths from chronic diseases are in low- and middle-income countries and the Novartis Access program aims to help countries respond Teaching children about malaria is a key part of fi ghting the disease in Kenya. Agnes Akoth regularly visits schools to talk to pupils and help them better understand how to minimize the risks they face. CORPORATE RESPONSIBILITY | INNOVATION IN ACCESS Novartis Annual Report 2015 | 63 Novartis Access is a fi rst in the industry, offering countries a portfolio of medicines for chronic diseases at a price of USD 1 per treatment per month Against this background, in 2015 we launched Novartis Access. The program Combining innovative, patented medicines and high-quality generics focuses on aff ordability and availability of 15 Novartis is in a unique position in the industry on- and off -patent medicines addressing four to establish a program that can have a lasting key NCDs: cardiovascular diseases, diabetes, impact on patients. Our Sandoz Division is the respiratory illnesses and breast cancer. A world’s second-largest maker of more aff ord- fi rst in the industry, the portfolio is off ered able generic medicines, and we have a long as a basket to governments and other public- history of providing access to our innovative sector healthcare providers at a price of patented medicines. Novartis Access builds USD 1 per treatment per month. We are also on our existing eff orts to get medicines to actively seeking partners to strengthen local patients who need them most, especially the healthcare system capabilities in NCDs, as poor and very poor. Lessons from our success- these partnerships will be essential to the ful Malaria Initiative and Healthy Family social success of the program. business programs were critical to helping us Novartis Access has been set up to be com- build the foundations of Novartis Access. mercially sustainable over the long term, The initial portfolio includes products from en abling continuous support for patients in Novartis Pharmaceuticals and Sandoz. These these regions. The governments, non-govern- medicines have been selected from the Novartis mental organizations (NGOs) and other stake- Group portfolio based on three criteria: signi- holders we consulted during the planning phase fi cant health need, medical relevance and lack underlined the importance of a long-term of local access programs. The portfolio includes perspective to fi ght chronic diseases; they Novartis Pharmaceuticals products valsartan stressed that donations are important but not (hypertension), vildagliptin (diabetes), and sustainable enough to make a signifi cant letrozole (breast cancer), as well as high- quality impact. generic medicines from Sandoz to treat heart failure and hypertension (amlodipine, biso prolol, NOVARTIS ACCESS STRATEGY Income segments 1 Population size Novartis access approaches High income Upper-middle income Middle income Low income Poor 1 PEW Research Center with data from World Bank PovcalNet (data 2011) > 450 m > 600 m Generics, original brands, patient assistance programs, tenders Differential pricing > 800 m Generics Group social business Novartis Access Patient assistance programs Strategic philanthropy Tenders Zero-profit models > 3 500 m > 1 000 m Donations, strategic philanthropy, tenders 64 | Novartis Annual Report 2015 CORPORATE RESPONSIBILITY CORPORATE RESPONSIBILITY continued 30 Countries are targeted for the rollout of Novartis Access in the coming years HCT, furosemide, ramipril), dys lipi demia (sim- to guide our expansion. We also reached an vastatin), diabetes (glimepiride, metformin), agreement with Boston University in the US breast cancer (anastrozole, tamoxifen), asthma to help us measure the public health impact and chronic obstructive pulmonary disease of Novartis Access. (salbutamol), and childhood pneumonia We know that we will not solve the access ( amoxicillin). Expansion challenge with this program alone, but we believe it can make a signifi cant contribution to improving the lives of patients in low- and Novartis Access is first targeting Kenya, lower-middle-income countries, and reduce Ethiopia and Vietnam. We have already signed the impact of NCDs. agreements in Kenya and Ethiopia, and the fi rst product orders have been received. These EXPANDING ACCESS TO MEDICINES countries were chosen because of their diverse Beyond Novartis Access, in 2015 we contin- access challenges, Novartis presence, existing ued to pursue a combination of approaches – healthcare infrastructure, and/or substantial philanthropy, zero-profi t initiatives and social partnerships with NGOs. Beyond the medi- ventures – to expand access to our medicines. cines, we are also actively seeking partners to raise awareness of key NCDs; distribute medi- Higher dose of antimalarial medicine cines and ensure the integrity of the supply In July, a higher dose of our artemisinin-based chain; and strengthen healthcare system combination therapy Coartem for the treatment capabilities in NCDs, including training on diag- of malaria received World Health Organization nosis and treatment. (WHO) prequalifi cation, which uses stringent Our initial plan is to roll out Novartis Access criteria to ensure quality, safety and effi cacy in 30 countries in the coming years – depending of medicines for HIV/AIDS, malaria and tuber- on government and stakeholder demand. We culosis. Many countries and NGOs buy medi- expect the insights we gather on the ground cines in bulk that have WHO prequalifi cation. A malaria surveillance team from the Walter Reed Project visits a home near the Kombewa clinic to check on children at risk from the disease. The team tests for malaria and administers medicine where appropriate. CORPORATE RESPONSIBILITY | EXPANDING ACCESS Novartis Annual Report 2015 | 65 Access-to-healthcare key performance indicators 2015 RESEARCH AND DEVELOPMENT Novartis Institute for Tropical Diseases Novartis Institutes for BioMedical Research neglected disease programs Pharmaceuticals development on malaria, tuberculosis and neglected diseases Total PATIENT ASSISTANCE FTEs 1 100 24 60 184 Value USD (millions) 2 17 5 20 42 Value USD (millions) 3 707 1 251 230 43 43 13 112 6 <1 1 Patients reached (thousands) 43 62 8 11 394 8 64 098 305 14 64 943 2 406 People reached (thousands) 6 Patients reached (thousands) Value USD (millions) 2 4 456 7 1 7 621 12 078 981 981 13 6 19 FTEs 1 10 6 519 535 719 12 078 65 924 2 467 Novartis Patient Assistance Foundation Inc. Glivec patient assistance Tasigna patient assistance Exjade patient assistance Alcon medical missions 4 Alcon US patient assistance Malaria/Coartem Leprosy (WHO) Fascioliasis/Egaten 5 Emergency relief (medicine donations) Total HEALTH SYSTEMS STRENGTHENING Novartis Foundation Novartis research capacity-building programs Social business: Healthy Family in India, Kenya, Vietnam and Indonesia 8 Total Grand total 1 Full-time equivalent positions and contractors 2 Operating costs 3 Wholesale acquisition cost plus logistics costs for some programs 4 Retail value for surgical products 5 Manufacturing, testing and FTE costs 6 Via training and service delivery 7 Includes potential catchment of population in certain districts in Tanzania 8 People reached through health awareness activities 66 | Novartis Annual Report 2015 CORPORATE RESPONSIBILITY continued 40 000 The approximate number of pregnant women in the Addis Ababa area who benefited from a Sandoz program to improve maternal and child health With this higher dose, a malaria patient can area. Sandoz began expanding the trainings take just six tablets – versus the previous 24 to 120 more midwives in 2015 and will continue – to complete a full course of treatment. The to do so in the first quarter of 2016. hope is that this reduction will help improve clinical effectiveness and adherence to treat- Stopping leprosy transmission ment. The Novartis Foundation continued to imple- ment a strategy adopted in 2014 that aims to Improving maternal and child health in Africa stop the transmission of leprosy. A key ele- In Ethiopia, the second most populous country ment of this strategy is leprosy post-exposure in Africa, most women give birth in their homes prophylaxis (LPEP), which is designed to – and if a problem arises during pregnancy or decrease the risk of developing leprosy and birth, local health centers are the first point of reduce further transmission of the mycobac- contact. Unfortunately, many health centers teria causing the disease. lack necessary medical supplies, and health- Through this project, implemented in col- care workers often do not have the medical laboration with International Federation of expertise needed to help women with pregnancy Anti-Leprosy Associations partners, the complications. families, friends and others who have been in In March, as part of our work to strengthen contact with newly diagnosed patients are health systems, Sandoz launched a new pro- examined and treated if they also have gram in Ethiopia called New Life & New Hope leprosy, or receive preventative therapy if they to improve maternal and child health and to have no symptoms. This could decrease the reduce mortality associated with childbirth. risk of them developing leprosy in the years They sponsored four Basic Emergency following contact by as much as 50–60%. Obstetric and Newborn Care trainings for 80 LPEP was launched in 2015 in India, Indo nesia, midwives, impacting the care of approximately Myanmar, Nepal, Tanzania and Sri Lanka. 40 000 pregnant women in the Addis Ababa A mother rests with her child under insecticide-treated mosquito netting, a major weapon in the fight against malaria. The insecticides repel mosquitoes and studies show they are highly effective in reducing the incidence of malaria. CORPORATE RESPONSIBILITYCORPORATE RESPONSIBILITY | DOING BUSINESS RESPONSIBLY Novartis Annual Report 2015 | 67 New model to combat hypertension in Ghana To further reinforce our culture of ethics, The Novartis Foundation also worked with in 2015 we launched a series of comprehen- partners to launch an innovative model for sive, multiyear initiatives in line with our six screening and managing hypertension in an core values of innovation, quality, collabora- urban district in Ghana. The intervention seeks tion, performance, courage and integrity. We to improve the control of hypertension by are working to adjust promotional practices making services more accessible in the com- with doctors and other healthcare profession- munity, while empowering individuals to con- als, and to be more transparent about our trol their own blood pressure. Screening began financial relationships with them. And we are in 2015. reviewing traditional practices, such as send- ing healthcare professionals to international DOING BUSINESS RESPONSIBLY congresses and engaging them to speak at We recognize that achieving our business goals professional gatherings, to determine if they requires that we operate with high integrity, should be modified or stopped. transparency and environmental sustainability. At the same time, we are pursuing new ways to interact with healthcare professionals. Building a culture of integrity In 2015, we began developing tools to facilitate In 2015, we continued taking concrete steps medical education for our customers. They to reinforce our culture of integrity, even as we include a mix of virtual and local meetings to dealt with several ethical issues. bring the experience of international congresses Society has increasingly high expectations to the local level, a platform to connect online for ethical behavior from global healthcare communities in disease areas related to companies – expectations that very often go Novartis products, and new digital tools that beyond what is legally required. We are taking supplement face-to-face meetings with our steps to ensure our standards align with these medical science liaisons. These tools will be expectations. rolled out to sales forces worldwide in 2016. We launched a series of comprehensive, multiyear initiatives that aim to sharpen our culture of ethics A woman fetches water by the shores of Lake Victoria, Africa’s largest lake, in Kenya. The lake is a fertile breeding ground for mosquitoes, putting local people at great risk of contracting malaria. 68 | Novartis Annual Report 2015 CORPORATE RESPONSIBILITY continued ETHICS AND PEOPLE KEY PERFORMANCE INDICATORS 1 Full-time equivalent positions / headcount 2 Turnover: % voluntary / % overall Voluntary turnover of superior performers (%) Internal hires / external hires (%) Women in management: % of management3 / % of Board of Directors Associate nationalities / associate nationalities in management 3 Annual training hours per employee Lost-time injury and illness rate (per 200 000 hours worked) 4 Total recordable case rate (per 200 000 hours worked) 4, 5 Novartis associates trained and certified on Code of Conduct 6 Misconduct cases reported / allegations substantiated 7 Dismissals and resignations related to misconduct Regulatory inspections without major findings (%) Suppliers posing an elevated risk under responsible procurement 8 Suppliers with active follow-up 8, 9 Suppliers audited 8 2015 2014 118 700 / 122 966 117 809 / 122 113 7.3 / 13.5 7.0 / 13.0 5.5 5.1 44.8 / 55.2 44.4 / 55.6 41 / 27 40 / 18 144 / 109 147 / 109 27.3 0.11 0.40 27.0 0.12 0.43 110 638 108 290 1 299 / 755 1 547 / 1 131 343 98.4 475 249 100 620 97.9 428 222 78 1 Continuing operations 2 Headcount reflects the total number of associates in our payroll systems. Full-time equivalent adjusts headcount for associates working less than 100%. All data as of December 31 3 Management defined locally 4 Data include Novartis associates and third-party personnel managed by Novartis associates 5 Includes all work-related injury and illness, whether leading to lost time or not 6 Active Novartis associates with email addresses, trained via e-learning, including associates who left during the year 7 Reporting has changed from assessing cases to assessing allegations. Because one case can have more than one allegation, the assessment per allegation is higher than the previously reported assessment per case. Furthermore, numbers are based on the date a misconduct case is reported, whereas previously they were based on the date a misconduct case was assigned for investigation. 2014 data have been restated following the new methodology. 8 Includes new suppliers and new products, services or sites from existing suppliers; figures include data on labor rights, HSE and animal welfare 9 Follow-up includes more information requested, audits or on-site assessments. BPO ALLEGATIONS PER CATEGORY1 CASES INVESTIGATED THROUGH BPO PROCESS (by type of violations) Fraud 48% / 629 Professional practices (with internal and external policies/codes) 29% / 378 Employee relations 24% / 311 Conflict of interest 7% / 94 Information protection 5% / 61 Quality assurance 7% / 92 Other 4% / 50 Research and development 1% / 18 1 Continuing operations One case can fall under several categories, so the total is greater than 100% and category figures total more than the stated number of cases. Investigation reports are received on an ongoing basis, which potentially leads to a reassessment of the allegation category and related figures. FURTHER DETAIL On managing misconduct cases: www.novartis.com/ethics-compliance CORPORATE RESPONSIBILITY CORPORATE RESPONSIBILITY | DOING BUSINESS RESPONSIBLY Novartis Annual Report 2015 | 69 While net sales of Novartis products have more than doubled in 15 years, GHG emissions have been reduced by 20.5% since 2008 We are also adjusting incentives for our Transparency in reporting sales teams around the world. For instance, We believe that openly communicating pay- we have started to increase the weight of fixed ments, fees or honoraria provided to health- pay in overall compensation and to reduce the care professionals or healthcare organizations variable component. Additionally, we are eval- such as hospitals helps foster trust and rein- uating whether people’s behavior aligns with forces our commitment to high ethical busi- Novartis Values and Behaviors as one element ness standards. used to set variable pay. In Europe, Novartis applies the European In 2015, we also continued to manage Federation of Pharmaceutical Industries and several integrity issues with root causes that Associations (EFPIA) Code. This industry-wide sometimes go back many years. In November, code requires EFPIA member companies, Novartis Pharmaceuticals Corporation (NPC) including Novartis Pharma AG, to disclose any settled litigation in the Southern District of transfers of value to healthcare professionals New York related to interactions with specialty and healthcare organizations, and publish them pharmacies from 2004 to 2013. The settle- on the internet as of 2016. Novartis has ment included payments totaling USD 390 mil- committed to go beyond the EFPIA Code and lion plus additional legal expenses to plaintiffs, establish a single, consistent standard for and an agreement to amend and extend for disclosing this information for all divisions, five years an existing corporate integrity agree- countries and product segments in Europe by ment with the Office of the Inspector General 2018. of the US Department of Health and Human Services. A new vision for the environment In Japan, we had setbacks in our efforts to Our aim is to be a leader in health, safety and address and improve ethics and compliance environmental protection. Since we launched at Novartis Pharma K.K. (NPKK), our Japanese our last set of environmental targets, our struc- sub sidiary. The company received a business tured approach to minimizing our environmen- suspension order, as well as a business tal impact has helped us make considerable improvement order and instruction from the progress: while Group sales have more than Japanese health authorities in 2015 for fail- doubled in 15 years, our consumption of energy ures to promptly report cases where patients and water has increased at a much slower pace experienced adverse effects while taking our and greenhouse gas (GHG) emissions have medicines. NPKK has taken steps to correct been reduced by 20.5% since 2008. the issue and prevent recurrence. To continue building on our success, we Although we may never be able to entirely adopted a new set of mid- to long-term targets prevent individual misconduct, the actions as part of an environmental sustainability plan Novartis is now taking will further support approved in June by the ECN. Our efforts are efforts to avoid systemic issues. focused in four strategic environmental impact areas: energy and climate, water and micro- pollutants, materials and waste, and environ- mental sustainability management. 70 | Novartis Annual Report 2015 CORPORATE RESPONSIBILITY continued 30 % Our commitment to cut GHG emissions by 2020, vs. 2010, as part of our updated environmental targets Our targets for 2020 are ambitious. We emitted. Existing pricing schemes by com- commit to cutting our GHG emissions (Scope panies and governments vary from USD 1 to 1 and 2) by 30% compared to 2010. We aim USD 168 per ton of carbon dioxide, but we to significantly reduce water consumption and wanted to set a price high enough to reflect create no adverse effects on water due to waste from our sites. We also commit to reducing our company’s non-recyclable waste created the actual cost of carbon emissions to society. By explicitly assuming the cost of CO2 we emit, we expect to make better investment decisions through our operations by 30% compared to that incorporate the benefits of greater energy 2010. efficiency. Throughout 2015, we continued to take practical strides toward achieving these goals. For example, at our Sandoz site in Kundl, Austria, a team found a low-energy way to FURTHER DETAIL separate a final product from a reaction mix- Corporate responsibility: ture by using a new membrane filtration pro- www.novartis.com/corporate-responsibility cess that operates at a lower temperature and requires less water. This reduced natural gas Detailed targets and results use for this process by 14% per year and cut for 2015, and targets for 2016: GHG emissions by 680 tons – the equivalent of www.novartis.com/cr-targets 500 average cars each driving 10 000 kilome- ters per year. CR materiality: To further reinforce our environmental www.novartis.com/cr-materiality protection activities, the ECN in June also approved our first-ever internal carbon price, CR Performance Report: set at USD 100 per ton of carbon dioxide www.novartis.com/cr-performance ENVIRONMENTAL SUSTAINABILITY KEY PERFORMANCE INDICATORS 1 Energy use (million gigajoules), on site and purchased Water discharge (million m3) Contact water use, excluding cooling water (million m3) Emissions 2015 17.1 16.6 15.4 2014 17.0 17.0 15.3    Greenhouse gas (GHG) emissions, total Scope 1 and Scope 2 (1 000 t) 1 350.7 1 361.9    GHG emissions, Scope 1, combustion and processes on site (1 000 t)    GHG emissions, Scope 1, vehicles (1 000 t)    GHG emissions, Scope 2, purchased energy (1 000 t)    Halogenated volatile organic compounds (t)    Non-halogenated volatile organic compounds (t) Operational waste    Hazardous waste not recycled (1 000 t)    Non-hazardous waste not recycled (1 000 t) 388.5 142.3 819.9 63.0 524.6 56.3 20.5 395.0 148.3 818.6 86.0 634.6 60.2 21.2 1 Continuing operations For more detail on environmental sustainability, see www.novartis.com/about-us/corporate-responsibility/environmental-sustainability. CORPORATE RESPONSIBILITY CORPORATE RESPONSIBILITY | INDEPENDENT ASSURANCE REPORT ON THE NOVARTIS 2015 CORPORATE RESPONSIBILITY REPORTING Novartis Annual Report 2015 | 71 Independent Assurance Report on the Novartis 2015 Corporate Responsibility Reporting TO THE BOARD OF DIRECTORS OF NOVARTIS AG, BASEL INDEPENDENT ASSURANCE REPORT ON THE NOVARTIS CORPORATE RESPONSIBILITY REPORTING We have been engaged to perform assurance procedures to provide limited assurance on the following aspects of the 2015 corporate responsibility (CR) reporting of Novartis AG and its consolidated subsidiaries (Novartis Group) included in the Annual Report 2015. SCOPE AND SUBJECT MATTER Our limited assurance engagement focused on the following data and information disclosed in the consolidated CR report- ing of Novartis Group for the year ended December 31, 2015: — The social key performance indicators on page 7, the “Access-to-Healthcare Key Performance Indicators 2015” on page 65, the “Ethics and People Key Perfor- mance Indicators” on page 68, the “BPO Allegations Per Category” on page 68, and the “Environmental Sustain- ability Key Performance Indicators” on page 70 (CR indicators) — Reporting processes and related controls in relation to data aggregation of CR indicators CRITERIA The management reporting processes with respect to the CR reporting and CR indicators were assessed against Novartis Group internal policies and procedures, as set forth in the following: — Guideline on Corporate Responsibility Management at Novartis and the Code of Conduct — Procedures by which the data for the CR indicators reporting are gathered, collected and aggregated internally The accuracy and completeness of CR indicators are subject to inherent limitations given their nature and methods for deter- mining, calculating and estimating such data. Our Assurance Report should therefore be read in connection with Novartis Group guidelines, definitions and procedures on CR reporting. RESPONSIBILITIES AND METHODOLOGY The Board of Directors of Novartis AG is responsible for both the subject matter and the criteria as well as for selection, preparation and presentation of the information in accordance with the criteria. Our responsibility is to form an independent opinion, based on our limited assurance procedures, on whether anything has come to our attention to indicate that the CR indi- cators are not stated, in all material respects, in accordance with the reporting criteria. We planned and performed our procedures in accordance with the International Standard on Assurance Engagements (ISAE) 3000 (revised) “Assurance Engagements Other Than Audits or Reviews of Historical Financial Information.” This standard requires that we plan and perform the assurance engagement to obtain limited assurance on the identified CR indicators. A limited assurance engagement under ISAE 3000 (revised) is substantially less in scope than a reasonable assurance engagement in relation to both the risk assessment proce- dures, including an understanding of internal control, and the procedures performed in response to the assessed risks. Consequently, the nature, timing and extent of procedures for gathering sufficient appropriate evidence are deliberately limited relative to a reasonable assurance engagement and, therefore, less assurance is obtained with a limited assurance engage- ment than for a reasonable assurance engagement. OUR INDEPENDENCE AND QUALITY CONTROL We have complied with the independence and other ethical requirements of the Code of Ethics for Professional Accoun- tants issued by the International Ethics Standards Board for Accountants, which is founded on fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behavior. Our firm applies International Standard on Quality Control 1 and accordingly maintains a comprehensive system of quality control including documented policies and procedures regard- ing compliance with ethical requirements, professional stan- dards, and applicable legal and regulatory requirements. SUMMARY OF WORK PERFORMED Our assurance procedures included the following: — Reviewing the application of the Novartis Group internal CR reporting guidelines — Interviewing associates responsible for internal reporting and data collection at Group, divisional and local levels — Performing tests on a sample basis of evidence supporting selected CR data concerning completeness, accuracy, adequacy and consistency — Inspecting relevant documentation on a sample basis — Reviewing and assessing the management reporting processes for CR reporting and consolidation, and their related controls We have not carried out any work on data other than outlined in the scope and subject matter section as defined above. We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our assurance conclusions. LIMITED ASSURANCE CONCLUSION Based on our work described in this report, nothing has come to our attention that causes us to believe that the data and information outlined in the scope and subject matter section (including the related controls) have not been prepared, in all material aspects, in accordance with Novartis Group internal policies and procedures. PricewaterhouseCoopers AG Bruno Rossi Raphael Rutishauser Basel, January 26, 2016 72 | Novartis Annual Report 2015 p CONTINUED FROM PAGE 61 Lake Victoria in southwestern Kenya is on the front line in the fight against malaria, and Agnes Akoth is a key figure. Tall and striking, this towering force of energy in Kisumu County is a 35- year veteran of the global quest to eradicate a deadly disease. Despite job offers from big hospitals in the capital Nairobi, Ms. Akoth has chosen to stay in Kisumu and works as head nurse at the US Army Medical Research Unit-Kombewa clinic, known locally as the Walter Reed Project. Here she provides much-needed local leadership and addresses poor understanding of malaria in surrounding communities. Her own experience of contracting the disease while pregnant with her youngest child has made her resolute about what must be done. The Walter Reed Project has a two-pronged approach to fighting the disease. Scientists there conduct research and run clinical trials that may potentially lead to new malaria vaccines and drugs. Novartis works with the project and runs clinical trials for new antimalarial medicines there, including two key studies for its artemisinin-based therapy Coartem. The project also has a strong emphasis on prevention and diagnosis. Teams of community health workers stride out of the center every day, laden with diagnostic kits, antimalarial medicines and other treatments, heading for local villages. They collect blood samples from residents, perform malaria tests, administer drugs, and advise people on how to protect themselves from the disease. Education is a top priority to counter misconceptions about malaria. Ms. Akoth talks about her own experience with the disease and how she has watched it kill young children, strike down men of working age, and rob families of economic independence. Ms. Akoth and colleagues give away insecticide-treated mosquito nets to pregnant women at maternity clinics, one of several practical measures used to combat the disease. But fighting malaria in this part of Kenya is a constant challenge. Bad weather, poor-quality roads, and a lack of knowledge among locals about how malaria spreads all combine to make life difficult for healthcare workers. Despite their best efforts, they do not always get a warm welcome. Some residents resent the intrusion, while others counter the advice they receive with their own views about how malaria is caused. Ms. Akoth believes the key to tackling malaria, especially among children, is to expand proven interventions until they reach every child who needs them. It’s a huge task, but lives are being saved and death rates are falling. That’s her motivation to carry on. Novartis works with the Walter Reed Project and runs clinical trials for new antimalarial medicines there, including two key studies for its artemisinin-based therapy Coartem 1 Agnes Akoth, head nurse at the Kombewa clinic 2 Malaria specialists examine a young child in the Nyanza District of Kisumu. 3 Children are carefully monitored for signs of malaria for up to four years. 4 Laboratory technician George Odongo manages the testing of blood samples for malaria at the Kombewa clinic. 1 2 Novartis Annual Report 2015 | 73 3 4 74 | Novartis Annual Report 2015 CORPORATE GOVERNANCE CORPORATE GOVERNANCE REPORT Novartis Annual Report 2015 | 75 CONTENTS 76 LETTER FROM THE CHAIRMAN 78 SUMMARY OF OUR CORPORATE GOVERNANCE APPROACH 79 OUR SHARES AND OUR SHAREHOLDERS 85 OUR BOARD OF DIRECTORS 97 OUR MANAGEMENT 102 OUR INDEPENDENT EXTERNAL AUDITORS 103 OUR CORPORATE GOVERNANCE FRAMEWORK 104 FURTHER INFORMATION PHOTO ESSAY The challenge of reversing the rise in obesity Around the world, obesity and asso ciated conditions such as diabetes and heart disease have become increasingly prevalent as living standards have improved and diet and lifestyles have changed. In the US, around two-thirds of the population is now considered overweight and one-third is obese. p CONTINUED ON PAGE 107 76 | Novartis Annual Report 2015 CORPORATE GOVERNANCE REPORT DEAR SHAREHOLDER, In 2015, we took steps to further strengthen our corporate governance, reinforce the role of our Board in innovation, increase the diversity of our Board, and embed strong values in our company’s culture. OUR MANDATE Our Board is primarily responsible for setting the strate- Our Board is accountable for striving to create sustainable gic direction of Novartis and for appointing our CEO and the value as described in article 2 of Novartis AG’s Articles of Incor- other Executive Committee members. We assert independent poration. We achieve this by setting a clear strategy for Novartis judgment and work closely with our Executive Committee, mak- and through effective governance focused on target setting, ing sure our strategy is properly implemented and our ethical risk management, and performance optimization to provide standards are applied. accountability and control. This requires an effective Board with the right composi- IMPORTANT BOARD DECISIONS tion, structure and processes, and with a clear understanding One of the most important tasks of our Board is to set the stra- of its role. Our Board meets these requirements. tegic direction of Novartis, re-evaluate it each year, and make Our Board includes members with diverse educations, necessary changes in line with our mandate to create sustain- experiences, nationalities and interpersonal skills. This diver- able value. Active portfolio management is part of this role. sity was further strengthened when Nancy C. Andrews joined To fulfill this task, our Board holds a dedicated two-day strat- our Board in 2015. It will be further strengthened if Elizabeth egy meeting each August. In 2015, we completed our portfo- Doherty and Ton Buechner are elected as new Board mem- lio transformation, approved by our Board in 2014, to focus bers at the forthcoming Annual General Meeting. For more on our core businesses – Pharmaceuticals, Alcon and Sandoz information on these two Board member candidates, please – and to bring our Over-the-Counter business into a joint ven- consult our Notice of Annual General Meeting, dated January ture, with Novartis holding a significant minority stake. Our 27, 2016. strategy for these businesses has not changed. It is to use sci- We emphasize training, performance evaluation, and ongo- ence-based innovation to deliver better outcomes for patients. ing improvement of our Board and its members, as well as We aim to lead in growing areas of healthcare. succession planning. To get an outside view on where we could The new Research & Development Committee of the Board, improve further, in 2014 we initiated a performance and created to oversee our research and development strategy and effectiveness evaluation by an independent expert. In 2015, to strengthen the Board’s role in innovation, met four times in we conducted this performance evaluation in-house. As a result 2015 to evaluate various aspects of the effectiveness and com- of these evaluations, our Board launched a search for the petitiveness of our research and development organization. above-mentioned two new Board members to strengthen the Novartis also implemented a Board decision to create a cen- general management and finance expertise of our Board, and tralized services group, Novartis Business Services, to facili- decided to further deepen the business understanding of our tate collaboration across our divisions, and drive efficiency and Board members by broadening their continuing education productivity gains. program. Finally, in 2015 we endorsed a proposal from our Execu- All Board members are independent, as defined by our tive Committee to introduce a revised set of six values to guide rules and, with the exception of two of our Board members, our employees’ behavior at work. They include integrity and those of key investors and proxy advisors. We have established collaboration, and I believe they are important to the long-term processes to ensure our Board functions effectively. They pro- success of Novartis. mote efficient and balanced decision-making and seamless For details on our strategy, please see page 16-17; for information transfer, enabling our Board to effectively fulfill its details on our culture and values, see page 18. duties. CORPORATE GOVERNANCE REPORT | LETTER fROM THE CHAIRMAN Novartis Annual Report 2015 | 77 ROLE Of THE CHAIRMAN IMPORTANCE Of SHAREHOLDER ENGAGEMENT As independent, non-executive Chairman, I provide direction Shareholder engagement is critical to our company’s long- to our Board and make sure we effectively collaborate with our term success. Our Board of Directors is dedicated to enhanc- CEO and Executive Committee. ing interactions with our shareholders. We conduct interac- I ensure that our Board and its committees work effectively, tions in an atmosphere of trust and respect that promotes a setting the agenda, style and tone of Board discussions; pro- collaborative dialogue between Novartis and our shareholders moting constructive debate and effective decision-making; and – with views and positions expressed openly to enhance mutual ensuring that our performance is regularly evaluated and that understanding. As part of these efforts, our governance our members are properly trained. specialists meet regularly with their peers from shareholder In addition, I support and mentor our CEO, but do not inter- groups. I have also personally met with many of our sharehold- fere with the operational management of Novartis. I also pro- ers and intend to continue this dialogue. mote effective communication with shareholders, so that we understand your views. In this task, I am supported by our Vice Chairman, Enrico Vanni. STRENGTHENED GOVERNANCE fRAMEWORK As of last year, we introduced annual elections of the Chair- Joerg Reinhardt man of the Board, of all Board members, and of Compensa- Chairman of the Board of Directors tion Committee members, and we instituted the option for our shareholders to provide their voting instructions to the Inde- pendent Proxy electronically. Moreover, we introduced yearly binding shareholder votes on the aggregate compensation of our Board and Executive Committee, as well as a yearly non-binding shareholder vote on the Compensation Report. 78 | Novartis Annual Report 2015 CORPORATE GOVERNANCE REPORT SUMMARY OF OUR CORPORATE GOVERNANCE APPROACH GOVERNANCE BODIES GENERAL MEETING Of SHAREHOLDERS Approves operating and financial review, Novartis Group consolidated financial statements and financial statements of Novartis AG; decides appropriation of available earnings and dividend; approves compensation of Board and Executive Committee; elects Board members, Chairman, members of Compensation Committee, Independent Proxy and External Auditors; adopts Articles of Incorporation BOARD Of DIRECTORS Audit and Compliance Committee Compensation Committee Governance, Nomi nation and Corporate Responsibilities Committee Research & Development Committee Risk Committee Sets strategic direction of Novartis, appoints and oversees key executives, approves major transactions and investments EXECUTIVE COMMITTEE Deal Committee Disclosure Committee/ Disclosure Review Committee Responsible for operational management of Novartis EXTERNAL AUDITOR Provides opinion on compliance of consolidated financial statements and the financial statements of Novartis AG with applicable standards and Swiss Law as well as on effectiveness of internal controls over financial reporting, and opines on compliance of Compensation Report with applicable law, as well as on the corporate responsibility reporting of Novartis. LEADERSHIP STRUCTURE PROCESSES Independent, non-executive Chairman and separate CEO The Board’s processes significantly influence its effectiveness. BOARD GOVERNANCE STRUCTURE The Board has implemented best practices for all such pro- cesses. Important elements include Board meeting agendas (to address all important topics), information submitted to the All Board members are non-executive and independent as Board (to ensure the Board receives sufficient information from defined by our rules. The Board has assigned responsibilities management to perform its supervisory duty and to make deci- to five committees: sions that are reserved for it), and boardroom behavior (to pro- — Audit and Compliance Committee mote an efficient and balanced decision-making process). — Compensation Committee — Governance, Nomination and Corporate Responsibilities BOARD AND EXECUTIVE COMMITTEE COMPENSATION Committee Information on Board and Executive Committee compensa- — Research & Development Committee tion is outlined in our Compensation Report, beginning on — Risk Committee page 108. COMPOSITION fULL IMPLEMENTATION Of MINDER ORDINANCE Board members have diverse educations, experience, nation- In 2015, all elements of the rules implementing the Minder Ini- alities and interpersonal skills. Their biographies (beginning tiative were fully introduced with the amendment of the Arti- on page 93) describe their specific qualifications. cles of Incorporation of Novartis AG. Key Articles of Incorpo- ration content is presented in this Corporate Governance Report, including information on the maximum number of Board mandates of Board and Executive Committee members, and on the “say-on-pay” votes at the Annual General Meeting of Shareholders (AGM). CORPORATE GOVERNANCE REPORT | OUR SHARES AND OUR SHAREHOLDERS Novartis Annual Report 2015 | 79 OUR SHARES AND OUR SHAREHOLDERS OUR SHARES CONVERTIBLE OR EXCHANGEABLE SECURITIES SHARE CAPITAL Of NOVARTIS AG Novartis AG has not issued convertible or exchangeable bonds, As of December 31, 2015, the share capital of Novartis AG is warrants, options or other securities granting rights to Novartis CHF 1 338 496 500 fully paid-in and divided into 2 676 993 000 shares, other than options (and similar instruments such as registered shares, each with a nominal value of CHF  0.50. stock appreciation rights) granted under or in connection with Novartis AG has neither authorized nor conditional capital. equity-based participation plans of associates. Novartis AG There are no preferential voting shares; all shares have equal does not grant any new stock options under these plans. voting rights. No participation certificates, non-voting equity securities (Genussscheine), or profit-sharing certificates have SHARE REPURCHASE PROGRAMS been issued. At the AGM in February 2008, shareholders approved the sixth Novartis shares are listed on the SIX Swiss Exchange (ISIN share repurchase program authorizing the Board to repur- CH0012005267, symbol: NOVN), as well as on the New York chase Novartis shares up to a maximum of CHF 10 billion via Stock Exchange (NYSE) in the form of American depositary a second trading line on the SIX Swiss Exchange. In 2008, a receipts (ADRs) representing Novartis American depositary total of 6 million Novartis shares were repurchased at an aver- shares (ADSs) (ISIN US66987V1098, symbol: NVS). age price of CHF 49.42 per Novartis share and canceled in The holder of an ADR has the rights enumerated in the 2009. In April 2008, the share repurchases were suspended deposit agreement (such as the right to give voting instruc- in favor of debt repayment. In December 2010, the Board tions and to receive a dividend). The ADS depositary of Novartis announced the reactivation of the share repurchases. In 2011, AG – JPMorgan Chase Bank, New York – holding the Novartis 39 430 000 Novartis shares were repurchased at an average shares underlying the ADRs is registered as a shareholder in price of CHF 52.81 per Novartis share and canceled in 2012. the Novartis Share Register. An ADR is not a Novartis share In 2012, no Novartis shares were repurchased. In 2013, and an ADR holder is not a Novartis AG shareholder. ADR hold- 2 160 000 Novartis shares were repurchased at an average ers exercise their voting rights by instructing the depositary price of CHF 70.58 per Novartis share. In 2014, 27 040 000 to exercise their voting rights. Each ADR represents one Novartis shares were repurchased at an average price of Novartis share. CHANGES IN SHARE CAPITAL CHF 81.18 per Novartis share. In 2015, 29 200 000 Novartis shares bought in 2013 and 2014 were canceled, and 49 878 180 Novartis shares were repurchased at an average price of During the last three years, the following changes were made CHF 93.24 per Novartis share. With those repurchases, the to the share capital of Novartis AG: sixth share repurchase program has been completed. In 2013 and 2014, the share capital of Novartis AG did not change. In 2015, Novartis AG reduced its share capital by CHF 14.6 SHARE DEVELOPMENTS million (from CHF 1 353 096 500 to CHF 1 338 496 500) by Share developments in 2015 canceling 29.2 million Novartis shares repurchased on the — Swiss-listed Novartis shares decrease 6% to CHF 86.80 second trading line during 2013 and 2014. — ADRs decrease 7% to USD 86.04 CAPITAL CHANGES Novartis shares finished at CHF 86.80, a decrease of 6% from the 2014 year-end closing price of CHF 92.35. Novartis ADRs Number of shares decreased in 2015 by 7% to USD 86.04 from USD 92.66. The Year As of Jan 1 Changes in shares As of Dec 31 Changes in CHF 2013 2 706 193 000 2 706 193 000 2014 2 706 193 000 2 706 193 000 2015 2 706 193 000 – 29 200 000 2 676 993 000 – 14 600 000 Swiss Market Index (SMI) in comparison decreased by 1.8% in 2015, whereas the world pharmaceutical index (MSCI) grew by 2.6% during the year. Total shareholder return in 2015 was -3.4% in CHF and -3.5% in USD. Over a longer-term period, Novartis AG has consistently delivered a solid performance, providing a 9.9% compounded annual total shareholder return A table with additional information on changes in the Novartis between January 1, 1996 and December 31, 2015, exceeding AG share capital can be found in Note 7 to the Financial State- the 8.9% compounded returns of its large pharmaceutical ments of Novartis AG. 80 | Novartis Annual Report 2015 CORPORATE GOVERNANCE REPORT peers (see page 113; “Benchmark Companies”) or the returns of 9.2% of the MSCI. The market capitalization of Novartis AG based on the num- ber of Novartis shares outstanding (excluding Novartis trea- sury shares) amounted to USD 208 billion as of December 31, 2015, compared to USD 224 billion as of December 31, 2014. Continuously rising dividend since 1996 130 NOVARTIS 2015 SHARE PRICE MOVEMENT 125 (based on USD amounts) 120 115 110 105 The Board proposes a 4% increase in the dividend payment for 2015 to CHF 2.70 per Novartis share (2014: CHF 2.60) for 100 approval at the AGM on February 23, 2016. This represents the 19th consecutive increase in the dividend paid per share since the creation of Novartis AG in December 1996. If the 2015 dividend proposal is approved by shareholders, dividends to be paid out will total approximately USD 6.6 billion (2014: USD 6.6 billion). This would result in an expected payout ratio of 93% of net income from continuing operations (2014: 62%) and 37% of net income attributable to shareholders of Novartis 95 90 Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Novartis Peers MSCI World Markets MSCI World Pharma AG (2014: 65%). Based on the 2015 year-end share price of NOVARTIS 1996–2015 TOTAL SHAREHOLDER RETURN CHF 86.80, the dividend yield will be 3.1% (2014: 2.8%). The (based on USD amounts) dividend payment date has been set for February 29, 2016. Direct Share Purchase Plan Novartis AG offers a Direct Share Purchase Plan to investors residing in Switzerland. It provides an easy and inexpensive way for investors to directly purchase registered Novartis shares and for them to be held at no cost in a deposit account 800 700 600 500 with SIX SAG AG. Due to legal restrictions, investors residing 400 outside Switzerland may not participate in the plan. At the end of 2015, 7 814 shareholders were enrolled in this plan. 300 200 100 0 KEY NOVARTIS SHARE DATA Issued shares Treasury shares 1 Outstanding shares at December 31 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Novartis Peers MSCI World Markets MSCI World Pharma Source: Datastream; data are converted into US dollars and re-based to 100 at January 1, 1996. Currency fluctuations have an influence on the representation of the relative performance of Novartis vs. indices and peers. 2015 2014 2013 2 676 993 000 2 706 193 000 2 706 193 000 303 098 183 307 566 743 280 108 692 2 373 894 817 2 398 626 257 2 426 084 308 Weighted average number of shares outstanding 2 402 806 352 2 425 782 324 2 440 849 805 1 Approximately 137 million treasury shares (2014: 153 million; 2013: 149 million) are held in entities that restrict their availability for use. CORPORATE GOVERNANCE REPORT | OUR SHARES AND OUR SHAREHOLDERS Novartis Annual Report 2015 | 81 PER-SHARE INfORMATION1 Basic earnings per share (USD) from continuing operations Basic earnings per share (USD) from discontinued operations Total basic earnings per share (USD) Diluted earnings per share (USD) from continuing operations Diluted earnings per share (USD) from discontinued operations Total diluted earnings per share Operating cash flow (USD) from continuing operations Year-end equity for Novartis AG shareholders (USD) Dividend (CHF) 2 1 Calculated on the weighted average number of shares outstanding, except year-end equity 2 2015: proposal to shareholders for approval at the Annual General Meeting on February 23, 2016 2015 2.92 4.48 7.40 2.88 4.41 7.29 5.03 2014 4.39 – 0.18 4.21 4.31 – 0.18 4.13 5.73 2013 3.76 0.00 3.76 3.70 0.00 3.70 5.17 32.46 29.50 2.70 2.60 30.64 2.45 2015 11.9 2014 22.2 2013 21.3 OUR SHAREHOLDERS SIGNIfICANT SHAREHOLDERS According to the Novartis Share Register, as of December 31, 2015, the following registered shareholders (including nomi- 30.1 21.3 21.3 nees and the ADS depositary) held more than 2% of the total KEY RATIOS – DECEMBER 31 Price/earnings ratio 1 Price/earnings ratio from continuing operations 1 Enterprise value/EBITDA from continuing operations Dividend yield (%) 1 16 3.1 15 2.8 13 3.4 1 Based on the Novartis share price at December 31 of each year. KEY DATA ON ADRs ISSUED IN THE US share capital of Novartis AG with the right to vote these shares:1 — Shareholders: Novartis Foundation for Employee Partici- pation, with its registered office in Basel, holding 2.6%; and Emasan AG, with its registered office in Basel, holding 3.3% — Nominees: Chase Nominees Ltd., London,2 holding 8.8%; Nortrust Nominees, London, holding 3.2%; and The Bank of New York Mellon, New York, holding 4.6% through its nominees, Mellon Bank, Everett, holding 1.7% and The Bank of New York Mellon, Brussels, holding 2.9% — ADS depositary: JPMorgan Chase Bank, New York, Year-end ADR price (USD) High 1 Low 1 Number of ADRs outstanding 2 2015 86.04 106.12 83.96 2014 92.66 96.65 78.20 2013 80.38 80.39 63.70 299 578 398 307 623 364 317 193 803 holding 11.2% 1 Based on the daily closing prices. 2 The depositary, JPMorgan Chase Bank, holds one Novartis AG share for every ADR issued. SHARE PRICE (CHf) Year-end share price High 1 Low 1 Year-end market capitalization (USD billions) 2 Year-end market capitalization (CHf billions) 2 2015 86.80 102.30 82.20 2014 92.35 93.80 70.65 2013 71.20 73.65 58.70 208.3 223.7 194.2 206.1 221.5 172.7 1 Based on the daily closing prices. 2 Market capitalization is calculated based on the number of shares outstanding (excluding treasury shares). According to disclosure notifications filed with Novartis AG and the SIX Swiss Exchange, each of the following shareholders held between 3% and 5% of the share capital of Novartis AG as of December 31, 2015: — Capital Group Companies Inc., Los Angeles — BlackRock Inc., New York 1 Excluding 6.2% of the share capital held as treasury shares by Novartis AG and its enti- ties that restrict their availability for use 2 Previously reported as JPMorgan Chase Bank, New York, but changed to its affiliate Chase Nominees Ltd., London, which is entered as nominee in the Novartis Share Register 82 | Novartis Annual Report 2015 CORPORATE GOVERNANCE REPORT Disclosure notifications pertaining to shareholdings in Novartis AG that were filed with Novartis AG and the SIX Swiss Exchange REGISTERED SHAREHOLDERS BY COUNTRY are published on the latter’s electronic publication platform, As of December 31, 2015 Shareholders in % Shares in % and can be accessed via: www.six-exchange-regulation.com/de/home/publications/ significant-shareholders.html. CROSS SHAREHOLDINGS Novartis AG has no cross shareholdings in excess of 5% of capital or voting rights with any other company. DISTRIBUTION Of NOVARTIS SHARES The information in the following tables relates only to regis- tered shareholders and does not include holders of unregis- tered shares. Also, the information provided in the tables below France Germany Luxembourg Switzerland 1 United Kingdom United States Other countries Total 2.49 5.21 0.03 88.60 0.50 0.30 2.87 0.92 1.91 1.08 40.93 23.77 27.53 3.86 100.00 100.00 Registered shares held by nominees are shown in the country where the company/ affiliate entered in the Novartis Share Register as shareholder has its registered seat 1 Excluding 6.2% of the share capital held as treasury shares by Novartis AG and its entities that restrict their availability for use cannot be assumed to represent the entire Novartis AG investor SHAREHOLDER RIGHTS base because nominees and JPMorgan Chase Bank, as ADS Shareholders have the right to receive dividends, to vote and depositary, are registered as shareholders for a large number to execute such other rights as granted under Swiss law and of beneficial owners. the Articles of Incorporation. As of December 31, 2015, Novartis AG had approximately 161 000 registered shareholders. Right to vote Number of registered shareholders % of registered share capital NUMBER Of SHARES HELD As of December 31, 2015 1–100 101–1 000 1 001–10 000 10 001–100 000 100 001–1 000 000 1 000 001–5 000 000 5 000 001 or more 1 24 096 96 203 36 616 3 387 470 73 34 Total registered shareholders/shares 160 879 Unregistered shares Total Each Novartis share registered with the right to vote entitles the holder to one vote at General Meetings. Novartis shares can only be voted if they are registered with voting rights with the Novartis Share Register by the third business day before the General Meeting (for shareholder registration and voting restrictions, see pages 83-84). ADR holders may vote by instructing JPMorgan Chase Bank, the ADS depositary, to exercise the voting rights attached to the registered shares underlying the ADRs. JPMorgan Chase Bank exercises the voting rights for registered shares under- lying ADRs for which no voting instructions have been given by providing a discretionary proxy to an uninstructed indepen- dent designee. Such designee has to be a Novartis AG share- holder. Powers of General Meetings 0.06 1.53 3.83 3.32 5.16 5.79 50.79 70.48 29.52 100.00 1 Including significant registered shareholders as listed above The following powers are vested exclusively in the General REGISTERED SHAREHOLDERS BY TYPE As of December 31, 2015 Shareholders in % Shares in % Individual shareholders Legal entities Nominees, fiduciaries and ADS depositary Total 96.14 3.79 0.07 100.00 11.76 39.65 48.59 100.00 Meeting: — Adoption and amendment of the Articles of Incorporation — Election and removal of the Chairman of the Board, Board and Compensation Committee members, the Independent Proxy and external auditors — Approval of the management report (if required) and of the consolidated financial statements — Approval of the financial statements of Novartis AG and decision on the appropriation of available earnings shown on the balance sheet, including with regard to dividends — Approval of the maximum aggregate amounts of compensation of the Board (for the period from an AGM until the next AGM) and of the Executive Committee (for the financial year following the AGM) — Grant of discharge to Board and Executive Committee members — Decision of other matters that are reserved by law or by the Articles of Incorporation to the General Meeting of Shareholders CORPORATE GOVERNANCE REPORT | OUR SHARES AND OUR SHAREHOLDERS Novartis Annual Report 2015 | 83 Resolutions and elections at General Meetings Other rights associated with a registered Novartis share The General Meeting passes resolutions and elections with the may only be exercised by the shareholder, its legal represen- absolute majority of the votes represented at the meeting. tative, another shareholder with the right to vote, or the Inde- However, under the Articles of Incorporation (www.novartis. pendent Proxy, or a usufructuary (a person not the owner of com/ corporate-governance), the approval of two-thirds of the the share who is entitled to exercise the shareholder rights) or votes represented at the meeting is required for: nominee who is registered in the Novartis Share Register. — An alteration of the purpose of Novartis AG — The creation of shares with increased voting powers SHAREHOLDER REGISTRATION — An implementation of restrictions on the transfer of Only shareholders, usufructuaries or nominees registered in registered shares and the removal of such restrictions the Novartis Share Register with voting rights may exercise — An authorized or conditional increase of the share capital their voting rights. To be registered with voting rights, a share- — An increase of the share capital out of equity, by holder must declare that he or she acquired the shares in his contribution in kind, for the purpose of an acquisition of or her own name and for his or her own account. According to property or the grant of special rights the Articles of Incorporation, the Board may register nominees — A restriction or suspension of rights or options to with the right to vote. For restrictions on the registration of subscribe nominees, please see below. — A change of location of the registered office of The Articles of Incorporation provide that no shareholder Novartis AG shall be registered with the right to vote for more than 2% of — The dissolution of Novartis AG the registered share capital. The Board may, upon request, grant an exemption from this restriction. Considerations In addition, the law provides for a qualified majority for other include whether the shareholder supports the Novartis goal of resolutions, such as a merger or spin-off. creating sustainable value and has a long-term investment Other shareholder rights horizon. In 2015, no exemptions were requested. Exemptions are in force for the registered significant shareholders listed Shareholders representing at least 10% of the share capital on page 81 under Our Shareholders – Significant Sharehold- may request that an extraordinary General Meeting of Share- ers, and for Norges Bank (Central Bank of Norway), Oslo, which holders be convened. Shareholders representing Novartis as of December 31, 2015, held less than 2% of the share cap- shares with an aggregate nominal value of at least CHF 1 mil- ital of Novartis AG. lion may request that an item be included in a General Meet- The same registration and voting restrictions indirectly ing agenda. Such requests must be made in writing at least apply to holders of ADRs. 45 days before the meeting, specify the agenda item to be Given that shareholder representation at General Meetings included, and contain the proposal on which the shareholder traditionally has been rather low in Switzerland, Novartis AG requests a vote. considers registration restrictions necessary to prevent a Shareholders can vote their Novartis shares by themselves minority shareholder from dominating a General Meeting. or appoint another shareholder or the Independent Proxy to The Articles of Incorporation provide that no nominee shall vote on their behalf. All shareholders (who are not yet regis- be regis tered with the right to vote for more than 0.5% of the tered on the Sherpany Platform; see below) receive a General registered share capital. The Board may, upon request, grant Meeting invitation letter with a proxy appointment form for the an exemption from this restriction if the nominee discloses the appointment of the Independent Proxy. On this form share- names, addresses and number of shares of the persons for holders can instruct the Independent Proxy to vote on alter- whose account it holds 0.5% or more of the registered share native or additional motions related to the agenda items either capital. Exemptions are in force for the nominees listed on (i) according to the motions of the Board for such alternative page 81 under – Our Shareholders – Significant Shareholders, or additional motions, or (ii) against such alternative or addi- and for the nominee Citi Bank, London, which in 2015 requested tional motions, or (iii) to abstain from voting. an exemption, but as of December 31, 2015 was not registered Novartis AG offers shareholders the opportunity to use an in the Novartis Share Register. online platform (the Sherpany Platform) to receive notices of The same restrictions indirectly apply to holders of ADRs. future General Meetings exclusively by email and to electron- Registration restrictions in the Articles of Incorporation ically give their instructions to the Independent Proxy, grant may only be removed through a resolution of the General Meet- powers of attorney to other shareholders, and order their ing of Shareholders, with approval of at least two-thirds of the admission cards online. The General Meeting registration form votes represented at the meeting. enables shareholders who are not yet registered on the Sher- Shareholders, ADR holders or nominees who are linked to pany Platform to order detailed documents related to opening each other or who act in concert to circumvent registration a Sherpany account. They may also do so by contacting the restrictions are treated as one person or nominee for the pur- Novartis Share Register. Shareholders can deactivate their poses of the restrictions on registration. online account at any time and again receive invitations in paper form. 84 | Novartis Annual Report 2015 CORPORATE GOVERNANCE REPORT NO RESTRICTIONS ON TRADING Of SHARES GENERAL COMPENSATION PROVISIONS No restrictions are imposed on the transferability of Novartis Non-executive members of the Board of Directors shares. The registration of shareholders in the Novartis Share Compensation of non-executive members of the Board Register or in the ADR register kept by JPMorgan Chase Bank includes fixed compensation elements only. In particular, does not affect the tradability of Novartis shares or ADRs. Reg- non-executive members of the Board of Directors shall receive istered Novartis shareholders or ADR holders may, therefore, no company contributions to any pension plan, no perfor- purchase or sell their Novartis shares or ADRs at any time, mance-related elements, and no financial instruments (e.g., including before a General Meeting regardless of the record options). date. The record date serves only to determine the right to vote at a General Meeting. Members of the Executive Committee The members of the Executive Committee receive fixed and CHANGE-Of-CONTROL PROVISIONS variable, performance-related compensation. Fixed compen- No opting up, no opting out sation comprises of the base salary and may include other ele- According to the Swiss Stock Exchange Act (as per 1.1.2016 ments and benefits such as contributions to pension plans. according to the Swiss Federal Act on Financial Infrastruc- Variable compensation may be structured into short-term and tures), anyone who – directly, indirectly or acting in concert long-term compensation elements. Short-term variable com- with third parties – acquires equity securities exceeding 33 pensation elements shall be governed by performance met- 1/3% of the voting rights of a company (whether or not such rics that take into account the performance of Novartis and/ rights are exercisable) is required to make an offer to acquire or parts thereof, and/or individual targets. Achievements are all listed equity securities of that company. A company may generally measured based on the one-year period to which raise this threshold to 49% of the voting rights (“opting up”) the short-term compensation relates. The long-term compen- or may, under certain circumstances, waive the threshold sation plans are based on performance metrics that take into (“opting out”). Novartis AG has not adopted any such mea- account strategic objectives of Novartis (such as financial, inno- sures. vation, shareholder return and/or other metrics). Achievements are generally measured based on a period of not less than Change-of-control clauses three years. In accordance with good corporate governance and the rules implementing the Minder Initiative, there are no change-of- Additional Amount control clauses and “golden parachute” agreements benefit- If the maximum aggregate amount of compensation already ing Board members, Executive Committee members, or other approved by the General Meeting is not sufficient to cover the members of senior management. Furthermore, employment compensation of newly appointed or promoted Executive Com- contracts with Executive Committee members do not contain mittee members, Novartis may pay out compensation, in a notice periods or contract periods exceeding 12 months, or total amount up to 40% of the total maximum aggregate commissions for the acquisition or transfer of enterprises or amount last approved for the Executive Committee per com- severance payments. pensation period, to newly appointed or promoted Executive Committee members. For detailed information on the compensation of the Board and Executive Committee, see the Compensation Report on pages 108-137. CORPORATE GOVERNANCE REPORT | OUR BOARD Of DIRECTORS Novartis Annual Report 2015 | 85 OUR BOARD OF DIRECTORS COMPOSITION Of THE BOARD Of DIRECTORS AND ITS COMMITTEES (AS PER DECEMBER 31, 2015) Chairman: J. Reinhardt Vice Chairman: E. Vanni BOARD Of DIRECTORS N. Andrews D. Azar V. Briner S. Datar A. Fudge P. Landolt A. von Planta C. Sawyers W. Winters Audit and Compliance Committee Compensation Committee Governance, Nominat ion and Corporate Respons- ibilities Committee Research & Development Committee Risk Committee S. Datar (Chairman) D. Azar E. Vanni A. von Planta E. Vanni (Chairman) S. Datar A. Fudge W. Winters P. Landolt (Chairman) A. Fudge C. Sawyers A. von Planta J. Reinhardt (Chairman) N. Andrews D. Azar C. Sawyers E. Vanni A. von Planta (Chairman) V. Briner S. Datar A. Fudge ELECTION AND TERM Of OffICE circumstances, shareholders may grant an exemption from Board members, the Chairman, and Compensation Commit- this rule and re-elect a Board member for additional terms of tee members are elected annually and individually by share- office. There is no mandatory term limit for Board members, holders at the General Meeting. Board members whose term so as not to lose the value of the insight and knowledge of the of office has expired are immediately eligible for re-election. company’s operations and practices that long-serving Board The average tenure of Board members is six years. A Board members have developed. member must retire after reaching age 70. Under special Name Joerg Reinhardt, Ph.D. Enrico Vanni, Ph.D. Nancy C. Andrews, M.D., Ph.D Dimitri Azar, M.D. Verena A. Briner, M.D. Srikant Datar, Ph.D. Ann Fudge Pierre Landolt, Ph.D. Andreas von Planta, Ph.D. Charles L. Sawyers, M.D. William T. Winters BOARD PROfILE BOARD COMPOSITION Nationality Year of birth First election at AGM Last election at AGM End of current term D CH US US CH US US CH CH US UK/US 1956 1951 1958 1959 1951 1953 1951 1947 1955 1959 1961 2013 2011 2015 2012 2013 2003 2008 1996 2006 2013 2013 2015 2015 2015 2015 2015 2015 2015 2015 2015 2015 2015 2016 2016 2016 2016 2016 2016 2016 2016 2016 2016 2016 INDIVIDUAL BOARD MEMBER PROfILE Board members should have the following personal qualities: The composition of the Board must align with our status as a — Interact with other Board members to build an effective listed company, business portfolio, geographic reach and cul- and complementary Board ture. The Board must be diverse in all aspects. Knowledge and — Establish trusting relationships experience in the following fields must be represented on the — Apply independence of thought Board: leadership and management; healthcare, life sciences — Be challenging but supportive in the boardroom and medicine; research and development; engineering and — Influence without creating conflict by applying a con- technology; marketing; banking, finance and accounting; structive, non-confrontational style human resources; legal and public affairs; and risk manage- — Listen well and offer advice based on sound judgment ment. — Be able and willing to commit adequate time to Board and committee responsibilities — Be open to personal feedback and seek to be responsive 86 | Novartis Annual Report 2015 CORPORATE GOVERNANCE REPORT NATIONALITY GENDER EXECUTIVE/NON-EXECUTIVE — Do not have existing board memberships or hold other BOARD DIVERSITY positions that could lead to a permanent conflict of The diversity of a board of directors is critical to its effective- interest ness. Thus, when the Governance, Nomination and Corporate — Understand and respect the boundaries of their role, Responsibilities Committee of Novartis identifies new Board leaving the operational management of the company to member candidates to be proposed to shareholders for the CEO and his Executive Committee election, the maintenance and improvement of the Board’s diversity is an important criterion. The Board’s aspiration is to Board members’ biographies (pages 93–96) highlight the have a diverse Board in all aspects. This includes nationality, specific qualifications that led the Board to conclude they are gender, background and experience, age, tenure, viewpoints, qualified to serve on the Board, which is diverse in terms of GENDER background, credentials, interests and skills. NATIONALITY NATIONALITY interests, and technical and interpersonal skills. EXECUTIVE/NON-EXECUTIVE EXECUTIVE/NON-EXECUTIVE GENDER INDEPENDENCE INDEPENDENCE DIVERSITY NATIONALITY (%) NATIONALITY NATIONALITY American 46 Swiss 36 British 9 German 9 GENDER (%) GENDER GENDER Male 73 female 27 BACKGROUND/EXPERIENCE EXECUTIVE/NON-EXECUTIVE EXECUTIVE/NON-EXECUTIVE AGE AGE (%) INDEPENDENCE TENURE INDEPENDENCE <55 9 55–60 46 61–65 36 >66 9 BACKGROUND/EXPERIENCE (%) BACKGROUND/EXPERIENCE BACKGROUND/EXPERIENCE AGE TENURE (%) AGE TENURE TENURE finance/accounting 27 Leadership management 9 Law 9 <3 y 9 3–6 y 55 BACKGROUND/EXPERIENCE BACKGROUND/EXPERIENCE Engineering/technology 9 AGE AGE TENURE TENURE Marketing 9 Medicine/healthcare/R&D 37 7–9 y 9 >9 y 27 CORPORATE GOVERNANCE REPORT | OUR BOARD Of DIRECTORS Novartis Annual Report 2015 | 87 ROLE Of THE BOARD AND ITS COMMITTEES approval. The committees enable the Board to work in an effi- The Board is responsible for the overall direction and super- cient and effective manner, ensuring a thorough review and vision of management and holds the ultimate decision- making discussion of issues, while giving the Board more time for delib- authority for Novartis AG, except for those decisions reserved eration and decision-making. Moreover, committees ensure for shareholders. that only Board members who are independent oversee audit The Board has delegated certain responsibilities to five and compliance, governance and compensation – as only committees, as set out below. Responsibilities described with independent Board members are delegated in the respective the terms “overseeing” or “reviewing” are subject to final Board committees. Responsibilities Board of Directors Members Number of meetings held in 2015/ approximate average duration (hrs) of each meeting attendance Link 10/6:00 The primary responsibilities of the Board of Directors include: — Setting the strategic direction of the Group — Appointing, overseeing and dismissing key executives, and planning their succession Joerg Reinhardt1 Enrico Vanni 10 10 Nancy C. Andrews3 8 — Approving major transactions and investments — Determining the organizational structure and governance of the Group — Determining and overseeing financial planning, accounting, Dimitri Azar Verena A. Briner reporting and controlling — Approving annual financial statements and corresponding financial results releases Srikant Datar Ann Fudge Pierre Landolt 10 10 10 10 10 Articles of Incorporation of Novartis AG Regulations of the Board of Directors, its Committees and the Executive Committee of Novartis AG (Board Regulations) www.novartis.com/ corporate-governance Andreas von Planta 10 Charles L. Sawyers 10 William T. Winters 10 Audit and Compliance Committee 7/2:30 The primary responsibilities of this committee include: — Supervising external auditors and selecting and nominating external auditors for election by the meeting of shareholders — Overseeing internal auditors — Overseeing accounting policies, financial controls, and compliance with accounting and internal control standards — Approving quarterly financial statements and financial results releases — Overseeing internal control and compliance processes and procedures — Overseeing compliance with laws, and external and internal regulations The Audit and Compliance Committee has the authority to retain external consultants and other advisors. Srikant Datar1,2 Dimitri Azar Enrico Vanni 7 7 7 Andreas von Planta 7 Charter of the Audit and Compliance Committee www.novartis.com/ corporate-governance Compensation Committee The primary responsibilities of this committee include: — Designing, reviewing and recommending to the Board compensation policies and programs — Advising the Board on the compensation of the Board members Enrico Vanni1 Srikant Datar Ann Fudge 5/2:30 5 5 5 and the CEO — Deciding on the compensation of Executive Committee members — Preparing the Compensation Report and submitting to the Board for approval The Compensation Committee has the authority to retain external consultants and other advisors. 1 Chairman 2 Audit Committee Financial Expert as defined by the US Securities and Exchange Commission 3 as of AGM February 2015 4 as of April meeting William T. Winters4 4 Charter of the Compensation Committee www.novartis.com/ corporate-governance 88 | Novartis Annual Report 2015 CORPORATE GOVERNANCE REPORT Membership comprises Number of meetings held in 2015/ approximate average duration (hrs) of each meeting attendance Link 3/2:00 Pierre Landolt1 3 2 Charles L. Sawyers 3 Ann Fudge Andreas von Planta 3 Responsibilities Governance, Nomination and Corporate Responsibilities Committee The primary responsibilities of this committee include: — Designing, reviewing and recommending to the Board corporate governance principles — Identifying candidates for election as Board members — Assessing existing Board members and recommending to the Board whether they should stand for re-election — Preparing and reviewing the succession plan for the CEO — Developing and reviewing an orientation program for new Board members and an ongoing education plan for existing Board members — Reviewing on a regular basis the Articles of Incorporation with a view to reinforcing shareholder rights — Reviewing on a regular basis the composition and size of the Board and its committees — Reviewing annually the independence status of each Board member — Reviewing directorships and agreements of Board members for conflicts of interest, and dealing with conflicts of interest — Overseeing the company’s strategy and governance on corporate responsibility The Governance, Nomination and Corporate Responsibilities Committee has the authority to retain external consultants and other advisors. Research & Development Committee 4/8:00 The primary responsibilities of this committee include: 4 — Monitoring research and development, and bringing recommendations Nancy C. Andrews2 3 4 — Assisting the Board in the oversight and evaluation related to Joerg Reinhardt1 Dimitri Azar to the Board Charles L. Sawyers 4 Enrico Vanni 3 research and development — Informing the Board on a periodic basis on the research and development strategy, the effectiveness and competitiveness of the research and development function, emerging scientific trends and activities critical to the success of research and development, and the pipeline — Advising the Board on scientific, technological, and research and development matters — Providing counsel and know-how to management in the area of research and development — Reviewing such other matters in relation to the company’s research and development as the committee may, in its own discretion, deem desirable in connection with its responsibilities The Research & Development Committee has the authority to retain external consultants and other advisors. Risk Committee 4/2:00 Andreas von Planta1 4 4 4 Verena A. Briner Srikant Datar Ann Fudge 4 The primary responsibilities of this committee include: — Ensuring that Novartis has implemented an appropriate and effective risk management system and process — Ensuring that all necessary steps are taken to foster a culture of risk-adjusted decision-making without constraining reasonable risk-taking and innovation — Approving guidelines and reviewing policies and processes — Reviewing with management, internal auditors and external auditors the identification, prioritization and management of risks, the accountabilities and roles of the functions involved in risk management, the risk portfolio, and the related actions implemented by management The Risk Committee has the authority to retain external consultants and other advisors. 1 Chairman 2 as of AGM February 2015 Charter of the Governance, Nomination and Corporate Responsibilities Committee www.novartis.com/ corporate-governance Charter of the Research & Development Committee www.novartis.com/ corporate-governance Charter of the Risk Committee www.novartis.com/ corporate-governance CORPORATE GOVERNANCE REPORT | OUR BOARD Of DIRECTORS Novartis Annual Report 2015 | 89 fUNCTIONING Of THE BOARD BOARD MEETINGS The Board takes decisions as a whole, supported by its five The Board has meetings with Executive Committee members committees. Each committee has a written charter outlining as well as private meetings without them. its duties and responsibilities, and is led by a Board-elected In 2015, there were 10 Board meetings. Because all Board chairman. members are independent, no separate meetings of the inde- The Board and its committees meet regularly throughout pendent Board members were held in 2015. the year. The chairmen set their meeting agendas. Any Board member may request a Board or committee meeting, and the inclusion of an agenda item. Before meetings, Board members KEY ACTIVITIES Of OUR BOARD AND COMMITTEES IN 2015 receive materials to help them prepare the discussions and The Board meeting agendas in 2015 included the following decision-making. CHAIRMAN standard topics: strategy; Group targets; personal objectives of the CEO; mergers and acquisitions, and business develop- ment and licensing review; financial and business reviews; Joerg Reinhardt has been independent, non-executive Chair- major projects; investments and transactions; the Annual man since August 1, 2013. He has both industry and Novartis Report; and the General Meeting agenda. Topics addressed experience, and meets the company’s independence criteria. during private meetings included Board self-evaluation and As independent Chairman, he can lead the Board to represent performance assessment of senior management, as well as the interests of all stakeholders, being accountable to them succession planning. and creating sustainable value through effective governance. The independent chairmanship also ensures an appropriate In addition, in 2015 our Board and its committees focused on balance of power between the Board and Executive Commit- a number of special topics, including: tee. In this role, Joerg Reinhardt: — Provides leadership to the Board — Supports and mentors the CEO BOARD Of DIRECTORS: Our biosimilars development pipeline, the pricing and com- petitive environment in pharmaceuticals, the rollout of our new — Supported by the Governance, Nomination and Values and Behaviors, a review of our brand identity, the pro- Corporate Responsibilities Committee, ensures effective posal to revise our Articles of Incorporation and Board regu- succession plans for the Board and the Executive lations to implement the “Minder Legislation,” the analysis of Committee the AGM 2015 and investor feedback from our corporate gov- — Ensures that the Board and its committees work ernance roadshow, the issue of new bonds, and the renewal effectively of existing credit facilities. — Sets the agenda, style and tone of Board discussions, promoting constructive dialogue and effective deci- sion-making GOVERNANCE, NOMINATION AND CORPORATE RESPONSIBILITIES COMMITTEE: — Supported by the Governance, Nomination and Investor feedback from our corporate governance roadshow Corporate Responsibilities Committee, ensures that all and how to address it; the search profile for and discussion of Board committees are properly established, composed potential new Board members to strengthen the general man- and operated agement and financial expertise background of our Board; a — Ensures that the Board’s performance is annually review of our corporate responsibility activities, including the evaluated proposal to introduce an “Access Brand” (a first-of-its-kind — Ensures introduction programs for new Board members portfolio of products aimed at increasing access to medicines and continuing education as well as specialization for all in low- and low-middle-income countries); and reviewing the Board members activities of the Novartis Foundation (a philanthropic organi- — Ensures effective communication with the company’s zation pioneering innovative healthcare models that have a shareholders transformational impact on the health of the poorest popula- — Promotes effective relationships and communication tions). between Board and Executive Committee members COMPENSATION COMMITTEE: VICE CHAIRMAN The metrics that underpin the Annual Incentive and the per- Enrico Vanni has been independent, non-executive Vice Chair- formance-based Long-Term Incentive plans; the constituents man since February 22, 2013. In this role, he: of the Novartis healthcare peer group used for benchmarking and variable compensation purposes; the rollout of the com- — Leads the Board in case and as long as the Chairman is pensation system of Executive Committee members to the incapacitated broader Novartis executive group, as well as approving the — Chairs the sessions of independent Board members and Long-Term Incentive plans for the rest of the Novartis employee leads independent Board members if and as long as the population; investor feedback from the corporate governance Chairman is not independent roadshow; and expense policies. 90 | Novartis Annual Report 2015 CORPORATE GOVERNANCE REPORT AUDIT AND COMPLIANCE COMMITTEE: employed by the external auditor of Novartis, (v) a Board The accounting of the portfolio transformation, the Novartis member or family member not being a board member, IT security organization and challenges, the roles of the Audit employee or 10% shareholder of an enterprise that has and Compliance Committee and the Risk Committee to avoid made payments to, or received payments from, Novartis, potential gaps or overlaps, working toward integrated assur- in excess of the greater of USD 1 million or 2% of that ance, specific accounting and compliance topics, compensa- enterprise’s gross revenues. For members of the Audit tion disclosures, the revision of the Internal Audit Charter, and and Compliance Committee and the Compensation the definition of growth products. Committee, even stricter rules apply. RISK COMMITTEE: — In addition, Board members are bound by the Novartis Conflict of Interest Policy, which prevents a Board Key business risks at Alcon; pharmacovigilance and quality member’s potential personal interests from influencing preparedness; benchmarking the enterprise risk management the decision-making of the Board. organization and processes; risks related to pricing, data pri- — The Governance, Nomination and Corporate Responsibil- vacy, IT security, and data integrity in manufacturing and devel- ities Committee annually submits to the Board a opment; and risks and opportunities related to the Step proposal concerning the determination of the indepen- Change program (a program evolving our approach to busi- dence of each Board member. For this assessment, the ness practices and customer relationships to strengthen our committee considers all relevant facts and circum- focus on performance with integrity). stances of which it is aware – not only the explicit formal independence criteria. This includes an assessment of RESEARCH & DEVELOPMENT COMMITTEE: whether a Board member is truly independent, in The Novartis portfolio of R&D projects in the following areas: character and judgment, from any member of the senior respiratory diseases; infectious diseases; autoimmune, trans- management and from any of his/her current or former plantation and immunological diseases; cardiovascular and colleagues. metabolic diseases; immuno-oncology; and musculoskeletal — In its meeting on December 17, 2015, the Board deter- diseases. The committee also supported the setting and eval- mined that all of its members are independent. uation of innovation-related long-term performance metrics. HONORARY CHAIRMEN RELATIONSHIP Of NON-EXECUTIVE BOARD MEMBERS WITH NOVARTIS Dr. Alex Krauer and Dr. Daniel Vasella have been appointed No Board member is or was a member of the management of Honorary Chairmen in recognition of their significant achieve- Novartis AG or of any other Novartis Group company in the ments on behalf of Novartis. They are not provided with Board last three financial years up to December 31, 2015. There are documents and do not attend Board meetings. no significant business relationships of any Board member with Novartis AG or with any other Novartis Group company. INDEPENDENCE Of BOARD MEMBERS The independence of Board members is a key corporate gov- MANDATES OUTSIDE THE NOVARTIS GROUP ernance issue. An independent Board member is one who is No Board member may hold more than 10 additional man- independent of management and has no business or relation- dates in other companies, of which no more than four shall be ship that could materially interfere with the exercise of objective, in other listed companies. Chairmanships of the boards of unfettered and independent judgment. Only with a majority of directors of other listed companies count as two mandates. Board members being independent can the Board fulfill its Each of these mandates is subject to Board approval. obligation to represent the interests of shareholders, being The following mandates are not subject to these limita- accountable to them and creating sustainable value through tions: an effective governance of Novartis. Accordingly, Novartis a) Mandates in companies that are controlled by Novartis established independence criteria based on international AG best-practice standards and outlined on the Novartis website: b) Mandates that a Board member holds at the request of www.novartis.com/investors/governance-documents.shtml. Novartis AG or companies controlled by it. No Board — The majority of Board members and any member of the c) Mandates in associations, charitable organizations, Audit and Compliance Committee; the Compensation foundations, trusts and employee welfare foundations. Committee; and the Governance, Nomination and No Board member may hold more than 10 such member shall hold more than five such mandates. Corporate Responsibilities Committee must meet the mandates. company’s independence criteria. These include, inter alia, (i) a Board member not having received direct “Mandates” means those in the supreme governing body of a compensation of more than USD 120 000 per year from legal entity that is required to be registered in the commercial Novartis, except for dividends or Board compensation, register or a comparable foreign register. Mandates in differ- within the last three years, (ii) a Board member not ent legal entities that are under joint control are deemed one having been an employee of Novartis within the last mandate. three years, (iii) a family member not having been an The Board may issue regulations that determine additional executive officer of Novartis within the last three years, restrictions, taking into account the position of the respective (iv) a Board member or family member not being member. CORPORATE GOVERNANCE REPORT | OUR BOARD Of DIRECTORS Novartis Annual Report 2015 | 91 LOANS AND CREDITS — Executive Committee meeting minutes are made No loans or credits shall be granted to members of the Board. available to the Board BOARD PERfORMANCE AND EffECTIVENESS EVALUATION — Meetings or teleconferences are held as required between Board members and the CEO — The Board regularly meets with all Executive Committee PROCESS members The Board conducts an annual review to evaluate its perfor- — The Board receives detailed, quarterly updates from mance and that of individual committees and members. As each Division Head part of this process, each Board member completes a ques- — By invitation, other members of management attend tionnaire on the performance and effectiveness of the Board Board meetings to report on areas of the business for and his/her committees, which lays the groundwork for a which they are responsible qualitative review led by the Chairman. The Chairman has dis- — Board members are entitled to request information from cussions with each Board member, and then with the entire Executive Committee members or any other Novartis Board. Further, the committee evaluations are discussed by associate, and they may visit any Novartis site the respective committee and the results are debriefed to the Board. Any suggestion for improvement is recorded and BOARD COMMITTEES actions are agreed upon. Board committees regularly meet with management and, at Periodically, this process is conducted by an independent times, outside consultants to review the business, better under- consultant. In 2014, an independent performance and effec- stand applicable laws and policies affecting the Group, and tiveness evaluation of the Board and its committees, including support the Board and management in meeting the require- an individual Board member assessment, was conducted by ments and expectations of stakeholders and shareholders. the independent expert company Russell Reynolds Associates. In particular, the Chief Financial Officer (CFO), the Group In 2015, the performance evaluation was conducted internally. General Counsel, and representatives of the external auditors CONTENT AND RESULTS are invited to Audit and Compliance Committee meetings. Additionally, the heads of Internal Audit, Financial Reporting The performance review examined the performance and effec- & Accounting, Compliance and Quality, as well as the Head of tiveness, and strengths and weaknesses, of individual Board the Global Business Practices Office report on a regular basis members and of the full Board and each Board committee. to the Audit and Compliance Committee. This committee This review covered topics including Board composition; reviews financial reporting processes on behalf of the Board. purpose, scope and responsibilities; processes and gover- For each quarterly and annual release of financial information, nance of the Board and its committees; meetings and pre-read- the Disclosure Review Committee is responsible for ensuring ing material; team effectiveness; and leadership and culture. the accuracy and completeness of disclosures. The Disclosure The review also evaluated the ability and willingness of Review Committee, which is a management committee, is each Board member to commit adequate time and effort to chaired by the CFO and includes the CEO; the Group General his/her responsibilities as provided for in the charter of the Counsel; the heads of the divisions, Novartis Business Services Governance, Nomination and Corporate Responsibilities (NBS) and the Novartis Institutes for BioMedical Research Committee. (NIBR); the heads of finance of the divisions, NBS and NIBR; The results were discussed at the January 2016 meeting and the heads of the following corporate functions: Treasury, of the Board. It was concluded that the Board and its commit- Tax, Financial Reporting & Accounting, Internal Audit and Inves- tees operate effectively. INfORMATION AND CONTROL SYSTEMS Of THE BOARD VIS-À-VIS MANAGEMENT tor Relations. The Audit and Compliance Committee reviews decisions made by the Disclosure Review Committee before the quarterly and annual releases are published. The Risk Committee oversees the risk management sys- INfORMATION ON MANAGEMENT tem and processes, and also reviews the risk portfolio of the The Board ensures that it receives sufficient information from Group to ensure appropriate and professional risk manage- the Executive Committee to perform its supervisory duty and ment. For this purpose, the Group Risk Office and the risk own- to make decisions that are reserved for it. The Board obtains ers of the divisions report on a regular basis to the Risk Com- this information through several means: mittee. The Group General Counsel, the Head of Group Risk, — The CEO informs the Board regularly about current the Head of Internal Audit, and other senior executives are developments invited to these meetings on a regular basis. 92 | Novartis Annual Report 2015 CORPORATE GOVERNANCE REPORT NOVARTIS MANAGEMENT INfORMATION SYSTEM The Board does not have direct access to the company’s Novartis produces comprehensive, consolidated (unaudited) financial and management reporting systems but can, at any financial statements on a monthly basis for the total Group time, request more detailed financial information on any aspect and its divisions. These are typically available within 10 days that is presented to it. of the end of the month and include the following: — Consolidated income statement of the month, quarter- INTERNAL AUDIT to-date and year-to-date in accordance with International The Internal Audit function carries out operational and system Financial Reporting Standards (IFRS), as well as adjust- audits in accordance with an audit plan approved by the Audit ments to arrive at core results as defined by Novartis. and Compliance Committee. This function helps organizational The IFRS and core figures are compared to the prior-year units accomplish objectives by providing an independent period and targets in both USD and on a constant approach to the evaluation, improvement and effectiveness of currency basis. their internal control framework. It prepares reports on the — Consolidated balance sheet as of the month end in audits it has performed, and reports actual or suspected irreg- accordance with IFRS in USD ularities to the Audit and Compliance Committee and the CEO. — Consolidated cash flow on a monthly, quarter-to-date The Audit and Compliance Committee regularly reviews the and year-to-date basis in accordance with IFRS in USD Internal Audit scope, audit plans and results. — Supplementary data on a monthly, quarterly and year-to-date basis such as free cash flow, gross and net RISK MANAGEMENT debt, headcount, personnel costs, working capital, and The Group Risk Office is overseen by the Board’s independent earnings per share on a USD basis where applicable Risk Committee. The Compensation Committee works closely with the Risk Committee to ensure that the compensation sys- Constant currencies, core results, free cash flow, net debt and tem does not lead to excessive risk-taking by management (for related target figures are non-IFRS measures. An explanation details, see our Compensation Report on pages 108-137). of non-IFRS measures can be found on pages 165-169 of the Organizational and process measures have been estab- Operating and Financial Review 2015. lished to identify and mitigate risks at an early stage. Organi- The above information is made available to Board members zationally, the individual divisions and functions are responsi- on a monthly basis. An analysis of key deviations from the prior ble for risk and risk mitigation, with specialized corporate year or target is also provided. functions – such as Group Finance; Group Quality Assurance; The Board also receives twice a year an outlook of the full- Corporate Health, Safety and Environment; Business Continu- year results in accordance with IFRS and core, along with ity Management and Integrity & Compliance; and the Business related commentary prior to the release of the quarterly Practices Office – providing support and controlling the effec- results. tiveness of risk management by the divisions and functions in On an annual basis, in the fourth quarter of the year, the these respective areas. Board receives and approves the operating and financial targets for the following year. In the middle of the year, the Board also reviews and approves the strategic plan for the next five years, which includes a projected consolidated income statement in USD prepared in accordance with IFRS and core (as defined by Novartis). CORPORATE GOVERNANCE REPORT | OUR BOARD Of DIRECTORS Novartis Annual Report 2015 | 93 BOARD OF DIRECTORS Joerg Reinhardt, Ph.D. Chairman of the Board of Directors German, age 59 Enrico Vanni, Ph.D. Vice Chairman of the Board of Directors Swiss, age 64 Nancy C. Andrews, M.D., Ph.D. Member of the Board of Directors American, age 57 function at Novartis AG Joerg Reinhardt, Ph.D., has been Chairman of the Board of Directors of Novartis since 2013. He is also Chairman of the Research & Development Committee and Chairman of the Board of Trustees of the Novartis Foundation. Other activities Mr. Reinhardt previously was chairman of the board of management and the executive committee of Bayer HealthCare, Germany. Prior to that, he was Chief Operat- ing Officer of Novartis from 2008 to 2010, and Head of the Vaccines and Diagnostics Division of Novartis from 2006 to 2008. He was also Chairman of the Board of the Genomics Insti- tute of the Novartis Research Foundation in the United States from 2000 to 2010, a mem- ber of the supervisory board of MorphoSys AG in Germany from 2001 to 2004, and a mem- ber of the board of directors of Lonza Group AG in Switzerland from 2012 to 2013. Professional background Mr. Reinhardt grad- uated with a Ph.D. in pharmaceutical sciences from Saarland University in Germany. He joined Sandoz Pharma Ltd. in 1982 and held various positions at Sandoz and later Novartis, including Head of Development. Key knowledge/experience Leadership, global and industry experience – former chairman of global healthcare company; former Chief Operating Officer of Novartis and former Chairman of Novartis research institution; for- mer board member of leading biotechnology company and of global supplier for pharma- ceutical, healthcare and life sciences indus- tries. function at Novartis AG Enrico Vanni, Ph.D., has been a member of the Board of Directors since 2011. He qualifies as an independent Non-Executive Director. He is Vice Chairman of the Board of Directors and Chairman of the Compensation Committee. He is also a mem- ber of the Audit and Compliance Committee and the Research & Development Committee. Other activities Since his retirement as direc- tor of McKinsey & Company in 2007, Mr. Vanni has been an independent consultant. He is a board member of several companies in indus- tries from healthcare to private banking – including Advanced Oncotherapy PLC in England, and non-listed companies such as Lombard Odier SA, Banque Privée BCP (Suisse) SA, Eclosion2, and Denzler & Partners SA, all based in Switzerland. Professional background Mr. Vanni holds an engineering degree in chemistry from the Fed- eral Polytechnic School of Lausanne, Switzer- land; a Ph.D. in chemistry from the University of Lausanne; and a Master of Business Admin- istration from INSEAD in Fontainebleau, France. He began his career as a research engineer at the International Business Machines Corp. (IBM) in California, United States, and joined McKinsey in Zurich in 1980. He managed the Geneva office for McKinsey from 1988 to 2004, and consulted for com- panies in the pharmaceutical, consumer and finance sectors. He led McKinsey’s European pharmaceutical practice and served as a member of the firm’s partner review commit- tee prior to his retirement in 2007. As an inde- pendent consultant, Mr. Vanni has continued to support leaders of pharmaceutical and bio- technology companies on core strategic chal- lenges facing the healthcare industry. Key knowledge/experience Global and indus- try experience – senior consultant of global pharmaceutical/biotechnology and consumer goods companies, and financial institutions. Science experience – research engineer at technology company and manager of projects in global pharmaceutical R&D. Leadership experience – office management of global con- sulting company and leadership of its Euro- pean pharmaceutical practice. function at Novartis AG Nancy C. Andrews, M.D., Ph.D., has been a member of the Board of Directors since February 27, 2015. She qual- ifies as an independent Non-Executive Direc- tor and is a member of the Research & Devel- opment Committee. Other activities Dr. Andrews is dean of the Duke University School of Medicine and vice chancellor for academic affairs at Duke Uni- versity in the United States. She is also a pro- fessor of pediatrics, pharmacology and can- cer biology at Duke. Prior to joining Duke, she was director of the Harvard/MIT M.D.-Ph.D. Program, and dean of basic sciences and graduate studies as well as professor of pedi- atrics at Harvard Medical School in the US. From 1993 to 2006, Dr. Andrews was a bio- medical research investigator at the Howard Hughes Medical Institute, also in the US. Her research expertise is in iron homeostasis and mouse models of human diseases. Professional background Dr. Andrews received her Ph.D. in biology from the Massa- chusetts Institute of Technology in the US and her M.D. from Harvard Medical School. She completed her residency and fellowship train- ings in pediatrics and hematology/oncology at Boston Children’s Hospital and the Dana-Farber Cancer Institute, both in the US, and served as an attending physician at Bos- ton Children’s Hospital. Dr. Andrews also served as president of the American Society for Clinical Investigation. Additionally, she was elected as a fellow of the American Associa- tion for the Advancement of Science and to membership in the US National Academy of Sciences, the National Academy of Medicine, and the American Academy of Arts and Sci- ences. She serves on the council of the National Academy of Medicine and on the board of directors of the American Academy of Arts and Sciences. Key knowledge/experience Leadership and healthcare experience – dean of leading US university medical school; member of various medical, scientific and ethical institutions and commissions. Education and scientific experi- ence – research scientist and professor at leading US universities. 94 | Novartis Annual Report 2015 CORPORATE GOVERNANCE REPORT BOARD OF DIRECTORS (CONTINUED) Dimitri Azar, M.D. Member of the Board of Directors American, age 56 Verena A. Briner, M.D. Member of the Board of Directors Swiss, age 64 Srikant Datar, Ph.D. Member of the Board of Directors American, age 62 function at Novartis AG Dimitri Azar, M.D., has been a member of the Board of Directors since 2012. He qualifies as an independent Non-Executive Director and is a member of the Audit and Compliance Committee and the Research & Development Committee. Other activities Dr. Azar is dean of the College of Medicine and professor of ophthalmology, bioengineering and pharmacology at the Uni- versity of Illinois at Chicago in the United States, where he formerly was head of the Department of Ophthalmology and Visual Sciences. He is a member of the American Ophthalmological Society and is on the boards of trustees of the Chicago Medical Society, the Chicago Ophthalmological Society, the Asso- ciation for Research in Vision and Ophthalmol- ogy, and the Tear Film and Ocular Surface Society. Professional background Dr. Azar began his career at the American University of Beirut Medical Center in Lebanon, and completed his fellowship and residency training at the Mas- sachusetts Eye and Ear Infirmary at Harvard Medical School in the US. His research on matrix metalloproteinases in corneal wound healing and angiogenesis has been funded by the US National Institutes of Health since 1993. Dr. Azar practiced at the Wilmer Eye Institute at the Johns Hopkins Hospital School of Medicine in the US, and then returned to the Massachusetts Eye and Ear Infirmary as director of cornea and external disease. He became professor of ophthal mology with ten- ure at Harvard Medical School in 2003. Dr. Azar holds an Executive Master of Business Administration from the University of Chicago Booth School of Business in the US. Key knowledge/experience Leadership, healthcare and education experience – dean and professor at leading US university medi- cal school. Biomedical science experience – federally-funded clinician-scientist and research fellowship recipient. function at Novartis AG Verena A. Briner, M.D., has been a member of the Board of Directors since 2013. She qualifies as an independent Non-Executive Director and is a member of the Risk Committee. Other activities Dr. Briner is professor of inter- nal medicine at the University of Basel, and visiting professor at the University of Lucerne, both in Switzerland. She is chief medical officer and head of the Department of Medicine at the Lucerne Cantonal Hospital in Switzerland. Additionally, she is a member of several med- ical and ethical institutions and commissions, including the board of the Foundation for the Development of Internal Medicine in Europe, the senate of the Swiss Academy of Medical Sciences, and the journal of the inter-cantonal convention on highly-specialized medicine (IVHSM), Switzerland. She is also a member and former president of the Swiss Society of Internal Medicine. Professional background Dr. Briner gradu- ated with an M.D. from the University of Basel in 1978, and has a specialized degree in inter- nal medicine and nephrology from the Swiss Medical Association. She has received several prestigious scholarships and scientific grants, including the President’s Grant of the Swiss Society of General Internal Medicine in 2011. Additionally, she is a fellow of the Royal College of Physicians, United Kingdom, and an honor- ary fellow of the American College of Physi- cians, the European Federation of Internal Medicine, the Polish Society of Internal Med- icine, and the Swiss Society of General Inter- nal Medicine. Key knowledge/experience Leadership and healthcare experience – chief medical officer and department head at leading Swiss hospital; former president of Swiss medical society; member of various medical and ethical institutions and commissions. Education expe- rience – professor and visiting professor at leading Swiss universities. function at Novartis AG Srikant Datar, Ph.D., has been a member of the Board of Directors since 2003. He qualifies as an independent Non-Executive Director. He is Chairman of the Audit and Compliance Committee, and a member of the Risk Committee and the Com- pensation Committee. The Board of Directors has appointed him as Audit Committee Financial Expert. Other activities Mr. Datar is Arthur Lowes Dickinson Professor at the Graduate School of Business Administration at Harvard Univer- sity in the United States. He is also a member of the boards of directors of ICF International Inc., Stryker Corp. and T-Mobile US, all in the US. Professional background Mr. Datar graduated in 1973 with distinction in mathematics and economics from the University of Bombay in India. He is a chartered accountant, and holds two master’s degrees and a doctorate from Stanford University in the US. Mr. Datar has worked as an accountant and planner in indus- try, and as a professor at Carnegie Mellon Uni- versity, Stanford University and Harvard Uni- versity, all in the US. His research interests are in the areas of cost management, measure- ment of productivity, new product develop- ment, innovation, time-based competition, incentives and performance evaluation. He is the author of many scientific publications and has received several academic awards and honors. Mr. Datar has also advised and worked with numerous companies in research, devel- opment and training. Key knowledge/experience Leadership and education experience – former senior associ- ate dean and current professor at leading US university. Global and industry experience – board member of global professional services firm, leading global medical techno logy company, and major US telecommunications company. CORPORATE GOVERNANCE REPORT | OUR BOARD Of DIRECTORS Novartis Annual Report 2015 | 95 Ann fudge Member of the Board of Directors American, age 64 Pierre Landolt, Ph.D. Member of the Board of Directors Swiss, age 68 Andreas von Planta, Ph.D. Member of the Board of Directors Swiss, age 60 function at Novartis AG Andreas von Planta, Ph.D., has been a member of the Board of Directors since 2006. He qualifies as an inde- pendent Non-Executive Director. He is Chair- man of the Risk Committee and a member of the Audit and Compliance Committee and the Governance, Nomination and Corporate Responsibilities Committee. Other activities Mr. von Planta is a board member of Helvetia Holding AG in Switzerland, and also serves on the boards of various Swiss subsidiaries of foreign companies and other non-listed Swiss companies, including A.P. Moller Finance SA, HSBC Private Bank (Swit- zerland) SA, Socotab Frana SA, Raymond Weil SA and Générale-Beaulieu Holding SA. Addi- tionally, he is chairman of the regulatory board of the SIX Swiss Exchange AG. Professional background Mr. von Planta holds lic. iur. and Ph.D. degrees from the University of Basel in Switzerland, and an LL.M. from Columbia University School of Law in the United States. He passed his bar examinations in Basel in 1982. Since 1983, he has lived in Geneva and worked for the law firm Lenz & Staehelin, where he became a partner in 1988. His areas of specialization include corporate law, corporate governance, corporate finance, company reorganizations, and mergers and acquisitions. Key knowledge/experience Leadership and global experience – board member of insur- ance company. Industry experience – partner at leading Swiss law firm. function at Novartis AG Ann Fudge has been a member of the Board of Directors since 2008. She qualifies as an independent Non-Executive Director and is a member of the Risk Committee; the Compensation Com- mittee; and the Governance, Nomination and Corporate Responsibilities Committee. Other activities Ms. Fudge is vice chairman and senior independent director of Unilever NV, London and Rotterdam. She is a trustee of the New York-based Rockefeller Foundation and the Washington, D.C.-based Brookings Institution, and is chair of the US Programs Advisory Panel of the Bill & Melinda Gates Foundation. Ms.  Fudge is also a trustee of WGBH public media and serves on the board of the Council on Foreign Relations. Professional background Ms. Fudge received her bachelor’s degree from Simmons College in the United States and her Master of Busi- ness Administration from Harvard University Graduate School of Business, also in the US. She is former chairman and CEO of Young & Rubicam Brands, New York. Before that, she served as president of the Beverages, Desserts and Post Division of Kraft Foods Inc. in the US. Key knowledge/experience Leadership and marketing experience – former chairman and CEO of global marketing communications company; former president of leading con- sumer products business unit. Global and industry experience – former board member of global technology company; board mem- ber of global consumer goods company. function at Novartis AG Pierre Landolt, Ph.D., has been a member of the Board of Directors since 1996. He qualifies as an independent Non-Executive Director and is Chairman of the Governance, Nomination and Corporate Responsibilities Committee. Other activities Mr. Landolt is chairman of the Sandoz Family Foundation, overseeing its development in several investment fields. He is also chairman of the Swiss private bank Landolt & Cie SA. In Switzerland, he is chair- man of Emasan AG and Vaucher Manufacture Fleurier SA, and vice chairman of Parmigiani Fleurier SA. Additionally, he is vice chairman of the Montreux Jazz Festival Foundation and a board member of Amazentis SA, Switzer- land. In Brazil, Mr. Landolt is president of Axi- alPar Ltda. and Moco Agropecuaria Ltda., the Instituto Fazenda Tamanduá and the Instituto Estrela de Fomento ao Microcrédito. Professional background Mr. Landolt gradu- ated with a bachelor’s degree in law from the University of Paris–Assas. From 1974 to 1976, he worked for Sandoz Brazil. In 1977, he acquired an agricultural estate in the semi-arid Northeast Region of Brazil, and within several years converted it into a model farm in organic and biodynamic production. Since 1997, Mr. Landolt has been associate and chairman of AxialPar Ltda., Brazil, an investment company focused on sustainable development. In 2000, he co-founded Eco-Carbone SAS, a company active in the design and development of car- bon-sequestration processes. In 2007, he co-founded Amazentis SA, a startup company active in the convergence space of medication and nutrition. In 2011, Mr. Landolt received the title of Docteur des Sciences Économiques Honoris Causa from the University of Lausanne in Switzerland. Key knowledge/experience Banking and industry experience in international and emerging markets – chairman of private bank; chairman and vice chairman of luxury goods companies; board member of agribusiness company. Leadership and global experience – chairman of large family investment holding. 96 | Novartis Annual Report 2015 CORPORATE GOVERNANCE REPORT BOARD OF DIRECTORS (CONTINUED) HONORARY CHAIRMEN Alex Krauer, Ph.D. Daniel Vasella, M.D. CORPORATE SECRETARY Charlotte Pamer-Wieser, Ph.D. Charles L. Sawyers, M.D. Member of the Board of Directors American, age 56 William T. Winters Member of the Board of Directors British/American, age 54 function at Novartis AG William T. Winters has been a member of the Board of Directors since 2013. He qualifies as an independent Non- Executive Director and is a member of the Compensation Committee. Other activities Mr. Winters is CEO and a board member of Standard Chartered, based in Lon- don. He previously ran Renshaw Bay, an alter- native asset management firm, and was co-CEO of JPMorgan’s investment bank from 2003 to 2010. Additionally, he was a commis- sioner on the UK Independent Commission on Banking in 2010 and 2011. Professional background Mr. Winters received his bachelor’s degree from Colgate University in the United States, and his Master of Busi- ness Administration from the Wharton School of the University of Pennsylvania, also in the US. He joined JPMorgan in 1983 and held management roles across several market areas and in corporate finance. Mr. Winters is a board member of Colgate University, and also serves on the boards of the International Rescue Committee, the Young Vic theater and the Print Room theater in the United Kingdom. He was awarded the title of Commander of the Order of the British Empire in 2013. Key knowledge/experience Leadership and global experience – CEO and executive director of leading international banking group; former chairman and CEO of alternative asset man- agement firm; former co-CEO of investment banking at global financial services firm. Education experience – board member of lead- ing US university. function at Novartis AG Charles L. Sawyers, M.D., has been a member of the Board of Directors since 2013. He qualifies as an inde- pendent Non-Executive Director and is a member of the Research & Development Com- mittee and the Governance, Nomination and Corporate Responsibilities Committee. Other activities In the United States, Dr. Saw- yers is chair of the Human Oncology and Pathogenesis Program at Memorial Sloan Ket- tering Cancer Center, professor of medicine and of cell and developmental biology at the Weill Cornell Graduate School of Medical Sci- ences, and an investigator at the Howard Hughes Medical Institute. He serves on US President Barack Obama’s National Cancer Advisory Board, and is former president of the American Association for Cancer Research and of the American Society for Clinical Inves- tigation. He is also a member of the US National Academy of Sciences and Institute of Medicine. Professional background Dr. Sawyers received his M.D. from the Johns Hopkins School of Medicine in the US, and worked at the Jonsson Comprehensive Cancer Center at the University of California, Los Angeles in the US for nearly 18 years before joining Memo- rial Sloan Kettering in 2006. An international- ly-acclaimed cancer researcher, he co-devel- oped the Novartis cancer drug Gleevec/Glivec and has received numerous honors and awards, including the Lasker-DeBakey Clinical Medical Research Award in 2009. Dr. Sawyers is a member of the scientific advisory board of Agios Pharmaceuticals Inc. in the US. Key knowledge/experience Leadership, healthcare and science experience – program chair at leading cancer treatment and research institution; member of US cancer advisory board; former president of scientific organi- zation and of medical honor society. Educa- tion experience – professor at leading US uni- versity. CORPORATE GOVERNANCE REPORT | OUR MANAGEMENT Novartis Annual Report 2015 | 97 OUR MANAGEMENT COMPOSITION Of THE EXECUTIVE COMMITTEE Joseph Jimenez Chief Executive Officer Steven Baert Human Resources Harry Kirsch Chief Financial Officer André Wyss Novartis Business Services felix R. Ehrat General Counsel David Epstein Pharmaceuticals Mark C. fishman Biomedical Research Jeff George Alcon Richard francis Sandoz EXECUTIVE COMMITTEE COMPOSITION — Informing the Board of all matters of fundamental The Executive Committee is headed by the CEO. Its members significance to the businesses are appointed by the Board. — Recruiting, appointing and promoting senior There are no contracts between Novartis and third parties management whereby Novartis would delegate any business management — Ensuring the efficient operation of the Group and tasks to such third parties. achievement of optimal results — Promoting an active internal and external EXECUTIVE COMMITTEE ROLE AND fUNCTIONING communications policy The Board has delegated to the Executive Committee overall — Dealing with any other matters delegated by the Board responsibility for and oversight of the operational management of Novartis. This includes: The Executive Committee is supported by two sub-commit- — Developing policies and strategic plans for Board tees: The Deal Committee (members are the CEO, CFO, Divi- approval, and implementing those approved sion Head Pharmaceuticals, Group General Counsel, and Head — Submitting to the Board and its committees proposed of Biomedical Research) reviews important acquisitions and changes in management positions of material signifi- divestments of companies and businesses, and business devel- cance, investments, financial measures, acquisitions or opment deals, and makes recommendations to the Executive divestments, contracts of material significance, and Committee. The Disclosure Committee (members are the CEO, targets – and implementing those approved CFO, and Group General Counsel) determines whether an event — Preparing and submitting quarterly and annual reports constitutes information that is material to the Group, deter- to the Board and its committees mines the appropriate disclosure and update of such informa- tion, and reviews media releases concerning such information. 98 | Novartis Annual Report 2015 CORPORATE GOVERNANCE REPORT CEO MANDATES OUTSIDE THE NOVARTIS GROUP In addition to other Board-assigned duties, the CEO leads the No Executive Committee member may hold more than six Executive Committee, building and maintaining an effective additional mandates in other companies, of which no more executive team. With the support of the Executive Committee, than two additional mandates shall be in other listed compa- the CEO: nies. Each of these mandates is subject to Board approval. — Is responsible for the operational management of Novartis Executive Committee members are not allowed to hold chair- — Develops strategy proposals to be recommended to the manships of the boards of directors of other listed companies. Board and ensures that approved strategies are imple- The following mandates are not subject to these limita- mented tions: — Plans human resourcing to ensure that Novartis has the a) Mandates in companies that are controlled by Novartis capabilities and means to achieve its plans, and that AG robust management succession and management b) Mandates that an Executive Committee member holds at development plans are in place and presented to the the request of Novartis AG or companies controlled by it. Board No Executive Committee member shall hold more than — Develops an organizational structure, and establishes five such mandates. processes and systems to ensure the efficient organiza- c) Mandates in associations, charitable organizations, tion of resources foundations, trusts and employee welfare foundations. — Ensures that financial results, business strategies and, No Executive Committee member may hold more than when appropriate, targets and milestones are communi- 10 such mandates. cated to the investment community – and generally develops and promotes effective communication with “Mandates” means those in the supreme governing body of a shareholders and other stakeholders legal entity that is required to be registered in the commercial — Ensures that business performance is consistent with register or a comparable foreign register. Mandates in differ- business principles, as well as legal and ethical standards ent legal entities that are under joint control are deemed one — Develops processes and structures to ensure that capital mandate. investment proposals are reviewed thoroughly, that The Board may issue regulations that determine additional associated risks are identified, and that appropriate restrictions, taking into account the position of the respective steps are taken to manage these risks member. — Develops and maintains an effective framework of internal controls over risk in relation to all business LOANS AND CREDITS activities of the company No loans or credits shall be granted to members of the — Ensures that the flow of information to the Board is Executive Committee. accurate, timely and clear CORPORATE GOVERNANCE REPORT | OUR MANAGEMENT Novartis Annual Report 2015 | 99 EXECUTIVE COMMITTEE Joseph Jimenez Chief Executive Officer of Novartis American, age 56 Steven Baert Head of Human Resources of Novartis Belgian, age 41 felix R. Ehrat, Ph.D. Group General Counsel of Novartis Swiss, age 58 Joseph Jimenez has been Chief Executive Officer (CEO) of Novartis since 2010. Under his leadership, and driven by a commitment to R&D investment, Novartis has developed one of the largest pipelines of self-originated drugs in the industry. Mr. Jimenez has also transformed the company’s portfolio to focus on leading businesses with innovation power and global scale in pharmaceuticals, eye care and generics. Prior to serving as CEO of Novartis, Mr. Jimenez held the position of Division Head, Novartis Pharmaceuticals. He joined Novartis in 2007 as Division Head, Novartis Consumer Health. Previously, Mr. Jimenez served as president and CEO of the North American and European businesses for the H.J. Heinz Company. Addi- tionally, he served on the board of directors of Colgate-Palmolive Co. from 2009 to 2015, and of AstraZeneca PLC from 2002 to 2007. Mr. Jimenez is a member of the board of direc- tors of General Motors Co. He graduated in 1982 with a bachelor’s degree from Stanford University and in 1984 with a Master of Busi- ness Administration from the University of Cal- ifornia, Berkeley, both in the United States. Steven Baert has been Head of Human Resources (HR) of Novartis since February 2014. He is a member of the Executive Com- mittee of Novartis. Mr. Baert joined Novartis in 2006 as Head of Human Resources Global Functions in Switzer- land. He has held several senior HR roles, including Head of Human Resources for Emerging Growth Markets, and Global Head, Human Resources, Oncology. Mr. Baert also served as Head of Human Resources, US and Canada, for Novartis Pharmaceuticals Corporation. Prior to joining Novartis, Mr. Baert held HR positions at Bristol-Myers Squibb Co. and Uni- lever. Mr. Baert represents Novartis on the board of GSK Consumer Healthcare. He holds a Master of Business Administration from the Vlerick Business School in Belgium and a Master in Law from the Katholieke Universiteit Leuven, also in Belgium. Additionally, he has a Bach- elor in Law from the Katholieke Universiteit Brussels. Felix R. Ehrat, Ph.D., has been Group General Counsel of Novartis since 2011. He is a mem- ber of the Executive Committee of Novartis. Mr. Ehrat is a leading practitioner of corporate, banking, and mergers and acquisitions law, as well as an expert in corporate governance and arbitration. He started his career as an asso- ciate with Baer & Karrer Ltd. in Zurich in 1987, became partner in 1992, and advanced to senior partner (2003 to 2011) and executive chairman of the board (2007 to 2011) of the firm. Mr. Ehrat is chairman of Globalance Bank AG in Switzerland, and chairman of SwissHold- ings (Federation of Industrial and Service Groups in Switzerland). He is a board mem- ber of Geberit AG and avenir suisse (a think tank for economic and social issues). Previ- ously, he was, among other things, chairman and a board member of several listed and non- listed companies. Mr. Ehrat was admitted to the Zurich bar in 1985 and received his doctorate of law from the University of Zurich in Switzerland in 1990. In 1986, he completed an LL.M. at McGeorge School of Law in the United States. Some of his past memberships include the Interna- tional Bar Association, where he was co-chair of the Corporate and M&A Law Committee from 2007 to 2008, and Association Interna- tionale des Jeunes Avocats, where he was president from 1998 to 1999. 100 | Novartis Annual Report 2015 CORPORATE GOVERNANCE REPORT EXECUTIVE COMMITTEE (CONTINUED) David Epstein Division Head, Novartis Pharmaceuticals American, age 54 Mark C. fishman, M.D. President of the Novartis Institutes for BioMedical Research American, age 64 Richard francis Division Head, Sandoz British, age 47 Richard Francis has been Division Head of Sandoz since May 2014. He is a member of the Executive Committee of Novartis. Mr. Francis joined Novartis from Biogen Idec, where he held global and country leadership positions during his 13-year career with the company. Most recently, he was senior vice president of the company’s US commercial organization. From 1998 to 2001, he was at Sanofi in the United Kingdom, where he held various marketing roles across the company’s urology, analgesics and cardiovascular prod- ucts. He has also held sales and marketing positions at Lorex Synthelabo and Wyeth. Mr. Francis holds a B.A. in economics from the Manchester Metropolitan University, England. David Epstein has been Division Head of Novartis Pharmaceuticals since 2010. He is a member of the Executive Committee of Novartis. Mark C. Fishman, M.D., has been President of the Novartis Institutes for BioMedical Research (NIBR) since 2002. He is a member of the Executive Committee of Novartis. Before joining Novartis in 2002, Dr. Fishman was chief of cardiology and director of the Car- diovascular Research Center at Massachu- setts General Hospital, as well as professor of medicine at Harvard Medical School, both in the United States. He completed his internal medicine residency, chief residency and car- diology training at Massachusetts General Hospital. Dr. Fishman graduated with a bachelor’s degree from Yale College in the US in 1972, and with an M.D. from Harvard Medical School in 1976. He has been honored with many awards and distinguished lectureships, and serves on the council of the Institute of Med- icine of the National Academies in the US. Additionally, he is a fellow of the American Academy of Arts and Sciences, also in the US. Since taking this role, Mr. Epstein has set a course for Novartis Pharmaceuticals to develop into the world’s best pharmaceutical business. He previously served as Head of Novartis Oncology, building the Oncology business from start-up to number two in the world through six new drug approvals and more than 10 indication expansions. Before joining Novartis, Mr. Epstein was an associate in the strategy practice of the con- sulting firm Booz Allen Hamilton in the United States. He joined Sandoz, a Novartis prede- cessor company, in 1989 and held various leadership positions of increasing responsibil- ity, including Chief Operating Officer of Novartis Pharmaceuticals Corporation in the US and Global Head of Novartis Specialty Medicines. Mr. Epstein received a bachelor’s degree in pharmacy, with honors, from the Ernest Mario School of Pharmacy at Rutgers, The State Uni- versity of New Jersey, in the US in 1984. He received a Master of Business Administration in finance and marketing from New York’s Columbia University Graduate School of Busi- ness, also in the US, in 1987. CORPORATE GOVERNANCE REPORT | OUR MANAGEMENT Novartis Annual Report 2015 | 101 Jeff George Division Head, Alcon American, age 42 Harry Kirsch Chief Financial Officer of Novartis German, age 50 Jeff George has been Division Head of Alcon since May 2014. He is a member of the Executive Committee of Novartis. Harry Kirsch has been Chief Financial Officer (CFO) of Novartis since 2013. He is a member of the Executive Committee of Novartis. Mr. Kirsch joined Novartis in 2003 and, prior to his current position, served as CFO of the company’s Pharmaceuticals Division. Under his leadership, the division’s core operating income margin increased, in constant curren- cies, every quarter of 2011 and 2012 despite patent expirations. At Novartis, he also served as CFO of Pharma Europe, and as Head of Business Planning & Analysis and Financial Operations for the Pharmaceuticals Division. Mr. Kirsch joined Novartis from Procter & Gamble (P&G) in the United States, where he was CFO of P&G’s global pharmaceutical busi- ness. Prior to that, he held finance positions in different categories of P&G’s consumer goods business, technical operations, and Global Business Services organization. Mr. Kirsch represents Novartis on the board of GSK Consumer Healthcare. He studied industrial engineering and economics at the University of Karlsruhe in Germany (“Dip- lom-Wirtschaftsingenieur”). For more than five years prior to joining Alcon, Mr. George led Sandoz, the generics division of Novartis and the world’s second-largest generics company with more than 26 000 associates across 164 countries. Prior to Sandoz, he was Head of Emerging Markets for the Middle East, Africa, Southeast Asia and CIS for Novartis Pharmaceuticals. Mr. George joined Novartis in 2007 as Head of Commercial Operations for Western and Eastern Europe for Novartis Vaccines. Before joining Novartis, he was senior director of stra- tegic planning and business development at Gap Inc. in San Francisco, United States. Between 2001 and 2004, he worked at McKinsey & Company, also in San Francisco, as an engagement manager. Mr. George received a Master of Business Administration from Harvard University in the US in 2001. He graduated in 1999 with a master’s degree from the Johns Hopkins Uni- versity’s School of Advanced International Studies, also in the US, where he studied international economics and emerging mar- kets political economy. In 1996, he received his bachelor’s degree, magna cum laude, in international relations from Carleton College in the US. André Wyss Global Head, Novartis Business Services and Country President for Switzerland Swiss, age 48 André Wyss has been Global Head of Novartis Business Services (NBS) since May 2014. In July 2014, he was also appointed Country President for Switzerland. He is a member of the Executive Committee of Novartis. Mr. Wyss joined Novartis in 1984 as a chem- istry apprentice. Before being appointed Head of NBS, he served as US Country Head and President of Novartis Pharmaceuticals Corpo- ration. Prior to that, he was Head of the Phar- maceuticals Division Region Asia-Pacific, Mid- dle East and African Countries (AMAC). Before leading AMAC, he served as Group Emerging Markets Head, and as Country President and Head of Pharmaceuticals, Greece. Mr. Wyss received a graduate degree in eco- nomics from the School of Economics and Business Administration (HWV) in Switzerland in 1995. He is a member of the board of econ- omiesuisse. SECRETARY Bruno Heynen 102 | Novartis Annual Report 2015 CORPORATE GOVERNANCE REPORT OUR INDEPENDENT EXTERNAL AUDITORS DURATION Of THE MANDATE AND TERMS Of OffICE Of THE AUDITORS Global Head of Internal Audit and, if necessary, obtains an independent external assessment. Criteria applied for the per- Based on a recommendation by the Audit and Compliance formance assessment of PwC include an evaluation of its tech- Committee, the Board nominates an independent auditor for nical and operational competence; its independence and election at the AGM. Pricewaterhouse Coopers (PwC) assumed objectivity; the sufficiency of the resources it has employed; its existing auditing mandate for Novartis in 1996. Bruno Rossi, its focus on areas of significant risk to Novartis; its willingness auditor in charge, began serving in his role in 2013, and Ste- to probe and challenge; its ability to provide effective, practical phen Johnson, global relationship partner, began serving in recommendations; and the openness and effectiveness of its his role in 2014. The Audit and Compliance Committee ensures communications and coordination with the Audit and Compli- that these partners are rotated at least every five years. ance Committee, the Internal Audit function, and management. INfORMATION TO THE BOARD AND THE AUDIT AND COMPLIANCE COMMITTEE APPROVAL Of AUDIT AND NON-AUDIT SERVICES The Audit and Compliance Committee approves a budget for PwC is responsible for providing an opinion on whether the audit services whether recurring or non-recurring in nature, Group-consolidated financial statements comply with IFRS and as well as audit-related services not related to internal controls Swiss law, and whether the separate parent company financial over financial reporting. PwC reports quarterly to the Audit statements of Novartis AG comply with Swiss law. Additionally, and Compliance Committee regarding the extent of services PwC is responsible for opining on the effectiveness of internal provided in accordance with the applicable pre-approval and control over financial reporting, on the Compensation Report the fees for services performed to date. The Audit and Com- as well as on the corporate responsibility reporting of Novartis. pliance Committee individually approves all audit-related ser- The Audit and Compliance Committee, acting on behalf of vices relating to internal controls over financial reporting, tax the Board, is responsible for overseeing the activities of PwC. services and other services prior to the start of work. In 2015, this committee held seven meetings. PwC was invited to six of these meetings to attend during the discussion of AUDIT AND ADDITIONAL fEES agenda items that dealt with accounting, financial reporting PwC charged the following fees for professional services or auditing matters, and any other matters relevant to its audit. rendered for the 12-month periods ended December 31, 2015 On an annual basis, PwC provides the Audit and Compliance and December 31, 2014: Committee with written disclosures required by the US Public Company Accounting Oversight Board (PCAOB), and the com- mittee and PwC discuss PwC’s independence from Novartis Audit Services and its management. Audit-Related Services The Audit and Compliance Committee recommended to Tax Services the Board to approve the audited Group-consolidated finan- Other Services cial statements and the separate parent company financial Total statements of Novartis AG for the year ended December 31, 2015 USD million 2014 USD million 25.9 1.7 0.0 0.1 27.7 29.7 2.0 0.2 0.1 32.0 2015. The Board proposed the acceptance of these financial Audit services include work performed to issue opinions on statements for approval by the AGM. Group-consolidated financial statements and parent company The Audit and Compliance Committee regularly evaluates financial statements of Novartis AG, to issue opinions relating the performance of PwC and once a year determines whether to the effectiveness of the Group’s internal control over finan- PwC should be proposed to the AGM for election. Also once a cial reporting, and to issue reports on local statutory financial year, the auditor in charge and the global relationship partner statements. Also included are audit services that generally can report to the Board on PwC’s activities during the current year only be provided by the statutory auditor, such as the audit of and on the audit plan for the coming year. They also answer the Compensation Report, audits of non-recurring transac- any questions or concerns Board members have about the tions, audits of the adoption of new accounting policies, audits performance of PwC, or about the work it has conducted or is of information systems and the related control environment, planning to conduct. reviews of quarterly financial results, as well as procedures To assess the performance of PwC, the Audit and Compli- required to issue consents and comfort letters. ance Committee holds private meetings with the CFO and the CORPORATE GOVERNANCE REPORT | OUR CORPORATE GOVERNANCE fRAMEWORK Novartis Annual Report 2015 | 103 Audit-related services include other assurance services Tax services represent tax compliance, assistance with provided by the independent auditor but not restricted to those historical tax matters and other tax-related services. that can only be provided by the statutory auditor. They include Other services include training in the finance area, bench- services such as audits of pension and other employee bene- marking studies, and license fees for use of accounting and fit plans, contract audits of third-party arrangements, corpo- other reporting guidance databases. rate responsibility assurance, compliance with corporate integ- rity agreements, and other audit-related services. OUR CORPORATE GOVERNANCE FRAMEWORK LAWS AND REGULATIONS Novartis AG is subject to the laws of Switzerland, in particular SWISS CODE Of BEST PRACTICE fOR CORPORATE GOVERNANCE Swiss company and securities laws, and to the securities laws Novartis applies the Swiss Code of Best Practice for Corporate of the US as applicable to foreign private issuers of securities. Governance. In addition, Novartis AG is subject to the rules of the SIX Swiss Exchange, including the Directive on Information Relat- NOVARTIS CORPORATE GOVERNANCE STANDARDS ing to Corporate Governance. Novartis has incorporated the corporate governance standards Novartis AG is also subject to the rules of NYSE as appli- described above into the Articles of Incorporation and the cable to foreign private issuers of securities. NYSE requires Regulations of the Board of Directors, its Committees and the Novartis AG to describe any material ways in which its corpo- Executive Committee of Novartis AG (www.novartis.com/cor- rate governance differs from that of domestic US companies porate-governance). listed on the exchange. These differences are: The Governance, Nomination and Corporate Responsibilities — Novartis AG shareholders do not receive written reports Committee regularly reviews these standards and principles, directly from Board committees. taking into account best practices, and recommends improve- — External auditors are appointed by shareholders at the ments to the corporate governance framework for consider- AGM, as opposed to being appointed by the Audit and ation by the full Board. Compliance Committee. Additional corporate governance information can be found — While shareholders cannot vote on all equity compensa- on the Novartis website: www.novartis.com/corporate-gover- tion plans, they are entitled to hold separate, yearly bind- nance. ing shareholder votes on Board and Executive Commit- Printed copies of the Novartis Articles of Incorporation, tee compensation. Regulations of the Board, and Charters of Board Committees — The Board has set up a separate Risk Committee that is can be obtained by writing to: Novartis AG, Attn: Corporate responsible for business risk oversight, as opposed to Secretary, Lichtstrasse 35, CH-4056 Basel, Switzerland. delegating this responsibility to the Audit and Compli- ance Committee. — The full Board is responsible for overseeing the performance evaluation of the Board and Executive Committee. — The full Board is responsible for setting objectives relevant to the CEO’s compensation and for evaluating his performance. 104 | Novartis Annual Report 2015 CORPORATE GOVERNANCE REPORT FURTHER INFORMATION GROUP STRUCTURE Of NOVARTIS POLITICAL CONTRIBUTIONS NOVARTIS AG AND GROUP COMPANIES Novartis makes political contributions to support the political Under Swiss company law, Novartis AG is organized as a cor- dialogue on public policy issues of relevance to Novartis, such poration that has issued shares of common stock to investors. as healthcare innovation and access to medicines. The registered office of Novartis AG is Lichtstrasse 35, CH-4056 Political contributions made by Novartis are not intended Basel, Switzerland. to give rise to any obligations of the party receiving it. More- Business operations are conducted through Novartis over, rules and procedures are in place to make sure that polit- Group companies. Novartis AG, a holding company, owns or ical contributions are never made with the expectation of a controls directly or indirectly all entities worldwide belonging direct or immediate return for Novartis, and that they fully to the Novartis Group. Except as described below, the shares comply with applicable laws, regulations and industry codes. of these companies are not publicly traded. The principal Novartis only makes political contributions in countries Novartis subsidiaries and associated companies are listed in where such contributions by corporations are legal and where Note 32 to the Group’s consolidated financial statements. political contributions from corporations are considered to DIVISIONS reflect “good corporate citizenship”. Moreover, Novartis only makes modest political contributions so as to not create any The businesses of Novartis are divided on a worldwide basis dependency from the political parties receiving these contri- into three operating divisions: Pharmaceuticals, Alcon (eye butions. care), and Sandoz (generics). In addition, there are NBS (shared In 2015, Novartis made political contributions totaling services organization, delivering services to the divisions), NIBR approximately USD  1.13 million, thereof approximately (the company’s global pharmaceutical research organization), USD  680 000 in Switzerland, USD  235 000 in the US, and Group Corporate activities. In 2015, Animal Health and USD 150 000 in Japan, USD 45 000 in Australia, USD 11 000 Vaccines were divested, and the Over-the-Counter business in Canada, and USD 8 000 in the UK. In addition, in the US, a (OTC) was brought into a joint venture with GlaxoSmithKline’s political action committee established by Novartis used funds (GSK) business in this area – with Novartis holding a 36.5% received from Novartis employees (but not from the company) minority stake in this joint venture. to make political contributions totaling approximately USD 280 000. MAJORITY HOLDINGS IN PUBLICLY-TRADED GROUP COMPANIES In Switzerland, Novartis supports political parties that have a political agenda and hold positions that support the strategic The Novartis Group owns 75% of Novartis India Limited, with interests of Novartis, its shareholders and other stakeholders. its registered office in Mumbai, India, and listed on the Bom- Swiss political parties are completely privately financed and bay Stock Exchange (ISIN INE234A01025, symbol: HCBA). The the contributions of companies are a crucial part thereof. This total market value of the 25% free float of Novartis India Lim- private financing of parties is a deeply-rooted trait of the Swiss ited was USD 97.6 million at December 31, 2015, using the political culture, and contributing to that system is an import- quoted market share price at year end. Applying this share ant element of being a good corporate citizen. price to all the shares of the company, the market capitaliza- tion of the whole company was USD 390.5 million and that of SHAREHOLDER RELATIONS the shares owned by Novartis was USD 292.9 million. The CEO, with the CFO and Investor Relations team, supported SIGNIfICANT MINORITY SHAREHOLDING OWNED BY THE NOVARTIS GROUP  by the Chairman, is responsible for ensuring effective commu- nication with shareholders to keep them informed of the com- pany’s strategy, business operations and governance. Through The Novartis Group owns 33.3% of the bearer shares of Roche communication, the Board also learns about and addresses Holding AG, with its registered office in Basel, Switzerland, and shareholders’ expectations and concerns. listed on the SIX Swiss Exchange (ISIN CH0012032113, sym- Novartis communicates with its shareholders through the bol: RO). The market value of the Group’s interest in Roche AGM, meetings with groups of shareholders and individual Holding AG, as of December 31, 2015, was USD 14.9 billion. shareholders, and written and electronic communications. The total market value of Roche Holding AG was USD 241.08 At the AGM, the Chairman, CEO and other Executive Com- billion. Novartis does not exercise control over Roche Holding mittee members, and representatives of the external auditors AG, which is independently governed, managed and operated. are present and can answer shareholders’ questions. Other The Novartis Group owns a 36.5% share of a joint venture meetings with shareholders may be attended by the Chair- created by GSK and Novartis, which combined the Novartis man, CEO, CFO, Executive Committee members, and other OTC and the GSK Consumer Healthcare businesses. Novartis members of senior management. holds four of the 11 seats of the joint venture’s board. Further- Topics discussed, in full respect of applicable laws, with more, Novartis has certain minority rights and exit rights, shareholders may include strategy, business performance and including a put option that is exercisable as of March 2, 2018. corporate governance. CORPORATE GOVERNANCE REPORT | fURTHER INfORMATION Novartis Annual Report 2015 | 105 INfORMATION fOR OUR STAKEHOLDERS Novartis also publishes a consolidated Corporate INTRODUCTION Responsibility Performance Report, which details progress and Novartis is committed to open and transparent communication demonstrates the company’s commitment to be a leader in with shareholders, financial analysts, customers, suppliers and corporate responsibility. This report reflects the best-in-class other stakeholders. Novartis aims to disseminate material reporting standard, the Global Reporting Initiative’s (GRI) G4 developments in its businesses in a broad and timely manner guidelines, and fulfills the company’s reporting requirement that complies with the rules of the SIX Swiss Exchange and NYSE. as a signatory of the UN Global Compact. COMMUNICATIONS Information contained in reports and releases issued by Novartis is only correct and accurate at the time of release. Novartis publishes an Annual Report that provides informa- Novartis does not update past releases to reflect subsequent tion on the Group’s results and operations. In addition, Novartis events, and advises against relying on them for current infor- prepares an annual report on Form 20-F that is filed with the mation. US Securities and Exchange Commission (SEC). Novartis dis- closes quarterly financial results in accordance with IFRS, and INVESTOR RELATIONS PROGRAM issues press releases from time to time regarding business An Investor Relations team manages the Group’s interaction developments. with the international financial community. Several events are Novartis furnishes press releases relating to financial held each year to provide institutional investors and analysts results and material events to the SEC via Form 6-K. An archive with various opportunities to learn more about Novartis. containing recent Annual Reports, annual reports on Form 20-F, Investor Relations is based at the Group’s headquarters in and quarterly results releases – as well as related materials Basel. Part of the team is located in the US to coordinate inter- such as slide presentations and conference call webcasts – is action with US investors. Information is available on the on the Novartis website at www.novartis.com/investors. Novartis website: www.novartis.com/investors. Investors are also welcome to subscribe to a free email service on this site. WEBSITE INfORMATION Topic Share capital Shareholder rights Board regulations Executive Committee Information Articles of Incorporation of Novartis AG www.novartis.com/corporate-governance Novartis key share data www.novartis.com/key-share-data Articles of Incorporation of Novartis AG www.novartis.com/corporate-governance Investor Relations information www.novartis.com/investors Board regulations www.novartis.com/corporate-governance Executive Committee www.novartis.com/executive-committee Novartis code for senior financial officers Additional information Novartis Code of Ethical Conduct for CEO and Senior Financial Officers www.novartis.com/corporate-governance Novartis Investor Relations www.novartis.com/investors 2 106 | Novartis Annual Report 2015 1 4 1 Program participant David Thomas undergoes exercise therapy. 2 The program’s director, Prof. Amy Rothberg, assesses Jacob Jensen’s progress toward his weight loss goals. 3 Prof. Rothberg at home in the US state of Michigan 4 Mr. Thomas inside a device that measures the body’s fat content and energy expenditure Novartis Annual Report 2015 | 107 “ We use a non- judgmental, scientific approach that resonates with a large number of people. When they come to us they feel it’s time to do something, so they’re ready to listen and ready to commit” 3 p CONTINUED fROM PAGE 75 As anyone who has struggled to control his or her weight Since the first pilot in 2010, a total of 1 800 people have knows, the process can be fraught with frustration. But a team been through the program. Male participants have lost an in the US state of Michigan has developed an approach that average of 56 pounds (25 kg) and female participants have is delivering promising results. lost an average of 47 pounds (21 kg). A few individuals shed The weight management program at the University of as many as 230 pounds (104 kg). Some patients with diabetes Michigan uses a combination of diet, exercise, behavior have been able to dispense with insulin injections to control modification and drugs to help patients achieve a major, their blood sugar. sometimes life-changing transformation. Their progress is Half of those who participated in the weight loss program supervised by a team of specialists who help them achieve also took part in associated research examining the effects and sustain weight loss during the two-year program. of the program on clinical outcomes, costs and quality of The program’s director, Prof. Amy Rothberg, is one of life, helping demonstrate the potential benefits for individual the first US doctors to receive certification in the field of patients and for society. obesity medicine. She said the program offers a solution that is both complex and deceptively simple: “We use a non- judgmental, scientific approach that resonates with a large number of people. When they come to us they feel it’s time to do something, so they’re ready to listen and ready to commit.” Those entering the program have an average body mass index – a measure of weight relative to height – of above 40, which classifies them as severely obese. Some have had surgery to reduce their stomach size, but even this has failed to control their weight. 108 | Novartis Annual Report 2015 COMPENSATION REPORT COMPENSATION REPORT Novartis Annual Report 2015 | 109 CONTENTS 110 COMPENSATION COMMITTEE CHAIRMAN’S INTRODUCTION 111 COMPENSATION REPORT AT A GLANCE 113 EXECUTIVE COMMITTEE COMPENSATION PHILOSOPHY AND PRINCIPLES 114 2015 EXECUTIVE COMMITTEE COMPENSATION SYSTEM 118 EXECUTIVE COMMITTEE PERFORMANCE MANAGEMENT PROCESS 120 2015 EXECUTIVE COMMITTEE COMPENSATION 127 PERFORMANCE VESTING OF OLD LONG-TERM PERFORMANCE PLAN (2013-2015) 129 2015 BOARD COMPENSATION SYSTEM 130 2015 BOARD COMPENSATION 133 COMPENSATION GOVERNANCE 135 REPORT OF THE STATUTORY AUDITOR ON THE COMPENSATION REPORT OF NOVARTIS AG PHOTO ESSAY Improving access to healthcare in rural Vietnam Dr. Chang As Xinh, 37, is one of just 15 doctors who deliver medical care to more than 40 000 people living in Mù Cang Chai, a rural district of Yen Bai province in northeast Vietnam. It’s a very poor part of the country rich in natural beauty and inhabited mostly by H’mong people, an ethnic minority. p CONTINUED ON PAGE 137 110 | Novartis Annual Report 2015 COMPENSATION REPORT CHF 3 090 758 (representing 100% of target) based on a com- bination of his and our company’s performance, as summa- rized above. Half of the Annual Incentive was delivered in cash, and the remaining half was delivered in restricted share units, which will have a three-year vesting period. His total compen- sation also included Long-Term Incentive grants with a target value of CHF 6 181 580, which will be subject to performance conditions for the 2015–2017 cycle. Compensation systems While the Compensation Committee continued to evaluate the effectiveness of our compensation program, 2015 was a year of stability and refinement of our existing compensation sys- tems following major changes to the Swiss and international regulatory environment. During 2015, the Compensation Com- mittee made only small changes to further align compensa- Dear shareholder, As Chairman of the Compensation Committee of the Board of Directors, I am pleased to share with you the 2015 Compensation Report of Novartis AG. At Novartis, our mission is to discover new ways to improve tion to long-term business strategy and shareholder interests and extend people’s lives. We use science-based innovation to for all associates of Novartis. With effect from 2016, the new address some of society’s most challenging healthcare issues, compensation system for Executive Committee members will discovering and developing breakthrough treatments and find- be rolled out to all key executives. Our company has also ing new ways to deliver them to as many people as possible. embedded our Values and Behaviors in the talent framework Our company also wants to be an employer of choice and to and ensured that our rigorous performance management pro- provide superior returns to our shareholders. During the last cess is upheld at all levels of the organization. The new pro- two years, the Compensation Committee undertook signifi- gram has the full support of our Board of Directors. We believe cant work to: that it provides a competitive advantage to Novartis in the mar- — Better align the executive compensation system with our ketplace for executive talent. long-term business strategy and shareholder interests — Strengthen the corporate governance framework 2016 AGM — Implement all elements of the Minder Ordinance to The Compensation Committee is committed to continued Board and executive compensation engagement between shareholders and our company to fully The Compensation Committee would like to acknowledge the understand diverse viewpoints and discuss the important con- strong shareholder support at the 2015 Annual General Meet- nections between our company’s compensation program, ing (AGM) for all of the remuneration-related resolutions, and business strategy, and long-term financial and operating per- express appreciation for the opportunity to engage many of formance. As was the case last year and in line with our Arti- our shareholders on compensation topics in 2015. The Com- cles of Incorporation, shareholders will be asked to approve pensation Committee would also like to thank Dr. Ulrich Leh- the following: ner for his services on the Compensation Committee and wel- — Total maximum amount of Board compensation from come William Winters as a new member. the 2016 AGM to the 2017 AGM 2015 company performance In 2015, Novartis progressed in all of its key priorities. The com- — Total maximum amount of Executive Committee compensation for the 2017 financial year pany completed its portfolio transformation ahead of schedule, Shareholders will also be asked to endorse this Compensation achieved major innovation milestones with Entresto, Cosentyx Report in an advisory vote. and biosimilars, captured cross-divisional synergies with the On behalf of Novartis and the Compensation Committee, creation of the Novartis Business Services unit and continued I  would like to thank you for your continued support and to build a high-performing organization. Currencies had a very feedback, which I consider extremely valuable in driving negative impact on our reported results in USD as the USD improvements in our compensation systems and practices. strengthened significantly vs. all major currencies in 2015. I invite you to send your comments to me at the following email Operationally, in constant currencies, the company was margin- address: investor.relations@novartis.com. ally below its sales target but slightly above its net income and free cash flow targets. Pharmaceuticals and Sandoz delivered Respectfully, strong performances, while Alcon negatively impacted consoli- dated results. The company improved core margin despite the currency impact. Although, in USD, Novartis’ TSR was -3.5% in 2015, TSR was +53.4% for the period 2013-2015, corre- sponding to the usual three-year cycle of our long-term plans. 2015 CEO compensation For 2015, our CEO was awarded total compensation of Enrico Vanni, Ph.D. CHF 11 596 560. This amount included an Annual Incentive of Chairman of the Compensation Committee COMPENSATION REPORT | COMPENSATION REPORT AT A GLANCE Novartis Annual Report 2015 | 111 COMPENSATION REPORT AT A GLANCE Executive Committee compensation 2015 EXECUTIVE COMMITTEE COMPENSATION SYSTEM (page 114–117) The following components are included: Fixed compensation and benefits Variable compensation Annual base compensation Pension and other benefits Annual Incentive Long-Term Performance Plan (LTPP) Long-Term Relative Performance Plan (LTRPP) Purpose Reflects associates’ responsibilities, job characteristics, experience and skill sets Rewards performance Rewards long-term Establish a level of security for associates against key short-term shareholder value and their dependents tailored to local market practices and regulations targets and Values & Behaviors creation and long-term innovation Rewards relative total shareholder return Performance period n/a Performance measures n/a n/a n/a 1 year (2015) 3 years (2015–2017) 3 years (2015–2017) Based on: — 75% Novartis Cash Based on a payout matrix made up of: — Individual balanced Value Added scorecard, including — 25% divisional financial targets and individual objectives long-term innovation milestones Based on Novartis relative total shareholder Return vs. versus our peer group of 12 healthcare companies1 Cash Country specific Delivery (at the end of the performance period for variable compensation) — Assessed Values and Behaviors 50% cash 50% deferred equity2 (3-year holding of restricted shares/ restricted share units) Equity (includes dividend equivalents) Equity (includes dividend equivalents) 1 The companies in our peer group consist of Abbott, AbbVie, Amgen, AstraZeneca, Bristol-Myers Squibb, Eli Lilly & Co., GlaxoSmithKline, Johnson & Johnson, Merck & Co., Pfizer, Roche and Sanofi. 2 Executive Committee members may elect to receive more of their Annual Incentive in shares instead of cash. CEO variable opportunity as % of base salary n/a Executive Committee n/a variable opportunity as % of base salary (excluding CEO) n/a n/a Target: 150% (range 0–200% of target) Target: 200% (range 0–200% of target) Target: 100% (range 0–200% of target) Total variable compensation Target: 450% (range 0–200% of target) Target: 90%–120% (range 0–200% of target) Target: 140%–190% (range 0–200% of target) Target: 30%–90% (range 0–200% of target) Target: 260%–400% (range 0–200% of target) 2015 EXECUTIVE COMMITTEE COMPENSATION (page 120–126) Amounts paid or granted during the 2015 financial year: (CHF) Total compensation CEO compensation  2 060 500  263 721  3 090 758  4 121 054 1  2 060 527 1  11 596 560 Executive Committee  7 429 769 compensation (excluding CEO)  5 071 392  11 230 142  11 973 697 1  4 652 661 1  40 357 661 Total  9 490 269  5 335 113 2  14 320 900  16 094 751  6 713 188  51 954 221 2 1 The amounts shown in these columns represent the underlying share value of the grant date target value of the number of Performance Share Units granted to each Executive Committee member for the performance cycle 2015–2017. 2 It includes an amount of CHF 58 757 for mandatory employer contributions paid by Novartis to governmental social security systems. This amount is out of total employer contributions of CHF 3 457 097, and provides a right to the maximum future insured government pension benefit for the Executive Committee member. 2016 EXECUTIVE COMMITTEE COMPENSATION SYSTEM Compensation opportunity As for all associates, Executive Committee members may have received a merit increase, based on their 2015 performance, and/or an adjustment to benchmark. Performance measures Annual Incentive No changes have been made to the performance measures under the Annual Incentive. Long-Term Incentives No changes have been made to the performance measures under either the Long-Term Performance Plan or the Long-Term Relative Performance Plan.                         112 | Novartis Annual Report 2015 COMPENSATION REPORT COMPENSATION REPORT AT A GLANCE continued Board compensation 2015 BOARD COMPENSATION SYSTEM (page 129) Delivery: 50% cash, 50% shares (CHF) Chairman of the Board Board membership Vice Chairman Chairman of Audit and Compliance Committee Chairman of the following committees: — Compensation Committee — Governance, Nomination and Corporate Responsibilities Committee — Research & Development Committee2 — Risk Committee Membership of Audit and Compliance Committee Membership of the following committees: — Compensation Committee — Governance, Nomination and Corporate Responsibilities Committee — Research & Development Committee — Risk Committee Annual fee 3 800 000 1 300 000 50 000 120 000 60 000 60 000 30 000 1 The Chairman also received company pension contributions until the 2015 AGM (when they ceased), and payment for loss of other entitlements with his previous employer for a total value of EUR 2 665 051 staggered over the period from 2014 to 2016. 2 The Chairman receives no additional committee fees for chairing the Research & Development Committee. 2015 BOARD COMPENSATION (page 130–133) Amounts earned during the 2015 financial year (CHF) Cash Equity Other benefits 1 Total Chairman Dr. Joerg Reinhardt 1 900 000 1 900 000 Other Board members 1 601 417 2 331 917 Total 3 501 417 4 231 917 29 197 17 145 46 342 3 829 197 3 950 479 7 779 676 2 1 It includes an amount of CHF 21 502 for mandatory employer contributions paid by Novartis to Swiss governmental social security systems. This amount is out of total employer contributions of CHF 429 806, and provides a right to the maximum future insured government pension benefit for the Board member. No occupational pension contributions have been provided to the Chairman from the 2015 AGM onwards. 2 Please see page 132 for a reconciliation between the amount reported in this table and the amount approved by shareholders at the 2015 AGM to be used to compensate Board members for the period from the 2015 AGM to the 2016 AGM. The amount paid is within the maximum amount approved by shareholders. 2016 BOARD COMPENSATION SYSTEM The Board compensation system will remain unchanged in 2016. Compensation governance GOVERNANCE AND RISK MANAGEMENT (page 133–134) Decision-making authorities with regard to compensation, within the parameters set by the shareholders’ meeting Decision on Compensation of Chairman and other Board members Compensation of CEO Authority Board of Directors Board of Directors Compensation of Executive Committee members Compensation Committee Executive Committee compensation risk management principles — Rigorous performance management process — Balanced mix of short-term and long-term — Performance-vesting Long-Term Incentives only, — No severance payments or change-of-control with three-year overlapping cycles clauses variable compensation elements — All variable compensation is capped at 200% — Clawback principles apply to all elements of — Matrix approach to performance evaluation under the Annual Incentive, including an individual balanced scorecard and assessed Novartis Values and Behaviors of target — Contractual notice period of 12 months — Post-contractual non-compete limited to a  maximum of 12 months (annual base compensation and Annual Incentive of the prior year only) variable compensation — Share ownership requirements; no hedging or pledging of Novartis share ownership position by Board and Executive Committee members COMPENSATION REPORT | EXECUTIVE COMMITTEE COMPENSATION PHILOSOPHY AND PRINCIPLES Novartis Annual Report 2015 | 113 EXECUTIVE COMMITTEE COMPENSATION PHILOSOPHY AND PRINCIPLES NOVARTIS COMPENSATION PHILOSOPHY The compensation philosophy aims to ensure that the Executive EXECUTIVE COMMITTEE COMPENSATION BENCHMARKING Committee is rewarded according to its success in implement- To attract and retain key talent, it is important for us to offer ing the company strategy and to its contribution to company competitive compensation opportunities. Executives meeting performance. The Executive Committee compensation system their objectives are generally awarded target compensation at is designed in line with the following key elements: a level comparable to the median level of similar roles within Pay for performance Variable compensation is tied directly to the achievement of strategic company targets Shareholder alignment A significant part of our incentives are equity-based. Also, one Long-Term Incentive rewards on the basis of relative total shareholder return Balanced rewards to create sustainable value Mix of targets based on financial metrics, innovation, individual objectives, Values and Behaviors, and performance vs. competitors Business ethics The Values and Behaviors are an integral part of our compensation system Competitive compensation Compensation competitive to relevant benchmarks ensures we are able to attract and retain the most talented global Executive Committee members the benchmark companies (see below). In the event of under- or over-performance, the actual compensation may be lower or higher than the benchmark median. While benchmarking information regarding executive pay is considered by the Compensation Committee, any decisions on compensation are ultimately based on the specific busi- ness needs of Novartis and the performance of the individual. The Compensation Committee reviews the compensation of the CEO and Executive Committee members annually in comparison to the relevant compensation levels of similar posi- tions at peer companies. For this purpose, the Compensation Committee uses benchmark data from publicly available sources, as well as reputable market data providers. All data is reviewed and evaluated by the Compensation Committee’s independent advisor, who also provides independent research and advice regarding the compensation of the CEO and other Executive Committee members. For the CEO and Executive Committee members, the com- pany benchmarks against global competitors in the healthcare industry with similar business models, size and needs for tal- ent and skills. The Compensation Committee reviews the com- ALIGNMENT WITH COMPANY STRATEGY panies in our compensation peer group annually and consid- The Novartis strategy is to use science-based innovation to ers adjustments over time in line with the evolution of the deliver better patient outcomes. We aim to lead in growing competitive environment in the healthcare industry. areas of healthcare. To align the compensation system with this strategy, the Board of Directors determines specific, BENCHMARK COMPANIES measurable and time-bound performance metrics, including financial metrics such as sales, profit and cash flow, as well as non-financial metrics, which indicate the success of its imple- mentation. The Board of Directors then sets short-term and long-term targets for each of these performance metrics and compensates the Executive Committee according to the extent to which the targets are achieved. In line with the company’s Abbott AbbVie Amgen AstraZeneca Bristol-Myers Squibb Eli Lilly & Co. GlaxoSmithKline Johnson & Johnson Merck & Co. Pfizer Roche Sanofi focus on science-based innovation, the Board of Directors sets Within this peer group, Novartis is among the largest in key a number of specific targets for each division to fulfill within dimensions including market capitalization, sales and operating specific timeframes. In line with the company’s aim to lead in income. growing areas of healthcare, Novartis has focused its port folio to have three market-leading divisions in innovative pharma- ceuticals, eye care and generics. Finally, to ensure that Novartis is a high-performing organization over the long term, the Board of Directors also sets targets in areas such as quality, talent, integrity and reputation, which are reinforced by the Novartis Values and Behaviors. 114 | Novartis Annual Report 2015 COMPENSATION REPORT 2015 EXECUTIVE COMMITTEE COMPENSATION SYSTEM The 2015 Executive Committee compensation system consists of the following components: Fixed compensation and benefits Variable compensation Annual base compensation Pension and other benefits Annual Incentive Long-Term Performance Plan (LTPP) Long-Term Relative Performance Plan (LTRPP) FIXED COMPENSATION AND BENEFITS Performance measures ANNUAL BASE COMPENSATION The Annual Incentive is based on a payout matrix made up of The level of base compensation reflects each associate’s key two elements: a balanced scorecard and the Novartis Values responsibilities, job characteristics, experience and skill sets. and Behaviors, which are described in more detail below. It is paid in cash, typically monthly. Base compensation is reviewed annually, and any increase Balanced scorecard reflects merit based on performance, as well as market move- The first element used to determine the payout of the Annual ments. Incentive is a balanced scorecard within which Group or divisional financial targets are weighted 60% and individual PENSION AND OTHER BENEFITS objectives are weighted 40%. As reported last year, as of 2015, The primary purpose of pension and insurance plans is to innovation was removed from the Group financial targets of establish a level of security for associates and their dependents the Annual Incentive and instead included in the Long-Term with respect to age, health, disability and death. The level and Performance Plan, as the Compensation Committee’s view is scope of pension and insurance benefits provided are country- that innovation achievements are more effectively measured specific, influenced by local market practices and regulations. on a multiyear basis. For more details on the target-setting Company policy is to change from defined-benefit pension and performance management process, please refer to page plans to defined-contribution pension plans. All major plans have 118. now been aligned with this policy as far as reasonably practi- cable. See also Note 25 to the Group’s audited consolidated Group or divisional financial targets financial statements (page 218). Within the Group or divisional financial targets, each measure Novartis may provide other benefits in a specific country such as sales or net income is weighted individually. The CEO according to local market practices and regulations, such as and function heads share the same Group financial targets a company car, and tax and financial planning services. Exec- (described further below). In place of the Group targets, divi- utive Committee members who have been transferred on an sion heads have divisional targets that include divisional sales, international assignment also receive benefits (such as tax operating income, free cash flow as a percentage of sales, and equalization) in line with the company’s international assign- market share of peers. The Board of Directors sets the Group ment policies. VARIABLE COMPENSATION ANNUAL INCENTIVE and divisional financial targets at the start of each performance year in constant currencies, and evaluates achievement against these targets at the end of that year. For the Annual Incentive of the CEO and Executive Committee Individual objectives members, a target incentive is defined as a percentage of base Individual objectives differ for each Executive Committee mem- compensation at the beginning of each performance year. The ber depending on his responsibilities, and may include addi- target incentive is 150% of base compensation for the CEO, tional financial and non-financial targets. Examples of additional and ranges from 90% to 120% for other Executive Committee financial targets are implementation of growth, productivity members. It is paid half in cash and half in shares deferred for and development initiatives. Non-financial targets may include three years. The formula for the target Annual Incentive is out- leadership and people management, workforce diversity, qual- lined below: ity, social initiatives such as access to medicines, and ethical business practices. ANNUAL INCENTIVE FORMULA Annual base compensation x Target incentive % = Target Annual Incentive value By way of illustration, the balanced scorecard measures used for the CEO in 2015 are set out in the table on the following page: COMPENSATION REPORT | 2015 EXECUTIVE COMMITTEE COMPENSATION SYSTEM Novartis Annual Report 2015 | 115 2015 BALANCED SCORECARD MEASURES USED FOR THE CEO Performance Weight Breakdown of performance measures measures Group financial 60% targets CEO individual objectives 40% Overall total 100% Group net sales Corporate net result Group net income Group free cash flow as % of sales Additional financial targets (e.g., EPS) Innovation and growth Portfolio review Cross-divisional synergies High-performing organization Novartis Values and Behaviors The second element used to determine the payout of the Annual Incentive ensures that the associate’s performance is 2015 ANNUAL INCENTIVE PAYOUT MATRIX Performance vs. balanced scorecard Exceeded expectations Fully met expectations Partially met expectations % Payout 3 60 – 90% 130 – 160% 170 – 200% 2 1 0 – 70% 90 – 120% 130 – 160% 0% 1 0 – 70% 60 – 90% 2 3 Partially met ex- pectations Fully met ex- pectations Exceeded ex- pectations Values and Behaviors assessment achieved in line with the highest standards of business con- The payout matrix for the Annual Incentive equally recognizes duct, as outlined in the Novartis Values and Behaviors. Novartis performance against the objectives in the balanced scorecard, requires Executive Committee members to be action-oriented and the assessment against the Novartis Values and Behav- and full of energy to face challenging situations, to assign the iors. highest priority to customer satisfaction, and to commit to hon- esty in every facet of behavior, demonstrating strong ethical Form and delivery of the award and legal conduct. Novartis leaders are expected to live up to The Annual Incentive is paid 50% in cash in March of the year these behaviors on a daily basis, and to align and energize following the performance period, and 50% in Novartis shares other associates to do the same. Novartis Values and Behav- (or restricted share units, known as RSUs) that are deferred iors are an essential element in the annual assessment of Exec- and restricted for three years. Each restricted share is entitled utive Committee members. For more details on the perfor- to voting rights and payment of dividends during the vesting mance assessment process of the Novartis Values and period. Each RSU is equivalent in value to one Novartis share Behaviors, please refer to page 119. and is converted into one share at the vesting date. RSUs under this plan do not carry any dividend, dividend equivalent or Performance evaluation and payout determination voting rights. Following the vesting period, settlement is made Following a thorough review of the two elements that compose in unrestricted Novartis shares or American Depositary the Annual Incentive – performance against the balanced Receipts (ADRs). scorecard objectives and an assessment against the Novartis If a participant leaves Novartis due to voluntary resigna- Values and Behaviors – a rating from 1 to 3 is assigned to each. tion or misconduct, unvested shares (and RSUs) are forfeited. The following payout matrix shows how the Annual Incentive The Board of Directors and the Compensation Committee performance factor is derived using a combination of perfor- retain accountability for ensuring that rules are applied cor- mance against the balanced scorecard and demonstration of rectly, and for determining whether a different treatment the Novartis Values and Behaviors. The Compensation should apply in exceptional circumstances. This is necessary Committee determines the final payout factor for Executive to ensure that the treatment of any award in the event of ces- Committee members taking into account the ranges shown. sation of employment is appropriate. Payouts are capped at 200% of target. Executives may choose to receive some or all of the cash portion of their Annual Incentive in Novartis shares or ADRs (US only) that will not be subject to conditions. In the US, awards may also be delivered in cash under the US-deferred compen- sation plan. 116 | Novartis Annual Report 2015 COMPENSATION REPORT LONG-TERM INCENTIVES due to approved retirement, including approved early retirement, Novartis operates two Long-Term Incentives (the Long-Term death or disability, will receive full vesting of their award on Performance Plan and the Long-Term Relative Performance the normal vesting date (acceleration will only apply in the case Plan) for the Executive Committee members, which function of death). The award will be subject to performance, should in an identical way except for the performance conditions an evaluation be possible, and will also be subject to other con- applied. Grant of Long-Term Incentives ditions such as observing the conditions of a non-compete agreement. Further details can be found in Note 26 to the Group’s audited consolidated financial statements (page 222). At the beginning of every performance period, Executive Com- The Board of Directors and the Compensation Committee mittee members are granted a target number of performance retain accountability for ensuring that rules are applied cor- share units (PSUs) under each of the Long-Term Incentives rectly, and for determining whether different treatment should according to the following formula: apply in exceptional circumstances. This is necessary to ensure STEP 1 Annual base compensation x Target incentive % = Grant value STEP 2 Grant value / Share price = Target number of PSUs that the treatment of any award in the event of cessation of employment is appropriate. Long-Term Performance Plan (LTPP) This is the first of the two Long-Term Incentive plans. Overview Vesting of Long-Term Incentives The LTPP, as described below, was granted for the first time At the end of the three-year performance period, the Compen- to the CEO and Executive Committee members in 2014. The sation Committee adjusts the number of PSUs realized based target incentive is 200% of base compensation for the CEO, on actual performance against target. and ranges from 140% to 190% for other Executive Committee LONG-TERM INCENTIVE PAYOUT FORMULA Target number of PSUs x Performance factor = Realized PSUs + dividend equivalents members. Additional executives in key positions who have a significant impact on the long-term success of Novartis were invited to participate in the LTPP, as of 2015. In the 2013 and earlier Compensation Reports, there was a different plan that was also called LTPP. In this Compensa- tion Report (as in the 2014 Compensation Report), that plan has been renamed Old Long-Term Performance Plan (OLTPP), and is described on page 127. The performance factor can range from 0% to 200% of tar- get. Each realized PSU is converted into one Novartis share at Performance measures the vesting date. PSUs do not carry voting rights, but do carry Awards under the LTPP are based on three-year performance dividend equivalents that are reinvested in additional PSUs objectives and split as follows: and paid at vesting to the extent that performance conditions have been met. In the US, awards may also be delivered in cash under the US-deferred compensation plan. If a participant leaves Novartis due to voluntary resignation or termination by the company for misconduct, none of the awards vest. When a member is terminated by the company 75% Financial 25% Innovation Measure Novartis Cash Value Added Up to 10 key innovation milestones for reasons other than for performance or conduct, the award vests on a pro-rata basis for time spent with the company CEO and function heads during the performance period. In such a case, the award will Division heads 100% Group Weighted average of division performance 100% Division vest on the regular vesting date (no acceleration), will be subject to performance should an evaluation be possible, and will also be subject to other conditions such as observing the condi- tions of a non-compete agreement. Executives leaving Novartis COMPENSATION REPORT | 2015 EXECUTIVE COMMITTEE COMPENSATION SYSTEM Novartis Annual Report 2015 | 117 Financial measure (Novartis Cash Value Added): 75% of LTPP Long-Term Relative Performance Plan (LTRPP) This is the second of the two Long-Term Incentive plans. The Novartis Cash Value Added (NCVA) is a metric that incen- tivizes both sales growth and margin improvement as well as Overview asset efficiency. A summary of the calculation is below: The LTRPP was granted for the first time to the CEO and CALCULATION FORMULA FOR NCVA in constant currencies Operating income + Amortization, impairments and adjusting for gains/losses from non-operating financial assets – Taxes – Capital charge (based on WACC1) on gross operational assets = NCVA2 1 WACC = weighted average cost of capital 2 NCVA = (cash flow return on investment % – WACC1) x gross operational assets Executive Committee members in 2014. The target incentive is 100% of base compensation for the CEO, and ranges from 30% to 90% for other Executive Committee members. Performance measure The LTRPP is based on the achievement of long-term relative Group total shareholder return (TSR) versus the peer group of 12 companies in the healthcare industry over rolling three- year performance periods. TSR is calculated in USD as share price growth plus dividends over the three-year performance period. The calculation will be based on Bloomberg standard published TSR data, which is publicly available. The peer group for the 2015–2017 performance cycle is The NCVA targets are determined considering expected growth the same as for benchmarking the compensation of Executive rates in sales, operating income and return from invested cap- Committee members and is comprised of: Abbott, AbbVie, ital, under foreseen economic circumstances. Amgen, AstraZeneca, Bristol-Myers Squibb, Eli Lilly & Co., At the end of the performance cycle, the NCVA performance GlaxoSmithKline, Johnson & Johnson, Merck & Co., Pfizer, factor is calculated in constant currencies. The NCVA perfor- Roche and Sanofi. mance factor is based on a 1:3 payout curve, where a 1% devi- At the end of the performance period, all companies are ation in realization versus target leads to a 3% change in pay- ranked in order of highest to lowest TSR, and the position in out (for example, a realization of 105% leads to a payout factor the peer group determines the payout range as follows: of 115%). If performance over the three-year vesting period falls below 67% of target, no payout is made for this portion PAYOUT MATRIX of LTPP. If performance over the three-year vesting period is above 133% of target, payout for this portion of LTPP is capped at 200% of target. The calculated performance realization is adjusted for unplanned major events during the cycle (e.g., significant merger and acquisition transactions). Position in peer group Positions 1–3 Positions 4–6 Positions 7–10 Positions 11–13 Payout range 160–200% 100–140% 20–80% 0% Innovation measure: 25% of LTPP The Compensation Committee determines the payout within Innovation is a key element of the Novartis strategy. Divisional the ranges shown, and takes into consideration factors such as innovation targets are set at the beginning of the performance absolute TSR, overall economic conditions, currency fluctuations cycle, comprised of up to 10 target milestones that represent and other unforeseeable situations. the most important research and development project mile- stones for each division. These milestones are chosen because of the expected future impact to Novartis in terms of potential revenue, or due to their qualitative potential impact to science, medicine, and the treatment or care of patients. A payout matrix has been established for this metric that allows a 0–150% payout for the achievement of target mile- stones. If all target milestones are achieved, a 150–200% pay- out may be awarded for extraordinary additional achievement. The CEO and function heads receive the weighted average of divisional innovation payouts. TARGET DISCLOSURE In line with our principle to allow shareholders to assess the rela- tionship between company performance and pay, the financial, innovation and individual targets under the Annual Incentive plan and the LTPP will be disclosed in the Compensation Report with the achievements against such targets at the end of each performance cycle. Targets under the Annual Incentive plan and the LTPP are considered confidential at the time of setting. Communicating such targets before the end of the performance cycle would allow sub- stantial insight into the company’s forward-looking strategies and could therefore place the company at a competitive disadvantage. The Research & Development Committee assists the Board 2016 EXECUTIVE COMMITTEE COMPENSATION SYSTEM of Directors and the Compensation Committee in setting the The Compensation Committee has evaluated the Executive innovation targets and reviewing achievements at the end of Committee compensation system and has decided that it will the cycle. remain unchanged in 2016. The Compensation Committee believes that it is operating as intended, supports the compa- ny’s strategy, and is aligned with market and best practice. 118 | Novartis Annual Report 2015 COMPENSATION REPORT EXECUTIVE COMMITTEE PERFORMANCE MANAGEMENT PROCESS To foster a high-performance culture, the company applies a CEO PERFORMANCE EVALUATION uniform performance management process worldwide based The Board of Directors periodically assesses Group business on quantitative and qualitative criteria, including Novartis performance as well as progress of the CEO against his objec- Values and Behaviors. Novartis associates, including the CEO tives and incentive plan targets. At the mid-year performance and Executive Committee members, are subject to a three- review, the performance of the CEO is reviewed by the Chair- step formal process: man of the Board of Directors. Objective setting Performance evaluation Compensation determination CEO OBJECTIVE SETTING For the year-end review, the CEO prepares and presents to the Chairman of the Board of Directors, and later to the full Board of Directors, the actual results against the previously agreed-upon objectives, taking into account the audited finan- cial results as well as an assessment against the Novartis Values and Behaviors. At the year-end review, the Board of At the beginning of the year, the CEO presents the Group and Directors discusses the performance of the CEO without him divisional financial and innovation targets of our variable com- being present. It evaluates the extent to which targeted objec- pensation plans to both the Compensation Committee and the tives have been achieved and, to the extent possible, compares Board of Directors for approval. At the same time, the CEO dis- these results with peer industry companies, taking into account cusses his individual objectives for the coming year with the general economic and financial criteria and industry develop- Chairman of the Board of Directors. ments. The Board of Directors later shares its assessment with The Board of Directors reviews and approves these objec- the CEO. tives, which are incorporated into the Annual Incentive and Long-Term Incentive plans. CEO COMPENSATION DETERMINATION Annual Incentive At its January meeting, following a recommendation from the Compensation Committee, the Board of Directors decides on The Group financial and individual targets proposed by the the CEO’s variable compensation for the prior performance CEO are challenged and approved by both the Compensation cycles and on the target compensation for the coming year. Committee and the Board of Directors. The targets set for the This meeting takes place without the CEO being present. The Annual Incentive support our ambition to be a leader in the Board of Directors later shares its decisions with the CEO. healthcare industry. Financial and innovation measure of LTPP The NCVA target is based on the company’s long-range stra- PERFORMANCE MANAGEMENT PROCESS FOR OTHER EXECUTIVE COMMITTEE MEMBERS (EXCLUDING THE CEO) tegic plan approved by the Board of Directors to deliver long- Executive Committee members propose the divisional finan- term sustainable growth and productivity as well as efficient cial and innovation targets for approval by the CEO and, sub- use of its assets. The Compensation Committee believes that sequently, by the Board of Directors and Compensation Com- the NCVA target is ambitiously set to create long-term value mittee. In addition, each Executive Committee member agrees for shareholders. on individual objectives with the CEO, who also reviews mem- The innovation targets of the LTPP are largely aligned with bers’ performance at mid-year and year-end. the major development projects outlined in the pipeline sched- At year-end, following his evaluation, the CEO meets with ule of the Annual Report (see page 52). The targets are rec- the Chairman of the Board of Directors, who reviews the per- ommended by the divisions and reviewed by the Research & formance of Executive Committee members. Subsequently, Development Committee. The innovation targets are focused the CEO presents and discusses at the Board of Directors meet- on challenging milestones of critical importance to the long- ing his recommended performance rating for each member. term success of the business, and should be best- or first-in- Later, in the presence of the CEO and taking into consid- class development projects that can significantly advance eration the recommendations of the Board of Directors, the treatment outcomes for patients worldwide. Compensation Committee decides at its January meeting on Relative TSR: 100% of LTRPP the variable compensation of Executive Committee members for the prior year and on their target compensation for the com- The payout matrix for the LTRPP can be found on page 117. ing year. The Compensation Committee informs the Board of The Compensation Committee believes that the LTRPP payout Directors of its final decisions, and the CEO later shares these matrix is aligned with the company’s pay-for-performance decisions with Executive Committee members. principle, including a very significant reduction in the actual payout relative to target payout if the company’s TSR is below the median of the peer group. COMPENSATION REPORT | EXECUTIVE COMMITTEE PERFORMANCE MANAGEMENT PROCESS Novartis Annual Report 2015 | 119 ASSESSMENT OF VALUES AND BEHAVIORS AT NOVARTIS These values are embedded in all aspects of employees’ Values and Behaviors have been an integral part of the com- lives at Novartis, from recruitment and development to pro- pany’s compensation system since its foundation. In 2015, to motions, performance assessments through 360-degree eval- reinforce the culture of the company, Novartis rolled out new uations and organizational employee surveys, as well as Annual Values and Behaviors – which are innovation, quality, collabo- Incentive awards to measure individual and organizational per- ration, performance, courage and integrity. formance against our values. As part of the Annual Incentive What we value Observed behaviors — Experiments and encourages others to do so Innovation by experimenting — Takes smart risks that benefit patients and delivering and customers solutions — Delivers new solutions with speed and simplicity Quality by taking pride in doing ordinary things extra- ordinarily well — Is always looking for better ways to do things — Does not compromise on quality and safety, and strives for excellence — Continuously works to improve own strengths and weaknesses — Champions working together in high-performing teams Collaboration by championing high-performing — Knows self and impact on others teams with diversity — Welcomes diversity and inclusion of styles, and inclusion ideas and perspectives Performance by prioritizing and making things happen with urgency — Is passionate to achieve goals and goes the extra mile — Puts team results before own success and acknowledges contributions of others — Prioritizes, decides and makes things happen with urgency — Speaks up and challenges the norm Courage by speaking up, — Acknowledges when things don’t work giving and receiving feedback — Gives and accepts constructive feedback and learns award process, training programs and toolkits were established to evaluate behavior related to the six new values. They are one of the elements used to assess associates’ performance. During 2015, we further improved the framework for mea- suring individual performance against our values, ensuring that fair, objective assessments can be made in a uniform way across all levels of the organization. The assessment is part of a rigorous management process review in which observed Val- ues and Behaviors are evaluated based on globally-defined principles. The assessment initially takes place during a dis- cussion between associates and line managers, followed by a calibration and validation at multiple levels of the organization to allow for a fair, consistent, objective and transparent evalu- ation. During the calibration sessions, line managers share the proposed ratings of their direct reports with peers to ensure all apply a common framework, and they seek input and feed- back on observed behaviors. The Values and Behaviors assessment for the CEO and other Executive Committee members is calibrated by the Board of Directors. Integrity by advocating and applying high ethical standards every day — Operates with high ethical standards — Is humble and caring, and shows trust, respect and empathy — Lives by the Code of Conduct even when facing resistance or difficulties 120 | Novartis Annual Report 2015 COMPENSATION REPORT 2015 EXECUTIVE COMMITTEE COMPENSATION 2015 CEO COMPENSATION The 2015 compensation of the CEO is outlined in detail within this section: Base salary: The CEO’s base salary remained CHF 2 060 500 for 2015. Benefits: The CEO received pension benefits of CHF 175 289 and other benefits of CHF 88 432 during 2015. Annual Incentive: The Annual Incentive performance is measured in constant currencies to reflect the operational performance that can be influenced. Overall, the company met most of its financial targets for the year set by the Board of Directors in constant currencies. Group results were negatively impacted by Alcon’s performance and by the slow-down of emerging markets, offset by strong results from Pharmaceuticals and Sandoz. The Group was marginally behind its sales target, while Group net income was slightly ahead of target mainly due to strong cost management. Corporate net result was significantly ahead of target mainly due to lower corporate costs and taxes. Performance in Group free cash flow as a percentage of sales was slightly above target mainly due to higher cash flows from operating activities. Currency movements had a significant negative impact on the reported results vs. target (in USD, sales: –5.2 billion, net income and free cash flow (FCF): –1.6 billion each) that were adjusted in the Annual Incentive calculation. 2015 CEO BALANCED SCORECARD Performance metrics for continuing operations (weight) Target1 Group net sales (30%) Corporate net result3 (20%) Group net income (30%) USD 55 289 m USD –2 284 m USD 8 996 m Group FCF as % of sales (20%) 20.5% Overall achievement for Group financial targets Group financial targets (60%) Additional key financial targets for continuing operations Additional financial targets were not all met. Including adjustments, in constant currencies, core operating income, EPS and core EPS targets were met, while reported operating income was slightly missed. Emerging Market growth and Divisional share of peers (Pharmaceuticals, Alcon and Sandoz) were below target (for the latter mainly due to currency impact). Innovation and growth 2015 was another excellent year for innovation and growth. The company successfully achieved 20 major approvals and 14 major submissions. Novartis had the highest number of FDA approvals4 in the industry (4 out of 45 novel drugs). Major innovation milestones were achieved in 2015 with Entresto (approved in the EU), Cosentyx (approved for AS and PsA in EU) and submission of biosimilars etanercept and pegfilgrastim. Zarxio was the first biosimilar approved under the BPCIA pathway. Sandoz also received US approval of Glatopa. The NIBR unit launched a new immuno-oncology research team that delivered significant progress in building a portfolio with several candidates already in clinical trials and more expected to enter the clinic by the end of 2016. Achievement vs. target2 (in constant currencies) Slightly below Significantly exceeded Slightly exceeded Slightly exceeded Slightly above target Slightly below Exceeded Individual objectives (40%) Portfolio review With the announcement on March 2, 2015 of the completion of the transactions with GSK, and the announcement on July 31, 2015 of the divestment of the Vaccines influenza business to CSL, Novartis successfully completed its portfolio review ahead of schedule (target for completion: H2 2015). A total of 17 000 associates transferred from Novartis to GSK and CSL. The completion of the portfolio review has improved Novartis’ competitive position resulting in a more focused company with leading positions in innovative pharmaceuticals, generics and eye care. Slightly exceeded Cross-divisional synergies Novartis Business Services, our shared services organization, continued to execute on its priorities and the transformation of the organization is developing as scheduled. The company generated approximately USD 3 216 million in total productivity gains (target: USD 2 746 million) by leveraging our scale. In 2015 we announced plans to close or divest 6 sites. All of these actions increased the productivity of the company. Exceeded High-performing organization (e.g., quality, talent) Across the Novartis network, for the full year, there were 192 inspections, including 31 conducted by the FDA. 189 of the 192 inspections in the full year were good or satisfactory. The outcomes of three inspections are still pending. In addition, the company continued to roll out the process of upgrading its compliance and integrity processes as well as Novartis Values and Behaviors. A new talent management strategy was established and some progress was made on the talent pipeline and talent management initiatives. The company was disappointed with certain compliance and reputational challenges. At target Overall achievement for individual objectives At target 1 The target was set using July 2014 forward currency exchange rates 2 Adjusted for significant currency movements (in USD, sales: -5.2 billion, net income and FCF: -1.6 billion each) and other adjustments including the changes in income from associated companies 3 Includes corporate cost, income from associated companies, net financial income and income taxes 4 Source: FDA’s Center for Drug Evaluation and Research’s (CDER’s) 2015 annual report COMPENSATION REPORT | 2015 EXECUTIVE COMMITTEE COMPENSATION Novartis Annual Report 2015 | 121 Following a thorough performance evaluation, including assessed Values and Behaviors (see page 119 for further details of the performance management process and assessment of Values and Behaviors), the Compensation Committee determined that the CEO’s Annual Incentive performance factor would be 100%. The value of his Annual Incentive award was determined as follows: 2015 CEO ANNUAL INCENTIVE Annual base salary CHF thousands Target incentive x % x Performance factor % = Final award CHF thousands Annual Incentive 2 061 x 150% x 100% = 3 091 1 1 50% of the Annual Incentive was paid in cash and 50% was paid as 19 390 RSUs, which have a three-year vesting period. The table below shows how the 2015 Long-Term Incentive grants of the CEO were determined. These grants were awarded under the LTPP and LTRPP, and will vest to the extent that performance conditions have been met for the 2015–2017 cycle. An overview of these plans is outlined on pages 116-117. CEO LONG-TERM INCENTIVE GRANTS CYCLE 2015–2017 Annual base salary CHF thousands Target incentive x % = Grant value CHF thousands Target number of PSUs 1 LTPP LTRPP 2 061 2 061 x 200% x 100% = 4 122 = 2 061 48 626 24 313 1 Achievement will be reported in the 2017 Compensation Report. The grant value has been converted into a target number of PSUs based on a price of CHF 84.75 per Novartis share. 2015 CEO TARGET COMPENSATION In January 2015, at target, the CEO’s compensation was made EXECUTIVE COMMITTEE COMPENSATION TABLES (AUDITED) up of 18% annual base compensation, 2% pension and other benefits, 27% Annual Incentive and 53% Long-Term Incentive. COMPENSATION OF EXECUTIVE COMMITTEE MEMBERS FOR 2015 The Long-Term Incentive was split according to a ratio of 2:1 The following table discloses the compensation paid or granted LTPP to LTRPP. to the CEO and other Executive Committee members for per- 2015 CEO COMPENSATION OPPORTUNITY1 (in CHF thousands) 25 000 20 000 15 000 10 000 5 000 0 LTRPP LTPP Annual Incentive Pension and other benefits Annual base compensation Below threshold On-target performance performance performance Maximum 1 Values of LTPP and LTRPP exclude share price development over performance period, as well as dividend equivalent rights. formance in 2015. ALIGNMENT OF REPORTING AND PERFORMANCE The compensation table synchronizes the reporting of Annual Incentive compensation with the performance in the given year (i.e., all amounts awarded for performance in 2015 are disclosed in full). This includes the restricted shares and RSUs granted under the Annual Incentive, which will vest three years follow- ing the grant based on plan rules. For awards granted under the LTPP and LTRPP, the target values (based on 100% achieve- ment) at the time of grant are shown. The performance and vesting value of the LTPP and LTRPP for the performance cycle 2015–2017 will be reported in the 2017 Compensation Report. The achievement against target and the vesting value of the OLTPP for the performance cycle 2013–2015 are shown in a separate table on page 127. VALUATION PRINCIPLES For the purpose of the tables contained within this Compen- sation Report, and to allow a comparison with other compa- nies, Novartis shares and ADRs are disclosed at their market value on the date of grant. Market value is the quoted closing share price at that date. Restricted shares and RSUs are dis- closed at the underlying value of Novartis shares and ADRs. 122 | Novartis Annual Report 2015 COMPENSATION REPORT PSUs are also valued for the purpose of this Compensation at the grant date, and are disclosed at target value, assuming Report at the underlying value of the Novartis shares and ADRs that they will vest at 100% achievement. EXECUTIVE COMMITTEE MEMBER COMPENSATION FOR FINANCIAL YEAR 2015 1 Fixed compensation and pension benefits Variable compensation Base compensation Pension benefits 2015 Annual Incentive LTPP 2015–2017 cycle LTRPP 2015–2017 cycle Other Total compensation Currency Cash (amount) Amount 2 Cash (amount) Equity (value at grant date) 3 PSUs (target value at grant date) 4 PSUs (target value at grant date) 4 Amount 5 Amount 6 CHF 2 060 500 175 289 1 545 375 1 545 383 4 121 054 2 060 527 88 432 11 596 560 CHF CHF 653 333 158 099 543 900 543 953 960 048 256 030 94 716 3 210 079 892 500 153 054 648 875 648 917 1 521 517 447 565 12 669 4 325 097 USD 1 400 000 362 819 1 428 000 1 428 054 2 520 001 1 260 050 569 737 8 968 661 USD CHF USD CHF 990 000 248 910 861 300 861 323 1 881 089 891 021 129 825 5 863 468 716 667 193 635 599 400 599 424 1 080 054 360 018 954 170 4 503 368 956 539 200 946 158 400 158 404 1 536 056 576 009 1 260 286 4 846 640 950 000 160 431 757 625 757 628 1 480 074 647 575 51 476 4 804 809 USD 131 154 69 008 115 100 CHF CHF 138 333 27 634 136 500 735 000 127 237 0 1 176 053 1 102 513 294 083 83 688 3 518 574 CHF 9 490 269 1 843 151 6 695 906 7 624 994 16 094 751 6 713 188 3 491 962 51 954 221 0 0 58 361 11 751 40 670 426 044 64 580 13 899 283 236 664 182 Joseph Jimenez (CEO) Steven Baert Felix R. Ehrat David Epstein Mark C. Fishman 7 Richard Francis Jeff George Harry Kirsch Brian McNamara (until March 1, 2015) 8 Andrin Oswald (until March 1, 2015) 8 André Wyss Total 9 See next page for 2014 compensation figures 1 Does not include reimbursement for travel and other necessary business expenses incurred by Executive Committee members in the performance of their services, as these amounts are not considered compensation 2 Includes service costs of pension and post-retirement healthcare benefits accumulated in 2015, in accordance with IAS19. It also includes an amount of CHF 58 757 for mandatory employer contributions paid by Novartis to governmental social security systems. This amount is out of total employer contributions of CHF 3 457 097, and provides a right to the maximum future insured government pension benefit for the Executive Committee member. 3 The portion(s) of the Annual Incentive delivered in shares is rounded up to the nearest share based on the closing share price on the grant date (January 20, 2016). The closing share price on this date was CHF 79.70 per Novartis share and USD 80.49 per ADR. 4 The amounts shown in these columns represent the underlying share value of the target number of PSUs granted to each Executive Committee member for the performance cycle 2015–2017 based on the closing share price on the grant date (January 21, 2015). The closing share price on this date was CHF 84.75 per Novartis share and USD 98.75 per ADR. 5 Includes any other perquisites, benefits in kind and international assignment benefits as per global mobility policy (e.g., housing, international health insurance, children’s school fees, tax equalization). Tax equalization benefits included for David Epstein, Richard Francis, Jeff George and Andrin Oswald are USD 305 867, CHF 739 086, USD 1 153 361 and CHF 249 728, respectively. 6 All amounts are before deduction of employee’s social security contribution and income tax due by the Executive Committee member 7 Mark C. Fishman, President NIBR and Executive Committee member, will step down from the Executive Committee on February 29, 2016 and retire from Novartis. He will receive further contractual compensation that includes the base salary, pension and other benefits (pro-rata until February 29, 2016) and the vesting of his incentive awards in accordance with the terms of the Novartis plan rules. As of March 1, 2016, Mark C. Fishman will provide certain consulting services to Novartis for which he will be compensated for a period of up to two years until February 28, 2018. The fees for these services are capped at USD 250 000 p.a. and are in line with those paid to other scientists who provide consultancy services to the NIBR organization. 8 Brian McNamara (Division Head, Novartis OTC) and Andrin Oswald (Division Head, Novartis Vaccines) transitioned to the GlaxoSmithKline (GSK) group on March 2, 2015 following the completion of the Novartis OTC and Vaccines transactions with GSK. The information disclosed under columns “LTPP” and “LTRPP” in the table above reflects their pro-rata compensation at target. Following their transition to GSK, and in accordance with the applicable plan rules, the LTPP and LTRPP awards for cycle 2015–2017 (as well as for those granted for cycle 2014–2016) will be eligible to vest on the normal vesting date and on a pro-rata basis based on the number of months worked with Novartis during the performance period. The vesting of these awards is subject to performance conditions assessed at the end of the cycle. 9 Amounts in USD for David Epstein, Mark C. Fishman, Jeff George and Brian McNamara were converted at a rate of CHF 1.00 = USD 1.040, which is the same average exchange rate used in the Group’s consolidated financial statements. COMPENSATION REPORT | 2015 EXECUTIVE COMMITTEE COMPENSATION Novartis Annual Report 2015 | 123 EXECUTIVE COMMITTEE MEMBERS COMPENSATION FOR FINANCIAL YEAR 2014 1 Fixed compensation and pension benefits Variable compensation Base compensation Pension benefits 2014 Annual Incentive LTPP 2014–2016 cycle LTRPP 2014–2016 cycle Other Total compensation Currency Cash (amount) Amount 2 Cash (amount) Equity (value at grant date) 3 PSUs (target value at grant date) 4 PSUs (target value at grant date) 4 Amount 5 Amount 6 Joseph Jimenez (CEO) Steven Baert (from February 26, 2014) Juergen Brokatzky-Geiger (until February 25, 2014) 7 Kevin Buehler (until April 30, 2014) 8 Felix R. Ehrat David Epstein CHF 2 060 500 165 584 2 009 000 2 009 084 4 121 003 2 060 501 222 818 12 648 490 CHF 482 426 68 963 309 212 309 253 709 328 136 438 103 147 2 118 767 CHF 110 650 22 454 0 0 0 0 3 245 256 3 378 360 USD CHF 382 691 82 991 230 400 230 384 729 614 345 620 4 139 920 6 141 620 875 000 154 299 0 1 408 037 1 496 019 440 066 8 928 4 382 349 USD 1 400 000 343 460 1 260 000 1 260 050 2 520 002 1 260 001 277 804 8 321 317 Mark C. Fishman USD 990 000 294 572 1 009 800 1 009 818 1 881 034 891 033 78 369 6 154 626 Richard Francis (from May 1, 2014) 9 Jeff George George Gunn 10 Harry Kirsch Brian McNamara Andrin Oswald André Wyss (from May 1, 2014) Total 11 CHF USD CHF CHF USD CHF 466 667 114 435 211 450 211 451 871 135 186 735 3 364 623 5 426 496 924 520 127 826 654 341 654 416 1 470 358 275 692 1 084 850 5 192 003 865 000 116 542 622 800 622 828 1 384 066 346 035 0 3 957 271 829 167 148 526 888 250 888 265 1 360 024 425 021 31 980 4 571 233 673 077 76 484 578 000 578 083 1 020 055 204 076 77 717 3 207 492 827 500 125 406 539 500 539 519 1 162 005 249 054 233 675 3 676 659 CHF 466 667 59 703 0 736 223 935 003 249 349 58 045 2 504 990 CHF 10 978 356 1 821 737 7 992 041 10 136 681 19 004 820 6 813 877 12 440 922 69 188 434 As published in the 2014 Compensation Report 1 Does not include reimbursement for travel and other necessary business expenses incurred in the performance of their services, as these amounts are not considered compensation. In general, for those who have left the Executive Committee in the course of 2014, the information under the columns “Base compensation”, “Pension benefits”, “Annual Incentive”, “LTPP” and “LTRPP” in the table above reflects their pro-rata compensation over 2014 for the period they were a member of the Executive Committee. The information under the column “Other” includes inter alia their pro-rata compensation from the date they stepped down from the Executive Committee to December 31, 2014. For those who have joined the Executive Committee in the course of 2014, the information under the columns “Base compensation”, “Pension benefits” and “Annual Incentive” includes their pro-rata compensation from the date they joined the Executive Committee to December 31, 2014. The information under the “LTPP” and “LTRPP” in the table above reflects their pro-rata compensation at target from the date they joined the Executive Committee to December 31, 2016. 2 Includes service costs of pension and post-retirement healthcare benefits accumulated in 2014, in accordance with IAS19. In addition, in compliance with the Minder Ordinance, it includes an amount of mandatory employer social security contributions of CHF 76 534. This amount provides a right to the maximum future insured government benefit for the members. This is out of a mandatory total of CHF 2 980 528 paid by Novartis to both Swiss and US governmental social security systems. 3 The portion(s) of the Annual Incentive delivered in shares is rounded up to the nearest share based on the closing share price on the grant date (January 21, 2015). 4 The amounts shown in these columns represent the underlying share value of the target number of PSUs granted to each Executive Committee member for the performance cycle 2014–2016 based on the closing share price on the grant date (January 22, 2014). The closing share price on this date was CHF 73.75 per Novartis share and USD 80.79 per ADR. 5 Includes any other perquisites, benefits in kind, international assignment benefits as per global mobility policy (e.g. housing, international health insurance, children’s school fees, tax equalization) and other compensation. Does not include relocation costs paid in 2014 6 All amounts are before deduction of employee’s social security contribution and income tax due by the Executive Committee member 7 Juergen Brokatzky-Geiger stepped down from the Executive Committee on February 25, 2014, and as of February 26, 2014, he has been appointed as Global Head Corporate Responsibility. He remained under the old Executive Committee incentive compensation system. As a result, his variable compensation has been reported in full under the column “Other”. 8 Kevin Buehler stepped down from the Executive Committee on April 30, 2014. In accordance with the contractual 12 month notice period of his employment agreement, he will retire from the company on April 30, 2015. He will receive further contractual compensation that includes the base salary, pension and other benefits (pro-rata until April 30, 2015) and the vesting of his incentive awards in accordance with the terms of the Novartis plan rules. His compensation does not include an annual pension in payment (USD 507 017) following the acquisition of Alcon in 2011. 9 Richard Francis will receive compensation in the form of 41 500 RSUs for lost entitlements at his former employer with a total value at grant of CHF 3.2 million. The vesting of the RSUs will be staggered based on the vesting period at his former employer, and extend over the period from 2015–2017, provided that he remains employed with Novartis at the respective due dates. 21 500, 13 500 and 6 500 RSUs will respectively vest on February 1, 2015, 2016 and 2017. 10 Following the completion on January 1, 2015 of the transaction with Eli Lilly, George Gunn (Division Head, Novartis Animal Health), stepped down from the Executive Committee. He will provide assistance with regard to the post-closing divestment of Animal Health until he will reach his contractual retirement age in July 2015. George Gunn will receive further contractual compensation that includes the base salary, pension and other benefits (pro-rata until July 31, 2015) and the vesting of his incentive awards in accordance with the terms of the Novartis plan rules. 11 Amounts in USD for Kevin Buehler, David Epstein, Mark C. Fishman, Jeff George and Brian McNamara were converted at a rate of CHF 1.00 = USD 1.094, which is the same average exchange rate used in the Group’s consolidated financial statements. At the time of his appointment as Head of Alcon, Jeff George’s Swiss employment agreement was replaced with a US employment agreement in US dollars. 124 | Novartis Annual Report 2015 COMPENSATION REPORT EXECUTIVE COMMITTEE MEMBERS – EQUITY AWARDS FOR FINANCIAL YEAR 2015 (NUMBER OF EQUITY INSTRUMENTS) 1 Joseph Jimenez Steven Baert Felix R. Ehrat David Epstein Mark C. Fishman Richard Francis Jeff George Harry Kirsch Brian McNamara (until March 1, 2015) 4 Andrin Oswald (until March 1, 2015) 4 André Wyss Total Variable compensation 2015 Annual Incentive LTPP 2015–2017 cycle LTRPP 2015–2017 cycle Equity (number) 2 19 390 6 825 8 142 17 742 10 701 7 521 1 968 9 506 0 0 14 756 96 551 PSUs (target number) 3 PSUs (target number) 3 48 626 11 328 17 953 25 519 19 049 12 744 15 555 17 464 591 762 13 009 182 600 24 313 3 021 5 281 12 760 9 023 4 248 5 833 7 641 119 164 3 470 75 873 See table below for 2014 compensation figures 1 The value of the awards included in this table are reported in the table “EXECUTIVE COMMITTEE MEMBER COMPENSATION FOR FINANCIAL YEAR 2015” on page 122. 2 Vested shares, restricted shares and/or RSUs granted under the Annual Incentive for performance year 2015 3 Target number of PSUs granted under the LTPP and LTRPP as applicable for the 2015–2017 performance cycle 4 Target number of PSUs granted under the LTPP and LTRPP are reported on a pro-rata basis. See footnote 8 of the table “EXECUTIVE COMMITTEE MEMBER COMPENSATION FOR FINANCIAL YEAR 2015” on page 122. EXECUTIVE COMMITTEE MEMBERS – EQUITY AWARDS FOR PERFORMANCE YEAR 2014 (NUMBER OF EQUITY INSTRUMENTS) 1 Joseph Jimenez Steven Baert (from February 26, 2014) Juergen Brokatzky-Geiger (until February 25, 2014) Kevin Buehler (until April 30, 2014) Felix R. Ehrat David Epstein Mark C. Fishman Richard Francis (from May 1, 2014) Jeff George George Gunn Harry Kirsch Brian McNamara Andrin Oswald André Wyss (from May 1, 2014) Total Variable compensation 2014 Annual Incentive LTPP 2014–2016 cycle LTRPP 2014–2016 cycle Equity (number) 2 23 706 3 649 0 2 333 16 614 12 760 10 226 2 495 6 627 7 349 10 481 5 854 6 366 8 687 Target PSUs (number) 3 Target PSUs (number) 3 55 878 9 618 0 9 031 20 285 31 192 23 283 11 812 18 224 18 767 18 441 12 626 15 756 12 678 27 939 1 850 0 4 278 5 967 15 596 11 029 2 532 3 417 4 692 5 763 2 526 3 377 3 381 Other Equity/ Target PSUs (number) 0 0 30 953 4 31 936 0 0 0 41 500 5 0 0 0 0 0 0 117 147 257 591 92 347 104 389 As published in the 2014 Compensation Report 1 See also corresponding footnote 1 of the table “EXECUTIVE COMMITTEE MEMBER COMPENSATION FOR FINANCIAL YEAR 2014” with regard to the Executive Committee members who left or joined the Committee in the course of 2014. 2 Vested shares, restricted shares and/or RSUs granted under the Annual Incentive for performance year 2014 3 Target number of PSUs granted under the LTPP and LTRPP as applicable for the 2014–2016 performance cycle 4 Juergen Brokatzky-Geiger remained under the old Executive Committee compensation system. The information under the column “Other” includes the following equity awards: 12 638 restricted shares granted under the Novartis Equity Plan Select, 6 342 investment shares and 3 171 matching shares under the Employee Share Ownership Plan, and 8 802 target PSUs under the OLTPP for the 2014–2016 performance cycle. 5 This amount reflects the total number of RSUs granted to Richard Francis in 2014 as compensation for lost entitlements at his former employer on joining Novartis. COMPENSATION REPORT | 2015 EXECUTIVE COMMITTEE COMPENSATION Novartis Annual Report 2015 | 125 EXECUTIVE COMMITTEE MEMBER COMPENSATION BASE AND VARIABLE COMPENSATION MIX FOR FINANCIAL YEAR 20151 advisor to many scientific companies he founded, and as a supervisory board member of another company. In reaching the terms of the offer for Dr. Bradner, the Board of Directors Base Variable salary compensation 2 recognized the need to make up for compensation that Dr. Bradner would be forfeiting on joining Novartis. In extending Joseph Jimenez Steven Baert Felix R. Ehrat David Epstein Mark C. Fishman Richard Francis Jeff George Harry Kirsch André Wyss Total 18.2% 22.1% 21.5% 17.4% 18.1% 21.4% 28.3% 20.7% 22.2% 81.8% 77.9% 78.5% 82.6% 81.9% 78.6% 71.7% 79.3% 77.8% 20.1% 79.9% 1 Excludes pension and other benefits, as well as Brian McNamara and Andrin Oswald, who stepped down from the Executive Committee on March 1, 2015 as a result of the GlaxoSmithKline transaction. 2 See the table “EXECUTIVE COMMITTEE MEMBER COMPENSATION FOR FINANCIAL YEAR 2015” on page 122 with regard to the disclosure principles of variable compensation. our offer to Dr. Bradner, the following compensation for lost entitlements was agreed to attract him to Novartis: — In January 2016, as compensation for lost entitlements at one of his scientific companies on joining Novartis, Dr. Bradner has been paid an amount of USD 844 250 for the 275 000 shares that he forfeited. The fair market value of the forfeited shares was determined by an independent valuation expert. — In January 2016, Dr. Bradner received compensation in the form of 3 607 RSUs for lost entitlements in connec- tion with his supervisory board mandate with a total value at grant of USD 309 300. The vesting of the RSUs will be staggered based on the original vesting period of the forfeited entitlements, provided that he remains employed with Novartis at the respective due dates. LOANS TO EXECUTIVE COMMITTEE MEMBERS Please also see the additional related disclosure made in Note No loans were granted to current or former Executive Commit- 27 to the Group’s audited consolidated financial statements tee members or to “persons closely linked” to them in 2015. No (page 226). These disclosures are made on a voluntary basis such loans were outstanding as of December 31, 2015. and will be further communicated in next year’s Annual Report. OTHER PAYMENTS TO EXECUTIVE COMMITTEE MEMBERS During 2015, no other payments (or waivers of claims) were AWARD AND DELIVERY OF EQUITY TO NOVARTIS ASSOCIATES made to Executive Committee members or to “persons closely During 2015, 12.4 million unvested restricted shares (or ADRs), linked” to them. PAYMENTS TO FORMER EXECUTIVE COMMITTEE MEMBERS RSUs and target PSUs were granted and 14.4 million Novartis shares (or ADRs) were delivered to Novartis associates under various equity-based participation plans. Current unvested equity instruments (restricted shares, RSUs and target PSUs) During 2015, under the former Executive Committee mem- as well as outstanding equity options held by associates rep- bers’ contracts and in line with the company’s plan rules and resent 2.4% of shares issued of Novartis. Novartis delivers policies, payments were made to Kevin Buehler, the former treasury shares to associates to fulfill these obligations and Division Head of Alcon, and George Gunn, the former Division aims to offset the dilutive impact from its equity-based partic- Head of Animal Health, who retired from the company on May ipation plans. 1, 2015 and on August 1, 2015, respectively. In 2015, an amount of USD 1 127 324 and CHF 1 214 583 was paid to Mr. Buehler and Mr. Gunn, respectively. These amounts exclude the value SHARE OWNERSHIP REQUIREMENTS FOR EXECUTIVE COMMITTEE MEMBERS of the vested OLTPP awards for cycle 2013–2015 of Mr. Bue- Executive Committee members are required to own at least a hler and Mr. Gunn, who received, in accordance with the plan minimum multiple of their annual base compensation in rules, USD 1 763 889 and CHF 1 527 285 (value of the shares Novartis shares or share options within three years of hire or delivered at vesting), respectively. In addition, in line with their promotion, as set out in the table below. contracts and the company’s policies, a total amount of CHF 24 116 was paid by the company for tax and financial services provided to two other former Executive Committee members. With the exception of the above amounts, during 2015, no other payments (or waivers of claims) were made to former Execu- CEO 5 x base compensation Executive Committee members 3 x base compensation tive Committee members or to “persons closely linked.” In the event of a substantial rise or drop in the share price, the JAMES E. BRADNER, FUTURE PRESIDENT OF NIBR AND EXECUTIVE COMMITTEE MEMBER Board of Directors may, at its discretion, amend that time period accordingly. The determination of equity amounts against the share As announced on September 24, 2015, James E. Bradner will ownership requirements is defined to include vested and succeed Mark Fishman as President of the Novartis Institutes unvested Novartis shares or ADRs, as well as RSUs acquired for BioMedical Research (NIBR) and become an Executive under the compensation plans, but excluding unvested match- Committee member with effect from March 1, 2016. Prior to ing shares granted under the Leveraged Share Savings Plan joining Novartis, Dr. Bradner served as a board member and (LSSP) and the Employee Share Ownership Plan (ESOP), and 126 | Novartis Annual Report 2015 COMPENSATION REPORT unvested PSUs from LTPP and LTRPP. The determination includes other shares as well as vested options of Novartis SHARES, ADRs, EQUITY RIGHTS AND SHARE OPTIONS OWNED BY EXECUTIVE COMMITTEE MEMBERS shares or ADRs that are owned directly or indirectly by “per- The following tables show the total number of shares, ADRs, sons closely linked” to them. The Compensation Committee other equity rights and share options owned by Executive Com- reviews compliance with the share ownership guideline on an mittee members and “persons closely linked” to them as of annual basis. December 31, 2015. As of December 31, 2015, all members who have served at As of December 31, 2015, no Executive Committee mem- least three years on the Executive Committee have met or bers together with “persons closely linked” to them owned 1% exceeded their personal Novartis share ownership requirements. or more of the outstanding shares (or ADRs) of Novartis, either As of January 1, 2016, to better align with prevalent mar- directly or through share options. ket practice and the change to our compensation system, Exec- The market value of share options (previously granted) is utive Committee members will be required to meet their share calculated using an option pricing valuation model as at the ownership requirement within five years of hire/promotion. grant date. SHARES, ADRS AND OTHER EQUITY RIGHTS OWNED BY EXECUTIVE COMMITTEE MEMBERS 1 Vested shares and ADRs Unvested shares Total at and other December 31, 2015 equity rights 2 Joseph Jimenez Steven Baert Felix R. Ehrat David Epstein Mark C. Fishman Richard Francis Jeff George Harry Kirsch André Wyss Total 4 284 405 322 200 606 605 1 700 44 977 46 677 92 435 107 870 200 305 70 371 230 535 3 300 906 52 242 276 622 3 328 864 14 357 37 722 52 079 119 247 99 373 218 620 46 579 100 359 146 938 44 660 79 917 124 577 725 996 1 299 575 2 025 571 1 Includes holdings of “persons closely linked” to Executive Committee members (see definition further below on this page) 2 Includes restricted shares, RSUs and target number of PSUs. Matching shares under the ESOP, LSSP, and target number of PSUs are disclosed pro-rata to December 31, unless the award qualified for full vesting under the relevant plan rules. Awards under all other incentive plans are disclosed in full. 3 Includes both deferred and unvested cash-settled equity awards and holdings of Novartis shares in US-defined contribution plans. 4 As a result of the GlaxoSmithKline transaction, Brian McNamara and Andrin Oswald stepped down from the Executive Committee on March 1, 2015. Brian McNamara owned 52 251 vested shares and 15 200 unvested shares and other equity rights at March 1, 2015. Andrin Oswald owned 122 892 vested shares and 41 547 unvested shares and other equity rights at March 1, 2015. SHARE OPTIONS OWNED BY EXECUTIVE COMMITTEE MEMBERS 1 Jeff George André Wyss Total 3 Number of share options 2 Total at December 31, 2015 Other 2011 141 396 0 141 396 0 378 390 378 390 141 396 378 390 519 786 1 The last share option grants under the Novartis Equity Plan Select were made in January 2013. 2 Share options disclosed for a specific year were granted in that year under the Novartis Equity Plan Select. The column “Other” refers to share options granted in 2008 or earlier, to share options granted to these executives while they were not Executive Committee members, and to share options bought on the market by the Executive Committee members or “persons closely linked” to them (see definition further below on this page). 3 No other current Executive Committee members owned share options at December 31, 2015. As a result of the GlaxoSmithKline transaction, Brian McNamara and Andrin Oswald stepped down from the Executive Committee on March 1, 2015. At March 1, 2015, Brian McNamara and Andrin Oswald did not own any share options. PERSONS CLOSELY LINKED “Persons closely linked” are (I) their spouse, (II) their children below age 18, (III) any legal entities that they own or otherwise control, and (IV) any legal or natural person who is acting as their fiduciary. COMPENSATION REPORT | PERFORMANCE VESTING OF OLD LONG-TERM PERFORMANCE PLAN (2013–2015) Novartis Annual Report 2015 | 127 PERFORMANCE VESTING OF OLD LONG-TERM PERFORMANCE PLAN (2013–2015) Overview performance factor was capped at 200% of target, correspond- As of 2014, grants are no longer made under this plan to Exec- ing to an achievement of 20% above target. utive Committee members, but performance for the last cycle of the OLTPP is reported in this Compensation Report. The Delivery at vesting performance for the first cycle of the LTPP and LTRPP (cycle At the end of the three-year performance period, the target 2014–2016) will be reported in the 2016 Compensation Report. number of PSUs was multiplied by the performance factor The OLTPP provided grants based on a target percentage approved by the Compensation Committee. PSUs were converted of base compensation at the beginning of each plan cycle. It into Novartis shares and immediately vested. In the US, awards represented 175% of base salary for the CEO. may also have been delivered in cash under the US-deferred compensation plan. Form of award at grant At the beginning of the performance period, participants were OUTCOME OF THE PERFORMANCE CYCLE 2013–2015 granted a target number of PSUs according to the following Over the three-year performance period, 2013 to 2015, formula: STEP 1 Annual base compensation x Target incentive % = Grant value STEP 2 Grant value / Share price = Target number of PSUs Performance measure Novartis performed 3.5% ahead of the USD 7.4 billion NVA target, corresponding to a payout of 118% following the appli- cation of the 1:5 payout curve. This achievement was mainly driven by operating income performance and productivity ini- tiatives. In arriving at the NVA performance score, the Com- pensation Committee excluded, as major items, the favorable impact from the delayed entry of generic competition for Dio- van monotherapy in the US, income generated from the sale of the Idenix Pharmaceuticals Inc. and LTS Lohmann Thera- The rewards were based on rolling three-year Group performance pie-Systeme AG stakes, and the negative impact from execut- objectives focused on the Novartis Economic Value Added (NVA) ing the Group portfolio transformation (including an excep- measured annually. NVA takes into account Group operating tional pre-tax impairment charge of USD 1.1 billion related to income adjusted for interest, taxes and cost of capital charge. the divestment of the Vaccines influenza business). Over the The formula is included on page 166 of the Financial Report. entire three-year cycle, currency movements had a significant The NVA performance factor was based on a 1:5 payout negative impact (more than USD 2.1 billion) in NVA well above curve, where a 1% deviation in realization versus target led to the impact on the previous cycle of the OLTPP. Considering a 5% change in payout (for example, a performance ratio of the total shareholder return of the three years (in USD, +53.4%), 105% would have led to a performance factor of 125%). If the Compensation Committee decided to exclude, on a dis- performance over the three-year vesting period would have cretionary basis, a portion of this currency impact. fallen below 80% of target, no shares would have vested. The The table below shows the vesting of the OLTPP 2013–2015 cycle for the CEO and other Executive Committee members. PAYOUT SCHEDULE FOR OLTPP 2013–2015 PERFORMANCE CYCLE 1 PSUs (target value PSUs Currency at grant date) (target number) Performance factor payout for OLTPP 2013–2015 cycle Shares delivered Shares at vesting delivered (value at at vesting (number) vesting price) Joseph Jimenez CHF 3 605 933 58 443 118% 68 963 5 496 351 Other 8 members of the Executive Committee 2 CHF 5 363 227 86 864 118% 102 500 8 214 409 Total CHF 8 969 160 145 307 118% 171 463 13 710 760 See next page for 2014 compensation figures 1 For those who have left or joined the Executive Committee in the course of the 2013–2015 performance period, the information disclosed under this table reflects the pro-rata OLTPP 2013–2015 payout attributable to the period they were a member of the Executive Committee. 2 This table excludes the awards which were originally granted to Brian McNamara (10 780 target PSUs) and Andrin Oswald (13 688 target PSUs) for OLTPP 2013–2015 performance cycle. As a result of the GlaxoSmithKline transaction, and in accordance with the OLTPP plan rules, these awards were forfeited. For the Executive Committee members, including the CEO, the impact of the share price appreciation over the vesting period on the total value realized at vesting was CHF 3.1 million. For the CEO, the impact of the share price appreciation was CHF 1.4 million. This represents 25% of the overall vesting value. 128 | Novartis Annual Report 2015 COMPENSATION REPORT For comparative purposes, the table below shows the vesting of the OLTPP 2012–2014 cycle for the CEO and other Executive Committee members, as published in the 2014 Compensation Report. PAYOUT SCHEDULE FOR OLTPP 2012–2014 PERFORMANCE CYCLE 1 PSUs (target value PSUs Currency at grant date) (target number) Performance factor payout for OLTPP 2012–2014 cycle Shares delivered Shares at vesting delivered at vesting (value at (number) vesting price) Joseph Jimenez CHF 3 605 926 66 530 168% 111 771 9 472 592 Other 13 members of the Executive Committee CHF 7 783 335 142 747 168% 239 822 20 539 978 Total CHF 11 389 261 209 277 168% 351 593 30 012 570 As published in the 2014 Compensation Report 1 For those who left or joined the Executive Committee in the course of the 2012–2014 performance period, the information disclosed under this table reflects the pro-rata OLTPP 2012–2014 payout attributable to the period they were a member of the Executive Committee. For the Executive Committee members, including the CEO, the impact of the share price appreciation over the vesting period of the OLTPP 2012–2014 cycle on the total value realized at vesting was CHF 10.9 million. For the CEO, the impact of the share price appreciation was CHF 3.4 million. This represents 36% of the overall vesting value. COMPENSATION REPORT | 2015 BOARD COMPENSATION SYSTEM Novartis Annual Report 2015 | 129 2015 BOARD COMPENSATION SYSTEM BOARD COMPENSATION PHILOSOPHY AND BENCHMARKING For 2015, the Chairman voluntarily waived the increase in com- pensation to which he is entitled, which is an amount not lower The Board of Directors sets compensation for its members at a than the average annual compensation increase awarded to level that allows for the attraction and retention of high-caliber associates based in Switzerland (1.5% for 2015). For the year individuals with global experience, including a mix of Swiss 2016, the Chairman will also voluntarily waive this increase. and international members. Board members do not receive variable compensation, underscoring their focus on corporate COMPENSATION OF THE OTHER BOARD MEMBERS strategy, supervision and governance. The annual fee rates for Board membership and additional The Board of Directors sets the level of compensation for functions are included in the table below. These were approved its Chairman and the other members to be in line with rele- by the Board of Directors with effect from the 2014 AGM and vant benchmark companies, which include other large align our aggregate Board compensation to the current levels Swiss-headquartered multinational companies, ABB, Credit of other large Swiss companies. Annual fee (CHF) 3 800 000 1 300 000 50 000 120 000 60 000 60 000 30 000 Suisse, Holcim, Nestlé, Roche, Syngenta and UBS. This peer group has been chosen for Board compensation due to the comparability of Swiss legal requirements, including broad personal and individual liabilities under Swiss law (and new criminal liability under the Swiss rules regarding compensa- tion of Board and Executive Committee members related to the Ordinance Against Excessive Compensation in Stock Exchange Listed Companies) and under US law (due to the company’s secondary listing on the New York Stock Exchange). The Board of Directors reviews the compensation of its members, including the Chairman, each year based on a pro- posal by the Compensation Committee and advice from its 2015 BOARD MEMBER ANNUAL FEE RATES Chairman of the Board Board membership Vice Chairman Chair of Audit and Compliance Committee Chair of the following committees: — Compensation Committee — Governance, Nomination and Corporate Responsibilities Committee — Research & Development Committee2 — Risk Committee independent advisor, including relevant benchmarking infor- Membership of Audit and Compliance Committee mation. COMPENSATION OF THE CHAIRMAN OF THE BOARD OF DIRECTORS As Chairman, Dr. Joerg Reinhardt receives total annual com- pensation valued at CHF 3.8 million. The total compensation is comprised equally of cash and shares, as follows: — Cash compensation: CHF 1.9 million per year — Share compensation: annual value equal to CHF 1.9 million of unrestricted Novartis shares Membership of the following committees: — Compensation Committee — Governance, Nomination and Corporate Responsibilities Committee — Research & Development Committee — Risk Committee 1 The Chairman also received company pension contributions until the 2015 AGM (when they ceased), and payment for loss of other entitlements at his previous employer for total EUR 2 665 051 staggered over 2014 to 2016. 2 The Chairman receives no additional committee fees for chairing the Research & Development Committee. In addition, the following policies apply regarding their com- From the 2015 Annual General Meeting (AGM), Dr. Reinhardt pensation: voluntarily waived the company contribution for pension and — 50% of compensation is delivered in cash, paid on a insurance benefits. Until this date, the company made employer quarterly basis in arrears. contributions regarding the Chairman’s participation in the — 50% of compensation is delivered in shares in two Novartis Swiss standard pension and life insurance benefit installments: one six months after the AGM and one 12 plans. These contributions amounted to CHF 24 840. months after the AGM. Dr. Reinhardt also receives compensation for lost entitlements — Board members bear the full cost of their employee at his former employer, with a total value of EUR 2.6 million, social security contributions, if any, and do not receive as reported in the 2014 and 2013 Compensation Reports. Pay- share options or pension benefits. ments are staggered based on the vesting period at his for- mer employer, and extend over the period from 2014–2016, The Board compensation system will remain unchanged in 2016. provided that he remains in office as Chairman at the respec- tive due dates. On January 31, 2015, he received EUR 871 251 in cash.1 1 On January 31, 2016, he will receive the third and final installment of EUR 1 045 800. 130 | Novartis Annual Report 2015 COMPENSATION REPORT 2015 BOARD COMPENSATION BOARD MEMBER COMPENSATION TABLE (AUDITED) The following table discloses the 2015 Board member com- pensation. Board compensation is reported as the amount earned in the financial year. BOARD MEMBER COMPENSATION EARNED FOR FINANCIAL YEAR 2015 1 Board Risk membership Chairman Committee Committee Committee Committee Committee Vice Compliance Audit and Compen- sation Governance, Nomination and Corporate Respon- sibilities Research & Develop- ment Cash (CHF) (A) Shares (CHF) Shares (B) (number) 2 Other (CHF) (C) 3 Total (CHF) (A)+(B)+(C) 4 Joerg Reinhardt 5 Chair Chair 1 900 000 1 900 000 19 397 29 197 3 829 197 Ulrich Lehner (until February 26, 2015) Enrico Vanni Nancy Andrews (from February 27, 2015) Dimitri Azar Verena A. Briner Srikant Datar Ann Fudge Pierre Landolt 6 Charles L. Sawyers Andreas von Planta William T. Winters Total • • • • • Chair • • • • • • • • • • • • • • 39 167 39 167 1 242 582 78 916 Chair • • • • • • 7 • Chair • 7 • 250 000 250 000 2 552 4 357 504 357 137 500 137 500 812 172 250 217 750 2 712 – – 275 000 390 000 165 000 165 000 1 684 4 357 334 357 240 000 240 000 2 450 195 000 195 000 1 990 – – 480 000 390 000 • • • – 360 000 3 674 3 492 363 492 • 177 500 177 500 1 757 – 355 000 Chair 225 000 225 000 2 296 4 357 454 357 – 325 000 3 210 – 325 000 3 501 417 4 231 917 43 776 46 342 7 779 676 See next page for 2014 compensation figures 1 Does not include reimbursement for travel and other necessary business expenses incurred by Board members in the performance of their services, as these are not considered compensation 2 Represents the gross number of shares delivered to each Board member in 2015. The number of shares reported in this column represents: (i) the second and final equity installment delivered in February 2015 for the services from the 2014 AGM to the 2015 AGM, and (ii) the first of two equity installment delivered in August 2015 for the services from the 2015 AGM to the 2016 AGM. The second and final equity installment for the services from the 2015 AGM to the 2016 AGM will take place in February 2016. 3 It includes an amount of CHF 21 502 for mandatory employer contributions paid by Novartis to Swiss governmental social security systems. This amount is out of total employer contributions of CHF 429 806, and provides a right to the maximum future insured government pension benefit for the Board member. 4 All amounts are before deduction of employee’s social security contribution and income tax due by the Board member 5 Does not include EUR 871 251 paid to Joerg Reinhardt on January 31, 2015 for lost entitlements at his former employer. This amount is the second of three installments comprising to a total amount of EUR 2 665 051, which compensates him for lost entitlements with his previous employer due to him on joining Novartis. The third and last installment of EUR 1 045 800 will be delivered on January 31, 2016, provided that he remains in office as our Chairman at the due dates. The lost entitlements of EUR 2 665 051 of Joerg Reinhardt were included in full in the 2013 Board compensation table on page 124 of the 2014 Compensation Report based on our disclosure policy to report compensation for lost entitlements in full in the year the member of the Board or Executive Committee joined Novartis. 6 According to Pierre Landolt, the Sandoz Family Foundation is the economic beneficiary of the compensation. 7 From February 27, 2015 COMPENSATION REPORT | 2015 BOARD COMPENSATION Novartis Annual Report 2015 | 131 BOARD MEMBER COMPENSATION EARNED FOR FINANCIAL YEAR 2014 1 Governance, Nomination and Corporate Respon- sibilities Audit and Compen- sation Vice Compliance Research & Develop- ment Board membership Chairman Committee Committee Committee Committee 2 Committee Committee 2 Delegated Board Risk Chairman’s member- ship Cash (CHF) (A) Shares (CHF) Shares (B) (number) 3 Other (CHF) (C) 4 Total (CHF) (A)+(B)+(C) 5 Joerg Reinhardt 6 Chair Chair Chair 2 058 334 1 741 666 12 180 157 844 7 3 957 844 Ulrich Lehner Enrico Vanni Dimitri Azar Verena A. Briner • • • • William Brody (until February 25, 2014) • Srikant Datar Ann Fudge Pierre Landolt 13 Charles L. Sawyers Andreas von Planta • • • • • Wendelin Wiedeking (until February 25, 2014) • William T. Winters • Rolf M. Zinkernagel (until February 25, 2014) • Total • • • • • • • Chair Chair • • • • • Chair • • • • • • • 8 • 10 • • Chair • • • 262 500 262 500 1 527 37 851 9 562 851 267 500 267 500 1 625 11 173 9 546 173 86 250 313 750 2 154 – 400 000 166 667 166 667 1 073 7 468 9 340 802 • 11 43 750 43 750 – 83 333 12 170 833 • 260 000 260 000 1 560 204 167 204 167 1 268 – – 520 000 408 334 – 368 333 2 340 7 031 9 375 364 166 667 166 667 1 073 – 333 334 234 167 234 167 1 462 9 175 9 477 509 – 75 000 – 4 482 9 79 482 29 167 279 167 1 950 – 308 334 • 14 54 167 54 167 – 175 870 9, 15 284 204 3 833 336 4 437 501 28 212 494 227 8 765 064 As published in the 2014 Compensation Report 1 Does not include reimbursement for travel and other necessary business expenses incurred in the performance of their services, as these are not considered compensation. 2 As of February 26, 2014, the Research & Development Committee has been introduced and the Chairman’s Committee disbanded. 3 Represents the gross number of shares delivered to each Board member in 2014 in respect of the first of two equity installments for the services from the 2014 AGM to the 2015 AGM. The second equity installment will take place in February 2015. This number does not include the number of shares for the compensation for services for the period from January 1, 2014 to the 2014 AGM. 4 In compliance with the Minder Ordinance, it includes an amount of mandatory employer social security contributions of CHF 27 771. This amount provides a right to the maximum future insured government benefit for the members. This is out of a mandatory total of CHF 359 890 paid by Novartis to both Swiss governmental social security systems. 5 All amounts are before deduction of employee’s social security contribution and income tax due by the Board member. 6 Does not include EUR 748 000 paid to Joerg Reinhardt on January 31, 2014 for lost entitlements at his former employer. This amount is the first of three installments comprising to a total amount of EUR 2 665 051, which compensates him for lost entitlements with his previous employer due to him on joining Novartis. The second and third installment are staggered based on the vesting period at his former employer, and extend over the period from 2015–2016, provided that he remains in office as our Chairman at the respective due dates. On January 31, 2015 and 2016, he will respectively receive EUR 871 251 and EUR 1 045 800. The lost entitlements of EUR 2 665 051 of Joerg Reinhardt are included in full in the 2013 Board compensation table on page 124 of the 2014 Compensation Report based on our disclosure policy to report compensation for lost entitlements in full in the year the member of the Board or ECN joined Novartis. 7 Includes social security costs due by the individual and paid by the company until January 31, 2014, and service costs of pension and post-retirement healthcare benefits accumulated in 2014 in accordance with IAS19 8 Until February 25, 2014 9 Includes social security costs due by the individual and paid by the company until February 25, 2014. As of February 26, 2014, all Board members bear the full cost of their employee social security. 10 As of February 26, 2014 11 The Board of Directors has delegated William Brody to the Board of Directors of the Genomics Institute of the Novartis Research Foundation (GNF) for the period from the 2014 AGM to the 2016 AGM. 12 Includes his pro-rata compensation for the delegated Board membership of GNF from February 26, 2014 to December 31, 2014 13 According to Pierre Landolt, the Sandoz Family Foundation is the economic beneficiary of the compensation. 14 The Board of Directors has delegated Rolf M. Zinkernagel to the Scientific Advisory Board of the Novartis Institute for Tropical Diseases (NITD) and to the Board of Directors of the Genomics Institute of the Novartis Research Foundation (GNF) for the period from the 2014 AGM to the 2016 AGM. 15 Includes his pro-rata compensation for the delegated Board memberships of NITD and GNF from February 26, 2014 to December 31, 2014 132 | Novartis Annual Report 2015 COMPENSATION REPORT RECONCILIATION BETWEEN THE REPORTED BOARD COMPENSATION AND THE AMOUNT APPROVED BY SHAREHOLDERS AT THE AGM Compensation earned for the period Compensation to be earned for the period from January 1 to the from January 1 to AGM (2 months) in the year following the financial year (C) Compensation earned during AGM (2 months) of the financial year (B) the financial year (A) 1 Total compensation Amount approved/ endorsed by shareholders at the respective AGM earned from AGM to AGM (A)-(B)+(C) Amount within the amount approved/ endorsed by shareholders at the AGM (CHF) 2015 January 1, 2015 to 2015 AGM January 1, 2016 to 2016 AGM 2 2015 AGM to 2016 AGM 2015 AGM 2015 AGM Joerg Reinhardt 3 829 197 (658 174) 633 334 3 804 357 3 805 000 Other Board members 3 950 479 (667 250) 653 334 3 936 563 3 940 000 Total 7 779 676 (1 325 424) 1 286 668 7 740 920 7 745 000 Yes Yes Yes 2014 January 1, 2014 to 2014 AGM 3 January 1, 2015 to 2015 AGM 2014 AGM to 2015 AGM 2014 AGM 2014 AGM Joerg Reinhardt 3 957 844 (670 497) 658 174 3 945 521 3 962 000 Other Board members 4 807 220 (1 446 909) 4 667 250 4 027 561 4 060 000 Total 8 765 064 (2 117 406) 1 325 424 7 973 082 8 022 000 Yes Yes Yes 1 See previous pages for 2015 and 2014 Board member compensation. 2 To be confirmed and reported in the 2016 Compensation Report. 3 Includes an amount of CHF 27 771 for mandatory employer social security contributions paid by Novartis to Swiss governmental social security systems. This amount is out of total employer contributions of CHF 359 890, and provides a right to the maximum future insured government pension benefit for the Board member. 4 Delegated Board membership fees earned after the 2014 AGM by William Brody and Rolf M. Zinkernagel are included in this amount. LOANS TO BOARD MEMBERS As of the same date, no members of the Board of Directors No loans were granted to current or former members of the held any share options. SHARES AND ADRS OWNED BY BOARD MEMBERS 1 Board of Directors or to “persons closely linked” to them during 2015. No such loans were outstanding as of December 31, 2015. OTHER PAYMENTS TO BOARD MEMBERS During 2015, no payments (or waivers of claims) other than those set out in the Board member compensation table (includ- ing its footnotes) on page 130 were made to current members of the Board of Directors or to “persons closely linked” to them. SHARE OWNERSHIP REQUIREMENTS FOR BOARD MEMBERS The Chairman is required to own a minimum of 30 000 shares, and other members of the Board of Directors are required to own at least 4 000 Novartis shares within three years after joining the Board of Directors, to ensure alignment of their interests with shareholders. Board members are prohibited from hedging or pledging their ownership positions in Novartis Joerg Reinhardt Enrico Vanni Nancy Andrews Dimitri Azar Verena A. Briner Srikant Datar Ann Fudge Pierre Landolt 3 Charles L. Sawyers Andreas von Planta William T. Winters Number of shares 2 At December 31, 2015 480 404 15 566 609 9 292 6 429 32 629 15 605 54 866 4 252 124 868 5 998 750 518 shares that are part of their guideline share ownership require- Total 4 ment, and are required to hold these shares for 12 months after retiring from the Board of Directors. As of December 31, 2015, all members of the Board of Directors who have served at least three years on the Board of Directors have complied with the share ownership guidelines. 1 Includes holdings of “persons closely linked” to Board members (see definition on page 126) 2 Each share provides entitlement to one vote. 3 According to Pierre Landolt, the Sandoz Family Foundation is the economic beneficiary of the shares. 4 Ulrich Lehner stepped down from the Board of Directors on February 26, 2015. At February 26, 2015, Ulrich Lehner owned 37 263 shares. SHARES, ADRS AND SHARE OPTIONS OWNED BY BOARD MEMBERS PAYMENTS TO FORMER BOARD MEMBERS During 2015, no payments (or waivers of claims) were made The total number of vested Novartis shares and ADRs owned to former Board members or to “persons closely linked” to by members of the Board of Directors and “persons closely them, except for the following amounts: linked” to them as of December 31, 2015 is shown in the table — Prof. Dr. William R. Brody and Prof. Dr. Rolf M. Zinkerna- below. gel, who stepped down from the Board of Directors at As of December 31, 2015, no members of the Board of the 2014 AGM, received delegated Board membership Directors together with “persons closely linked” to them owned fees for their work on the Boards of the Novartis Institute 1% or more of the outstanding shares (or ADRs) of Novartis. for Tropical Diseases (Prof. Dr. Zinkernagel) and the COMPENSATION REPORT | COMPENSATION GOVERNANCE Novartis Annual Report 2015 | 133 Genomics Institute of the Novartis Research Foundation — The payments reported in Note 27 to the Group’s (Prof. Dr. Brody and Prof. Dr. Zinkernagel). During 2015, audited consolidated financial statements (page 226) an amount of CHF 100 000 and CHF 200 000 was paid to Prof. Dr. Brody and Prof. Dr. Zinkernagel, respectively, for their work on these Boards. Their mandate on the NOTE 27 TO THE GROUP’S AUDITED CONSOLIDATED FINANCIAL STATEMENTS Board of the Genomics Institute of the Novartis Research The total expense for the year for the compensation awarded Foundation ended as of November 19, 2015. The to Board and Executive Committee members using IFRS mea- company is appreciative of their many years of service surement rules is presented in the Financial Report in Note 27 on this Board. to the Group’s audited consolidated financial statements. COMPENSATION GOVERNANCE LEGAL FRAMEWORK COMMITTEE MEMBER INDEPENDENCE The Swiss Code of Obligations and the Corporate Governance The Compensation Committee is composed exclusively of Guidelines of the SIX Swiss Exchange require listed companies members of the Board of Directors who meet the independence to disclose certain information about the compensation of criteria set forth in the Board Regulations. From the 2015 AGM, Board and Executive Committee members, their equity partic- the Compensation Committee had the following four members: ipation in the Group, and loans made to them. This Annual Ann Fudge, Enrico Vanni, Srikant Datar and William Winters. Report fulfills that requirement. In addition, the Annual Report Enrico Vanni has served as Chair since 2012. Ulrich Lehner is in line with the principles of the Swiss Code of Best Practice did not stand for re-election to the Board of Directors at the for Corporate Governance of the Swiss Business Federation 2015 AGM. (economiesuisse). COMPENSATION DECISION-MAKING AUTHORITIES ROLE OF THE COMPENSATION COMMITTEE’S INDEPENDENT ADVISOR Authority for decisions related to compensation is governed The Compensation Committee retained Frederic W. Cook & Co. by the Articles of Incorporation, the Board Regulations and the Inc. as its independent external compensation advisor for 2015. Compensation Committee Charter, which are all published on the The advisor was hired directly by the Compensation Commit- company website: www.novartis.com/corporate-governance. tee in 2011, and the Compensation Committee has been fully The Compensation Committee serves as the supervisory and satisfied with the performance and independence of the advi- governing body for compensation policies and plans within sor since its engagement. Frederic W. Cook & Co. Inc. is inde- Novartis, and has overall responsibility for determining, review- pendent of management and does not perform any other con- ing and proposing compensation policies and plans for approval sulting work for Novartis. In determining whether or not to renew by the Board of Directors in line with the Compensation Com- the engagement with the advisor, the Compensation Commit- mittee Charter. A summary of discussions and conclusions of tee evaluates, at least annually, the quality of the consulting each committee meeting is delivered to the full Board of Direc- service, the independence of the advisor, and the benefits of tors. A summary of the compensation decision-making authori- rotating advisors. ties is set out below: COMPENSATION AUTHORIZATION LEVELS WITHIN THE PARAMETERS SET BY THE SHAREHOLDERS’ MEETING Decision on Compensation of Chairman and other Board members Authority Board of Directors Compensation of CEO Board of Directors Compensation of Executive Committee members Compensation Committee COMPENSATION COMMITTEE MEETINGS HELD IN 2015 In 2015, the Compensation Committee held five formal meetings. The Compensation Committee conducted a perfor- mance self-evaluation in 2015 and a review of its charter, as it does every year. 134 | Novartis Annual Report 2015 COMPENSATION REPORT COMPENSATION GOVERNANCE AND RISK MANAGEMENT Executive Committee employment contracts provide for a The Compensation Committee, with support from its indepen- notice period of up to 12 months and contain no change-of- dent advisor, reviews market trends in compensation and control clauses or severance provisions (e.g., agreements changes in corporate governance rules. It also reviews, together concerning special notice periods, longer-term contracts, with the Risk Committee, the Novartis compensation systems “golden parachutes,” waiver of lock-up periods for equities and to ensure that it does not encourage inappropriate or exces- bonds, shorter vesting periods, and additional contributions sive risk taking and instead encourages behaviors that support to occupational pension schemes). sustainable value creation. A summary of the risk management principles is outlined MALUS AND CLAWBACK below: RISK MANAGEMENT PRINCIPLES — Rigorous performance management process, with approval of targets and evaluation of performance for the CEO by the Board of Directors — Balanced mix of short-term and long-term variable compensation elements — Balanced scorecard approach to performance evaluation under the Annual Incentive, including Values and Behaviors — Clawback principles — Performance-vesting Long- Term Incentives only, with three-year overlapping cycles — Variable compensation is capped at 200% of target — Contractual notice period of 12 months — Post-contractual non- compete limited to a maximum of 12 months (annual base compensation and Annual Incentive of the prior year only) — No severance payments or change-of-control clauses — Share ownership requirements; no hedging or pledging of Novartis share ownership position by Board and Executive Committee members Any incentive compensation paid to Executive Committee members is subject to “malus” and “clawback” rules. This means that the Board of Directors for the CEO, or the Com- pensation Committee for other Executive Committee mem- bers, may decide, subject to applicable law, not to pay any unpaid or unvested incentive compensation (malus), or seek to recover incentive compensation that has been paid in the past (clawback), where the payout has been proven to conflict with internal management standards including company pol- icies and accounting policies or a violation of law. This princi- ple applies to both the Annual Incentive and to the Long-Term Incentives. COMPENSATION REPORT | REPORT OF THE STATUTORY AUDITOR ON THE COMPENSATION REPORT OF NOVARTIS AG Novartis Annual Report 2015 | 135 Report of the Statutory Auditor on the Compensation Report of Novartis AG TO THE GENERAL MEETING OF NOVARTIS AG, BASEL of the risks of material misstatements in the Compensation Report, whether due to fraud or error. This audit also includes We have audited the Executive Committee Compensation evaluating the reasonableness of the methods applied to value Tables pages 121–126 and the 2015 Board Compensation components of compensation, as well as assessing the overall pages 130–133 of the accompanying Compensation Report presentation of the Compensation Report. of Novartis AG for the year ended December 31, 2015. We believe that the audit evidence we have obtained is sufficient BOARD OF DIRECTORS’ RESPONSIBILITY and appropriate to provide a basis for our opinion. The Board of Directors is responsible for the preparation and overall fair presentation of the Compensation Report in accor- OPINION dance with Swiss law and the Ordinance against Excessive In our opinion, the Compensation Report of Novartis AG for Compensation in Stock Exchange Listed Companies (Ordinance). the year ended December 31, 2015 complies with Swiss law The Board of Directors is also responsible for designing the and articles 14–16 of the Ordinance. compensation system and defining individual compensation packages. PricewaterhouseCoopers AG AUDITOR’S RESPONSIBILITY Our responsibility is to express an opinion on the accompanying Compensation Report. We conducted our audit in accordance with Swiss Auditing Standards. These standards require that we comply with ethical requirements, and plan and perform the audit to obtain reasonable assurance about whether the Compensation Report complies with Swiss law and articles 14–16 of the Ordinance. Bruno Rossi Audit expert Stephen Johnson Global relationship partner An audit involves performing procedures to obtain audit evidence Auditor in charge on the disclosures made in the Compensation Report with regard to compensation, loans and credits in accordance with articles 14–16 of the Ordinance. The procedures selected Basel, January 26, 2016 depend on the auditor’s judgment, including the assessment 136 | Novartis Annual Report 2015 1 A rice farmer tills a paddy field with his water buffalo. Rice is the staple crop here. 2 Dr. Cu Ahong, director of the Mù Cang Chai Preventative Health Centre, examines 8-year-old Mu Thi Cha, who complains of abdominal pain. 3 Gian Cho De has hypertension. The rise of chronic disease in Vietnam is an additional burden for the healthcare system. 4 Despite the availability of modern medicine, many people in Vietnam still use herbal remedies, such as these seen on sale in Hanoi. 1 3 2 4 Novartis Annual Report 2015 | 137 p CONTINUED FROM PAGE 109 Dr. Xinh grew up in Mù Cang Chai, so he understands local traditions and speaks the local dialect, enabling him to communicate easily with patients, understand their ailments, and treat them. The H’mong people have numerous health problems, some linked to traditional beliefs and lifestyles. For instance, it is still common among the H’mong to use open fires to cook and heat their houses, and the indoor air pollution has led to widespread respiratory ailments. Giang Giua Cua, 77, is a typical patient seen by Dr. Xinh. He has chronic obstructive pulmonary disease after many years of inhaling smoke at home. Because he is short of breath, Mr. Cua is no longer capable of trekking to the community hospital, so the doctor must come to him. Respiratory illness is just one of the chronic diseases that are on the rise in Vietnam, just as they are elsewhere in the world. For instance, cases of diabetes have tripled in Vietnam over the past decade, according to the World Health Organization. Hypertension is also on the rise. These and other chronic ailments, which can require ongoing treatment for years or even decades, are adding significantly to the existing burden felt by healthcare providers. Efforts to improve public health in the region have been complicated by locals’ reliance on traditional medicines, as well as their reluctance to seek medical attention. And the need for more healthcare professionals remains acute, says Dr. Cu Ahong, director of the Mù Cang Chai community hospital. But the situation is changing. Mù Cang Chai will eventually benefit from a program begun in 2013 by the Ministry of Health to increase the number of rural doctors. And efforts are underway to reinforce health education and healthcare delivery in rural Vietnam. One initiative is Healthy Family, or Cung Song Khoe in Vietnamese, run by Novartis in collaboration with the Vietnamese government. This social venture was launched in 2012 and involves doctors working at community health centers to improve education, and expand access to treatment and health screenings. In Mù Cang Chai, for instance, doctors are making strides in the area of disease prevention. Community clinics run patient- education classes to inform people about the risk of developing chronic illnesses such as diabetes and hypertension. And they offer diagnostic tests, uncovering problems before they become acute. Such progress gives Dr. Ahong hope. He believes that education will help people adopt healthier lifestyles. And he looks forward to the arrival of more medical personnel to reinforce the efforts that he and Dr. Xinh are making. The Healthy Family initiative, launched in 2012, is run by Novartis and involves doctors working at community health centers to improve education, and expand access to treatment and health screenings 138 | Novartis Annual Report 2015 FINANCIAL REPORT FINANCIAL REPORT Novartis Annual Report 2015 | 139 CONTENTS 140 OPERATING AND FINANCIAL REVIEW 2015 140 145 148 149 152 153 155 157 162 165 Results of Operations Factors Affecting Comparability of Year-on-Year Results of Operations Free Cash Flow Liquidity, Cash Flow and Capital Resources Contractual Obligations Effects of Currency Fluctuations Condensed Consolidated Balance Sheets Critical Accounting Policies and Estimates Factors Affecting Results of Operations Non-IFRS Measures as Defined by Novartis 170 SUMMARY OF QUARTERLY AND GROUP FINANCIAL DATA 172 NOVARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS 242 243 Report of Novartis Management on Internal Control over Financial Reporting Report of the Statutory Auditor on the Consolidated Financial Statements of Novartis AG and Internal Control over Financial Reporting 245 FINANCIAL STATEMENTS OF NOVARTIS AG 254 Appropriation of Available Earnings of Novartis AG and Declaration of Dividend 255 Report of the Statutory Auditor on the Financial Statements of Novartis AG PHOTO ESSAY Making clear vision a personal mission For many working people, the weekend is a time to relax and unwind, but for Indian eye surgeons Janak and Preeti Shah, it offers the chance to help a group of patients who desperately need their skills. Once or twice a month, the couple leaves their busy practice in Mumbai and travels to remote areas of rural India to perform surgery free of charge on people who would otherwise have no chance of treatment for a range of debilitating eye conditions such as glaucoma and cataracts. p CONTINUED ON PAGE 256 140 | Novartis Annual Report 2015 FINANCIAL REPORT OPERATING AND FINANCIAL REVIEW 2015 This operating and financial review should be read together industry could lead to difficulties in bringing products to mar- with the Group’s consolidated financial statements in this ket, while increased pressure on pricing could impact our abil- Annual Report, which have been prepared in accordance with ity to generate returns and invest for the future. The growing International Financial Reporting Standards (IFRS) as published trend of government investigations and litigations against by the International Accounting Standards Board, and with the healthcare companies, despite our best efforts to comply with sections on Performance and Innovation on pages 24 to 59 of local laws, could also have an adverse effect on our business this Annual Report. and reputation. Following the announcement of our portfolio transformation For more detail on these trends and how they could impact transactions completed during 2015, in which we agreed to our results, see details starting on page 162. divest our Vaccines, OTC and Animal Health businesses, Novartis reported the Group’s results for the current and prior years as “continuing operations” and “discontinued opera- tions”. Results of operations Unless otherwise noted, the comments in this Operating In evaluating the Group’s performance, we consider not only and Financial Review refer to continuing operations, which the IFRS results, but also certain non-IFRS measures, includ- includes the businesses of Pharmaceuticals, Alcon and Sandoz ing core results and constant currency results. These mea- Divisions, Corporate activities and, starting on March 2, 2015, sures assist us in evaluating our ongoing performance from the results from the new oncology assets acquired from GSK year to year and we believe this additional information is use- and the 36.5% interest in the GSK Consumer Healthcare joint ful to investors in understanding our business. venture (the latter reported as investment in associated com- The Group’s core results exclude the amortization of panies). We also provide information on discontinued operations intangible assets, impairment charges, expenses relating to and total Group performance. For further details on continu- divestments, the integration of acquisitions, restructuring ing and discontinued operations see pages 145 and 147 and charges that exceed a threshold of USD 25 million, as well as Note 30 to the Group Consolidated Financial Statements. other income and expense items that management deems exceptional and that are or are expected to accumulate within OPPORTUNITY AND RISK SUMMARY the year to be over a USD 25 million threshold. A reconcilia- Our financial results are affected to varying degrees by exter- tion between IFRS results and core results is shown on pages nal factors. The aging of the global population and rising rates 167-169. of chronic diseases are driving demand for healthcare world- We present information about our net sales and other key wide, as well as for treatments that Novartis provides. Contin- figures relating to operating and net income in constant cur- ued growth in healthcare spending is contributing to increased rencies (cc). We calculate constant currency net sales and oper- scrutiny on drug pricing by governments, media and consum- ating income by applying the prior-year average exchange rates ers, but also to increased demand for lower-cost treatment to current financial data expressed in local currencies in order options, such as those produced by our generics division, San- to estimate an elimination of the impact of foreign exchange doz. Advances in science and technology are opening new rate movements. opportunities to develop treatments tailored for individual The core results, constant currencies and other non-IFRS patients. measures are explained in more detail starting on page 165 At the same time, the loss of market exclusivity and the and are not intended to be substitutes for the equivalent introduction of branded and generic competitors could signifi- measures of financial performance prepared in accordance cantly erode sales of our innovative products. Heightened with IFRS. These measures may differ from similarly titled regulatory requirements and the inherent complexity of our non-IFRS measures of other companies. FINANCIAL REPORT | OPERATING AND FINANCIAL REvIEw 2015 Novartis Annual Report 2015 | 141 GROUP OvERvIEw KEY FIGURES Novartis delivered solid financial performance in 2015, driven by our continued success with growth products and expan- Year ended sion in emerging growth markets, which helped offset the effects of generic competition of approximately USD 2.2 bil- lion. As a result, we achieved net sales to third parties from continuing operations of USD  49.4 billion (–5%, +5% cc). Growth in constant currencies has been more than offset by negative currency impacts driven by the strengthening of the US dollar versus the euro, Japanese yen and major emerging Net sales to third parties from continuing operations Sales to discontinued operations Net sales from continuing operations Dec 31, 2015 Dec 31, 2014 USD millions USD millions Change in Year ended Change constant in USD currencies % % 49 414 52 180 – 5 5 26 239 – 89 – 88 49 440 52 419 – 6 4 market currencies. Other revenues 947 1 215 – 22 – 22 Operating income decreased by 2% in constant currencies Cost of goods sold – 17 404 – 17 345 0 – 8 to USD 9.0 billion (–19%, –2% cc), mainly due to the amorti- zation of the new oncology assets in Pharmaceuticals. In addi- Gross profit from continuing operations 32 983 36 289 – 9 Marketing & Sales – 11 772 – 12 377 5 2 – 5 tion, an exceptional expense of USD 400 million for a settle- ment of the specialty pharmacies case in the Southern District of New York was recorded in 2015, whereas the prior-year ben- efitted from a one-time commercial settlement gain of USD 302 Research & Development General & Administration million and USD 248 million gain from selling a Novartis Ven- Other income – 8 935 – 9 086 2 – 3 – 2 475 – 2 616 2 049 1 391 5 47 – 1 55 ture Fund investment. Operating income margin was 18.2 per- Other expense – 2 873 – 2 512 – 14 – 24 cent of net sales. Net income from continuing operations was USD 7.0 bil- lion, declining more than operating income (–34%, –18% cc) mainly due to higher financial expense driven by USD 0.4 bil- lion exceptional charges related to Venezuela and lower income from associated companies, which included in the prior year a gain of USD 0.8 billion from the sale of the shares of Idenix Pharmaceuticals, Inc., US (Idenix) to Merck & Co., US, and a gain of USD 0.4 billion from the divestment of the sharehold- ing in LTS Lohmann Therapie-Systeme AG, Germany (LTS). Basic earnings per share from continuing operations decreased 33% (–17% cc) to USD 2.92, declining less than net income from continuing operations due to the lower number of average outstanding shares. Free Cash Flow from continuing operations decreased 15% to USD 9.3 billion, primarily due to negative currency impact on operations. Net income from discontinued operations amounted to USD 10.8 billion in 2015, which included USD 12.7 billion of pre-tax divestment gains and the operational results of the divested businesses until the respective dates of completion of the transactions, compared to a net loss of USD 447 million in 2014. For more information on discontinued operations please see pages 145 and 147 and Note 30 of the Novartis Group consolidated financial statements. For the total Group, net income amounted to USD 17.8 bil- lion in 2015 compared to USD 10.3 billion in 2014, impacted Operating income from continuing operations 8 977 11 089 – 19 – 2 Return on net sales (%) 18.2 21.3 Income from associated companies 266 1 918 – 86 – 86 Interest expense – 655 – 704 7 2 Other financial income and expense Income before taxes from continuing operations – 454 – 31 nm nm 8 134 12 272 – 34 – 17 Taxes – 1 106 – 1 545 28 10 Net income from continuing operations Net income/loss from discontinued operations Net income Attributable to:    Shareholders    of Novartis AG    Non-controlling    interests Basic earnings per share (USD) from continuing operations Basic earnings per share (USD) from discontinued operations Total basic earnings per share (USD) Free cash flow from continuing operations 7 028 10 727 – 34 – 18 10 766 – 447 nm 17 794 10 280 73 nm 91 17 783 10 210 74 92 11 70 – 84 – 84 2.92 4.39 – 33 – 17 4.48 – 0.18 nm nm 7.40 4.21 76 94 9 259 10 934 – 15 by the exceptional divestment gains included in net income Free cash flow 9 029 10 762 – 16 from the discontinued operations. Basic earnings per share nm = not meaningful increased to USD 7.40 from USD 4.21 in the prior year and free cash flow for the total Group amounted to USD 9.0 billion. 142 | Novartis Annual Report 2015 FINANCIAL REPORT NET SALES BY SEGMENT The following table provides an overview of net sales to third parties by segment: Pharmaceuticals Alcon Sandoz Net sales to third parties from continuing operations Year ended Year ended Dec 31, 2015 Dec 31, 2014 USD millions USD millions Change in USD % 30 445 31 791 9 812 10 827 9 157 9 562 49 414 52 180 – 4 – 9 – 4 – 5 Change in constant currencies % 6 – 1 7 5 Additional comments on the changes in the net sales by division can be found starting on page 34. OPERATING INCOME FROM CONTINUING OPERATIONS The following table provides an overview of operating income by segment: Pharmaceuticals Alcon Sandoz Corporate Operating income from continuing operations nm = not meaningful 7 597 794 1 005 – 419 8 977 Year ended Dec 31, 2015 USD millions Year ended % of Dec 31, 2014 net sales USD millions % of net sales 26.6 14.8 11.4 25.0 8.1 11.0 8 471 1 597 1 088 – 67 18.2 11 089 21.3 Change in USD % – 10 – 50 – 8 nm – 19 Change in constant currencies % 5 – 20 1 nm – 2 Operating income from continuing operations was USD 9.0 net decrease of 3.1 percentage points to 18.2 percent of net billion (–19%, –2% cc), mainly due to amortization of the new sales. oncology assets in Pharmaceuticals. The current year includes Additional comments on the changes in operating income an exceptional expense of USD 400 million for a settlement of by division can be found starting on page 34. the specialty pharmacies case in the Southern District of New Corporate income and expense amounted to a net expense York, whereas the prior-year benefitted from a one-time com- of USD  419 million in 2015 compared to a net expense of mercial settlement gain of USD 302 million and USD 248 mil- USD 67 million in the prior year. The increased expense was lion gain from selling a Novartis Venture Fund investment. The mainly due to the USD 302 million commercial settlement gain negative currency impact of 17 percentage points was mainly and a USD 248 million gain from selling Novartis Venture Fund due to the strong USD versus the euro, Japanese yen and investments recorded in 2014, partially offset by the gain on emerging market currencies. Operating income margin in con- the sale of real estate in Switzerland of USD 54 million, lower stant currencies decreased 1.4 percentage points; currency share-based compensation accruals and lower provision in the had a negative impact of 1.7 percentage points resulting in a captive insurance companies in 2015. CORE OPERATING INCOME KEY FIGURES1 Core gross profit from continuing operations Marketing & Sales Research & Development General & Administration Other income Other expense Core operating income from continuing operations as % of net sales 1 An explanation of non-IFRS measures and reconciliation tables can be found starting on page 165. Year ended Year ended Dec 31, 2015 Dec 31, 2014 USD millions USD millions 36 900 38 821 – 11 729 – 12 355 – 8 738 – 8 723 – 2 389 – 2 552 823 563 – 1 077 – 1 281 13 790 14 473 27.9 27.7 Change in USD % – 5 5 0 6 46 16 – 5 Change in constant currencies % 5 – 5 – 6 0 59 7 10 FINANCIAL REPORT | OPERATING AND FINANCIAL REvIEw 2015 Novartis Annual Report 2015 | 143 The adjustments made to operating income to arrive at core Excluding these items, core operating income from con- operating income from continuing operations amounted to tinuing operations decreased 5% (+10% cc) to USD 13.8 bil- USD 4.8 billion (2014: USD 3.4 billion). The increase was mainly lion. Core operating income margin in constant currencies driven by higher amortization of the new oncology assets in increased 1.3 percentage points mainly due to higher sales Pharmaceuticals, higher legal settlement expense and higher and productivity initiatives; currency had a negative impact of acquisition-related expense, whereas 2014 included a com- 1.1 percentage points, resulting in a margin of 27.9% of net mercial settlement gain of USD 302 million, partially offset by sales, compared to 27.7% in 2014. Additional comments on the provision of USD 204 million for the US healthcare reform the changes in the core operating income by division can be fee. found starting on page 34. The following table provides an overview of core operating income by segment: Pharmaceuticals Alcon Sandoz Corporate Core operating income from continuing operations Year ended Dec 31, 2015 USD millions Year ended % of Dec 31, 2014 net sales USD millions 9 420 3 063 1 659 – 352 30.9 31.2 18.1 9 514 3 811 1 571 – 423 % of net sales 29.9 35.2 16.4 Change in USD % – 1 – 20 6 17 13 790 27.9 14 473 27.7 – 5 Change in constant currencies % 14 – 7 17 11 10 RESEARCH AND DEvELOPMENT OF PHARMACEUTICALS DIvISION The following table provides an overview on the reported and core Research and Development expense of the Pharmaceuti- cals Division: Research and Exploratory Development Confirmatory Development Total Pharmaceuticals Division Research and Development expense    as % of Pharmaceuticals net sales to third parties Core Research and Exploratory Development1 Core Confirmatory Development1 Total Core Pharmaceuticals Division Research and Development expense    as % of Pharmaceuticals net sales to third parties 1 Core excludes impairments, amortization and certain exceptional items. Year ended Year ended Dec 31, 2015 Dec 31, 2014 USD millions USD millions Change in USD % – 2 565 – 2 724 – 4 667 – 4 607 – 7 232 – 7 331 23.8 23.1 – 2 493 – 2 654 – 4 560 – 4 343 – 7 053 – 6 997 23.2 22.0 6 – 1 1 6 – 5 – 1 Change in constant currencies % 3 – 7 – 3 3 – 11 – 5 Pharmaceuticals Division Research and Exploratory Develop- Core R&D expense in the Pharmaceuticals Division as per- ment expenditure amounted to USD  7.2 billion in 2015, a cent of sales decreased by 0.1 percentage points in constant decrease of 1% (–3% cc) compared to 2014. Confirmatory currencies, which was offset by negative currency movements Develop ment expenditures increased by 1% (–7% cc) to of 1.3 percentage points mainly from the sales base, as the USD 4.7 billion, compared to USD 4.6 billion in 2014, mainly Core R&D expenses are primarily denominated in US dollars driven by the additional development expense for the new and Swiss francs, which resulted in a net increase of 1.2 per- oncology assets acquired from GSK. centage points to 23.2% of net sales. 144 | Novartis Annual Report 2015 FINANCIAL REPORT NON-OPERATING INCOME & EXPENSE Other financial income and expense amounted to an The following table provides an overview of non-operating expense of USD 454 million compared to USD 31 million in income and expense: Year ended Dec 31, 2015 Dec 31, 2014 USD millions USD millions Change in Year ended Change constant in USD currencies % % Operating income from continuing operations Income from associated companies 8 977 11 089 – 19 – 2 266 1 918 – 86 – 86 Interest expense – 655 – 704 7 2 the prior-year period mainly on account of the exceptional charges of USD 410 million related to Venezuela due to for- eign exchange losses of USD 211 million and monetary losses from hyperinflation accounting of USD 72 million and a loss of USD 127 million on the sale of PDVSA bonds received to settle a portion of intra-group payables. The tax rate for continuing operations (taxes as percent- age of pre-tax income) in 2015 increased to 13.6% from 12.6% in the prior year, as a result of a change in profit mix from lower to higher tax jurisdictions. – 454 – 31 nm nm Net income from continuing operations of USD 7.0 billion Taxes – 1 106 – 1 545 28 10 8 134 12 272 – 34 – 17 7 028 10 727 – 34 – 18 the sale of LTS shares. Net income 17 794 10 280 73 10 766 – 447 nm was down 34% (–18% cc) declining more than operating income mainly due to the exceptional charges related to Ven- ezuela in the current year and the prior-year gains of USD 0.8 billion from the sale of Idenix shares and USD 0.4 billion from nm 91 Basic earnings per share (EPS) from continuing operations was USD 2.92 per share, down 33% (–17% cc), declining less than net income from continuing operations due to the lower number of outstanding shares. 2.92 4.39 – 33 – 17 4.48 7.40 – 0.18 nm 4.21 76 nm 94 CORE NON-OPERATING INCOME & EXPENSE The following table provides an overview of core non-operat- ing income and expense: Other financial income and expense Income before taxes from continuing operations Net income from continuing operations Net income/loss from discontinued operations Basic EPS (USD) from continuing operations Basic EPS (USD) from discontinued operations Total basic EPS (USD) nm = not meaningful Income from associated companies from continuing opera- tions amounted to USD  266 million in 2015, compared to USD 1.9 billion in 2014. The prior-year benefited from a pre- tax gain of USD 0.8 billion recognized on the sale of the shares of Idenix to Merck, a gain of USD 0.4 billion from the divest- ment of the shareholding in LTS and from the gain of USD 64 million recorded on the Novartis Venture Funds investments. In addition, the estimated income from Roche Holding AG declined from USD  599 million in the prior-year period to USD 343 million in 2015, due to an adjustment of USD 157 million recognized in the first quarter of 2015 when Roche published full year results, as well as a lower estimated income contribution from Roche for 2015 due to an announced restruc- turing. The estimated share in net results from the GSK Consumer Healthcare joint venture amounted to a loss of USD 17 million, as income from operations was more than offset by integra- tion charges. This estimate will be adjusted based on actual results in the first quarter of 2016. In addition, in 2015, we finalized the purchase price allocation for the investment in Core operating income from continuing operations Income from associated companies Interest expense Other financial income and expense Core income before taxes from continuing operations Taxes Core net income from continuing operations Core net income/loss from discontinued operations Core basic EPS (USD) from continuing operations Core basic EPS (USD) from discontinued operations the GSK Consumer Healthcare joint venture which is accounted Core basic EPS (USD) for as associated company and recognized amortization of nm = not meaningful purchase price adjustments of USD 62 million, resulting in a total estimated loss of USD 79 million for our share in the net Year ended Dec 31, 2015 Dec 31, 2014 USD millions USD millions Change in Year ended Change constant in USD currencies % % 13 790 14 473 – 5 10 981 – 655 943 – 704 4 7 4 2 – 24 – 31 23 nm 14 092 14 681 – 2 051 – 2 028 – 4 – 1 10 – 16 12 041 12 653 – 5 9 5.01 5.19 – 3 10 – 0.11 4.90 0.04 nm 5.23 – 6 nm 7 Core net income 11 785 12 755 – 8 – 256 102 nm nm 6 results from the GSK Consumer Healthcare joint venture for Core income from associated companies increased to USD 981 the year. million compared to USD 943 million in 2014. Our estimated Interest expense from continuing operations decreased by share in core results from the consumer healthcare joint ven- 7% (-2 % cc) to USD 655 million from USD 704 million in the ture with GSK, which amounted to USD 213 million in 2015, prior year. was offset by decreases in our estimated share of core results FINANCIAL REPORT | OPERATING AND FINANCIAL REvIEw 2015 Novartis Annual Report 2015 | 145 from Roche (from USD 856 million to USD 766 million) and formation. Excluding the divestment gains, the remaining oper- prior-year income from associated companies of the Novartis ating loss from discontinued operations was USD 0.2 billion, Venture Fund. representing the operating performance of the Vaccines influ- Core other financial income and expense, which exclude enza business up to July 31, 2015 as well as the Vaccines the exceptional charges of USD 410 million related to Venezu- non-influenza business and OTC until their respective divest- ela, amounted to a net expense of USD 24 million, compared ment dates, and is net of the partial reversal of USD 0.1 billion to USD 31 million in 2014. of the impairment of the assets of Vaccines influenza business The core tax rate from continuing operations (core tax as recorded in 2014. a percentage of core pre-tax income) increased to 14.6% from The prior year operating loss of USD 353 million included 13.8% in 2014, mainly as a result of a change in profit mix an exceptional impairment charge of USD 1.1 billion for the from lower to higher tax jurisdictions. Vaccines influenza business which was partially offset by an Core net income from continuing operations of USD 12.0 exceptional pre-tax gain of USD 0.9 billion from the divestment billion was down 5% (+9% cc), in line with core operating of our blood transfusion diagnostics unit. income. Net income from discontinued operations amounted to Core basic EPS from continuing operations was USD 5.01 USD 10.8 billion in 2015 compared to a net loss USD 447 mil- (–3%, +10% cc), growing ahead of core net income due to lower lion in 2014. For more information on discontinued operations average outstanding shares and lower minority interests. please see pages 145 and 147 and Note 30 to the Novartis Group consolidated financial statements. DISCONTINUED OPERATIONS Net sales to third parties from discontinued operations Operating income/loss from discontinued operations Net income/loss from discontinued operations Attributable to:    Shareholders of Novartis AG 10 758 – 444    Non-controlling interests 8 – 3 Basic earnings per share (USD) from discontinued operations Free cash flow from discontinued operations 4.48 – 0.18 – 230 – 172 Year ended Year ended Dec 31, 2015 Dec 31, 2014 USD millions USD millions 601 5 816 TOTAL GROUP For the total Group, net income amounted to USD 17.8 billion compared to USD 10.3 billion in 2014, impacted by the excep- tional divestment gains included in the net income from the discontinued operations. Basic earnings per share increased 12 477 – 353 to USD 7.40 from USD 4.21. 10 766 – 447 Factors affecting comparability of year-on-year results of operations SIGNIFICANT TRANSACTIONS IN 2015 The comparability of the year-on-year results of our operations Operational results for discontinued operations in 2015 include for the total Group can be significantly affected by acquisitions the results from the Vaccines influenza business, prior to its and divestments. The transactions of significance during 2015 divestment to CSL Limited on July 31, 2015, as well as results and 2014 are mentioned below. from the Vaccines non-influenza business and OTC until March 2, 2015. Operational results from the Animal Health business, PORTFOLIO TRANSFORMATION TRANSACTIONS which was divested on January 1, 2015 include only the divest- Transaction with Eli Lilly and Company ment gain. The prior year included the results of all divested On January 1, 2015, Novartis closed its transaction with Eli units during the full year. Lilly and Company, USA (Lilly) announced in April 2014 to Discontinued operations also include the exceptional pre- divest its Animal Health business for USD 5.4 billion in cash. tax gains of USD 12.7 billion from the divestment of Animal This resulted in a pre-tax gain of USD  4.6 billion which is Health (USD 4.6 billion) and the transactions with GSK (USD 2.8 recorded in operating income from discontinued operations. billion for the Vaccines non-influenza business and USD 5.9 billion arising from the contribution of Novartis OTC into the Transactions with GlaxoSmithKline plc GSK Consumer Healthcare joint venture). In addition, the GSK On March 2, 2015, Novartis closed its transactions with transactions resulted in USD 0.6 billion of additional transac- GlaxoSmithKline plc, Great Britain (GSK) announced in April tion-related costs that were expensed. 2014 with the following consequences: Net sales to third parties of the discontinued operations in 2015 amounted to USD 0.6 billion compared to USD 5.8 bil- Pharmaceuticals – Acquisition of GSK oncology products lion in 2014. Novartis acquired GSK’s oncology products and certain related Operating income from discontinued operations in 2015 assets for an aggregate cash consideration of USD 16.0 bil- amounted to an income of USD 12.5 billion which was mainly lion. Up to USD 1.5 billion of this cash consideration at the driven by the exceptional pre-tax gains from the portfolio trans- acquisition date is contingent on certain development mile- 146 | Novartis Annual Report 2015 FINANCIAL REPORT stones. The fair value of this potentially refundable consider- gain, net of transaction-related costs, of USD  5.9 billion is ation is USD 0.1 billion. In addition, under the terms of the recorded in operating income from discontinued operations. agreement, Novartis is granted a right of first negotiation over Novartis has four of eleven seats on the joint venture enti- the co-development or commercialization of GSK’s current ty’s Board of Directors. Furthermore, Novartis has customary and future oncology R&D pipeline, excluding oncology vaccines. minority rights and also exit rights at a pre-defined, mar- The right of first negotiation is for a period of 12.5 years from ket-based pricing mechanism. the acquisition closing date. The purchase price allocation of The investment is accounted for using the equity method the fair value of the consideration of USD 15.9 billion resulted of accounting using estimated results for the last quarter of in net identified assets of USD  13.5 billion and goodwill of the year. Any differences between this estimate and actual USD 2.4 billion. Since the acquisition the business generated results, when available, will be adjusted in the Group’s 2016 net sales of USD 1.8 billion. Management estimates net sales consolidated financial statements. for the entire year 2015 would have amounted to USD 2.1 bil- lion had the Oncology products been acquired at the begin- Additional GSK related cost ning of the 2015 reporting period. The net results from oper- The GSK transaction resulted in USD 0.6 billion of additional ations on a reported basis since the acquisition date were not transaction-related costs that were expensed. significant, mainly due to amortization of intangible assets. Transaction with CSL Vaccines – Divestment On October 26, 2014, Novartis entered into an agreement with Novartis has divested its Vaccines business (excluding its Vac- CSL to sell its Vaccines influenza business to CSL for USD 275 cines influenza business) to GSK for up to USD 7.1 billion, plus million. Entering into the separate divestment agreement with royalties. The USD 7.1 billion consists of USD 5.25 billion paid CSL resulted in the Vaccines influenza business being classi- at closing and up to USD 1.8 billion in future milestone pay- fied as a separate disposal group consisting of a group of cash ments. The fair value of the contingent future milestones and generating units within the Vaccines Division, requiring the royalties is USD 1.0 billion, resulting in a fair value of consid- performance of a separate valuation of the Vaccines influenza eration received of USD 6.25 billion. Included in this amount business net assets. This triggered the recognition of an excep- is a USD 450 million milestone payment received in late March tional impairment charge in 2014 of USD 1.1 billion, as the 2015. The sale of this business resulted in a pre-tax gain of estimated net book value of the Vaccines influenza business USD 2.8 billion which is recorded in operating income from net assets was above the USD 275 million consideration. The discontinued operations. transaction with CSL was completed on July 31, 2015, result- Novartis’s Vaccines influenza business is excluded from ing in a partial reversal of the impairment recorded in 2014 in the GSK Vaccines business acquisition. However, GSK entered the amount of USD 0.1 billion, which is included in operating into a future option arrangement with Novartis in relation to income from discontinued operations. the Vaccines influenza business, pursuant to which Novartis could have unilaterally required GSK to acquire the entire or OTHER SIGNIFICANT TRANSACTIONS IN 2015 certain parts of its Vaccines influenza business for consider- ation of up to USD 250 million (the Influenza Put Option) if the Pharmaceuticals – Acquisition of Spinifex Pharmaceuticals, Inc. divestment to CSL Limited, Australia (CSL), discussed below, On June  29, 2015 Novartis entered into an agreement to had not been completed. The option period was 18 months acquire Spinifex Pharmaceuticals, Inc. (Spinifex), a US and from the closing date of the GSK transaction, but terminated Australian-based, privately held development stage company, with the sale of the Vaccines influenza business to CSL on July focused on developing a peripheral approach to treat neuro- 31, 2015. Novartis paid GSK a fee of USD 5 million in consid- pathic pain. The transaction closed on July 24, 2015, and the eration for the grant of the Influenza Put Option. total purchase consideration was USD 312 million. The amount Consumer Health – Combination of Novartis OTC with GSK Consumer Healthcare in a joint venture consisted of an initial cash payment of USD 196 million and the net present value of the contingent consideration of USD 116 million due to previous Spinifex shareholders, which Novartis and GSK agreed to create a combined consumer they are eligible to receive upon achievement of specified devel- healthcare business through a joint venture between Novartis opment and commercialization milestones. The purchase price OTC and GSK Consumer Healthcare. On March 2, 2015, a new allocation resulted in net identifiable assets of USD 263 mil- entity was formed via contribution of businesses from both lion and goodwill of USD 49 million. Results of operations since Novartis and GSK. Novartis has a 36.5% interest in the newly the date of acquisition were not material. created entity. Novartis has valued the contribution of 63.5% of its OTC Division in exchange for 36.5% of the GSK Consumer Healthcare business at fair value. Based on the estimates of Pharmaceuticals – Acquisition of Admune Therapeutics LLC the fair values exchanged, an investment in an associated com- On October 16, 2015, Novartis acquired Admune Therapeu- pany of USD 7.6 billion was recorded. The resulting pre-tax tics LLC (Admune), a US-based, privately held company, broad- FINANCIAL REPORT | OPERATING AND FINANCIAL REvIEw 2015 Novartis Annual Report 2015 | 147 ening Novartis’ pipeline of cancer immunotherapies. The total purchase consideration amounted to USD 258 million. This CORPORATE – DIvESTMENT OF LTS LOHMANN THERAPIE-SYSTEME AG (LTS) SHAREHOLDING amount consists of an initial cash payment of USD 140 million On November 5, 2014, Novartis divested its 43% shareholding and the net present value of the contingent consideration of in LTS and realized a gain of approximately USD 0.4 billion which USD 118 million due to Admune’s previous owners, which they was recorded in income from associated companies. are eligible to receive upon the achievement of specified devel- opment and commercialization milestones. The purchase price allocation resulted in net identifiable assets of USD 258 mil- CLASSIFICATION AS CONTINUING OPERATIONS AND DISCONTINUED OPERATIONS lion. No goodwill was recognized. Results of operations since Following the April 22, 2014 announcement of the portfolio the date of acquisition were not material. transformation transactions with Lilly and GSK, as described above, Novartis reported the Group’s financial statements for SIGNIFICANT TRANSACTIONS IN 2014 the current and prior years as “continuing operations” and vACCINES – DIvESTMENT OF BLOOD TRANSFUSION DIAGNOSTICS UNIT “discontinued operations”. Continuing operations comprise the activities of the Phar- On January 9, 2014, Novartis completed the divestment of its maceuticals, Alcon and Sandoz Divisions and the continuing blood transfusion diagnostics unit to the Spanish company Corporate activities. Continuing operations also include the Grifols S.A., for USD 1.7 billion in cash. The pre-tax gain on results from Oncology assets acquired from GSK and the esti- this transaction was approximately USD 0.9 billion and was mated results from the 36.5% interest in the GSK/Novartis recorded in operating income from discontinued operations. consumer healthcare joint venture for the period from March PHARMACEUTICALS – ACQUISITION OF CoStim PHARMACEUTICALS, INC. 2, 2015 to December 31, 2015 (the latter reported as part of income from associated companies). Discontinued operations include in 2015 the operational On February 17, 2014, Novartis acquired all of the outstand- results from the Vaccines influenza business, prior to its divest- ing shares of CoStim Pharmaceuticals Inc., a Cambridge, Mas- ment to CSL Limited on July 31, 2015, as well as results from sachusetts, US-based, privately held biotechnology company the Vaccines non-influenza business and OTC business until focused on harnessing the immune system to eliminate March 2, 2015. Operational results from the Animal Health immune-blocking signals from cancer, for a total purchase business, which was divested on January 1, 2015, include only consideration of USD 248 million (excluding cash acquired). the divestment gain. This amount consists of an initial cash payment and the net Discontinued operations in 2015 also include the excep- present value of contingent consideration of USD 153 million tional pre-tax gain of USD 12.7 billion from the divestment of due to previous CoStim shareholders, which they are eligible Animal Health (USD 4.6 billion) and the transactions with GSK to receive upon the achievement of specified development and (USD 2.8 billion for the Vaccines non-influenza business and commercialization milestones. The purchase price allocation USD 5.9 billion arising from the contribution of Novartis OTC resulted in net identified assets of USD 152 million (excluding into the GSK Consumer Healthcare joint venture). In addition cash acquired) and goodwill of USD 96 million. Results of oper- the GSK transactions resulted in USD 0.6 billion of additional ations since the date of acquisition were not material. transaction-related expenses reported in Corporate discontin- ued operations. PHARMACEUTICALS – DIvESTMENT OF IDENIX PHARMACEUTICALS, INC. (IDENIX) SHAREHOLDING In 2014, discontinued operations include the results of the Vaccines influenza and non-influenza business, OTC and Ani- On August 5, 2014, Merck & Co., USA completed a tender offer mal Health for the full year. Results also included an excep- for Idenix. As a result, Novartis divested its 22% shareholding tional impairment charge of USD 1.1 billion for the Vaccines in Idenix and realized a gain of approximately USD 0.8 billion influenza business, which was reduced by USD 0.1 billion in which was recorded in income from associated companies. 2015 upon closing of the CSL transaction and an exceptional ALCON – ACQUISITION OF WaveteC vISION SYSTEMS, INC. (WaveteC) pre-tax gain of USD 0.9 billion arising from the USD 1.7 billion divestment of the blood transfusion diagnostics unit to Grifols S.A., completed on January 9, 2014. On October 16, 2014, Alcon acquired all of the outstanding Excluded from discontinued operations are certain intel- shares of WaveTec, a privately held company, for USD 350 mil- lectual property rights and related other revenues of the Vac- lion in cash. The purchase price allocation resulted in net iden- cines Division, which are retained by Novartis and are now tified assets of USD 180 million and goodwill of USD 170 mil- reported under Corporate activities. lion. Results of operations since the date of acquisition were As required by IFRS, results of the discontinued operations not material. exclude any further depreciation and amortization related to discontinued operations from the date of the portfolio trans- formation announcement of April 22, 2014. 148 | Novartis Annual Report 2015 FINANCIAL REPORT Free cash flow Novartis defines free cash flow as cash flow from operating activities and cash flow associated with the purchase or sale of property, plant and equipment, intangible, other non-current and financial assets. Cash flows in connection with the acquisi- tion or divestment of subsidiaries, associated companies and non-controlling interests in subsidiaries are not taken into account to determine free cash flow. The free cash flow measure, which is a non-IFRS measure, is discussed more on page 165. The following is a summary of the free cash flow: 2015 Change USD millions USD millions USD millions 2014 Operating income from continuing operations Reversal of non-cash items    Depreciation, amortization and impairments    Change in provisions and other non-current liabilities    Other Operating income adjusted for non-cash items Interest and other financial receipts Interest and other financial payments Taxes paid Payments out of provisions and other net cash movements in non-current liabilities Change in inventory and trade receivables less trade payables Change in other net current assets and other operating cash flow items Cash flows from operating activities from continuing operations Purchase of property, plant & equipment Purchase of intangible assets Purchase of financial assets Purchase of other non-current assets Proceeds from sales of property, plant & equipment Proceeds from sales of intangible assets Proceeds from sales of financial assets Proceeds from sales of other non-current assets Free cash flow from continuing operations Free cash flow from discontinued operations Free cash flow 8 977 11 089 – 2 112 5 575 1 642 – 96 4 751 1 490 824 152 122 – 218 16 098 17 452 – 1 354 1 180 – 669 1 067 – 692 113 23 – 2 454 – 2 179 – 275 – 1 207 – 1 125 – 617 – 246 – 731 106 – 82 114 – 352 12 085 13 898 – 1 813 – 2 367 – 2 624 – 1 138 – 264 – 82 237 621 166 1 – 780 – 239 – 60 60 246 431 2 257 – 358 – 25 – 22 177 375 – 265 – 1 9 259 10 934 – 1 675 – 230 – 172 – 58 9 029 10 762 – 1 733 In 2015, free cash flow from continuing operations decreased proceeds from Novartis Venture Fund divestments and com- by 15% to USD 9.3 billion compared to USD 10.9 billion in mercial settlements. Total free cash flow including the continu- 2014. This decrease was primarily due to the negative cur- ing and discontinued operations was USD 9.0 billion in 2015 rency impact on operations. The prior year also included higher compared to USD 10.8 billion in 2014. FINANCIAL REPORT | OPERATING AND FINANCIAL REvIEw 2015 Novartis Annual Report 2015 | 149 Liquidity, cash flow and capital resources chase of property, plant and equipment, intangible and other non-current assets and the net outflow of USD 0.3 billion from the change in marketable securities. In 2014, cash flows used in investing activities from con- The following tables summarize the Group’s cash flow and net tinuing operations was a small net outflow of USD 8 million. debt: Cash flows from operating activities from continuing operations Cash flows used in investing activities from continuing operations Cash flows from operating and investing activities from discontinued operations Cash flows used in financing activities Currency translation effect on cash and cash equivalents Net change in cash and cash equivalents Change in marketable securities, commodities, time deposits and derivative financial instruments Change in current and non-current financial debts and derivative financial instruments 2015 Change USD millions USD millions USD millions 2014 12 085 13 898 – 1 813 This was primarily due to net outflows of USD 0.3 billion from the acquisition of businesses, USD 3.0 billion mainly from pur- chase of property, plant and equipment, offset by USD 1.4 bil- lion of proceeds from the sale of investments in associated companies, particularly LTS Lohmann Therapie-Systeme AG and Idenix Pharmaceuticals, Inc. and USD 1.9 billion proceeds from the net sale of other marketable securities, including – 19 666 – 8 – 19 658 maturing long-term deposits. 8 694 888 7 806 USD 9.2 billion, compared to USD 8.1 billion in 2014. The 2015 The cash flows used in financing activities amounted to – 9 176 – 8 147 – 1 029 amount includes a cash outflow of USD 6.6 billion for the div- idend payment and USD 4.5 billion for treasury share trans- actions, net. The net inflow from the increase in current and – 286 – 295 9 non-current financial debt of USD 2.0 billion was mainly due – 8 349 6 336 – 14 685 – 66 – 1 696 1 630 – 1 520 – 2 393 873 Change in net debt – 9 935 2 247 – 12 182 Net debt at January 1 – 6 549 – 8 796 2 247 Net debt at December 31 – 16 484 – 6 549 – 9 935 Group net debt consists of: 2015 Change USD millions USD millions USD millions 2014 Current financial debts and derivative financial instruments – 5 604 – 6 612 1 008 Non-current financial debts – 16 327 – 13 799 – 2 528 Total financial debt – 21 931 – 20 411 – 1 520 to the issuance of three Swiss franc denominated bonds for a total amount of USD 1.5 billion in the first half of 2015, the issuance of two US dollar denominated bonds totaling USD 3.0 billion in the fourth quarter 2015 and the increase in commer- cial paper outstanding of USD 0.4 billion, partially offset by the repayment at maturity of a US dollar denominated bond of USD 2.0 billion and a Swiss franc denominated bond of USD 0.9 billion. In 2014, the cash outflows included USD 6.8 billion for the dividend payment and USD 4.5 billion for trea- sury share transactions, net. These outflows were partially off- set by increase in the current and non-current financial debt of USD 3.3 billion. The net cash inflows from discontinued operations of USD 8.7 billion in 2015 were mainly driven by the net proceeds of USD 8.9 billion from the divestments in connection with the portfolio transformation transactions. In 2014, the net cash inflow of USD 0.9 billion consisted mainly of proceeds from the divestment of the blood transfusion diagnostics unit to Gri- fols S.A. Total financial debt, including derivatives, amounted to USD 21.9 billion at December 31, 2015 compared to USD 20.4 Less liquidity    Cash and cash    equivalents    Marketable securities,    commodities, time    deposits and derivative    financial instruments 4 674 13 023 – 8 349 billion at December 31, 2014. 773 839 – 66 at December 31, 2014. The increase was mainly due to the Non-current financial debt increased by USD 2.5 billion to USD 16.3 billion at December 31, 2015, from USD 13.8 billion Total liquidity 5 447 13 862 – 8 415 issuance of three Swiss franc denominated bonds for a total Net debt at December 31 – 16 484 – 6 549 – 9 935 amount of USD 1.5 billion and the issuance of two US dollar denominated bonds for a total of USD 3.0 billion, partially off- Cash flow from operating activities from continuing operations set by the reclassification to current financial debt of a euro decreased to USD 12.1 billion from USD 13.9 billion in 2014. denominated bond of USD 1.6 billion. The decrease was primarily due to the negative currency Current financial debt decreased by USD  1.0 billion to impact on operations. The prior year also included higher pro- USD 5.6 billion at December 31, 2015, from USD 6.6 billion at ceeds from commercial settlements. December 31, 2014. The decrease was mainly due to repay- The cash outflow for investing activities from continuing ment at maturity of a US dollar denominated bond of USD 2.0 operations amounted to USD 19.7 billion in 2015. This was pri- billion and a Swiss franc denominated bond of USD 0.9 billion, marily due to the outflow of USD 16.5 billion for acquisitions partially offset by the reclassification from non-current finan- of businesses, mainly the oncology business from GSK for cial debt of the USD 1.6 billion euro denominated bond men- USD 16.0 billion, the net outflow of USD 2.8 billion for the pur- tioned above. 150 | Novartis Annual Report 2015 FINANCIAL REPORT Overall current financial debt consists of the current por- This credit facility is provided by a syndicate of banks and is tion of non-current debt of USD 1.7 billion and other short- intended to be used as a backstop for the US commercial paper term borrowings (including derivatives and commercial paper) programs. It matures in September 2020 and was undrawn of USD 3.9 billion. Group net debt increased to USD 16.5 bil- as per December 31, 2015. lion at the end of 2015 compared to USD 6.5 billion at the end The long-term credit rating for the company continues to of 2014. be double-A (Moody’s Aa3; Standard & Poor’s AA–; Fitch AA). Novartis has two US commercial paper programs under We are not aware of significant demands to change our which it can issue up to USD 9 billion in the aggregate of unse- level of liquidity needed to support our normal business cured commercial paper notes. Novartis also has a Japanese activities. We make use of various borrowing facilities provided commercial paper program under which it can issue up to JPY by several financial institutions. We also successfully issued 150 billion (approximately USD 1.25 billion) of unsecured com- various bonds in 2009, 2010, 2012, 2014 and 2015 and raised mercial paper notes. Commercial paper notes totaling USD 1.1 funds through our commercial paper programs. In addition, billion under these three programs were outstanding as per reverse repurchasing agreements are contracted and Novartis December 31, 2015. Novartis further has a committed credit has entered into credit support agreements with various banks facility of USD 6 billion, entered into on September 23, 2015. for derivative transactions. An overview of our current financial debt and related interest rates is set forth below: 2015 Interest-bearing accounts of associates payable on demand Other bank and financial debt Commercial paper Current portion of non-current financial debt Fair value of derivative financial instruments Total current financial debt 2014 Interest-bearing accounts of associates payable on demand Other bank and financial debt Commercial paper Current portion of non-current financial debt Fair value of derivative financial instruments Total current financial debt na = not applicable or available December 31 USD millions 1 645 1 185 1 085 1 659 30 5 604 1 651 1 272 648 2 989 52 6 612 Maximum Average interest rate balance at year end during the year during the year during the year % USD millions Average interest rate % USD millions Average balance 0.62 5.98 0.62 na na 1.00 5.32 0.26 na na 1 720 1 280 3 545 1 916 79 8 540 1 792 1 537 1 260 2 565 50 7 204 0.59 5.54 0.19 na na 1.00 4.40 0.13 na na 1 803 2 785 5 686 3 044 188 13 506 1 891 2 074 3 076 3 500 92 10 633 Interest bearing accounts of associates payable on demand relate to employee deposits in CHF from the compensation of associates employed by Swiss entities (December 31, 2015 interest rate: 0.5%). Other bank and financial debt refer to usual lending and overdraft facilities. FINANCIAL REPORT | OPERATING AND FINANCIAL REvIEw 2015 Novartis Annual Report 2015 | 151 The maturity schedule of our net debt is as follows: December 31, 2015 Current assets Due later than Due later than Due later than one year one month three months Due within but less than but less than but less than five years one month one year Due after five years Total USD millions USD millions USD millions USD millions USD millions USD millions three months Marketable securities and time deposits 22 11 200 247 Commodities Derivative financial instruments and accrued interest Cash and cash equivalents Total current financial assets Non-current liabilities Financial debt Financial debt – undiscounted Total non-current financial debt Current liabilities Financial debt Financial debt – undiscounted Derivative financial instruments Total current financial debt 40 4 674 4 736 67 38 78 238 247 148 62 86 542 86 145 4 674 5 447 – 4 664 – 11 663 – 16 327 – 4 676 – 11 797 – 16 473 – 4 664 – 11 663 – 16 327 – 3 258 – 3 258 – 289 – 2 027 – 289 – 2 028 – 8 – 20 – 2 – 3 266 – 309 – 2 029 – 5 574 – 5 575 – 30 – 5 604 Net debt 1 470 – 231 – 1 791 – 4 417 – 11 515 – 16 484 December 31, 2014 Current assets Marketable securities and time deposits Commodities Derivative financial instruments and accrued interest Cash and cash equivalents Total current financial assets Non-current liabilities Financial debt Financial debt – undiscounted Total non-current financial debt Current liabilities Financial debt Financial debt – undiscounted Derivative financial instruments Total current financial debt Due later than Due later than Due later than one year one month three months Due within but less than but less than but less than five years one month three months Due after five years Total USD millions USD millions USD millions USD millions USD millions USD millions one year 68 37 181 76 21 97 161 9 623 9 902 72 126 3 400 3 594 383 97 359 13 023 109 181 76 13 862 – 5 423 – 8 376 – 13 799 – 5 434 – 8 470 – 13 904 – 5 423 – 8 376 – 13 799 – 2 678 – 2 678 – 335 – 3 547 – 335 – 3 549 – 18 – 32 – 2 – 2 696 – 367 – 3 549 – 6 560 – 6 562 – 52 – 6 612 Net debt 7 206 3 227 – 3 440 – 5 242 – 8 300 – 6 549 152 | Novartis Annual Report 2015 FINANCIAL REPORT The following table provides a breakdown of liquidity and financial debt by currency: LIQUIDITY AND FINANCIAL DEBT BY CURRENCY (as of December 31) USD EUR CHF JPY Other Liquidity in % 2015 1 Liquidity in % 2014 1 Financial debt in % 2015 2 Financial debt in % 2014 2 50 16 13 1 20 100 80 1 10 9 100 64 14 14 5 3 59 17 13 8 3 100 100 1 Liquidity includes cash and cash equivalents, marketable securities, commodities and time deposits. 2 Financial debt includes non-current and current financial debt. Contractual obligations The following table summarizes the Group’s contractual obligations and other commercial commitments, as well as the effect these obligations and commitments are expected to have on the Group’s liquidity and cash flow in future periods: Payments due by period After 5 years USD millions USD millions USD millions USD millions USD millions Less than 1 year 4–5 years 2–3 years Total Non-current financial debt, including current portion 17 986 1 659 Operating leases Unfunded pensions and other post-employment benefit plans Research & Development    Unconditional commitments    Potential milestone commitments Purchase commitments    Property, plant & equipment Total contractual cash obligations 2 996 2 165 650 2 405 273 113 88 601 505 335 234 147 781 5 460 10 362 207 251 265 626 2 181 1 567 150 397 359 304 55 26 561 3 038 2 057 6 809 14 657 The Group intends to fund the R&D and purchase commitments with internally generated resources. FINANCIAL REPORT | OPERATING AND FINANCIAL REvIEw 2015 Novartis Annual Report 2015 | 153 Effects of currency fluctuations ment and balance sheet. The Group is exposed to a potential adverse devaluation risk on its intercompany funding and total investment in certain subsidiaries operating in countries with exchange controls. We transact our business in many currencies other than the The most significant country in this respect is Venezuela, US dollar, our reporting currency. where the Group is exposed to potential devaluation losses in The following provides an overview of net sales and oper- the income statement on its total intercompany balances with ating expenses for our continuing operations based on IFRS its subsidiaries in Venezuela, which at December 31, 2015 values for 2015 and 2014 for currencies most important to amounted to USD 0.3 billion. The Group also has an equiva- the Group: Currency US dollar (USD) Euro (EUR) Swiss franc (CHF) Japanese yen (JPY) Chinese yuan (CNY) British pound (GBP) Canadian dollar (CAD) Brazilian real (BRL) Australian dollar (AUD) Russian ruble (RUB) Other currencies 2015 2014 Operating Operating Net sales expenses Net sales expenses % % % % 40 24 2 6 4 3 3 2 2 1 13 42 23 13 4 3 3 1 2 1 1 7 36 26 2 7 3 3 3 2 2 2 14 39 25 13 5 3 2 1 2 1 1 8 lent of approximately USD 0.2 billion of cash in local currency, which is only slowly being approved for remittance outside of the country and which is subject to loss of purchase power due to high inflation in the country. Subsidiaries whose functional currencies have experienced a cumulative inflation rate of more than 100% over the past three years apply the rules of IAS 29 “Financial Reporting in Hyperinflationary Economies”. Gains and losses incurred upon adjusting the carrying amounts of non-monetary assets and liabilities for inflation are recognized in the income statement. The subsidiaries in Venezuela restate non-monetary items in the balance sheet in line with the requirements of IAS 29. The corresponding monetary loss of USD 72 million is included in the 2015 financial results. In 2014 and through October 2015, the exchange rate used by the Group for consolidation of the financial statements of its Venezuela subsidiaries was the official exchange rate for Operating expenses in the above table include Cost of goods the Venezuela bolivar (VEF) of VEF 6.3/USD, which is available sold, Marketing & Sales, Research & Development, General & for imports of specific goods and services of national priority, Administration, Other income and Other expense. including medicines and medical supplies, as published by the We prepare our consolidated financial statements in US Centro Nacional de Comercio Exterior (CENCOEX, formerly dollars. As a result, fluctuations in the exchange rates between CADIVI). the US dollar and other currencies can have a significant effect In November 2015, a Venezuela subsidiary of the Group on both the Group’s results of operations as well as on the agreed with CENCOEX to settle a substantial part of our inter- reported value of our assets, liabilities and cash flows. This in company trade payables dated on or before December 31, turn may significantly affect reported earnings (both positively 2014 in a transaction that required the Venezuela subsidiary and negatively) and the comparability of period-to-period to purchase a USD denominated bond at par value issued by results of operations. Petróleos de Venezuela (PDVSA), with a coupon rate of 6% per For purposes of our consolidated balance sheets, we trans- annum maturing in 2024. In Venezuela there are differing offi- late assets and liabilities denominated in other currencies into cial exchange rates against the USD and for the settlement of US dollars at the prevailing market exchange rates as of the these intercompany trade payables, through the purchase of relevant balance sheet date. For purposes of the Group’s con- the USD bond, CENCOEX set the exchange rate at VEF 11.0/ solidated income and cash flow statements, revenue, expense USD. As a result, from November 2015 the Group changed its and cash flow items in local currencies are translated into US exchange rate used for the consolidation of the financial state- dollars at average exchange rates prevailing during the rele- ments of its Venezuela subsidiaries. The use of the new vant period. As a result, even if the amounts or values of these exchange rate by the Venezuela subsidiaries resulted in a items remain unchanged in the respective local currency, USD 211 million loss from the re-measurement of the intra- changes in exchange rates have an impact on the amounts or Group and third party liabilities. values of these items in our consolidated financial statements. As agreed with CENCOEX, the Venezuela subsidiary pur- Because our expenditures in Swiss francs are significantly chased the PDVSA bond on December 9, 2015. The bond was higher than our revenues in Swiss francs, volatility in the value sold on December 11, 2015. The proceeds from the sale of this of the Swiss franc can have a significant impact on the reported bond were USD 73 million resulting in a loss of USD 127 mil- value of our earnings, assets and liabilities, and the timing and lion. extent of such volatility can be difficult to predict. In addition, We seek to manage currency exposure by engaging in there is a risk that certain countries could take steps which hedging transactions where management deems appropriate, could significantly impact the value of their currencies. after taking into account the natural hedging afforded by our There is also a risk that certain countries could devalue global business activity. For 2015, we entered into various con- their currency. If this occurs, then it could impact the effective tracts that change in value with movements in foreign exchange prices we would be able to charge for our products and also rates in order to preserve the value of assets, commitments have an adverse impact on both our consolidated income state- and expected transactions. We use forward contracts and for- 154 | Novartis Annual Report 2015 FINANCIAL REPORT eign currency options to hedge. For more information on how euro, Japanese yen and emerging market currencies (espe- these transactions affect our consolidated financial statements cially the Brazilian real and Russian ruble) decreased in 2015 and on how foreign exchange rate exposure is managed, see against the USD dollar. In January 2015, following an announce- Notes 1, 5, 16 and 29 to the Group’s consolidated financial ment by the Swiss National Bank that it was discontinuing its statements. minimum exchange rate with the euro, the value of the Swiss In 2015, the US dollar significantly increased in value franc increased versus the euro and the USD. against most currencies. In particular, the average value of the The following table sets forth the foreign exchange rates of the US dollar against key currencies used for foreign currency translation when preparing the Group’s consolidated financial statements: USD per unit AUD BRL CAD CHF CNY EUR GBP JPY (100) RUB (100) Average for year Year-end 2015 0.753 0.305 0.784 1.040 0.159 1.110 1.529 0.826 1.649 2014 Change in % 0.903 0.426 0.906 1.094 0.162 1.329 1.648 0.947 2.649 – 17 – 28 – 13 – 5 – 2 – 16 – 7 – 13 – 38 2015 0.731 0.253 0.721 1.011 0.154 1.093 1.483 0.831 1.362 2014 Change in % 0.819 0.376 0.861 1.010 0.161 1.215 1.556 0.836 1.722 – 11 – 33 – 16 0 – 4 – 10 – 5 – 1 – 21 The following table provides a summary of the currency impact on key Group figures due to their conversion into USD, the Group’s reporting currency, of the financial data from entities reporting in non-US dollars. Constant currency (cc) calculations apply the exchange rates of the prior year to the current year financial data for entities reporting in non-US dollars. CURRENCY IMPACT ON KEY FIGURES Net sales from continuing operations Operating income from continuing operations Net income from continuing operations Core operating income from continuing operations Core net income from continuing operations Change in constant currencies % 2015 Percentage Change in point currency impact 2015 USD % 2015 Change in constant currencies % 2014 Percentage Change in point currency impact 2014 USD % 2014 5 – 2 – 18 10 9 – 5 – 19 – 34 – 5 – 5 – 10 – 17 – 16 – 15 – 14 3 7 21 7 8 1 1 15 2 3 – 2 – 6 – 6 – 5 – 5 For additional information on the effects of currency fluctuations, see Note 29 to the Group’s consolidated financial statements. FINANCIAL REPORT | OPERATING AND FINANCIAL REvIEw 2015 Novartis Annual Report 2015 | 155 34 217 23 832 10 385 ables, inventories and other current assets were in line with Condensed Consolidated Balance Sheets Change Dec 31, 2015 Dec 31, 2014 USD millions USD millions USD millions 15 982 15 983 – 1 31 174 29 311 1 863 6 226 8 180 2 992 6 093 8 275 2 530 133 – 95 462 5 447 13 862 – 8 415 Assets Property, plant & equipment Goodwill Intangible assets other than goodwill Financial and other non-current assets Inventories Trade receivables Other current assets Cash, marketable securities, commodities, time deposits and derivative financial instruments Assets related to discontinued operations 1 Total non-current assets 108 711 87 826 20 885 27 338 18 700 8 638 ture of USD 7.6 billion, while investments in property, plant and equipment were in line with the prior year. Total current assets decreased by USD  14.7 billion to USD  22.8 billion at December 31, 2015, as cash and cash equivalents decreased by USD 8.4 billion to USD 5.4 billion, mainly on account of the net cash outflows from the portfolio transformation transactions as well as the dividend payment. The assets related to discontinued operations and held for sale reduced by USD 6.8 billion as a result of the closing of the portfolio transformation transactions in 2015. Trade receiv- the prior year. Based on our current incurred loss provisioning approach, we consider that our doubtful debt provisions are adequate. However, we intend to continue to monitor the level of trade receivables in Greece, Italy, Portugal and Spain (the “GIPS countries”). Should there be a substantial deterioration in our economic exposure with respect to those countries, we may increase our level of provisions by moving to an expected loss provisioning approach or may change the terms of trade on 0 6 801 – 6 801 which we operate. Total current assets 22 845 37 561 – 14 716 Total assets 131 556 125 387 6 169 The following table provides an overview of our aging anal- ysis of our trade receivables as of December 31, 2015 and 2014: Equity and liabilities Total equity Financial debts 77 122 70 844 16 327 13 799 Other non-current liabilities 14 399 13 771 Total non-current liabilities 30 726 27 570 Trade payables 5 668 5 419 6 278 2 528 628 3 156 249 Financial debts and derivatives 5 604 6 612 – 1 008 Other current liabilities 12 436 12 524 – 88 Liabilities related to discontinued operations 1 0 2 418 – 2 418 Total current liabilities 23 708 26 973 – 3 265 Total liabilities 54 434 54 543 Total equity and liabilities 131 556 125 387 – 109 6 169 1 For details of discontinued operations in the consolidated balance sheet, refer to Note 30 to the consolidated financial statements. Not overdue Past due for not more than one month Past due for more than one month but less than three months Past due for more than three months but less than six months Past due for more than six months but less than one year Past due for more than one year 2015 2014 USD millions USD millions 7 318 265 7 406 334 255 193 156 135 275 174 102 140 Provisions for doubtful trade receivables Total trade receivables, net – 142 8 180 – 156 8 275 With regard to the GIPS countries, the majority of the outstand- ing trade receivables from these countries are due directly from local governments or from government-funded entities. Total non-current assets of USD 108.7 billion at December 31, The gross trade receivables from GIPS countries at December 2015 increased by USD 20.9 billion compared to December 31, 2015 amount to USD 920 million (2014: USD 915 million), 31, 2014. Intangible assets other than goodwill increased by of which USD 58 million are past due for more than one year USD 10.4 billion to USD 34.2 billion, mainly on account of the (2014: USD 69 million) and for which provisions of USD 37 new oncology assets acquired from GSK, which added prod- million have been recorded (2014: USD 48 million). At Decem- uct rights amounting to USD 13.0 billion to the intangible assets ber 31, 2015 amounts past due for more than one year are not of the Group. This increase was partially offset by the amorti- significant in any of the GIPS countries on a standalone basis. zation of intangible assets of USD 3.8 billion. Goodwill increased There is also a risk that certain countries could devalue by USD 1.9 billion to USD 31.2 billion, mainly on account of their currency. The most significant exposure for Novartis in the goodwill of USD 2.4 billion recorded on the new oncology this respect is in Venezuela, which is described in more detail assets, partially offset by currency translation adjustments of in paragraph “Effects of currency fluctuation” on page 153. USD 0.6 billion. Trade payables, other current and non-current liabilities Financial and other non-current assets increased by of USD 32.5 billion increased by USD 0.8 billion compared to USD 8.6 billion to USD 27.3 billion, mainly on account of the USD 31.7 billion at December 31, 2014. This change was due 36.5% investment in the GSK consumer healthcare joint ven- to an increase in other non-current liabilities of USD 0.6 bil- lion and an increase in trade payables of USD 0.2 billion. The 156 | Novartis Annual Report 2015 FINANCIAL REPORT liabilities related to discontinued operations and held for sale income of USD  17.8 billion, share-based compensation of reduced by USD 2.4 billion as a result of the closing of the USD 0.8 billion and the settlement of the obligation under the portfolio transformation transactions in 2015. share repurchase agreement of USD 0.7 billion. The increase Included in other current liabilities are USD 1.7 billion relat- was partially offset by the USD 6.6 billion dividend payment, ing to outstanding taxes. While there is some uncertainty about net purchases of treasury shares of USD 4.5 billion, unfavor- the final taxes to be assessed in our major countries, we able currency translation differences of USD 1.7 billion and consider this uncertainty to be limited since our tax assess- net actuarial losses from defined benefit plans of USD 0.1 bil- ments are generally relatively current. In our key countries, lion. Switzerland and the US, assessments have been agreed by the The Group’s liquidity amounted to USD  5.4 billion at tax authorities up to 2010 in Switzerland and in the US up to December 31, 2015, compared to USD 13.9 billion at Decem- 2009, with the exception of one open US position in 2007. ber 31, 2014, and net debt increased over the same period by The Group’s equity increased by USD 6.3 billion to USD 77.1 USD  10.0 billion to USD  16.5 billion. The debt/equity ratio billion at December 31, 2015, compared to USD 70.8 billion decreased to 0.28:1 at December 31, 2015 compared to 0.29:1 at December 31, 2014. The increase was on account of our net at December 31, 2014. SUMMARY OF EQUITY MOvEMENTS ATTRIBUTABLE TO NOvARTIS AG SHAREHOLDERS Number of outstanding shares (in millions) Issued share capital and reserves attributable to Novartis AG shareholders Balance at beginning of year 2 398.6 2 426.1 – 27.5 70 766 74 343 – 3 577 2015 2014 Change Change USD millions USD millions USD millions 2014 2015 Shares acquired to be held in Group Treasury Shares acquired to be canceled Other share purchases Increase in equity from exercise of options and employee transactions Equity-based compensation Decrease/(Increase) of treasury share repurchase obligation under a share buy-back trading plan Dividends Net income of the year attributable to shareholders of Novartis AG Other comprehensive income attributable to shareholders of Novartis AG – 9.6 – 49.9 – 4.1 27.0 11.9 – 46.8 – 27.0 – 5.4 41.4 10.3 37.2 – 897 – 4 057 3 160 – 22.9 – 4 805 – 2 396 – 2 409 1.3 – 417 – 473 56 – 14.4 1 592 1.6 815 2 400 1 143 658 – 658 – 6 643 – 6 810 – 808 – 328 1 316 167 17 783 10 210 7 573 Balance at end of year 2 373.9 2 398.6 – 24.7 77 046 70 766 – 1 806 – 2 936 1 130 6 280 During 2015, 38.9 million treasury shares were delivered as a billion share buyback announced in 2013, which was com- result of options being exercised and physical share deliveries pleted in November 2015, and also to offset the dilutive impact related to equity-based participation plans (2014: 51.7 million from equity-based participation plans (2014: 27.0 million). shares). 9.6 million shares were repurchased on the SIX Swiss With these transactions, the total number of shares outstand- Exchange first trading line (2014: 46.8 million), 4.1 million ing was reduced by 24.7 million in 2015 (2014: reduction of shares were acquired from employees which were previously 27.5 million shares) and the sixth share buyback program, granted to them under the respective programs (2014: 5.4 which was approved by the shareholders at the AGM 2008 has million). In addition, Novartis repurchased 49.9 million shares been completed. on the SIX Swiss Exchange second trading line under the USD 5 FINANCIAL REPORT | OPERATING AND FINANCIAL REvIEw 2015 Novartis Annual Report 2015 | 157 Critical accounting policies and estimates based on the terms of individual plan agreements, product sales and population growth, product price increases and the mix of contracts, and are adjusted periodically. We offer rebates to key managed healthcare plans in an Our significant accounting policies are set out in Note 1 to the effort to sustain and increase sales of our products. These Group’s consolidated financial statements, which are prepared rebate programs provide payors a rebate after they have in accordance with International Financial Reporting Standards demonstrated they have met all terms and conditions set forth (IFRS) as issued by the International Accounting Standards in their contract with us. These rebates are estimated based Board (IASB). on the terms of individual agreements, historical experience Given the uncertainties inherent in our business activities, and projected product growth rates. We adjust provisions we must make certain estimates and assumptions that require related to these rebates periodically to reflect actual experi- difficult, subjective and complex judgments. Because of ence. uncertainties inherent in such judgments, actual outcomes There is often a time lag of several months between us and results may differ from our assumptions and estimates, recording the revenue deductions and our final accounting for which could materially affect the Group’s consolidated finan- them. cial statements. Application of the following accounting policies requires certain assumptions and estimates that have the potential for the most significant impact on our consolidated NON-UNITED STATES SPECIFIC HEALTHCARE PLANS AND PROGRAM REBATES financial statements. In certain countries other than the US, we provide rebates to governments and other entities. These rebates are often DEDUCTIONS FROM REvENUES mandated by laws or government regulations. As is typical in the pharmaceuticals industry, our gross sales In several countries we enter into innovative pay-for- are subject to various deductions which are composed primar- performance arrangements with certain healthcare providers, ily of rebates and discounts to retail customers, government especially in Europe and Australia. Under these agreements, agencies, wholesalers, health insurance companies and man- we may be required to make refunds to the healthcare provid- aged healthcare organizations. These deductions represent ers or to provide additional medicines free of charge if antici- estimates of the related obligations, requiring the use of judg- pated treatment outcomes do not meet predefined targets. ment when estimating the effect of these sales deductions on Potential refunds and the delivery of additional medicines at gross sales for a reporting period. These adjustments are no cost are estimated and recorded as a deduction of revenue deducted from gross sales to arrive at net sales. at the time the related revenues are recorded. Estimates are The following summarizes the nature of some of these based on historical experience and clinical data. In cases where deductions and how the deduction is estimated. After record- historical experience and clinical data are not sufficient for a ing these, net sales represent our best estimate of the cash reliable estimation of the outcome, revenue recognition would that we expect to ultimately collect. The US market has the be deferred until such history would be available. In addition, most complex arrangements related to revenue deductions. we offer global patient assistance programs. UNITED STATES SPECIFIC HEALTHCARE PLANS AND PROGRAM REBATES The United States Medicaid Drug Rebate Program is adminis- There is often a time lag of several months between us recording the revenue deductions and our final accounting for them. tered by State governments using State and Federal funds to provide assistance to certain vulnerable and needy individuals NON-HEALTHCARE PLANS AND PROGRAM REBATES, RETURNS AND OTHER DEDUCTIONS and families. Calculating the rebates to be paid related to this Charge-backs occur where our subsidiaries have arrangements Program involves interpreting relevant regulations, which are with indirect customers to sell products at prices that are lower subject to challenge or change in interpretative guidance by than the price charged to wholesalers. A charge-back represents government authorities. Provisions for estimating Medicaid the difference between the invoice price to the wholesaler and rebates are calculated using a combination of historical expe- the indirect customer’s contract price. We account for vendor rience, product and population growth, product price increases charge-backs by reducing revenue by an amount equal to our and the mix of contracts and specific terms in the individual estimate of charge-backs attributable to a sale and they are State agreements. These provisions are adjusted based on generally settled within one to three months of incurring the established processes and experiences from filing data with liability. Provisions for estimated charge-backs are calculated individual States. using a combination of factors such as historical experience, The United States Federal Medicare Program, which funds product growth rates, payments, level of inventory in the healthcare benefits to individuals age 65 or older, provides distribution channel, the terms of individual agreements and prescription drug benefits under Part D of the program. This our estimate of the claims processing time lag. benefit is provided through private prescription drug plans. We offer rebates to purchasing organizations and other Provisions for estimating Medicare Part D rebates are calculated direct and indirect customers to sustain and increase market 158 | Novartis Annual Report 2015 FINANCIAL REPORT share for our products. Since rebates are contractually agreed existing inventory for the relevant product. Provisions for shelf upon, rebates are estimated based on the terms of the stock adjustments, which are primarily relevant within the individual agreements, historical experience, and projected Sandoz Division, are determined at the time of the price decline product growth rates. or at the point of sale, if the impact of a price decline on the When we sell a product providing a customer the right to products sold can be reasonably estimated based on the return it, we record a provision for estimated sales returns customer’s inventory levels of the relevant product. based on our sales returns policy and historical rates. Other Other sales discounts, such as consumer coupons and factors considered include actual product recalls, expected co-pay discount cards, are offered in some markets. The esti- marketplace changes, the remaining shelf life of the product, mated amount of these discounts are recorded at the time of and the expected entry of generic products. In 2015, sales sale, or when the coupon is issued, and are estimated utilizing returns amounted to approximately 1% of gross product sales. historical experience and the specific terms for each program. If sufficient experience is not available, sales are only recorded If a discount for a probable future transaction is offered as part based on evidence of product consumption or when the right of a sales transaction then an appropriate portion of revenue of return has expired. is deferred to cover this estimated obligation. We enter into distribution service agreements with major We adjust provisions for revenue deductions periodically wholesalers, which provide a financial disincentive for the to reflect actual experience. To evaluate the adequacy of pro- wholesalers to purchase product quantities in excess of cur- vision balances, we use internal and external estimates of the rent customer demand. Where possible, we adjust shipping level of inventory in the distribution channel, actual claims data patterns for our products to maintain wholesalers’ inventories received and the time lag for processing rebate claims. level consistent with underlying patient demand. Management also estimates the level of inventory of the rele- We offer cash discounts to customers to encourage prompt vant product held by retailers and in transit. External data payment. Cash discounts are estimated and accrued at the sources include reports of wholesalers and third-party market time of invoicing and deducted from revenue. data purchased by Novartis. Following a decrease in the price of a product, we generally grant customers a “shelf stock adjustment” for a customer’s The following table shows the worldwide extent of our revenue deductions provisions and related payment experiences for the Pharmaceuticals, Alcon and Sandoz divisions: PROvISIONS FOR REvENUE DEDUCTIONS Income statement charge Effect of currency translation Revenue deductions Revenue offset against deductions gross trade provisions at receivables December 31 USD millions USD millions USD millions USD millions USD millions USD millions USD millions January 1 combinations utilizations of prior years Current year provisions at and business Payments/ Adjustments Change in provisions 2015 US-specific healthcare plans and program rebates 1 097 – 2 823 – 90 2 981 Non-US-specific healthcare plans and program rebates 1 015 – 109 – 1 716 – 3 1 846 – 9 Non-healthcare plans and program-related rebates, returns and other deductions 1 421 – 69 – 10 679 – 124 10 993 Total continuing operations 2015 3 533 – 178 – 15 218 – 217 15 820 59 50 2014 US-specific healthcare plans and program rebates 1 376 – 3 118 – 186 3 025 Non-US-specific healthcare plans and program rebates 1 145 – 124 – 1 743 – 19 1 787 – 31 Non-healthcare plans and program-related rebates, returns and other deductions 1 427 – 83 – 9 046 – 52 9 564 – 389 Total continuing operations 2014 3 948 – 207 – 13 907 – 257 14 376 – 420 1 165 1 024 1 601 3 790 1 097 1 015 1 421 3 533 FINANCIAL REPORT | OPERATING AND FINANCIAL REvIEw 2015 Novartis Annual Report 2015 | 159 The table below shows the gross to net sales reconciliation for our Pharmaceuticals Division: GROSS TO NET SALES RECONCILIATION Income statement charge Charged through revenue deduction Charged directly without being recorded in revenue provisions deduction provisions Total USD millions USD millions In % of gross sales 2015 Pharmaceuticals gross sales subject to deductions US-specific healthcare plans and program rebates Non-US-specific healthcare plans and program rebates Non-healthcare plans and program-related rebates, returns and other deductions Total Pharmaceuticals gross to net sales adjustments Pharmaceuticals net sales 2015 2014 Pharmaceuticals gross sales subject to deductions US-specific healthcare plans and program rebates Non-US-specific healthcare plans and program rebates Non-healthcare plans and program-related rebates, returns and other deductions Total Pharmaceuticals gross to net sales adjustments Pharmaceuticals net sales 2014 USD millions – 1 422 – 1 150 – 2 241 – 4 813 – 1 800 – 1 200 – 1 873 – 4 873 37 853 100.0 – 1 422 – 779 – 1 929 – 1 816 – 4 057 – 2 595 – 7 408 30 445 – 3.8 – 5.1 – 10.7 – 19.6 80.4 39 529 100.0 – 1 800 – 877 – 2 077 – 4.6 – 5.3 – 1 989 – 3 862 – 9.8 – 2 866 – 7 739 – 19.6 31 790 80.4 IMPAIRMENT OF GOODwILL, INTANGIBLE ASSETS AND PROPERTY, PLANT AND EQUIPMENT Due to the above factors and those further described in Note 1, actual cash flows and values could vary significantly from We review long-lived intangible assets and property, plant and forecasted future cash flows and related values derived using equipment for impairment whenever events or changes in cir- discounting techniques. cumstance indicate that the asset’s balance sheet carrying The recoverable amount of cash-generating units and amount may not be recoverable. Goodwill, the Alcon brand- related goodwill is usually based on the fair value less costs of name and other currently not amortized intangible assets are disposal derived from applying discounted future cash flows reviewed for impairment at least annually. based on the key assumptions in the following table: An asset is generally considered impaired when its balance sheet carrying amount exceeds its estimated recoverable amount, which is defined as the higher of its fair value less costs of disposal and its value in use. Usually, Novartis adopts the fair value less costs of disposal method for its impairment evaluation. In most cases no directly observable market inputs are available to measure the fair value less costs of disposal. Cash flows growth rate assumptions after forecast period Discount rate (post-tax) Pharmaceuticals % Alcon % Sandoz % 1 6 3 6 0 to 2 6 Therefore an estimate of fair value less costs of disposal is In 2015, intangible asset impairment charges for continuing derived indirectly and is based on net present value techniques operations of USD  206 million were recognized, of which utilizing post-tax cash flows and discount rates. In the limited USD  120 million were recorded in the Alcon Division and cases where the value in use method is applied, net present USD 86 million in total in the Pharmaceuticals and Sandoz value techniques are utilized using pre-tax cash flows and dis- divisions. count rates. In 2014, intangible asset impairment charges of continu- Fair value reflects estimates of assumptions that market ing operations amounted to USD 347 million (USD 302 mil- participants would be expected to use when pricing the asset lion in the Pharmaceuticals Division and USD 45 million in and for this purpose management considers the range of total in the Sandoz and Alcon divisions). economic conditions that are expected to exist over the In 2015, the reversal of impairment charges recorded in remaining useful life of the asset. The estimates used in prior years amounted to USD 40 million (2014: USD 70 mil- calculating net present values are highly sensitive, and depend lion). on assumptions specific to the nature of the Group’s activities Goodwill and other intangible assets represent a signifi- with regard to: cant part of our consolidated balance sheet, primarily due to — amount and timing of projected future cash flows; acquisitions. Although no significant additional impairments — future tax rates; are currently anticipated, impairment evaluation could lead to — behavior of competitors (launch of competing products, material impairment charges in the future. For more informa- marketing initiatives, etc.); and — appropriate discount rate. tion, see Note  11 to the Group’s consolidated financial statements. 160 | Novartis Annual Report 2015 FINANCIAL REPORT Additionally, net impairment charges for property, plant and probable that the contingent consideration will become due. equipment from continuing operations during 2015 amounted In both cases, if appropriate, a corresponding asset is recorded. to USD 68 million (2014: USD 44 million). TRADE RECEIvABLES IMPAIRMENT OF ASSOCIATED COMPANIES ACCOUNTED FOR AT EQUITY Trade receivables are initially recognized at their invoiced Novartis considers investments in associated companies for amounts including any related sales taxes less adjustments impairment evaluation whenever there is a quoted share price for estimated revenue deductions such as rebates, charge indicating a fair value less than the per-share balance sheet backs and cash discounts. carrying value for the investment. For unquoted investments Provisions for doubtful trade receivables are established in associated companies, recent financial information is taken once there is an indication that it is likely that a loss will be into account to assess whether an impairment evaluation is incurred. These provisions represent the difference between the necessary. trade receivable’s carrying amount in the consolidated balance If the recoverable amount of the investment is estimated to sheet and the estimated net collectible amount. Significant be lower than the balance sheet carrying amount an impairment financial difficulties of a customer, such as probability of bank- charge is recognized for the difference in the consolidated ruptcy, financial reorganization, default or delinquency in pay- income statement under “Income from associated companies”. ments are considered indicators that recovery of the trade receivable is doubtful. Trade receivable balances include sales to drug wholesalers, retailers, private health systems, govern- RETIREMENT AND OTHER POST-EMPLOYMENT BENEFIT PLANS ment agencies, managed care providers, pharmacy benefit We sponsor pension and other post-employment benefit plans managers and government-supported healthcare systems. in various forms that cover a significant portion of our current Novartis continues to monitor sovereign debt issues and eco- and former associates. For post-employment plans with nomic conditions in Greece, Italy, Portugal, Spain and other defined benefit obligations, we are required to make signifi- countries, and evaluates trade receivables in these countries for cant assumptions and estimates about future events in calcu- potential collection risks. Substantially all of the trade receiv- lating the expense and the present value of the liability related ables overdue from such countries are due directly from local to these plans. These include assumptions about the interest governments or from government-funded entities. Deteriorat- rates we apply to estimate future defined benefit obligations ing credit and economic conditions and other factors in these and net periodic pension expense as well as rates of future countries have resulted in, and may continue to result in an pension increases. In addition, our actuarial consultants pro- increase in the average length of time that it takes to collect vide our management with historical statistical information these trade receivables and may require Novartis to re-evalu- such as withdrawal and mortality rates in connection with ate the collectability of these trade receivables in future periods. these estimates. Assumptions and estimates used by the Group may differ CONTINGENT CONSIDERATION materially from the actual results we experience due to chang- In a business combination or divestment of a business, it is ing market and economic conditions, higher or lower with- necessary to recognize contingent future payments to previ- drawal rates, and longer or shorter life spans of participants ous or from new owners representing contractually defined among other factors. For example, in 2015, a decrease in the potential amounts as a liability or asset. Usually for Novartis interest rate we apply in determining the present value of the these are linked to milestone or royalty payments related to defined benefit obligations of one quarter of one percent would certain assets and are recognized as a financial liability or have increased our year-end defined benefit pension obliga- asset at their fair value which is then re-measured at each sub- tion for plans in Switzerland, US, UK, Germany and Japan, sequent reporting date. These estimations typically depend which represent 95% of the Group total defined benefit pen- on factors such as technical milestones or market performance sion obligation, by approximately USD 0.8 billion. Similarly, if and are adjusted for the probability of their likelihood of the 2015 interest rate had been one quarter of one percent- payment and if material, appropriately discounted to reflect age point lower than actually assumed, net periodic pension the impact of time. Changes in the fair value of contingent lia- cost for pension plans in these countries, which represent bilities in subsequent periods are recognized in the consoli- about 88% of the Group’s total net periodic pension cost for dated income statement in “Cost of goods sold” for currently pension plans, would have increased by approximately marketed products and in “Research & Development” for USD 22 million. Depending on events, such differences could IPR&D. Changes in contingent assets are recognized in “Other have a material effect on our total equity. For more informa- income and expense”. The effect of unwinding the discount tion on obligations under retirement and other post-employ- over time is recognized in “Interest expense” in the consoli- ment benefit plans and underlying actuarial assumptions, see dated income statement. Novartis does not recognize contin- Note 25 to the Group’s consolidated financial statements. gent consideration associated with asset purchases outside of a business combination that are conditional upon future events CONTINGENCIES which are within its control until such time as there is an uncon- A number of Group companies are involved in various govern- ditional obligation. If the contingent consideration is outside ment investigations and legal proceedings (intellectual prop- the control of Novartis, a liability is recognized once it becomes erty, sales and marketing practices, product liability, commer- FINANCIAL REPORT | OPERATING AND FINANCIAL REvIEw 2015 Novartis Annual Report 2015 | 161 cial, employment and wrongful discharge, environmental criteria such as the subsidiary’s market share or sales volume claims, etc.) arising out of the normal conduct of their busi- compared to certain targets. Considerable judgment is nesses. For more information, see Note 20 to the Group’s con- required in estimating these contributions as not all data is solidated financial statements. available when the estimates need to be made. We record accruals for contingencies when it is probable The largest of these healthcare contributions relates to the that a liability has been incurred and the amount can be reli- US Healthcare Reform fee, which was introduced in 2011. This ably estimated. These accruals are adjusted periodically as fee is an annual levy to be paid by US pharmaceutical compa- assessments change or additional information becomes avail- nies, including various Novartis subsidiaries, based on each able. For significant product liability cases the accrual is actu- company’s qualifying sales as a percentage of the prior year’s arially determined based on factors such as past experience, government-funded program sales. This pharmaceutical fee amount and number of claims reported, and estimates of levy is recognized in “Other expense”. claims incurred but not yet reported. Expected legal defense On July 25, 2014, the US Department of the Treasury and costs are accrued when the amount can be reliably estimated. the US Internal Revenue Service issued final guidance on this In some instances, the inherent uncertainty of litigation, the pharmaceutical fee levy which stipulated that instead of a lia- resources required to defend against governmental actions, the bility being estimated and recognized immediately with the potential impact on our reputation, and the potential for exclu- first qualifying sale in the following fee year, as had been indus- sion from government reimbursement programs in the US and try practice, the levy is owed in the year in which the sales other countries have contributed to decisions by Novartis and occur. other companies in our industry to enter into settlement agree- As a result of this final guidance, in 2014, “Other expense” ments with governmental authorities in the absence of an includes the recurring non-tax deductible annual expense of acknowledgement of legal liability. These settlements have had approximately USD 200 million for the 2014 pharmaceutical in the past, and may continue in the future, to involve large cash fee levy, as well as the non-tax deductible expense of USD 204 payments, including potential repayment of amounts that were million for the 2013 pharmaceutical fee levy. USD 204 million allegedly improperly obtained and other penalties including tre- of this charge has been considered as an additional excep- ble damages. In addition, settlements of governmental health- tional charge in 2014 since it results from the change in tim- care fraud cases often require companies to enter into corpo- ing of recognition of the pharmaceutical fee levy as required rate integrity agreements, which are intended to regulate by the final guidance. company behavior for a period of years. Our affiliate Novartis In addition, effective 2013, the US government also imple- Pharmaceuticals Corporation is a party to such an agreement, mented a medical device sales tax which is levied on the Alcon which will expire in 2020. Also, matters underlying governmen- Division’s US sales of products which are considered surgical tal investigations and settlements may be the subject of separate devices under the law. This medical device tax is initially private litigation. included in the cost of inventory as, for Alcon, the tax is usually Provisions are recorded for environmental remediation levied on intercompany sales. It is expensed as cost of goods costs when expenditure on remedial work is probable and the sold when the inventory is sold to third parties. cost can be reliably estimated. Remediation costs are provided for under “Non-current liabilities” in the Group’s consolidated TAXES balance sheet. We prepare and file our tax returns based on an interpretation Provisions relating to estimated future expenditure for lia- of tax laws and regulations, and record estimates based on these bilities do not usually reflect any insurance or other claims or judgments and interpretations. Our tax returns are subject to recoveries, since these are only recognized as assets when the examination by the competent taxing authorities, which may amount is reasonably estimable and collection is virtually result in an assessment being made requiring payments of addi- certain. RESEARCH & DEvELOPMENT tional tax, interest or penalties. Inherent uncertainties exist in our estimates of our tax positions. We believe that our estimated amounts for current and deferred tax assets or liabilities, includ- Internal Research & Development costs are fully charged to ing any amounts related to any uncertain tax positions, are the consolidated income statement in the period in which they appropriate based on currently known facts and circumstances. are incurred. We consider that regulatory and other uncertain- ties inherent in the development of new products preclude the NEw ACCOUNTING PRONOUNCEMENTS capitalization of internal development expenses as an intan- See Note 1 to the Group’s consolidated financial statements. gible asset usually until marketing approval from the regula- tory authority is obtained in a relevant major market, such as INTERNAL CONTROL OvER FINANCIAL REPORTING for the US, the EU, Switzerland or Japan. The Group’s management has assessed the effectiveness of internal control over financial reporting. The Group’s indepen- HEALTHCARE CONTRIBUTIONS dent statutory auditor also issued an opinion on the effective- In many countries our subsidiaries are required to make ness of internal control over financial reporting. Both the contributions to the countries’ healthcare costs as part of pro- Group’s management and its external auditors concluded that grams other than the ones mentioned above under deductions the Group maintained, in all material respects, effective inter- from revenues. The amounts to be paid depend on various nal control over financial reporting as of December 31, 2015. 162 | Novartis Annual Report 2015 FINANCIAL REPORT Factors affecting results of operations market is expected to reach USD 35 billion by 2020 from an estimated USD 1.3 billion in 2013, according to a report by Allied Market Research. Our Sandoz Division is a global leader in biosimilars, with three products on the market in Europe Long-term demographic trends and changing lifestyles are and ten major filings (including etanercept and pegfilgrastim, driving increased demand for healthcare around the world, which were submitted in 2015) planned in the next three years. while advances in science and technology are opening new In 2015, Sandoz became the first company to win approval for frontiers in patient treatments. In the coming years, these a biosimilar in the United States under the pathway created trends are expected to drive steady growth overall in the health- by the Biologics Price Competition and Innovation Act. care market and accelerate growth in key segments of our business. At the same time, the current business and regula- SCIENTIFIC ADvANCES OPENING NEw OPPORTUNITIES tory environment poses significant risks and potential imped- As scientific research has become more sophisticated, we have iments to our growth and to the growth of the healthcare indus- developed a better understanding of the genetic basis of dis- try. eases. This has given rise to a new generation of innovative therapies that could more effectively target the underlying TRANSFORMATIONAL CHANGES FUELING DEMAND causes of disease. AGING POPULATION AND SHIFTING BEHAvIORS For example, our investigational therapy CTL019 works by Scientific advances and increased access to healthcare are reprogramming a patient’s own T-cells to hunt cancer cells contributing to a rise in life expectancy, increasing the propor- that express specific proteins. After they have been repro- tion of elderly people worldwide. According to United Nations grammed, the T cells are re-introduced into the patient’s blood; projections, the number of people over the age of 60 is expected they proliferate and bind to the targeted cancer cells and to rise by 500 million, reaching 1.4 billion, by 2030. destroy them. The aging of the world’s population has contributed to an Therapies like these have the potential to transform the increase in chronic illnesses that are prevalent among the treatment of disease. We believe that our ability to leverage elderly, such as cancer, heart disease, respiratory ailments, scientific advances to generate innovative new treatments will diabetes and eye disease. A global shift toward more seden- enable us to create value over the long-term for society, patients tary lifestyles is also increasing demand for healthcare. In the and shareholders. last 20 years, obesity rates have doubled among adults and tripled among children. CONvERGENCE OF HEALTHCARE AND TECHNOLOGY Novartis has developed new treatments to address some From molecular diagnostics to clinical trial recruitment to real of these growing health threats and we plan to continue world data and analytics, technology continues to play an research and development activities in these areas. increasingly important role in the pharmaceutical industry. In 2015, for example, Novartis received approval from the This is attracting new entrants to the sector. For instance, ven- US Food and Drug Administration (FDA) and the European ture funding grew 200% for digital health companies between Commission for Entresto in chronic heart failure with reduced 2012 and 2014. Established technology companies such as ejection fraction, which affects more than two million people Google are also using their expertise to expand into health- in the United States and more than five million people in care. Europe. Regulatory decisions were based on the PARADIGM-HF While new entrants may shift the competitive landscape, study, which showed a 20% reduction in cardiovascular deaths the growing role of technology in healthcare presents an oppor- versus an ACE inhibitor, the current standard of care in heart tunity to pharmaceutical companies like Novartis. Google, for failure. example, is collaborating with our Alcon Division to develop an accommodating contact or intraocular lens for people living GLOBAL RISE IN HEALTHCARE SPENDING with presbyopia. Through the collaboration, we are marrying Increased demand for healthcare around the world has trans- Google’s expertise in miniaturized electronics and microfab- lated into rising healthcare costs. If growth in healthcare spend- rication with Alcon’s expertise in the physiology of the eye, as ing were to continue at the current pace, global outlays could well as clinical development and commercialization of contact more than double by 2025 to USD 15 trillion. At the same time, and intraocular lenses, to advance a product that has the economic uncertainty and tight budgets are prompting many potential to make reading glasses obsolete. governments, healthcare insurers and consumers to look for We also formed a joint investment company with Qual- ways to moderate spending. comm Ventures to support early stage companies with tech- In the context of these trends, we believe that our portfo- nologies, products or services that “go beyond the pill” to ben- lio spanning pharmaceuticals, generics and eye care, is well-po- efit physicians and patients. We recognize the potential of sitioned to meet the evolving needs of patients and healthcare technology to enhance our ability to deliver the right medicine systems. For example, the use of generic medicines and bio- to the right patient at the right time, and seek to partner with similars helps reduce healthcare costs and free up resources experts in emerging technologies to build our expertise in these for new innovative medicines. Indeed, the global biosimilars areas. FINANCIAL REPORT | OPERATING AND FINANCIAL REvIEw 2015 Novartis Annual Report 2015 | 163 INCREASINGLY CHALLENGING BUSINESS ENvIRONMENT and expensive process of obtaining regulatory approvals for PATENT EXPIRATIONS AND PRODUCT COMPETITION pharmaceutical products has become even more challenging. It is common for pharmaceutical companies to face generic In addition, approved drugs have increasingly been sub- erosion when their products lose patent or other intellectual ject to requirements such as risk management plans, compar- property protection, and Novartis is no exception. The prod- ative effectiveness studies, health technology assessments and ucts of our Pharmaceuticals and Alcon Divisions are generally post-approval Phase IV clinical trials, making the maintenance protected by patent or other intellectual property rights, allow- of regulatory approvals and achievement of reimbursement ing us to exclusively market those products. The loss of exclu- for our products increasingly expensive. In addition, these sivity has had, and will continue to have, an adverse effect on requirements further heighten the risk of recalls, product our results. In 2015, the impact of generic competition on our withdrawals, or loss of market share. net sales amounted to USD 2.2 billion. Despite this risk, however, we expect that our focus on Like other players in the pharmaceutical industry, some of accelerating innovation in areas of unmet medical need and our products have begun to face considerable competition due demonstrating real improvement in patient outcomes will allow to the expiration of patent or other intellectual property pro- Novartis to continue to bring effective and safe medicines to tection. For example: market. — We already face generic competition in Japan and some EU countries for Gleevec/Glivec. In the US, we have INCREASING PRESSURE ON PRICING resolved patent litigation with certain generic manufac- Against the backdrop of steadily rising healthcare costs, there turers. We licensed to a subsidiary of Sun Pharmaceuti- has been increased scrutiny on drug pricing by governments, cal Industries the right to market a generic version of media and consumers. Following the launch of Gilead’s Sovaldi® Gleevec in the US as of February 1, 2016. In the EU, our in hepatitis C, media focused on the price tag and lawsuits Glivec intellectual property rights are also being chal- were filed against the company, alleging price-gouging. In lenged by generic manufacturers. 2015, the pricing debate reached a new level of intensity when — Diovan and Co-Diovan/Diovan HCT, which had long been Turing Pharmaceuticals acquired the rights to the decades- our best-selling product, has generic competitors for old medicine Daraprim® and raised the price by 5,000%. Diovan in the US, EU and Japan and for Co-Diovan/ We expect scrutiny on prices to continue in 2016 as polit- Diovan HCT in the US and EU. In Japan, Novartis resolved ical pressures mount and healthcare payors around the globe patent litigation with a generic manufacturer. Patent – including government-controlled health authorities, insur- protection for Co-Diovan will expire in Japan in 2016. ance companies and managed care organizations – step up initiatives to reduce the overall cost of healthcare, restrict To counter the impact of patent expirations, we continuously access to higher-priced new medicines, increase the use of invest in research and development to rejuvenate our portfo- generics and impose overall price cuts. lio. For example, in 2015, we invested 18% of total net sales in In this environment, we believe that it is more important research and development. One measure of the output of our than ever to demonstrate the value that true innovation brings efforts is the performance of our Growth Products – products to the healthcare system. For example, with our psoriasis med- launched in a key market (EU, US, Japan) in 2010 or later, or icine Cosentyx, we demonstrated superiority to Stelara® in a products with exclusivity in key markets until at least 2019 head-to-head study, but still adopted a similar price for our (except Sandoz, which includes only products launched in the product. Similarly, with Entresto, an independent organization last 24 months). These products accounted for 34% of total called the Institute for Clinical and Economic Review found net sales in 2015, up 17% from the previous year. that its US list price was “well-aligned with the degree of ben- Moreover, while patent expirations present a significant efit it brings to patients.” Furthermore, we expressed a willing- challenge to our Pharmaceuticals and Alcon divisions, they ness to work with our customers on flexible, performance-based also create an opportunity for Sandoz, our generics business. pricing models, where we would only be fully compensated if With our global footprint and advanced technical expertise, we the drug succeeded in meeting certain targets, such as reduc- expect Sandoz to help offset the financial impact of generic ing heart failure hospitalizations and associated costs. competition on our branded portfolio. To manage pricing pressure, we aim to invest in access to real-world data and analytics, explore new technologies and HEIGHTENED REGULATORY AND SAFETY HURDLES patient management services, and partner with payors to Our ability to grow is dependent on our ability to bring new develop and scale outcomes-based commercial models. products to market. In recent years, health regulators have raised the bar on product innovation. They are increasingly focused on the benefit-risk profile of pharmaceutical products, POTENTIAL LIABILITY ARISING FROM LEGAL PROCEEDINGS AND GOvERNMENT INvESTIGATIONS emphasizing product safety and improvements over older In recent years, there has been a trend of increasing govern- products in the same therapeutic class. These developments ment investigations and litigation against companies operat- have led to requests for more clinical trial data, the inclusion ing in our industry, including in the US and other countries. of significantly higher numbers of patients in those trials, and We are obligated to comply with the laws of all countries in more detailed analyses of trial outcomes. As a result, the long which we operate, with new requirements imposed on us as 164 | Novartis Annual Report 2015 FINANCIAL REPORT government and public expectations of corporate behavior deviations at any point in the production process could lead develop. We have a significant global compliance program in to production failures or recalls. The Group’s portfolio also place, and devote substantial time and resources to ensure includes a number of sterile products, such as oncology treat- that our business is conducted in a legal and publicly accept- ments, which are technically complex to manufacture and able manner. Despite our efforts, any failure to comply with require strict environmental controls. There is a greater chance the law could lead to substantial liabilities that may not be cov- of production failures and supply interruptions for these prod- ered by insurance and could affect our business and reputa- ucts. tion. Given the complexity of our manufacturing processes, we Governments and regulatory authorities worldwide are also have had a multi-year effort in place to ensure adherence to a increasingly challenging practices previously considered to be single high quality standard across the Group. This effort con- legal and responding to such challenges and new regulations tinued to yield steady improvement in 2015: regulatory agen- is costly. Such investigations may affect our reputation, create cies carried out 192 inspections of Novartis facilities world- a risk of potential exclusion from government reimbursement wide last year, with 189 or 98.4% resulting in a good or programs in the US and other countries, and may lead to costly acceptable outcome, in line with prior year. In addition, in Sep- litigation. tember the FDA closed out the May 2013 Warning Letter issued These factors have contributed to recent trends in the phar- for our Sandoz site in Unterach, Austria. maceutical industry to enter into settlement agreements with Despite this progress, more work remains to be done. In governmental authorities around the world prior to any formal October 2015, the FDA issued a Warning Letter to our Sandoz decision by the authorities. For example, in 2015, our affiliate Division concerning its Indian sites in Kalwe and Turbhe. The Novartis Pharmaceuticals Corporation settled litigation in the letter related to documentation practices in Kalwe and sterile Southern District of New York related to its interactions with manufacturing practices in Turbhe that were identified during specialty pharmacies from 2004 to 2013. The settlement an inspection in August 2014. Novartis took action immedi- included payments totaling USD 390 million plus additional ately and has addressed a majority of the issues. legal expenses to plaintiffs, and an agreement to amend and extend for five years an existing corporate integrity agreement RISK ASSESSMENT DISCLOSURES (CIA) with the Office of the Inspector General of the US Depart- The Risk Committee of the Board ensures the Group has imple- ment of Health and Human Services. This resolution and the mented an appropriate and effective risk management system new CIA obligations provide clear guidelines as we continue to and process. It reviews with management and internal audit work with independent specialty pharmacies in support of the identification, prioritization and management of the risks, patient care. RISK OF LIABILITY AND SUPPLY DISRUPTION FROM MANUFACTURING ISSUES the accountabilities and roles of the functions involved with risk management, the risk portfolio and the related actions implemented by management. The Risk Committee informs the Board of Directors on a periodic basis. The manufacture of our products is both highly regulated and The Group Risk Office coordinates and aligns the risk man- complex, which introduces a greater chance for disruptions agement processes, and reports to the Risk Committee on a and liabilities. Government authorities closely regulate our regular basis on risk assessment and risk management. Orga- manufacturing processes, and if those processes fail to meet nizational and process measures have been designed to iden- the necessary requirements, then there is a risk that our pro- tify and mitigate risks at an early stage. Organizationally, the duction facilities could be shut down. Disturbances in our sup- responsibility for risk assessment and management is allocated ply chain can lead to product shortages, significant loss in to the divisions, with specialized Corporate functions such as sales revenue, and litigation. Furthermore, any manufacturing Group Finance, Group Quality Assurance, Corporate Health, issue compromising supply or quality could have serious con- Safety and Environment, Business Continuity Management, sequences for the health of our patients. Integrity and Compliance and the Business Practices Office Beyond regulatory requirements, many of our products providing support and controlling the effectiveness of the risk involve technically complex manufacturing processes or management by the divisions and functions in these respec- require a supply of highly specialized raw materials. For exam- tive areas. ple, biologic products, produced from living plant or animal micro-organisms, comprise a significant portion of the port- Financial risk management is described in more detail in Note folio across the Group. For biologic-based products, even slight 29 to the Group Consolidated Financial Statements. FINANCIAL REPORT | OPERATING AND FINANCIAL REvIEw 2015 Novartis Annual Report 2015 | 165 Non-IFRS measures as defined by Novartis CONSTANT CURRENCIES Changes in the relative values of non-US currencies to the US dollar can affect the Group’s financial results and financial position. To provide additional information that may be useful Novartis uses certain non-IFRS metrics when measuring per- to investors, including changes in sales volume, we present formance, especially when measuring current year results information about our net sales and various values relating to against prior periods, including core results, constant curren- operating and net income that are adjusted for such foreign cies, free cash flow and net debt. currency effects. Despite the use of these measures by management in set- Constant currency calculations have the goal of eliminat- ting goals and measuring the Group’s performance, these are ing two exchange rate effects so that an estimate can be made non-IFRS measures that have no standardized meaning pre- of underlying changes in the consolidated income statement scribed by IFRS. As a result, such measures have limits in their excluding the impact of fluctuations in exchange rates: usefulness to investors. — the impact of translating the income statements of Because of their non-standardized definitions, the non- consolidated entities from their non-USD functional IFRS measures (unlike IFRS measures) may not be compara- currencies to USD; and ble to the calculation of similar measures of other companies. — the impact of exchange rate movements on the major These non-IFRS measures are presented solely to permit inves- transactions of consolidated entities performed in tors to more fully understand how the Group’s management currencies other than their functional currency. assesses underlying performance. These non-IFRS measures are not, and should not be viewed as, a substitute for IFRS We calculate constant currency measures by translating the measures. current year’s foreign currency values for sales and other As an internal measure of Group performance, these non- income statement items into USD using the average exchange IFRS measures have limitations, and the Group’s performance rates from the prior year and comparing them to the prior year management process is not solely restricted to these metrics. values in USD. CORE RESULTS We use these constant currency measures in evaluating the Group’s performance, since they may assist us in evaluat- The Group’s core results – including core operating income, ing our ongoing performance from year to year. However, in core net income and core earnings per share – exclude the performing our evaluation, we also consider equivalent mea- amortization of intangible assets, impairment charges, sures of performance which are not affected by changes in the expenses relating to divestments, the integration of acquisi- relative value of currencies. tions and restructuring charges that exceed a threshold of USD 25 million, as well as other income and expense items GROwTH RATE CALCULATION that management deems exceptional and that are or are expected For ease of understanding, Novartis uses a sign convention for to accumulate within the year to be over a USD 25 million thresh- its growth rates such that a reduction in operating expenses old. or losses compared to the prior year is shown as a positive Novartis believes that investor understanding of the Group’s growth. performance is enhanced by disclosing core measures of per- formance because, since they exclude items which can vary FREE CASH FLOw significantly from year to year, the core measures enable better Novartis defines free cash flow as cash flow from operating comparison of business performance across years. For this activities and cash flow associated with the purchase or sale same reason, Novartis uses these core measures in addition of property, plant and equipment, intangible, other non-cur- to IFRS and other measures as important factors in assessing rent and financial assets. Cash flows in connection with the the Group’s performance. acquisition or divestment of subsidiaries, associated compa- The following are examples of how these core measures nies and non-controlling interests in subsidiaries are not taken are utilized: into account to determine free cash flow. — In addition to monthly reports containing financial Free cash flow is presented as additional information information prepared under IFRS, senior management because Novartis considers it to be a useful indicator of the receives a monthly analysis incorporating these core Group’s ability to operate without reliance on additional bor- measures. rowing or use of existing cash. Free cash flow is a measure of — Annual budgets are prepared for both IFRS and core the net cash generated that is available for debt repayment, measures. investment in strategic opportunities and for returning to shareholders. Novartis uses free cash flow in internal compar- A limitation of the core measures is that they provide a view isons of results from the Group’s divisions. Free cash flow is of the Group’s operations without including all events during not intended to be a substitute measure for cash flow from a period, such as the effects of an acquisition or amortization operating activities (as determined under IFRS). of purchased intangible assets. 166 | Novartis Annual Report 2015 FINANCIAL REPORT NET DEBT The capital charge is the notional interest charge on the Novartis defines net debt as current and non-current financial average non-current assets of operations based on an inter- debt less cash and cash equivalents, current investments and nally calculated weighted average cost of capital for the Group. derivative financial instruments. Net debt is presented as addi- The NVA for continuing operations decreased to USD 844 tional information because management believes it is a useful million in 2015 from USD 4.2 billion in the prior-year, mainly supplemental indicator of the Group’s ability to pay dividends, on account of the negative currency effect on operating income to meet financial commitments and to invest in new strategic and lower income from associated companies, which included opportunities, including strengthening its balance sheet. in the prior year exceptional one-time gains from the sale of the shares of Idenix (USD 0.8 billion) and LTS (USD 0.4 billion). NOvARTIS CASH vALUE ADDED The NVA for discontinued operations in 2015 was mainly The Novartis Cash Value Added (NCVA) is a metric that is based driven by the USD 12.7 billion exceptional pre-tax gains form on what the company assesses to be its cash flow return less the portfolio transformation transactions with GSK and Lilly. a capital charge on gross operating assets. NCVA is used as the primary internal financial measure for determining pay- ADDITIONAL INFORMATION outs under the new Long-Term Performance Plan (LTPP) intro- EBITDA duced in 2014. More information on NCVA is presented as part Novartis defines earnings before interest, tax, depreciation and of the Compensation report on page 117. amortization (EBITDA) as operating income from continuing operations excluding depreciation of property, plant and equip- NOvARTIS ECONOMIC vALUE ADDED ment (including any related impairment charges) and amorti- Novartis utilizes its own definition for measuring Novartis Eco- zation of intangible assets (including any related impairment nomic Value Added (NVA), which is utilized for determining charges). payouts under the Old Long-Term Performance Plan (OLTPP). The following table shows NVA for 2015 and 2014: 2015 Change USD millions USD millions USD millions 2014 Operating income from continuing operations Income from associated companies Operating interest Operating tax Capital charge Novartis Economic value Added from continuing operations Novartis Economic Value Added from discontinued operations Total Novartis Economic value Added Year ended Year ended Dec 31, 2015 Dec 31, 2014 USD millions USD millions Change in USD % 8 977 11 089 – 19 266 – 298 1 918 – 306 – 1 937 – 2 565 – 6 164 – 5 938 – 86 3 24 – 4 Operating income from continuing operations Depreciation of property, plant & equipment Amortization of intangible assets Impairments of property, plant & equipment and intangible assets EBITDA from continuing operations 8 977 11 089 – 2 112 1 470 1 586 – 116 3 755 2 775 980 246 321 – 75 14 448 15 771 – 1 323 844 4 198 – 80 ENTERPRISE vALUE 10 808 – 678 nm Enterprise value represents the total amount that sharehold- ers and debt holders have invested in Novartis, less the Group’s 11 652 3 520 231 liquidity. Dec 31, 2015 Dec 31, 2014 Change USD millions USD millions USD millions Operating interest is the internal charge on average working Market capitalization 208 321 223 728 – 15 407 capital based on the short-term borrowing rates of the entity Non-controlling interests 76 78 – 2 owning them. Operating tax is the internal tax charge for each entity apply- ing the applicable tax rate to the operational profit before tax unadjusted for tax-disallowed items or tax loss carryforwards. Financial debts and derivatives Liquidity 21 931 20 411 – 5 447 – 13 862 1 520 8 415 Enterprise value 224 881 230 355 – 5 474 Enterprise value/EBITDA 16 15 FINANCIAL REPORT | OPERATING AND FINANCIAL REvIEw 2015 Novartis Annual Report 2015 | 167 2015 AND 2014 RECONCILIATION OF GROUP IFRS RESULTS TO GROUP CORE RESULTS 2015 Gross profit from continuing operations Operating income from continuing operations Income before taxes from continuing operations Taxes from continuing operations 5 Net income from continuing operations Income before taxes from discontinued operations 6 Taxes from discontinued operations Net income / loss from discontinued operations Net income Basic EPS from continuing operations (USD) 7 Basic EPS from discontinued operations (USD) 7 Total basic EPS (USD) 7 Acquisition or divestment related items, including restructuring and integration charges 3 Other exceptional items 4 Amortization of intangible assets 1 IFRS results Core results USD millions USD millions USD millions USD millions USD millions USD millions Impairments 2 32 983 8 977 8 134 – 1 106 7 028 12 479 – 1 713 10 766 17 794 2.92 4.48 7.40 3 666 3 709 4 132 126 369 369 182 182 125 553 36 900 13 790 1 275 14 092 – 83 – 12 627 8 – 2 051 12 041 – 223 – 33 – 256 11 785 5.01 – 0.11 4.90 The following are adjustments to arrive at Core Gross Profit from continuing operations Other revenues Cost of goods sold 947 – 17 404 3 666 126 – 28 919 153 – 13 459 The following are adjustments to arrive at Core Operating Income from continuing operations Marketing & Sales Research & Development General & Administration Other income Other expense – 11 772 – 8 935 – 2 475 2 049 – 2 873 43 40 43 – 11 729 114 – 8 738 86 – 2 389 – 56 259 – 283 – 887 823 465 1 072 – 1 077 The following are adjustments to arrive at Core Income before taxes from continuing operations Income from associated companies Other financial income and expense 266 – 454 423 292 430 981 – 24 1 Amortization of intangible assets: Cost of goods sold includes recurring amortization of acquired rights to in-market products and other production-related intangible assets; Research & Development includes the recurring amortization of acquired rights for technology platforms; Income from associated companies includes USD 423 million for the Novartis share of the estimated Roche core items. 2 Impairments: Cost of goods sold, Research & Development and Other expense consist principally of net impairment charges or reversals related to intangible assets, property, plant and equipment, and financial assets; Other income includes a reversal of an impairment related to property, plant and equipment. 3 Acquisition or divestment related items, including restructuring and integration charges: Other income and Other expense include items related to the portfolio transformation. 4 Other exceptional items: Other revenues and Other income include additional gains from product divestments; Cost of goods sold and Other expense include charges for the Group-wide rationalization of manufacturing sites; Cost of goods sold also includes an inventory write-off; Marketing & Sales, Research & Development and Other expense include other restructuring charges; Research & Development also includes expenses related to product acquisitions; General & Administration includes charges for transforming IT and finance processes and expenses related to setup costs for Novartis Business Services; Other income also includes a gain of USD 110 million from a Swiss pension plan amendment and items related to portfolio transformation; Other expense also includes legal settlement provisions; Income from associated companies includes USD 292 million for the Novartis share of the estimated OTC joint venture core items; Other financial income and expense includes a charge of USD 410m related to Venezuela consisting of foreign exchange losses (USD 211 million) , loss on the sale of PDVSA bonds (USD 127 million) and the monetary loss due to hyperinflation (USD 72 million). 5 Taxes on the adjustments between IFRS and core results take into account, for each individual item included in the adjustment, the tax rate that will finally be applicable to the item based on the jurisdiction where the adjustment will finally have a tax impact. Generally, this results in amortization and impairment of intangible assets and acquisition- related restructuring and integration items having a full tax impact. There is usually a tax impact on exceptional items although this is not always the case for items arising from legal settlements in certain jurisdictions. Adjustments related to income from associated companies are recorded net of any related tax effect. Due to these factors and the differing effective tax rates in the various jurisdictions, the tax on the total adjustments for continuing operations of USD 6.0 billion to arrive at the core results before tax amounts to USD 945 million. The average tax rate on the adjustments for continuing operations is 15.9%. 6 Core adjustments on net income before tax of discontinued operations include gains from the divestment of Animal Health (USD 4.6 billion) and from the transactions with GSK (USD 2.8 billion for the non-influenza Vaccines business and USD 5.9 billion resulting from the contribution of the former Novartis OTC Division into the GSK Consumer Healthcare joint venture in exchange for 36.5% interest in this newly created entity), as well as additional transaction-related expenses of USD 0.6 billion and other portfolio transformation-related costs. 7 Earnings per share (EPS) is calculated on the amount of net income attributable to shareholders of Novartis AG. 168 | Novartis Annual Report 2015 FINANCIAL REPORT 2014 Gross profit from continuing operations Operating income from continuing operations Income before taxes from continuing operations Taxes from continuing operations 5 Net income from continuing operations Income before taxes from discontinued operations 6 Taxes from discontinued operations Net income / loss from discontinued operations Net income Basic EPS from continuing operations (USD) 7 Basic EPS from discontinued operations (USD) 7 Total basic EPS (USD) 7 Acquisition or divestment related items, including restructuring and integration charges 3 Other exceptional items 4 Amortization of intangible assets 1 IFRS results Core results USD millions USD millions USD millions USD millions USD millions USD millions Impairments 2 36 289 11 089 12 272 – 1 545 10 727 – 351 – 96 – 447 10 280 4.39 – 0.18 4.21 2 692 2 743 3 000 – 21 433 434 – 139 38 821 175 14 473 – 1 058 14 681 33 33 73 1 141 – 680 – 38 – 2 028 12 653 145 – 43 102 12 755 5.19 0.04 5.23 The following are adjustments to arrive at Core Gross Profit from continuing operations Other revenues Cost of goods sold 1 215 – 17 345 2 692 – 21 – 302 913 163 – 14 511 The following are adjustments to arrive at Core Operating Income from continuing operations Marketing & Sales Research & Development General & Administration Other income Other expense – 12 377 – 9 086 – 2 616 1 391 – 2 512 48 298 – 15 171 3 22 17 64 – 12 355 – 8 723 – 2 552 – 813 563 33 1 024 – 1 281 The following are adjustments to arrive at Core Income before taxes from continuing operations Income from associated companies 1 918 257 1 – 1 233 943 1 Amortization of intangible assets: Cost of goods sold includes recurring amortization of acquired rights to in-market products and other production-related intangible assets; Research & Development includes the recurring amortization of acquired rights for technology platforms; Other expense includes amortization of intangible assets; Income from associated companies includes USD 257 million for the Novartis share of the estimated Roche core items. 2 Impairments: Cost of goods sold, Research & Development, Other income and Other expense consist principally of net impairment charges or reversals related to intangible assets, property, plant and equipment and financial assets. 3 Acquisition or divestment-related items, restructuring and integration charges: Other expense includes costs related to the portfolio transformation. 4 Other exceptional items: Other revenues includes an amount for a commercial settlement; Cost of goods sold includes charges for the Group-wide rationalization of manufacturing sites; Marketing & Sales, Research & Development and General & Administration include charges for transforming IT and finance processes; Other income includes product-related divestment gains and gains in the Novartis Venture Fund, an insurance recovery net of a deferred amount, a partial reversal of a legal expense provision, a reduction in restructuring provisions, and the impact from a post-retirement medical plan amendment; Other expense includes restructuring provision charges, charges for transforming IT and finance processes, an expense related to Lucentis in Italy, the expense of USD 204 million related to the advancement of the timing of recording the US Healthcare Fee liability as a result of final regulations. Income from associated companies includes gains from the divestment of Idenix and LTS shareholdings. 5 Taxes on the adjustments between IFRS and core results of continuing operations take into account, for each individual item included in the adjustment, the tax rate that will finally be applicable to the item based on the jurisdiction where the adjustment will finally have a tax impact. Generally, this results in amortization and impairment of intangible assets and acquisition-related restructuring and integration items having a full tax impact. There is usually a tax impact on exceptional items although this is not always the case for items arising from legal settlements in certain jurisdictions. Adjustments related to income from associated companies are recorded net of any related tax effect. Due to these factors and the differing effective tax rates in the various jurisdictions, the tax on the total adjustments of USD 2.4 billion to arrive at the core results before tax amounts to USD 483 million. This results in the average tax rate on the adjustments being 20.0 %. 6 Core adjustments on net income before tax of discontinued operations includes mainly the USD 1.1 billion impairment charge as a result of the sale of the influenza vaccines business and under divestment related core adjustments the USD 0.9 billion gain on the disposal of the blood transfusion diagnostics unit on January 9, 2014, partly offset by divestment-related expense. 7 Earnings per share (EPS) is calculated on the amount of net income attributable to shareholders of Novartis AG. FINANCIAL REPORT | OPERATING AND FINANCIAL REvIEw 2015 Novartis Annual Report 2015 | 169 2015 AND 2014 RECONCILIATION FROM IFRS RESULTS TO CORE RESULTS – BY SEGMENT Pharmaceuticals Alcon Sandoz Corporate Total Group 2015 USD 2014 USD millions millions millions millions millions millions millions millions millions millions 2015 USD 2015 USD 2015 USD 2015 USD 2014 USD 2014 USD 2014 USD 2014 USD IFRS Operating income from continuing operations 7 597 8 471 794 1 597 1 005 1 088 – 419 – 67 8 977 11 089 Amortization of intangible assets 1 290 276 2 063 2 064 356 400 3 3 709 2 743 Impairments    Intangible assets    Property, plant & equipment    related to the Group-wide    rationalization of manufacturing sites    Other property, plant & equipment    Financial assets Total impairment charges    Acquisition or divestment    related items    - Income    - Expense Total acquisition or divestment related items, net Other exceptional items 6 – 45 32 12 – 22 214 19 231 120 7 27 39 166 277 23 – 8 20 1 – 1 83 14 7 1 21 91 23 91 266 121 6 124 47 112 114 33 – 1 1 192 33 – 260 250 – 10 89 – 9 123 369 – 283 465 182 23 21 112 433 33 33    Exceptional divestment gains – 626 – 237 – 54 – 294 – 680 – 531    Restructuring items    - Income    - Expense    Legal-related items    - Expense – 27 391 – 56 632 578 125    Additional exceptional income – 119 – 158    Additional exceptional expense Total other exceptional items 132 329 162 468 – 7 60 4 – 5 33 85 – 24 95 121 – 3 21 – 5 57 – 39 629 – 83 749 1 – 29 102 144 40 – 2 15 174 654 – 30 30 592 155 – 68 – 315 – 194 – 502 18 36 65 105 – 35 – 473 245 553 387 175 483 67 – 356 4 813 3 384 Total adjustments 1 823 1 043 2 269 2 214 Core operating income from continuing operations 9 420 9 514 3 063 3 811 1 659 1 571 – 352 – 423 13 790 14 473 as % of net sales 30.9 29.9 31.2 35.2 18.1 16.4 27.9 27.7 Income from associated companies Core adjustments to income from associated companies, net of tax Interest expense Other financial income and expense 1 Taxes (adjusted for above items) Core net income from continuing operations Core net income from discontinued operations 2 Core net income Core net income attributable to shareholders Core basic EPS from continuing operations (USD) 3 Core basic EPS from discontinued operations (USD) 3 Total core basic EPS (USD) 3 812 – 812 2 4 264 1 102 266 1 918 715 – 163 715 – 975 – 655 – 704 – 24 – 31 – 2 051 – 2 028 12 041 12 653 – 256 102 11 785 12 755 11 774 12 685 5.01 5.19 – 0.11 4.90 0.04 5.23 1 Adjustments for charges of USD 0.4 billion are related to Venezuela subsidiaries. 2 For details on discontinued operations reconciliation from IFRS to core net income, please refer to page 167 and 168. 3 Earnings per share (EPS) is calculated on the amount of net income attributable to shareholders of Novartis AG. 170 | Novartis Annual Report 2015 FINANCIAL REPORT SUMMARY OF QUARTERLY AND GROUP FINANCIAL DATA SUMMARY OF QUARTERLY FINANCIAL DATA FOR 2015 AND 2014 USD millions unless indicated otherwise Q1 Q2 Q3 Q4 2015 Q1 Q2 Q3 Q4 2014 Net sales to third parties from continuing operations 11 935 12 694 12 265 12 520 49 414 12 767 13 347 12 991 13 075 52 180 Sales to discontinued operations 26 0 0 0 26 65 64 55 55 239 Net sales from continuing operations 11 961 12 694 12 265 12 520 49 440 12 832 13 411 13 046 13 130 52 419 Other revenues Cost of goods sold Gross profit Marketing & Sales 241 202 220 284 947 199 538 254 224 1 215 – 3 980 – 4 487 – 4 388 – 4 549 – 17 404 – 4 130 – 4 378 – 4 421 – 4 416 – 17 345 8 222 8 409 8 097 8 255 32 983 8 901 9 571 8 879 8 938 36 289 – 2 691 – 3 016 – 2 890 – 3 175 – 11 772 – 2 988 – 3 188 – 2 972 – 3 229 – 12 377 Research & Development – 2 067 – 2 206 – 2 190 – 2 472 – 8 935 – 2 210 – 2 178 – 2 161 – 2 537 – 9 086 General & Administration – 591 – 601 – 573 – 710 – 2 475 – 649 – 638 – 593 – 736 – 2 616 Other income Other expense Operating income from continuing operations 414 357 682 596 2 049 236 207 342 606 1 391 – 502 – 662 – 892 – 817 – 2 873 – 475 – 590 – 756 – 691 – 2 512 2 785 2 281 2 234 1 677 8 977 2 815 3 184 2 739 2 351 11 089 Income from associated companies 15 121 120 10 266 215 185 938 580 1 918 Interest expense – 179 – 164 – 154 – 158 – 655 – 168 – 166 – 182 – 188 – 704 Other financial income and expense 57 – 82 – 31 – 398 – 454 – 25 – 56 37 13 – 31 Income before taxes from continuing operations 2 678 2 156 2 169 1 131 8 134 2 837 3 147 3 532 2 756 12 272 Taxes – 372 – 300 – 357 – 77 – 1 106 – 383 – 424 – 430 – 308 – 1 545 Net income from continuing operations Net income/loss from discontinued operations Net income Attributable to: 2 306 1 856 1 812 1 054 7 028 2 454 2 723 3 102 2 448 10 727 10 699 – 18 83 2 10 766 514 – 138 138 – 961 – 447 13 005 1 838 1 895 1 056 17 794 2 968 2 585 3 240 1 487 10 280    Shareholders of Novartis AG 13 005 1 836 1 888 1 054 17 783 2 941 2 555 3 223 1 491 10 210    Non-controlling interests Basic earnings per share (USD) from continuing operations Basic earnings per share (USD) from discontinued opeations 2 7 2 11 27 30 17 – 4 70 0.96 0.77 0.75 0.44 2.92 0.99 1.11 1.27 1.02 4.39 4.44 – 0.01 0.04 0.79 0.00 0.44 4.48 7.40 0.22 – 0.06 0.06 – 0.40 – 0.18 1.21 1.05 1.33 0.62 4.21 Total basic earnings per share (USD) 5.40 0.76 Net sales to third parties by segment Pharmaceuticals 7 140 7 847 7 593 7 865 30 445 7 807 8 199 7 925 7 860 31 791 Alcon Sandoz Net sales to third parties from continuing operations Operating income by segment 2 558 2 559 2 346 2 349 9 812 2 642 2 817 2 665 2 703 10 827 2 237 2 288 2 326 2 306 9 157 2 318 2 331 2 401 2 512 9 562 11 935 12 694 12 265 12 520 49 414 12 767 13 347 12 991 13 075 52 180 Pharmaceuticals 2 299 1 986 1 841 1 471 7 597 2 221 2 406 2 233 1 611 8 471 Alcon Sandoz Corporate Operating income from continuing operations Core operating income from continuing operations Core net income from continuing operations Core basic EPS (USD) from continuing operations 353 279 150 193 159 317 132 794 216 1 005 380 282 471 244 381 272 365 1 597 290 1 088 – 146 – 48 – 83 – 142 – 419 – 68 63 – 147 85 – 67 2 785 2 281 2 234 1 677 8 977 2 815 3 184 2 739 2 351 11 089 3 651 3 593 3 489 3 057 13 790 3 800 3 859 3 585 3 229 14 473 3 199 3 074 3 061 2 707 12 041 3 333 3 335 3 128 2 857 12 653 1.33 1.27 1.27 1.14 5.01 1.35 1.36 1.28 1.19 5.19 FINANCIAL REPORT | SUMMARY OF QUARTERLY AND GROUP FINANCIAL DATA Novartis Annual Report 2015 | 171 SUMMARY OF GROUP FINANCIAL DATA 2011–2015 USD millions unless indicated otherwise 2015 2014 2013 2012 2011 Net sales to third parties from continuing operations 49 414 52 180 51 869 51 080 51 939 Net income/loss from discontinued operations 10 766 – 447 Change relative to preceding year Pharmaceuticals net sales Change relative to preceding year Alcon net sales Change relative to preceding year Sandoz net sales Change relative to preceding year Operating income from continuing operations Change relative to preceding year As a % of net sales As a % of average equity As a % of average net operating assets Net income from continuing operations Change relative to preceding year As a % of net sales As a % of average equity Net income As a % of average equity Dividends of Novartis AG1 As % of net income from continuing operations2 As % of net income2 Cash flows from operating activities from continuing operations Change relative to preceding year As a % of net sales Cash flows from operating activities Free cash flow from continuing operations Change relative to preceding year As a % of net sales Free cash flow Purchase of property, plant & equipment3 Change relative to preceding year As a % of net sales Depreciation of property, plant & equipment3 As a % of net sales Core Research & Development3 As a % of net sales % – 5.3 0.6 1.5 – 1.7 8.4 30 445 31 791 32 214 32 153 32 508 % – 4.2 – 1.3 0.2 – 1.1 9 812 10 827 10 496 10 225 – 9.4 9 157 – 4.2 3.2 2.7 9 562 9 159 4.4 5.3 2.7 8 702 – 8.1 8 977 11 089 10 983 11 507 10 293 – 19.0 18.2 12.1 10.5 1.0 21.3 15.3 13.8 – 4.6 21.2 15.3 13.4 11.8 22.5 17.0 14.2 1.4 19.8 15.2 12.4 7 028 10 727 9 309 9 530 8 685 – 34.5 14.2 9.5 15.2 20.6 14.8 – 2.3 17.9 13.0 – 17 9.7 18.7 14.1 – 147 9 383 13.9 17 794 10 280 9 292 % 24.1 14.1 12.9 6 550 6 643 6 810 6 100 93 37 62 65 74 74 65 66 12 085 13 898 12 617 13 810 13 613 – 13.0 24.5 10.2 26.6 – 8.6 24.3 1.4 27.0 13.5 26.2 11 897 13 897 13 174 14 194 14 309 9 259 10 934 9 521 11 251 12 004 – 15.3 18.7 14.8 21.0 – 15.4 18.4 – 6.3 22.0 14.3 23.1 9 029 10 762 9 945 11 383 12 503 2 367 2 624 2 903 2 458 1 913 – 9.8 4.8 – 9.6 5.0 18.1 5.6 28.5 4.8 36.6 3.7 1 470 1 586 1 554 1 517 1 559 3.0 3.0 3.0 3.0 8 738 8 723 8 885 8 396 % 17.7 16.7 17.1 16.4 % % % % % % % % % % % % % % % % % % 7.3 9 958 10.3 9 473 10.3 – 4.1 16.7 12.8 387 9 072 13.4 6 030 70 67 3.0 8 453 16.3 6 860 21.1 Core Pharmaceuticals Division Research & Development 7 053 6 997 7 161 6 697 As a % of Pharmaceuticals Division net sales % 23.2 22.0 22.2 20.8 Total assets Liquidity Equity Debt/equity ratio Current ratio Net operating assets Change relative to preceding year As a % of net sales Personnel costs3, 4 As a % of net sales 131 556 125 387 126 254 124 191 117 468 5 447 13 862 9 222 8 119 5 075 77 122 70 844 74 472 69 263 65 989 0.28:1 0.96:1 0.29:1 1.39:1 0.24:1 1.16:1 0.28:1 1.16:1 0.31:1 1.04:1 93 606 77 393 83 268 80 870 81 143 % % 20.9 189.4 – 7.1 148.3 3.0 160.5 – 0.3 158.3 – 4.1 156.2 13 540 14 569 13 760 13 127 13 246 % 27.4 27.9 26.5 25.7 25.5 Full-time equivalent associates at year-end3, 4 118 700 117 809 119 362 112 461 109 208 Net sales per full-time equivalent associate (average)3 USD 417 861 440 020 447 488 460 867 482 151 1 2015 dividend: Proposal for shareholder approval at the Annual General Meeting on February 23, 2016. In all years, this figure reflects only amounts paid to third-party shareholders of Novartis AG. 2 Based on net income attributable to the shareholders of Novartis AG. 3 Continuing operations 4 Own employees nm = not meaningful 172 | Novartis Annual Report 2015 FINANCIAL REPORT NOVARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED INCOME STATEMENTS (For the years ended December 31, 2015 and 2014) Net sales to third parties from continuing operations Sales to discontinued segments Net sales from continuing operations Other revenues Cost of goods sold Gross profit from continuing operations Marketing & Sales Research & Development General & Administration Other income Other expense Operating income from continuing operations Income from associated companies Interest expense Other financial income and expense Income before taxes from continuing operations Taxes Net income from continuing operations Net income/loss from discontinued operations Net income Attributable to:    Shareholders of Novartis AG    Non-controlling interests Basic earnings per share (USD) from continuing operations Basic earnings per share (USD) from discontinued operations Total basic earnings per share (USD) Diluted earnings per share (USD) from continuing operations Diluted earnings per share (USD) from discontinued operations Total diluted earnings per share (USD) The accompanying Notes form an integral part of the consolidated financial statements. 2015 2014 Note USD millions USD millions 3 49 414 52 180 26 239 3 49 440 52 419 947 1 215 – 17 404 – 17 345 32 983 36 289 – 11 772 – 12 377 – 8 935 – 9 086 – 2 475 – 2 616 2 049 1 391 – 2 873 – 2 512 8 977 11 089 266 – 655 – 454 1 918 – 704 – 31 8 134 12 272 3 4 5 5 6 – 1 106 – 1 545 7 028 10 727 30 10 766 – 447 17 794 10 280 17 783 10 210 11 70 2.92 4.48 7.40 2.88 4.41 7.29 4.39 – 0.18 4.21 4.31 – 0.18 4.13 7 7 FINANCIAL REPORT | NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 173 CONSOLIDATED STATEMENTS OF COMPREHENSIvE INCOME (For the years ended December 31, 2015 and 2014) Net income Other comprehensive income to be eventually recycled into the consolidated income statement:       Fair value adjustments on marketable securities, net of taxes       Fair value adjustments on deferred cash flow hedges, net of taxes    Total fair value adjustments on financial instruments, net of taxes    Novartis share of other items recorded in comprehensive income recognized by associated companies,    net of taxes    Currency translation effects Total of items to eventually recycle 2014 2015 Note USD millions USD millions 17 794 10 280 8.1 8.1 8.1 8.2 8.3 28 20 48 – 48 89 21 110 – 5 – 1 662 – 2 220 – 1 662 – 2 115 Other comprehensive income never to be recycled into the consolidated income statement:    Actuarial losses from defined benefit plans, net of taxes 8.4 – 147 Total comprehensive income Attributable to:    Shareholders of Novartis AG       Continuing operations       Discontinued operations    Non-controlling interests The accompanying Notes form an integral part of the consolidated financial statements. 15 985 15 977 5 238 10 739 8 – 822 7 343 7 274 7 820 – 546 69 174 | Novartis Annual Report 2015 FINANCIAL REPORT CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (For the years ended December 31, 2015 and 2014) Share capital USD millions Treasury shares USD millions Note Issued share capital and reserves attributable to Novartis USD adjustments shareholders millions USD millions USD millions Retained earnings Total value Non- controlling interests USD millions Total equity USD millions Total equity at January 1, 2014 1 001 – 89 73 065 366 74 343 129 74 472 Net income Other comprehensive income Total comprehensive income Dividends Purchase of treasury shares Increase of Treasury share repurchase obligation under a share buy-back trading plan Increase in equity from exercise of options and employee transactions Equity-based compensation Changes in non-controlling interests Total of other equity movements Total equity at December 31, 2014 Net income Other comprehensive income Total comprehensive income Dividends Purchase of treasury shares Reduction of share capital Decrease of treasury share repurchase obligation under a share buy-back trading plan Increase in equity from exercise of options and employee transactions Equity-based compensation Changes in non-controlling interests Fair value adjustments related to divestments Total of other equity movements Total equity at December 31, 2015 8 9.1 9.2 9.4 9.5 9.6 9.7 8 9.1 9.2 9.3 9.4 9.5 9.6 9.7 8 10 210 10 210 70 10 280 – 5 – 2 931 – 2 936 – 1 – 2 937 10 205 – 2 931 7 274 69 7 343 – 6 810 – 43 – 6 883 – 658 23 6 2 377 1 137 – 6 810 – 6 926 – 658 2 400 1 143 – 6 810 – 6 926 – 658 2 400 1 143 – 120 – 120 – 14 – 10 837 – 10 851 – 120 – 10 971 1 001 – 103 72 433 – 2 565 70 766 17 783 17 783 78 11 70 844 17 794 – 48 – 1 758 – 1 806 – 3 – 1 809 17 735 – 1 758 15 977 8 15 985 – 6 643 – 33 – 6 086 – 10 15 – 5 658 14 6 1 578 809 – 6 643 – 6 119 658 1 592 815 – 100 100 – 10 – 6 643 – 6 119 658 1 592 815 – 10 – 10 991 2 – 9 789 100 – 9 697 – 10 – 9 707 – 101 80 379 – 4 223 77 046 76 77 122 The accompanying Notes form an integral part of the consolidated financial statements. FINANCIAL REPORT | NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 175 CONSOLIDATED BALANCE SHEETS (At December 31, 2015 and 2014) Assets Non-current assets Property, plant & equipment Goodwill Intangible assets other than goodwill Investments in associated companies Deferred tax assets Financial assets Other non-current assets Total non-current assets related to continuing operations Current assets Inventories Trade receivables Marketable securities, commodities, time deposits and derivative financial instruments Cash and cash equivalents Other current assets Total current assets related to continuing operations Assets related to discontinued operations Total current assets Total assets Equity and liabilities Equity Share capital Treasury shares Reserves Issued share capital and reserves attributable to Novartis AG shareholders Non-controlling interests Total equity Liabilities Non-current liabilities Financial debts Deferred tax liabilities Provisions and other non-current liabilities Total non-current liabilities related to continuing operations Current liabilities Trade payables Financial debts and derivative financial instruments Current income tax liabilities Provisions and other current liabilities Total current liabilities related to continuing operations Liabilities related to discontinued operations Total current liabilities Total liabilities Total equity and liabilities The accompanying Notes form an integral part of the consolidated financial statements. 2014 2015 Note USD millions USD millions 10 11 11 4 12 13 13 14 15 16 16 17 30 15 982 15 983 31 174 29 311 34 217 23 832 15 314 8 957 2 466 601 8 432 7 994 1 720 554 108 711 87 826 6 226 8 180 773 6 093 8 275 839 4 674 13 023 2 992 2 530 22 845 30 760 0 6 801 22 845 37 561 131 556 125 387 18 18 991 – 101 1 001 – 103 76 156 69 868 77 046 70 766 76 78 77 122 70 844 19 12 20 21 16 327 13 799 6 355 8 044 6 099 7 672 30 726 27 570 5 668 5 604 1 717 5 419 6 612 2 076 22 10 719 10 448 23 708 24 555 30 0 2 418 23 708 26 973 54 434 54 543 131 556 125 387 176 | Novartis Annual Report 2015 FINANCIAL REPORT CONSOLIDATED CASH FLOW STATEMENTS (For the years ended December 31, 2015 and 2014) Net income from continuing operations Reversal of non-cash items Dividends received from associated companies and others Interest received Interest paid Other financial receipts Other financial payments Taxes paid 1 Cash flows before working capital and provision changes from continuing operations Payments out of provisions and other net cash movements in non-current liabilities 2014 2015 Note USD millions USD millions 7 028 10 727 23.1 9 070 6 725 432 34 479 35 – 646 – 668 714 – 23 553 – 24 – 2 454 – 2 179 14 155 15 648 – 1 207 – 1 125 Change in net current assets and other operating cash flow items 23.2 – 863 – 625 Cash flows from operating activities from continuing operations Cash flows used in operating activities from discontinued operations 1 Total cash flows from operating activities Purchase of property, plant & equipment Proceeds from sales of property, plant & equipment Purchase of intangible assets Proceeds from sales of intangible assets Purchase of financial assets Proceeds from sales of financial assets Purchase of other non-current assets Proceeds from sales of other non-current assets Divestments/acquisitions of interests in associated companies Acquisitions of businesses Purchase of marketable securities and commodities Proceeds from sales of marketable securities and commodities Cash flows used in investing activities from continuing operations Cash flows from investing activities from discontinued operations 1 Total cash flows used in/from investing activities Dividends paid to shareholders of Novartis AG Acquisition of treasury shares Proceeds from exercise options and other treasury share transactions Increase in non-current financial debts Repayment of non-current financial debts Change in current financial debts Dividends paid to non-controlling interests and other financing cash flows Cash flows used in financing activities Net effect of currency translation on cash and cash equivalents Net change in cash and cash equivalents Cash and cash equivalents at January 1 Cash and cash equivalents at December 31 The accompanying Notes form an integral part of the consolidated financial statements. 12 085 13 898 – 188 – 1 11 897 13 897 – 2 367 – 2 624 237 – 1 138 621 – 264 166 – 82 1 23.3 – 16 507 – 595 262 – 19 666 23.4 8 882 – 10 784 60 – 780 246 – 239 431 – 60 2 1 370 – 331 – 169 2 086 – 8 889 881 – 6 643 – 6 810 – 6 071 – 6 915 1 581 4 596 2 400 6 024 – 3 086 – 2 599 451 – 4 – 107 – 140 – 9 176 – 8 147 – 286 – 8 349 13 023 – 295 6 336 6 687 4 674 13 023 1 In 2015, the total tax payment amounted to USD 3.3 billion (2014: USD 2.6 billion) of which a refund of USD 94 million (2014: payment of USD 7 million) was included in the cash flows used in operating activities of discontinued operations and a USD 965 million payment (2014: USD 459 million) in the cash flows from investing activities of discontinued operations. FINANCIAL REPORT | NOTES TO THE NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 177 NOTES TO THE NOVARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS 1. Significant Accounting Policies The Novartis Group (Novartis or Group) is a multinational group FOREIGN CURRENCIES of companies specializing in the research, development, The consolidated financial statements of Novartis are presented manufacturing and marketing of a broad range of healthcare in US dollars (USD). The functional currency of subsidiaries is products led by innovative pharmaceuticals and also includ- generally the local currency of the respective entity. The ing eye care products and cost saving generic pharmaceuti- functional currency used for the reporting of certain Swiss and cals. It is head quartered in Basel, Switzerland. foreign finance entities is USD instead of their respective local The consolidated financial statements of the Group are currencies. This reflects the fact that the cash flows and prepared in accordance with International Financial Reporting transactions of these entities are primarily denominated in Standards (IFRS) as issued by the International Accounting these currencies. Standards Board (IASB). They are prepared in accordance with For subsidiaries not operating in hyperinflationary econo- the historical cost convention except for items that are required mies, the subsidiary’s results, financial position and cash flows to be accounted for at fair value. that do not have USD as their functional currency are translated The Group’s financial year-end is December 31 which is into USD using the following exchange rates: also the annual closing date of the individual entities’ financial — income, expense and cash flows using for each month statements incorporated into the Group’s consolidated the average exchange rate with the US dollar values for financial statements. each month being aggregated during the year. The preparation of financial statements requires manage- — balance sheets using year-end exchange rates. ment to make certain estimates and assumptions, either at — resulting exchange rate differences are recognized in the balance sheet date or during the year that affect the other comprehensive income. reported amounts of assets and liabilities, including any con- tingent amounts, as well as of revenues and expenses. Actual The only hyperinflationary economy applicable to Novartis is outcomes and results could differ from those estimates and Venezuela. The financial statements of the major subsidiaries assumptions. in this country are first adjusted for the effect of inflation with Listed below are accounting policies of significance to any gain or loss on the net monetary position recorded in the Novartis or, in cases where IFRS provides alternatives, the related functional lines in the consolidated income statement option adopted by Novartis. and then translated into USD. SCOPE OF CONSOLIDATION ACQUISITION OF ASSETS The consolidated financial statements include all entities, Acquired assets are initially recognized on the balance sheet including structured entities, over which Novartis AG, Basel, at cost if they meet the criteria for capitalization. If acquired Switzerland, directly or indirectly has control (generally as a as part of a business combination, the fair value of identified result of owning more than 50% of the entity’s voting interest). assets represents the cost for these assets. If separately Consolidated entities are also referred to as “subsidiaries”. acquired, the cost of the asset includes the purchase price and In cases where Novartis does not fully own a subsidiary it any directly attributable costs for bringing the asset into the has elected to value any remaining outstanding non-controlling condition to operate as intended. Expected costs for obliga- interest at the time of acquiring control of the subsidiary at its tions to dismantle and remove property, plant and equipment proportionate share of the fair value of the net identified assets. when it is no longer used are included in their cost. The contribution of a business to an associate or joint ven- ture is accounted for by applying the option under IFRS that PROPERTY, PLANT AND EQUIPMENT permits the accounting for the retained interest of the busi- Property, plant and equipment are depreciated on a straight- ness contributed at its net book value at the time of the con- line basis in the consolidated income statement over their esti- tribution. mated useful lives. Leasehold land is depreciated over the Investments in associated companies (generally defined period of its lease whereas freehold land is not depreciated. as investments in entities in which Novartis holds between The related depreciation expense is included in the costs of 20% and 50% of voting shares or over which it otherwise has the functions using the asset. significant influence) and joint ventures are accounted for using Property, plant and equipment are assessed for impair- the equity method except for selected venture fund invest- ment whenever there is an indication that the balance sheet ments for which the Group has elected to apply the method carrying amount may not be recoverable using cash flow pro- of fair value through the consolidated income statement. jections for the useful life. 178 | Novartis Annual Report 2015 FINANCIAL REPORT 1. Significant Accounting Policies (Continued) The following table shows the respective useful lives for The following table shows the respective useful lives for property, plant and equipment: available-for-use intangible assets and the location in the Buildings Machinery and other equipment    Machinery and equipment    Furniture and vehicles    Computer hardware Useful life 20 to 40 years 7 to 20 years 5 to 10 years 3 to 7 years Government grants obtained for construction activities, includ- ing any related equipment, are deducted from the gross acquisition cost to arrive at the balance sheet carrying value of the related assets. consolidated income statement in which the respective amor- tization and any potential impairment charge is recognized: Income statement location for amortization and impairment charges Useful life Currently marketed products 5 to 20 years “Cost of goods sold” Marketing know-how 25 years “Cost of goods sold” Technologies 10 to 30 years Other (including computer software) Alcon brand name 3 to 5 years Not amortized, indefinite useful life “Cost of goods sold” or “Research and Development” In the respective functional expense Not applicable GOODWILL AND INTANGIBLE ASSETS GOODWILL INTANGIBLE ASSETS NOT YET AvAILABLE FOR USE Goodwill arises in a business combination and is the excess Acquired research and development intangible assets, which of the consideration transferred to acquire a business over the are still under development and have accordingly not yet underlying fair value of the net identified assets acquired. It is obtained marketing approval, are recognized as In-Process allocated to groups of cash generating units (CGUs) which are Research & Development (IPR&D). IPR&D assets are only usually represented by the reported segments. Goodwill is capitalized if they are deemed to enhance the intellectual prop- tested for impairment annually at the CGU level and any impair- erty of Novartis and include items such as initial upfront and ment charges are recorded under “Other Expense” in the con- milestone payments on licensed or acquired compounds. solidated income statement. IPR&D is not amortized, but evaluated for potential impair- ment on an annual basis or when facts and circumstances INTANGIBLE ASSETS AvAILABLE FOR USE warrant. Any impairment charge is recorded in the consoli- Novartis has the following classes of available-for-use intangi- dated income statement under “Research & Development”. ble assets: Currently marketed products; Marketing know-how; Once a project included in IPR&D has been successfully Technologies; Other intangible assets (including computer developed it is transferred to the “Currently marketed product” software) and the Alcon brand name. category. Currently marketed products represent the composite value of acquired intellectual property, patents, and distribu- IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS tion rights and product trade names. An asset is considered impaired when its balance sheet car- Marketing know-how represents the value attributable to rying amount exceeds its estimated recoverable amount, which the expertise acquired for marketing and distributing Alcon is defined as the higher of its fair value less costs of disposal surgical equipment. and its value in use. Usually, Novartis applies the fair value less Technologies represent identified and separable acquired costs of disposal method for its impairment assessment. In know-how used in the research, development and production most cases no directly observable market inputs are available processes. to measure the fair value less costs of disposal. Therefore, an Significant investments in internally developed and estimate is derived indirectly and is based on net present value acquired computer software are capitalized and included in techniques utilizing post-tax cash flows and discount rates. In the “Other” category and amortized once available for use. the limited cases where the value in use method would be The Alcon brand name is shown separately as it is the only applied, net present value techniques would be applied using Novartis intangible asset that is available for use with an indef- pre-tax cash flows and discount rates. inite useful life. Novartis considers that it is appropriate that Fair value less costs of disposal reflects estimates of the Alcon brand name has an indefinite life since Alcon has a assumptions that market participants would be expected to history of strong revenue and cash flow performance, and use when pricing the asset or CGU, and for this purpose man- Novartis has the intent and ability to support the brand with agement considers the range of economic conditions that are spending to maintain its value for the foreseeable future. expected to exist over the remaining useful life of the asset. Except for the Alcon brand name, intangible assets avail- able for use are amortized over their estimated useful lives on a straight-line basis and evaluated for potential impairment whenever facts and circumstances indicate that their carrying value may not be recoverable. The Alcon brand name is not amortized, but evaluated for potential impairment annually. FINANCIAL REPORT | NOTES TO THE NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 179 The estimates used in calculating the net present values The Group defines “marketable securities” as those finan- are highly sensitive and depend on assumptions specific to cial assets which are managed by the Group’s Corporate Trea- the nature of the Group’s activities with regard to: sury and consist principally of quoted equity and quoted debt — amount and timing of projected future cash flows; securities as well as fund investments which are principally — outcome of R&D activities (compound efficacy, results of traded in liquid markets. Certain marketable securities are clinical trials, etc.); managed independently of Corporate Treasury, and these are — amount and timing of projected costs to develop IPR&D typically held for long-term strategic purposes and are there- into commercially viable products; fore classified as non-current financial assets. They include — probability of obtaining regulatory approval; equity securities and fund investments. — long-term sales forecasts for periods of up to 25 years; Marketable securities are initially recorded at fair value on — sales erosion rates after the end of patent or other their trade date which is different from the settlement date intellectual property rights protection and timing of the when the transaction is ultimately effected. Quoted securities entry of generic competition; are re-measured at each reporting date to fair value based on — selected tax rate; current market prices. If the market for a financial asset is not — behavior of competitors (launch of competing products, active or no market is available, fair values are established marketing initiatives, etc.); and — selected discount rate. using valuation techniques. Apart from discounted cash flow analysis and other pricing models, for the majority of invest- ments in what is known as the “Level 3” hierarchy, the valua- Generally, for intangible assets with a definite useful life tion is based on the acquisition cost as the best approxima- Novartis uses cash flow projections for the whole useful life of tion of the fair value of the investee. This is adjusted for a higher these assets, and for goodwill and the Alcon brand name, or lower valuation in connection with a partial disposal, a new Novartis utilizes cash flow projections for a five-year period round of financing and for the investee’s performance below based on management forecasts, with a terminal value based or above expectations. The fair value of investments in “Level on cash flow projections usually in line with or lower than infla- 3” is reviewed regularly for a possible diminution in value. tion rates for later periods. Probability-weighted scenarios are The Group has classified all its equity and quoted debt typically used. securities as well as fund investments as available-for-sale, as Discount rates used are based on the Group’s estimated they are not acquired to generate profit from short-term fluc- weighted average cost of capital adjusted for specific country tuations in price. Unrealized gains, except exchange gains and currency risks associated with cash flow projections as an related to quoted debt instruments, are recorded as a fair value approximation of the weighted average cost of capital of a com- adjustment in the consolidated statement of comprehensive parable market participant. income. They are recognized in the consolidated income state- Due to the above factors, actual cash flows and values ment when the financial asset is sold at which time the gain is could vary significantly from forecasted future cash flows and transferred either to “Other financial income and expense” for related values derived using discounting techniques. the marketable securities managed by the Group’s Corporate IMPAIRMENT OF ASSOCIATED COMPANIES ACCOUNTED FOR AT EQUITY Treasury or to “Other income” in the consolidated income statement for all other equity securities and fund investments. Exchange gains related to quoted debt instruments are imme- Novartis considers investments in associated companies for diately recognized in the consolidated income statement under impairment evaluation whenever there is a quoted share price “Other financial income and expense”. indicating a fair value less than the per-share balance sheet A security is assessed for impairment when its market carrying value for the investment. For unquoted investments value at the balance sheet date is less than initial cost reduced in associated companies recent financial information is taken by any previously recognized impairment. Impairments on into account to assess whether an impairment evaluation is equity securities, quoted debt securities and fund investments, necessary. and exchange rate losses on quoted debt securities in a for- If the recoverable amount of the investment is estimated eign currency which are managed by the Group’s Corporate to be lower than the balance sheet carrying amount an Treasury are immediately recorded in “Other financial income impairment charge is recognized for the difference in the and expense”. Impairments are recorded for all other equity consolidated income statement under “Income from associated securities and other fund investments in “Other expense” in companies”. the consolidated income statement. CASH AND CASH EQUIvALENTS, MARKETABLE SECURITIES, COMMODITIES, DERIvATIvE FINANCIAL INSTRUMENTS AND NON-CURRENT FINANCIAL ASSETS Commodities include gold bullion or coins which are valued at the lower of cost or fair value using current market prices. The changes in fair value below cost are immediately recorded in “Other financial income and expense”. Cash and cash equivalents include highly liquid investments Other non-current financial assets including loans are car- with original maturities of three months or less which are read- ried at either amortized cost, which reflects the time value of ily convertible to known amounts of cash. Bank overdrafts are money, or cost adjusted for any accrued interest, less any usually presented within current financial debts on the allowances for uncollectable amounts. Impairments and consolidated balance sheet except in cases where a right of exchange rate gains and losses on other non-current financial offset has been agreed with a bank which then allows for assets, including loans, as well as interest income using the presentation on a net basis. effective interest rate method, are immediately recorded in 180 | Novartis Annual Report 2015 FINANCIAL REPORT 1. Significant Accounting Policies (Continued) “Other income” or “Other expense” in the consolidated income are recognized in the consolidated income statement within statement. “Marketing & Sales” expenses. Derivative financial instruments are initially recognized in the balance sheet at fair value and are re-measured to their LEGAL AND ENvIRONMENTAL LIABILITIES current fair value at the end of each subsequent reporting Novartis and its subsidiaries are subject to contingencies aris- period. The valuation of a forward exchange rate contract is ing in the ordinary course of business such as patent litiga- based on the discounted cash flow model, using interest curves tion, environmental remediation liabilities and other prod- and spot rates at the reporting date as observable inputs. uct-related litigation, commercial litigation, and governmental Options are valued based on a modified Black-Scholes investigations and proceedings. Provisions are made where a model using volatility and exercise prices as major observable reliable estimate can be made of the probable outcome of legal inputs. or other disputes including related fees and expenses against The Group utilizes derivative financial instruments for the the subsidiary. Novartis believes that its total provisions are purpose of hedging to reduce the volatility in the Group’s per- adequate based upon currently available information, however, formance due to the exposure to various types of business risks. given the inherent difficulties in estimating liabilities in this The Group, therefore, enters into certain derivative financial area, Novartis may incur additional costs beyond the amounts instruments which provide effective economic hedges. The risk provided. Management believes that such additional amounts, reduction is obtained because the derivative’s value or cash if any, would not be material to the Group’s financial condition flows are expected, wholly or partly, to move inversely to the but could be material to the results of operations or cash flows hedged item and, therefore, offset changes in the value or cash in a given period. flows of the hedged item. The overall hedging strategy is aim- ing to mitigate the currency and interest exposure risk of posi- CONTINGENT CONSIDERATION tions which are contractually agreed and to partially hedge the In a business combination or divestment of a business, it is exposure risk of selected anticipated transactions. However, the necessary to recognize contingent future payments to previ- Group generally does not hedge the translation risk related to ous or from new owners representing contractually defined its foreign investments. potential amounts as a liability or asset. Usually for Novartis, Not all of the financial impact of derivative financial instru- these are linked to milestone or royalty payments related to ments can be matched with the financial impact of the eco- certain assets and are recognized as a financial liability or nomically hedged item. A prerequisite for obtaining this asset at their fair value which is then re-measured at each sub- accounting-hedge relationship is extensive documentation on sequent reporting date. These estimations typically depend inception and proving on a regular basis that the economic on factors such as technical milestones or market performance hedge is effective for accounting purposes. Changes in the fair and are adjusted for the probability of their likelihood of value of any derivative instruments that do not qualify for cash payment and if material, appropriately discounted to reflect flow hedge accounting are recognized immediately in “Other the impact of time. Changes in the fair value of contingent lia- financial income and expense” in the consolidated income bilities in subsequent periods are recognized in the consoli- statement. INvENTORIES dated income statement in “Cost of goods sold” for currently marketed products and in “Research & Development” for IPR&D. Changes in contingent assets are recognized in “Other Inventory is valued at acquisition or production cost deter- income” or “Other expense”. The effect of unwinding the dis- mined on a first-in first-out basis. This value is used for the count over time is recognized in “Interest expense” in the con- “Cost of goods sold” in the consolidated income statement. solidated income statement. Novartis does not recognize con- Unsalable inventory is fully written off in the consolidated tingent consideration associated with asset purchases outside income statement under “Cost of goods sold”. of a business combination that are conditional upon future TRADE RECEIvABLES events which are within its control until such time as there is an unconditional obligation. If the contingent consideration is Trade receivables are initially recognized at their invoiced outside the control of Novartis, a liability is recognized once it amounts including any related sales taxes less adjustments becomes probable that the contingent consideration will for estimated revenue deductions such as rebates, charge- become due. In both cases, if appropriate, a corresponding backs and cash discounts. asset is recorded. Provisions for doubtful trade receivables are established once there is an indication that it is likely that a loss will be incurred. These provisions represent the difference between DEFINED BENEFIT PENSION PLANS AND OTHER POST- EMPLOYMENT BENEFITS the trade receivable’s carrying amount in the consolidated bal- The liability in respect of defined benefit pension plans and other ance sheet and the estimated net collectible amount. Signifi- post-employment benefits is the defined benefit obligation cal- cant financial difficulties of a customer, such as probability of culated annually by independent actuaries using the projected bankruptcy, financial reorganization, default or delinquency in unit credit method. The current service cost for such post- payments are considered indicators that recovery of the trade employment benefit plans is included in the personnel expenses receivable is doubtful. Charges for doubtful trade receivables of the various functions where the associates are employed, while FINANCIAL REPORT | NOTES TO THE NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 181 the net interest on the net defined benefit liability or asset is any other relevant factors. This is applied to the amounts recognized as “Other expense” or “Other income”. invoiced also considering the amount of returned products to TREASURY SHARES be destroyed versus products that can be placed back in inven- tory for resale. Where shipments are made on a re-sale or Treasury shares are initially recorded at fair value on their trade return basis, without sufficient historical experience for esti- date which is different from the settlement date when the trans- mating sales returns, revenue is only recorded when there is action is ultimately effected. Treasury shares are deducted evidence of consumption or when the right of return has from consolidated equity at their nominal value of CHF 0.50 expired. per share. Differences between the nominal amount and the Provisions for revenue deductions are adjusted to actual transaction price on purchases or sales of treasury shares with amounts as rebates, discounts and returns are processed. The third parties, or the value of services received for the shares provision represents estimates of the related obligations, allocated to associates as part of share-based compensation requiring the use of judgment when estimating the effect of arrangements, are recorded in “Retained earnings” in the these sales deductions. consolidated statement of changes in equity. REvENUE RECOGNITION REvENUE REvENUE FROM LEASE ARRANGEMENTS For surgical equipment, in addition to cash and instalment sales, revenue is recognized under finance and operating lease Revenue is recognized on the sale of Novartis Group products arrangements. An arrangement that is not in the legal form of and services and recorded as “Net sales” in the consolidated a lease is accounted for as a lease if it is dependent on the use income statement when there is persuasive evidence that a of a specific asset or assets and the arrangement conveys a sales arrangement exists, title and risks and rewards for the right to use the asset. Arrangements in which Novartis trans- products are transferred to the customer, the price is deter- fers substantially all the risks and rewards incidental to own- minable and collectability is reasonably assured. When ership to the customer are treated as finance lease arrange- contracts contain customer acceptance provisions, sales are ments. Revenue from finance lease arrangements is recognized recognized upon the satisfaction of acceptance criteria. If at amounts equal to the fair values of the equipment, which products are stockpiled at the request of the customer, reve- approximate the present values of the minimum lease pay- nue is only recognized once the products have been inspected ments under the arrangements. As interest rates embedded and accepted by the customer and there is no right of return in lease arrangements are approximately market rates, reve- or replenishment on product expiry. nue under finance lease arrangements is comparable to rev- Provisions for rebates and discounts granted to govern- enue for outright sales. Finance income for arrangements in ment agencies, wholesalers, retail pharmacies, managed excess of twelve months is deferred and subsequently recog- healthcare organizations and other customers are recorded nized based on a pattern that approximates the use of the as a deduction from revenue at the time the related revenues effective interest method and recorded in “Other income”. are recorded or when the incentives are offered. They are cal- Operating lease revenue for equipment rentals is recognized culated on the basis of historical experience and the specific on a straight-line basis over the lease term. terms in the individual agreements. Provisions for refunds granted to healthcare providers under innovative pay-for-per- OTHER REvENUE formance agreements are recorded as a revenue deduction at “Other revenue” includes royalty income and revenue from the time the related sales are recorded. They are calculated activities such as manufacturing services or other services on the basis of historical experience and clinical data available rendered to the extent such revenue is not recorded under net for the product as well as the specific terms in the individual sales. agreements. In cases where historical experience and clinical data are not sufficient for a reliable estimation of the outcome, RESEARCH & DEvELOPMENT revenue recognition is deferred until such history is available. Internal Research & Development (R&D) costs are fully charged Cash discounts are offered to customers to encourage to “Research & Development” in the consolidated income prompt payment and are recorded as revenue deductions. Fol- statement in the period in which they are incurred. The Group lowing a decrease in the price of a product, we generally grant considers that regulatory and other uncertainties inherent in customers a “shelf stock adjustment” for a customer’s exist- the development of new products preclude the capitalization ing inventory for the involved product. Provisions for shelf stock of internal development expenses as an intangible asset until adjustments, which are primarily relevant within the Sandoz marketing approval from a regulatory authority is obtained in Division, are determined at the time of the price decline or at a major market such as the United States, the European Union, the point of sale, if the impact of a price decline on the prod- Switzerland or Japan. ucts sold can be reasonably estimated based on the custom- Payments made to third parties in compensation for sub- er’s inventory levels of the relevant product. When there is his- contracted R&D, such as contract research and development torical experience of Novartis agreeing to customer returns organizations, that is deemed not to enhance the intellectual and Novartis can reasonably estimate expected future returns, property of Novartis are expensed as internal R&D expenses a provision is recorded for estimated sales returns. In doing in the period in which they are incurred. Such payments are so the estimated rate of return is applied, determined based only capitalized if they meet the criteria for recognition of an on historical experience of customer returns and considering internally generated intangible asset, usually when marketing 182 | Novartis Annual Report 2015 FINANCIAL REPORT 1. Significant Accounting Policies (Continued) approval has been achieved from a regulatory authority in a related options granted to associates as compensation are major market. recognized as an expense over the related vesting period. The Payments made to third parties in order to in-license or expense recorded in the consolidated income statement is acquire intellectual property rights, compounds and products, included in the personnel expenses of the various functions including initial upfront and subsequent milestone payments, where the associates are employed. are capitalized as are payments for other assets, such as tech- Unvested restricted shares, restricted ADRs and RSUs and nologies to be used in R&D activities. If additional payments any related options are only conditional on the provision of are made to the originator company to continue to perform services by the plan participant during the vesting period. As R&D activities, an evaluation is made as to the nature of the a result, restricted shares, restricted ADRs, RSUs and any payments. Such additional payments will be expensed if they related options are valued using their market value on the grant are deemed to be compensation for subcontracted R&D ser- date. The value of these grants, after making adjustment for vices not resulting in an additional transfer of intellectual prop- assumptions related to their forfeiture during the vesting erty rights to Novartis. By contrast, such additional payments period, are expensed on a straight-line basis over the respec- will be capitalized if they are deemed to be compensation for tive vesting period. the transfer to Novartis of additional intellectual property PSUs require the plan participant to not only provide ser- developed at the risk of the originator company. Subsequent vices during the vesting period but they are also subject to internal R&D costs in relation to IPR&D and other assets are certain performance criteria being achieved during the vest- expensed since the technical feasibility of the internal R&D ing period. PSUs granted under plans defined as “Long-Term activity can only be demonstrated by the receipt of marketing Performance Plans” are subject to performance criteria based approval for a related product from a regulatory authority in on Novartis internal performance metrics. The expense is a major market. determined taking into account assumptions concerning per- Costs for post-approval studies performed to support the formance during the period against targets and expected for- continued registration of a marketed product are recognized feitures due to plan participants not meeting their service con- as marketing expenses. Costs for activities that are required ditions. These assumptions are periodically adjusted. Any by regulatory authorities as a condition for obtaining market- change in estimates for past services are recorded immedi- ing approval are charged as development expenses as they ately as an expense or income in the consolidated income are incurred, in cases where it is anticipated that the related statement and amounts for future periods are expensed over product will be sold over a longer period than the activities the remaining vesting period. As a result, at the end of the vest- required to be performed to obtain the marketing approval. ing period, the total charge during the whole vesting period As a result, all activities necessary as a condition to maintain represents the amount which will finally vest. The number of a received approval, whether conditional or not, are expensed equity instruments that finally vest is determined at the vest- in the consolidated income statement. ing date. IPR&D assets are transferred to “Currently marketed prod- In 2014, a Long-Term Relative Performance Plan (LTRPP) ucts” once the related project has been successfully developed was introduced. PSUs granted under this plan are not only and then are amortized straight-line in the consolidated conditional on the provision of services by the plan participant income statement over their useful life. Other acquired tech- during the vesting period but are also conditional on the Total nologies included in intangible assets are amortized straight- Shareholder Return (TSR) performance of Novartis relative to line in the consolidated income statement over their estimated a specific peer group of companies over the vesting period. useful lives. These performance conditions are based on variables which Inventory produced ahead of regulatory approval is provi- can be observed in the market. IFRS requires that these obser- sioned against and the charge is included in “Other expense” vations are taken into account in determining the fair value of in the consolidated income statement as its ultimate use these PSUs at the date of grant. Novartis has determined the cannot be assured. If this inventory can be subsequently sold, fair value of these PSUs at the date of grant using a “Monte the provision is released to “Other income” in the consolidated Carlo” simulation model. The total fair value of this grant is income statement either on approval by the appropriate reg- expensed on a straight-line basis over the vesting period. ulatory authority or, exceptionally in Europe, on recommenda- Adjustments to the number of equity instruments granted are tion by the Committee for Medicinal Products for Human Use only made if a plan participant does not fulfill the service (CHMP) if approval is virtually certain. conditions. If a plan participant leaves Novartis, for reasons other than SHARE-BASED COMPENSATION retirement, disability or death, then unvested restricted shares, Vested Novartis shares and ADRs which are granted as com- restricted ADRs, RSUs and related share options and PSUs are pensation are valued at their market value on the grant date forfeited, unless determined otherwise by the provision of the and are immediately expensed in the consolidated income plan rules or by the Compensation Committee, for example, statement. in connection with a reorganization or divestment. The fair values of unvested restricted shares, restricted Measuring the fair values of PSUs granted under the LTRPP share units (RSUs) and performance share units (PSUs) in and share and ADR options granted under other plans, requires Novartis shares and American Depositary Receipts (ADRs) and an estimation of the probability of uncertain future events and FINANCIAL REPORT | NOTES TO THE NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 183 various other factors used in the valuation models. The Monte in an assessment being made requiring payments of additional Carlo simulation used for determining the fair value of the tax, interest or penalties. Inherent uncertainties exist in the PSUs related to the LTRPP requires as input parameters the estimates of the tax positions. probability of factors related to uncertain future events; the term of the award; grant price of underlying shares or ADRs; expected volatilities; expected correlation matrix of the under- NON-CURRENT ASSETS HELD FOR SALE OR RELATED TO DISCONTINUED OPERATIONS lying equity instruments with those of the peer group of com- Non-current assets are classified as assets held for sale or panies and the risk free interest rate. The fair values of options related to discontinued operations when their carrying amount on Novartis shares and ADRs are calculated using the trino- is to be recovered principally through a sale transaction and mial valuation method and has as input parameters the a sale is considered highly probable. They are stated at the expected dividend yield and expected price volatility. Expected lower of carrying amount and fair value less costs to sell. Assets volatilities are based on those implied from listed financial held for sale or included within a disposal group are not depre- instruments on Novartis shares, and – to the extent that equiv- ciated or amortized. alent values are not available – a future extrapolation based on historical volatility. STATUS OF ADOPTION OF SIGNIFICANT NEW OR AMENDED IFRS STANDARDS OR INTERPRETATIONS GOvERNMENT GRANTS The adoption of new or amended standards and interpreta- Grants from governments or similar organizations are recog- tions which are effective for the financial year beginning on nized at their fair value when there is a reasonable assurance January 1, 2015 did not have a material impact on the Group’s that the grant will be received and the Group will comply with consolidated financial statements. all attached conditions. The following new IFRS standards will, based on a Novartis Government grants related to income are deferred and analysis, be of significance to the Group, but have not yet been recognized in the consolidated income statement over the early adopted: period necessary to match them with the related costs which — IFRS 9 Financial Instruments will substantially change the they are intended to compensate. classification and measurement of financial instruments; The accounting policy for property, plant and equipment will require impairments to be based on a forward-look- describes the treatment of any related grants. ing model; will change the approach to hedging financial RESTRUCTURING CHARGES exposures and related documentation and also the recognition of certain fair value changes. The mandatory Charges to increase restructuring provisions are included in effective date for requirements issued as part of IFRS 9 “Other expense” in the consolidated income statements. Cor- is January 1, 2018 with early adoption permitted. The responding releases are recorded in “Other income” in the Group is currently assessing the impact of IFRS 9. consolidated income statement. — IFRS 15 Revenue from contracts with customers amends TAXES revenue recognition requirements and establishes principles for reporting information about the nature, Taxes on income are provided in the same periods as the rev- amount, timing and uncertainty of revenue and cash enues and expenses to which they relate and include any inter- flows arising from contracts with customers. The est and penalties incurred during the period. Deferred taxes standard replaces IAS 18 Revenue and IAS 11 Construc- are determined using the comprehensive liability method and tion contracts and related interpretations. The standard are calculated on the temporary differences that arise between is effective for annual periods beginning on or after the tax base of an asset or liability and its carrying value in the January 1, 2018 with earlier adoption permitted. The balance sheet prepared for consolidation purposes, except for Group is currently assessing the impact of adopting those temporary differences related to investments in subsid- IFRS 15. iaries and associated companies, where the timing of their — IFRS 16 Leases substantially changes the financial reversal can be controlled and it is probable that the differ- statements as the majority of leases will become ence will not reverse in the foreseeable future. Furthermore, on-balance sheet liabilities with corresponding right of withholding or other taxes on eventual distribution of a sub- use assets on the balance sheet. The standard replaces sidiary’s retained earnings are only taken into account when IAS 17 Leases and is effective January 1, 2019. Early a dividend has been planned since generally the retained earn- application is permitted for companies that also apply ings are reinvested. IFRS 15 Revenue from Contracts with Customers. The The estimated amounts for current and deferred tax assets Group is currently assessing the impact of adopting or liabilities, including any amounts related to any uncertain IFRS 16. tax positions, are based on currently known facts and circum- stances. Tax returns are based on an interpretation of tax laws There are no other IFRS standards or interpretations which are and regulations and reflect estimates based on these judg- not yet effective which would be expected to have a material ments and interpretations. The tax returns are subject to exam- impact on the Group. ination by the competent taxing authorities which may result 184 | Novartis Annual Report 2015 FINANCIAL REPORT 2. Significant Transactions SIGNIFICANT TRANSACTIONS IN 2015 completed. The option period was 18 months from the closing PORTFOLIO TRANSFORMATION TRANSACTIONS date of the GSK transaction, but terminated with the sale of the Transaction with Eli Lilly and Company Vaccines influenza business to CSL on July 31, 2015. Novartis On January 1, 2015, Novartis closed its transaction with Eli paid GSK a fee of USD 5 million in consideration for the grant Lilly and Company, USA (Lilly) announced in April 2014 to of the Influenza Put Option. divest its Animal Health business for USD 5.4 billion in cash. This resulted in a pre-tax gain of USD  4.6 billion which is recorded in operating income from discontinued operations. Consumer Health – Combination of Novartis OTC with GSK consumer healthcare in a joint venture Novartis and GSK have agreed to create a combined Consumer Transactions with GlaxoSmithKline plc Healthcare business through a joint venture between Novartis On March 2, 2015, Novartis closed its transactions with OTC and GSK Consumer Healthcare. On March 2, 2015, a new GlaxoSmithKline plc, Great Britain (GSK) announced in April entity was formed via contribution of businesses from both 2014, with the following consequences: Novartis and GSK. Novartis has a 36.5% interest in the newly created entity. Novartis has valued the contribution of 63.5% Pharmaceuticals – Acquisition of GSK oncology products of its OTC Division in exchange for 36.5% of the GSK Consumer Novartis acquired GSK’s oncology products and certain related Healthcare business at fair value. Based on the estimates of fair assets for an aggregate cash consideration of USD 16.0 bil- values exchanged, an investment in an associated company of lion. Up to USD 1.5 billion of this cash consideration at the USD 7.6 billion was recorded. The resulting pre-tax gain, net of acquisition date is contingent on certain development mile- transaction related costs, of USD 5.9 billion is recorded in oper- stones. The fair value of this potentially refundable consider- ating income from discontinued operations. ation is USD 0.1 billion. In addition, under the terms of the Novartis has four of eleven seats on the joint venture enti- agreement, Novartis is granted a right of first negotiation over ty’s Board of Directors. Furthermore, Novartis has customary the co-development or commercialization of GSK’s current minority rights and also exit rights at a pre-defined, market and future oncology R&D pipeline, excluding oncology vac- based pricing mechanism. cines. The right of first negotiation is for a period of 12.5 years The investment is accounted for using the equity method from the acquisition closing date. The purchase price alloca- of accounting using estimated results for the last quarter of the tion of the fair value of the consideration of USD 15.9 billion year. Any differences between this estimate and actual results, resulted in net identified assets of USD 13.5 billion and good- when available, will be adjusted in the Group’s 2016 consoli- will of USD 2.4 billion. Since the acquisition the business gen- dated financial statements. erated net sales of USD 1.8 billion. Management estimates net sales for the entire year 2015 would have amounted to USD 2.1 Additional GSK related costs billion had the Oncology products been acquired at the begin- The GSK transaction resulted in USD 0.6 billion of additional ning of the 2015 reporting period. The net results from oper- transaction-related costs that were expensed. ations on a reported basis since the acquisition date were not material. Transaction with CSL Vaccines – Divestment On October 26, 2014, Novartis entered into an agreement with CSL to sell its Vaccines influenza business to CSL for USD 275 Novartis has divested its Vaccines business (excluding its Vac- million. Entering into the separate divestment agreement with cines influenza business) to GSK for up to USD 7.1 billion plus CSL resulted in the Vaccines influenza business being classi- royalties. The USD 7.1 billion consists of USD 5.25 billion paid fied as a separate disposal group consisting of a group of cash at closing and up to USD 1.8 billion in future milestone pay- generating units within the Vaccines Division, requiring the ments. The fair value of the contingent future milestones and performance of a separate valuation of the Vaccines influenza royalties is USD 1.0 billion, resulting in a fair value of consider- business net assets. This triggered the recognition of an excep- ation received of USD 6.25 billion. Included in this amount, is a tional impairment charge in 2014 of USD 1.1 billion as the esti- USD 450 million milestone payment received in late March 2015. mated net book value of the Vaccines influenza business net The sale of this business resulted in a pre-tax gain of USD 2.8 assets was above the USD 275 million consideration. The trans- billion which is recorded in operating income from discontin- action with CSL was completed on July 31, 2015, resulting in ued operations. a partial reversal of the impairment recorded in 2014 in the Novartis’s Vaccines influenza business is excluded from the amount of USD  0.1 billion, which is included in operating GSK Vaccines business acquisition. However, GSK has entered income from discontinued operations. into a future option arrangement with Novartis in relation to the Vaccines influenza business, pursuant to which Novartis could OTHER SIGNIFICANT TRANSACTIONS IN 2015 have unilaterally required GSK to acquire the entire or certain parts of its Vaccines influenza business for consideration of up Pharmaceuticals – Acquisition of Spinifex Pharmaceuticals, Inc. to USD 250 million (the Influenza Put Option) if the divestment On June 29, 2015 Novartis entered into an agreement to acquire to CSL Limited, Australia (CSL), discussed below, had not been Spinifex Pharmaceuticals, Inc. (Spinifex), a US and Austra- FINANCIAL REPORT | NOTES TO THE NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 185 lian-based, privately held development stage company, focused on developing a peripheral approach to treat neuropathic pain. PHARMACEUTICALS – ACQUISITION OF CoStim PHARMACEUTICALS, INC. The transaction closed on July 24, 2015, and the total purchase On February 17, 2014, Novartis acquired all of the outstand- consideration was USD 312 million. The amount consisted of an ing shares of CoStim Pharmaceuticals, Inc., a Cambridge, Mas- initial cash payment of USD 196 million and the net present sachusetts, US-based, privately held biotechnology company value of the contingent consideration of USD 116 million due to focused on harnessing the immune system to eliminate previous Spinifex shareholders, which they are eligible to receive immune-blocking signals from cancer, for a total purchase upon achievement of specified development and commercial- consideration of USD 248 million (excluding cash acquired). ization milestones. The purchase price allocation resulted in net This amount consists of an initial cash payment and the net identifiable assets of USD 263 million and goodwill of USD 49 present value of contingent consideration of USD 153 million million. Results of operations since the date of acquisition were due to previous CoStim shareholders, which they are eligible not material. to receive upon the achievement of specified development and commercialization milestones. The purchase price allocation Pharmaceuticals – Acquisition of Admune Therapeutics LLC resulted in net identified assets of USD 152 million (excluding On October 16, 2015, Novartis acquired Admune Therapeu- cash acquired) and goodwill of USD 96 million. Results of oper- tics LLC (Admune), a US-based, privately held company, broad- ations since the acquisition were not material. ening Novartis’ pipeline of cancer immunotherapies. The total purchase consideration amounted to USD 258 million. This amount consists of an initial cash payment of USD 140 million PHARMACEUTICALS – DIvESTMENT OF IDENIX PHARMACEUTICALS, INC. (IDENIX) SHAREHOLDING and the net present value of the contingent consideration of On August 5, 2014, Merck & Co., USA completed a tender offer USD 118 million due to Admune’s previous owners, which they for Idenix. As a result, Novartis divested its 22% shareholding in are eligible to receive upon the achievement of specified devel- Idenix and realized a gain of approximately USD 0.8 billion which opment and commercialization milestones. The purchase price was recorded in income from associated companies. allocation resulted in net identifiable assets of USD 258 mil- lion. No goodwill was recognized. Results of operations since the date of acquisition were not material. ALCON – ACQUISITION OF WaveteC vISION SYSTEMS, INC. (WaveteC) On October 16, 2014, Alcon acquired all of the outstanding SIGNIFICANT TRANSACTIONS IN 2014 shares of WaveTec, a privately held company, for USD 350 mil- vACCINES – DIvESTMENT OF BLOOD TRANSFUSION DIAGNOSTICS UNIT lion in cash. The purchase price allocation resulted in net iden- tified assets of USD 180 million and goodwill of USD 170 mil- On January 9, 2014, Novartis completed the divestment of its lion. Results of operations since the date of acquisition were not blood transfusion diagnostics unit announced on November material. 11, 2013 to the Spanish company Grifols S.A., for USD 1.7 bil- lion in cash. The pre-tax gain on this transaction was approx- imately USD 0.9 billion and was recorded in operating income from discontinued operations. CORPORATE – DIvESTMENT OF LTS LOHMANN THERAPIE-SYSTEME AG (LTS) SHAREHOLDING On November 5, 2014, Novartis divested its 43% sharehold- ing in LTS and realized a gain of approximately USD 0.4 billion which was recorded in income from associated companies. 3. Segmentation of Key Figures 2015 and 2014 The businesses of Novartis are divided operationally on a The reporting segments are as follows: worldwide basis into three reporting segments. In addition, we Pharmaceuticals researches, develops, manufactures, separately report Corporate activities. distributes and sells patented prescription medicines. The Reporting segments are presented in a manner consistent Pharmaceuticals Division is organized into global business with the internal reporting to the chief operating decision franchises responsible for the commercialization of various maker which is the Executive Committee of Novartis. The products. These franchises are: Oncology, Neuroscience, Ret- reporting segments are managed separately because they ina, Immunology and Dermatology, Respiratory, Cardio-Met- each research, develop, manufacture, distribute, and sell dis- abolic, Established Medicines and Cell and Gene Therapies. tinct products that require differing marketing strategies. Alcon researches, discovers, develops, manufactures, The Executive Committee of Novartis is responsible for distributes and sells eye care products. The Alcon Division is allocating resources and assessing the performance of the the global leader in eye care with product offerings in surgi- reporting segments. cal, ophthalmic pharmaceuticals and vision care. The Alcon Division is organized globally in three global business fran- 186 | Novartis Annual Report 2015 FINANCIAL REPORT 3. Segmentation of Key Figures 2015 and 2014 (Continued) chises as follows: In Surgical, Alcon develops, manufactures, Cambridge, Massachusetts. NIBR conducts the Pharma- distributes and sells ophthalmic surgical equipment, instru- ceuticals and Alcon divisions research activities. ments, disposable products and intraocular lenses. In Oph- — Novartis Business Services (NBS) was created in July thalmic Pharmaceuticals, Alcon discovers, develops, manufac- 2014 and started operations in January 2015 as a tures, distributes and sells medicines to treat chronic and acute shared services organization providing business support diseases of the eye, as well as over-the-counter medicines for services across the Group such as information technol- the eye. In Vision Care, Alcon develops, manufactures, distrib- ogy, real estate and facility services, procurement, utes and sells contact lenses and lens care products. product lifecycle services, human resources and Sandoz develops, manufactures, distributes and sells pre- financial reporting and accounting operations. scription medicines, as well as pharmaceutical active sub- stances, which are not protected by valid and enforceable third- Following the Portfolio Transformation transactions described party patents. The Sandoz Division is organized globally in in Note 2, Novartis has separated the Group’s reported finan- three franchises, Retail Generics, Anti-Infectives and Biophar- cial data for the current and prior year into “continuing” maceuticals & Oncology Injectables. In Retail Generics, San- operations and “discontinued” operations: doz develops, manufactures and markets active ingredients and finished dosage forms of pharmaceuticals to third parties. Continuing operations comprise: Retail Generics includes the areas of dermatology, respiratory — Pharmaceuticals: Innovative patent-protected prescrip- and ophthalmics, as well as cardiovascular, metabolism, cen- tion medicines tral nervous system, pain, gastrointestinal, and hormonal ther- — Alcon: Surgical, ophthalmic pharmaceutical and vision apies. Finished dosage form anti-infectives sold to third par- care products ties are also part of Retail Generics. In Anti-Infectives, Sandoz — Sandoz: Generic pharmaceuticals manufactures active pharmaceutical ingredients and interme- — Corporate activities diates – mainly antibiotics- for internal use by Retail Generics and for sale to third party customers. In Biopharmaceuticals, Discontinued operations comprise: Sandoz develops, manufactures and markets protein- or other — Vaccines: Preventive human vaccines and the blood biotechnology-based products known as biosimilars and pro- transfusion diagnostics unit. Excluded are certain vides biotechnology manufacturing services to other compa- intellectual property rights and related other revenues of nies. In Oncology Injectables, Sandoz develops, manufactures the Vaccines Division which are now reported under and markets cytotoxic products for the hospital market. Corporate activities. Income and expenses relating to Corporate include the — Consumer Health: OTC (over-the-counter medicines) and costs of the Group headquarters and those of corporate Animal Health. These two divisions were managed coordination functions in major countries. In addition, separately. However, neither was material enough to the Corporate includes other items of income and expense which Group to be disclosed separately as a reporting segment. are not attributable to specific segments such as certain — Corporate: certain transactional and other expenses expenses related to post-employment benefits, environmental related to the portfolio transformation. remediation liabilities, charitable activities, donations and sponsorships. Usually, no allocation of Corporate items is made The accounting policies mentioned in Note 1 are used in the to the segments. As a result, Corporate assets and liabilities reporting of segment results. Inter-segmental sales are made principally consist of net liquidity (cash and cash equivalents, at amounts which are considered to approximate arm’s length marketable securities less financial debts), investments in transactions. The Executive Committee of Novartis evaluates associated companies and current and deferred taxes and segmental performance and allocates resources among the non-segment specific environmental remediation and post-em- segments based on a number of measures including net sales, ployment benefit liabilities. operating income and net operating assets. Segment net oper- ating assets consist primarily of property, plant and equip- Our divisions are supported by the Novartis Institutes for Bio- ment, intangible assets, inventories and trade and other oper- Medical Research and by Novartis Business Services. ating receivables less operating liabilities. — The Novartis Institutes for BioMedical Research (NIBR) was created in 2003, and is headquartered in FINANCIAL REPORT | NOTES TO THE NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 187 SEGMENTATION – CONSOLIDATED INCOME STATEMENTS Pharmaceuticals Alcon Sandoz Corporate (including eliminations) Group (USD millions) 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 Net sales to third parties from continuing operations 30 445 31 791 9 812 10 827 9 157 9 562 49 414 52 180 Sales to other segments 137 262 45 49 128 286 – 284 – 358 26 239 Net sales from continuing operations 30 582 32 053 9 857 10 876 9 285 9 848 – 284 – 358 49 440 52 419 Other revenues Cost of goods sold 790 629 25 34 25 12 – 7 379 – 6 889 – 5 153 – 5 193 – 5 325 – 5 751 Gross profit from continuing operations 23 993 25 793 4 729 5 717 3 985 4 109 Marketing & Sales – 7 789 – 8 178 – 2 398 – 2 474 – 1 585 – 1 725 Research & Development – 7 232 – 7 331 – 926 – 928 – 777 – 827 107 453 276 540 947 1 215 488 – 17 404 – 17 345 670 32 983 36 289 – 11 772 – 12 377 – 8 935 – 9 086 General & Administration – 937 – 1 009 – 544 – 613 – 346 – 376 – 648 – 618 – 2 475 – 2 616 Other income Other expense Operating income from continuing operations 1 145 734 58 79 109 97 737 481 2 049 1 391 – 1 583 – 1 538 – 125 – 184 – 381 – 190 – 784 – 600 – 2 873 – 2 512 7 597 8 471 794 1 597 1 005 1 088 – 419 – 67 8 977 11 089 Income from associated companies 812 2 4 264 1 102 266 1 918 Interest expense Other financial income and expense Income before taxes from continuing operations Taxes Net income from continuing operations Net income/loss from discontinued operations Net income Attributable to:    Shareholders of Novartis AG    Non-controlling interests Included in net income from continuing operations are:    Interest income    Depreciation of property,    plant & equipment – 655 – 704 – 454 – 31 8 134 12 272 – 1 106 – 1 545 7 028 10 727 10 766 – 447 17 794 10 280 17 783 10 210 11 70 33 33 – 796 – 856 – 280 – 307 – 277 – 317 – 117 – 106 – 1 470 – 1 586    Amortization of intangible assets – 1 305 – 287 – 2 079 – 2 080 – 362 – 403 – 9 – 5 – 3 755 – 2 775    Impairment charges on property,    plant & equipment, net    Impairment charges on intangible    assets, net    Impairment charges and fair value    gains on financial assets, net 39 – 15 – 1 1 – 97 – 7 – 21 – 23 – 80 – 44 – 19 – 231 – 120 – 7 – 27 – 39 – 166 – 277    Additions to restructuring provisions – 206 – 433 – 51 – 64 – 93 – 32 – 20 – 1 – 4 – 72 – 49 – 48 – 104 – 69 – 3 – 399 – 504    Equity-based compensation of    Novartis and Alcon equity plans – 600 – 685 – 86 – 92 – 53 – 51 – 164 – 179 – 903 – 1 007 188 | Novartis Annual Report 2015 FINANCIAL REPORT 3. Segmentation of Key Figures 2015 and 2014 (Continued) SEGMENTATION – CONSOLIDATED BALANCE SHEETS (USD millions) 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 Assets related to continuing operations 41 552 25 657 40 330 42 494 17 688 18 771 31 986 31 664 131 556 118 586 Pharmaceuticals Alcon Sandoz Corporate (including eliminations) Group Assets related to discontinued operations 6 801 Total assets 41 552 25 657 40 330 42 494 17 688 18 771 31 986 31 664 131 556 125 387 Liabilities related to continuing operations Liabilities related to discontinued operations Total liabilities Total equity Net debt – 10 798 – 10 532 – 2 403 – 2 709 – 3 545 – 3 449 – 37 688 – 35 435 – 54 434 – 52 125 – 10 798 – 10 532 – 2 403 – 2 709 – 3 545 – 3 449 – 37 688 – 35 435 – 54 434 – 54 543 – 2 418 77 122 70 844 16 484 6 549 93 606 77 393 Net operating assets 30 754 15 125 37 927 39 785 14 143 15 322 Included in assets and liabilities related to continuing operations1 are:    Total property, plant & equipment 9 985 9 732 2 504 2 413 2 788 3 123 705 715 15 982 15 983    Additions to property,    plant & equipment 2 1 309 1 676 565 517 421 531 224 180 2 519 2 904    Total goodwill and intangible assets 21 345 6 096 33 604 35 642 10 410 11 378 32 27 65 391 53 143    Additions to goodwill and    intangible assets 2    Total investment in associated    companies    Additions to investment in associated    companies 2    Cash and cash equivalents,    marketable securities, commodities,    time deposits and derivative    financial instruments    Financial debts and derivative    financial instruments    Current income tax and deferred    tax liabilities 994 493 110 192 44 110 11 4 1 159 799 8 5 11 9 15 16 15 291 8 405 15 314 8 432 57 44 62 53 5 447 13 862 5 447 13 862 21 931 20 411 21 931 20 411 8 072 8 175 8 072 8 175 1 Items reflect the allocation to continuing operations as described on page 186. 2 Excluding impact of business combinations. The following table shows countries that accounted for more than 5% of at least one of the respective Group totals and regional information for the years ended December 31, 2015 and 2014: USD millions Country Switzerland United States United Kingdom Germany France Japan Other Group Region Europe Americas Asia/Africa/Australasia Group Net sales 1 Total of selected non-current assets 2 2015 % 2014 % 2015 % 2014 774 2 658 1 47 054 18 079 37 17 337 33 28 677 3 7 5 6 1 379 3 742 2 638 3 781 3 7 5 7 7 769 2 908 188 142 49 30 8 3 34 399 28 329 612 3 365 228 141 40 22 645 44 9 949 10 10 484 100 52 180 100 96 687 100 77 558 1 277 3 262 2 269 3 163 20 590 49 414 16 472 22 414 10 528 33 45 22 18 690 22 218 11 272 36 43 21 63 681 30 375 2 631 66 31 3 45 040 30 074 2 444 49 414 100 52 180 100 96 687 100 77 558 100 % 44 37 1 4 14 100 58 39 3 1 Net sales from operations by location of third-party customer. 2 Total of property, plant and equipment; goodwill; intangible assets; and investment in associated companies. FINANCIAL REPORT | NOTES TO THE NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 189 The Group’s largest, second and third largest customer The highest amounts of trade receivables outstanding were accounts for approximately 14%, 11% and 5% of net sales, for these same three customers. They amounted to 13%, 9% respectively (2014: 12%, 11% and 5% respectively). No other and 6%, respectively, of the trade receivables at December 31, customer accounted for 5% or more of net sales, in either year. 2015 (2014: 13%, 9% and 5% respectively). PHARMACEUTICALS BUSINESS FRANCHISE NET SALES 2015 2014 Change USD millions USD millions USD % 2015 2014 Change USD millions USD millions USD % Oncology Gleevec/Glivec Tasigna Subtotal Bcr-Abl franchise Sandostatin Afinitor/Votubia Exjade Votrient Tafinlar/Mekinist Jakavi Revolade/Promacta Femara Zykadia Other 4 658 4 746 – 2 Ultibro Breezhaler Respiratory 1 632 1 529 6 290 6 275 1 630 1 650 1 607 1 575 7 0 – 1 2 – 1 nm nm 47 nm 926 0 0 279 0 917 565 453 410 402 304 79 819 Cardio-Metabolic Galvus 380 – 20 Entresto 31 155 Other Onbrez Breezhaler/Arcapta Neohaler Seebri Breezhaler Subtotal COPD1 portfolio Xolair 2 Other 260 166 150 576 755 263 118 120 220 – 25 146 484 777 3 19 – 3 320 – 18 Total Respiratory 1 594 1 581 1 1 140 1 224 21 0 0 8 – 7 nm nm – 6 Total Oncology 13 476 11 703 587 Total Cardio-Metabolic 1 161 1 232 40 15 Neuroscience Gilenya Exelon/Exelon Patch Comtan/Stalevo Other Established medicines Diovan 2 776 2 477 12 Exforge 728 294 141 1 009 – 28 Voltaren 371 – 21 Ritalin/Focalin 243 – 42 Other 1 284 2 345 – 45 1 047 1 396 – 25 558 365 632 – 12 492 – 26 2 774 3 675 – 25 Total Neuroscience 3 939 4 100 – 4 Total Established Medicines 6 028 8 540 – 29 Retina Lucentis Other Total Retina Immunology and Dermatology Neoral/Sandimmun(e) Myfortic Zortress/Certican Cosentyx Ilaris Other Subtotal Immunology and Dermatology excluding Everolimus stent drug Everolimus stent drug Total Division net sales 30 445 31 791 – 4 2 060 2 441 – 16 50 63 – 21 2 110 2 504 – 16 1 Chronic Obstructive Pulmonary Disease 2 Net sales reflect Xolair sales for all indications (e.g. including Xolair SAA and Xolair CSU, which are managed by the Immunology and Dermatology franchise). nm = not meaningful The product portfolio of other segments is widely spread in 2015 and 2014. 570 441 335 261 236 160 684 – 17 543 – 19 327 0 199 173 2 nm 19 – 8 2 003 1 926 4 134 205 – 35 Total Immunology and Dermatology 2 137 2 131 0 190 | Novartis Annual Report 2015 FINANCIAL REPORT 4. Associated Companies Net income statement effect Other comprehensive income effect Total comprehensive income effect 2015 2014 USD millions USD millions USD millions USD millions USD millions USD millions 2015 2015 2014 2014 Roche Holding AG, Switzerland GlaxoSmithKline Consumer Healthcare Holdings Ltd., UK Idenix Pharmaceuticals, Inc., US LTS Lohmann Therapie-Systeme AG, Germany Others Associated companies related to continuing operations 343 – 79 2 599 – 149 – 51 – 4 194 – 83 812 436 71 20 2 548 812 436 91 266 1 918 – 153 – 31 113 1 887 Novartis has significant investments in Roche Holding AG, Basel (Roche) and in GlaxoSmithKline Consumer Healthcare Holdings Ltd, Brentford, Middlesex, UK as well as certain other smaller investments which are accounted for as associated companies: Total comprehen- comprehen- Revenue Net income sive income sive income CHF billions CHF billions CHF billions CHF billions Other December 31, 2014 June 30, 2015 47.5 23.6 7.3 4.1 – 2.3 – 1.1 5.0 3.0 Balance sheet value 2015 2014 USD millions USD millions A purchase price allocation was performed on the basis of publicly available information at the time of acquisition of the Roche Holding AG, Switzerland 7 919 8 159 investment. The December 31, 2015 balance sheet value GlaxoSmithKline Consumer Healthcare Holdings Ltd., UK Others Total 7 194 201 273 15 314 8 432 ROCHE HOLDING AG The Group’s holding in Roche voting shares was 33.3% at December 31, 2015 and 2014. This investment represents approximately 6.3% of Roche’s total outstanding voting and non-voting equity instruments at December 31, 2015 and 2014. Since full-year 2015 financial data for Roche are not avail- allocation is as follows: Novartis share of Roche’s estimated net assets Novartis share of re-appraised intangible assets Implicit Novartis goodwill Current value of share in net identifiable assets and goodwill Accumulated equity accounting adjustments and translation effects less dividends received December 31, 2015 balance sheet value USD millions 2 314 1 039 2 879 6 232 1 687 7 919 able when Novartis produces its consolidated financial results, The identified intangible assets principally relate to the value a survey of analyst estimates is used to estimate the Group’s of currently marketed products and are amortized on a share of Roche’s net income. Any differences between these straight-line basis over their estimated average useful life of estimates and actual results will be adjusted in the Group’s 20 years. 2016 consolidated financial statements when available. In 2015, dividends received from Roche in relation to the The following tables show summarized financial informa- distribution of its 2014 net income amounted to USD  429 tion of Roche, including current values of fair value adjustments million (2014: USD 473 million in relation with the distribution made at the time of the acquisition of the shares, for the year of its 2013 net income). ended December 31, 2014 and for the six months ended June The consolidated income statement effects from applying 30, 2015 since full year 2015 data is not yet available: Novartis accounting principles for this investment in 2015 and Current assets Current Non-current liabilities liabilities CHF billions CHF billions CHF billions CHF billions Non-current assets 2014 are as follows: December 31, 2014 June 30, 2015 31.1 25.2 63.5 61.3 23.1 21.7 31.0 28.0 Novartis share of Roche’s estimated current-year consolidated net income Prior-year adjustment Amortization of fair value adjustments relating to intangible assets, net of taxes of USD 41 million (2014: USD 45 million) Net income effect 2015 2014 USD millions USD millions 650 – 157 813 – 56 – 150 343 – 158 599 FINANCIAL REPORT | NOTES TO THE NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 191 The publicly quoted market value of the Novartis interest in The following tables show interim unaudited financial infor- Roche (Reuters symbol: RO.S) at December 31, 2015, was mation of GSK Consumer Healthcare, including current values USD 14.9 billion (2014: USD 14.4 billion). of fair value adjustments made at the time of acquisition, for GLAXOSMITHKLINE CONSUMER HEALTHCARE HOLDINGS LTD On March 2, 2015, Novartis closed its transactions with GlaxoSmithKline plc, Great Britain (GSK) announced in April 2014. As part of these transactions, Novartis and GSK have agreed to create a combined consumer healthcare business through a joint venture between Novartis OTC and GSK Con- sumer Healthcare. On March 2, 2015, a new entity GlaxoSmith- Kline Consumer Healthcare Holdings Ltd (GSK Consumer the seven months ended September 30, 2015 since full year 2015 data is not yet available: Current assets Current Non-current liabilities liabilities GBP billions GBP billions GBP billions GBP billions Non-current assets September 30, 2015 3.3 21.3 1.8 2.1 Total comprehen- comprehen- Revenue Net income sive income sive income GBP millions GBP millions GBP millions GBP millions Other Healthcare) was formed via contribution of businesses from September 30, 2015 3 241 4 – 44 – 40 both Novartis and GSK. At December 31, 2015, Novartis has a 36.5% interest in Since full-year 2015 financial data for GSK Consumer Health- GSK Consumer Healthcare and four of eleven seats on the joint care are not available when Novartis produces its consolidated venture entity’s Board of Directors. Furthermore, Novartis has financial results, a projection of the latest internal manage- customary minority rights and also exit rights at a pre-defined, ment reporting is used to estimate the Group’s share of GSK market based pricing mechanism. Consumer Healthcare’s net result for the year. Any differences Novartis has valued the contribution of 63.5% of its OTC between this estimate and actual results will be adjusted in Division in exchange for 36.5% of the GSK Consumer Health- the Group’s 2016 consolidated financial statements when care business at fair value. Based on the estimates of values available. exchanged, an investment in associated company of USD 7.6 The consolidated income statement effects from applying billion was recorded on March 2, 2015. Novartis accounting principles for this investment in 2015 are The December 31, 2015 balance sheet value allocation is as follows: as follows: Novartis share of GSK Consumer Healthcare’s estimated net assets Novartis share of re-appraised intangible assets Implicit Novartis goodwill Current value of share in net identifiable assets and goodwill Accumulated equity accounting adjustments and translation effects December 31, 2015 balance sheet value USD millions 957 4 273 1 941 7 171 23 7 194 Novartis share of GSK Consumer Healthcare’s estimated current-year consolidated net income Amortization of fair value adjustments relating to intangible assets and inventory, net of taxes of USD 18 million Net income effect 2015 USD millions – 17 – 62 – 79 OTHER ASSOCIATED COMPANIES During 2014, the shareholdings of 22% in Idenix Pharmaceu- The identified intangible assets principally relate to the value ticals, Inc. and 43% in LTS Lohmann Therapie-Systeme AG of the indefinite life GSK Consumer Healthcare intangible were sold realizing gains of USD 812 million and USD 421 mil- assets. The identified intangible assets with a definite life are lion, respectively. Others include a gain of USD  64 million amortized on a straight-line basis over their estimated aver- recorded on investments in associated companies held by the age useful life of 20 years. Novartis Venture Funds, which are accounted at fair value from January 1, 2014 onwards, consistent with other investments held by these Funds. 192 | Novartis Annual Report 2015 FINANCIAL REPORT 5. Interest Expense and Other Financial Income and Expense INTEREST EXPENSE OTHER FINANCIAL INCOME AND EXPENSE 2015 2014 USD millions USD millions 2015 2014 USD millions USD millions Interest expense – 669 – 701 Interest income Income/(expense) due to discounting long-term liabilities Total interest expense 14 – 3 – 655 – 704 Dividend income Net capital losses on available-for-sale securities Income on forward contracts and options Impairment of commodities and available-for-sale securities Other financial expense Monetary loss from hyperinflation accounting Currency result, net Total other financial income and expense 33 1 – 8 1 – 132 – 23 – 72 – 254 – 454 33 1 – 2 1 – 25 – 61 22 – 31 6. Taxes INCOME BEFORE TAXES ANALYSIS OF TAX RATE 2015 2014 USD millions USD millions 5 765 2 369 5 245 7 027 The main elements contributing to the difference between the Group’s overall expected tax rate (which can change each year since it is calculated as the weighted average tax rate based on pre-tax income of each subsidiary) and the effective tax rate are: Switzerland Foreign Income before taxes from continuing operations Income/(loss) before taxes from discontinued operations Total income before taxes 8 134 12 272 12 479 – 351 20 613 11 921 CURRENT AND DEFERRED INCOME TAX EXPENSE Switzerland Foreign Current income tax expense from continuing operations Switzerland Foreign Deferred tax income from continuing operations Income tax expense from continuing operations Income tax expense from discontinued operations Total income tax expense 2015 2014 USD millions USD millions – 317 – 661 – 1 333 – 1 952 – 1 650 – 2 613 – 68 612 309 759 544 1 068 – 1 106 – 1 545 – 1 713 – 96 – 2 819 – 1 641 Expected tax rate Effect of disallowed expenditures Effect of utilization of tax losses brought forward from prior periods Effect of income taxed at reduced rates Effect of tax credits and allowances Effect of tax rate change on opening balance Effect of tax benefits expiring in 2017 Effect of non-deductible losses in Venezuela Effect of write down and reversal of write-down of investments in subsidiaries Prior year and other items Effective tax rate for continuing operations Effective tax rate for discontinued operations Effective tax rate 2015 % 12.4 3.5 – 0.2 – 0.3 – 2.7 – 0.5 – 0.4 1.2 – 0.9 1.5 2014 % 11.7 2.9 – 0.3 – 0.6 – 1.8 – 0.8 0.9 0.6 13.6 12.6 13.7 13.7 – 27.4 13.8 The utilization of tax-loss carry-forwards lowered the tax charge by USD  15 million in 2015 and by USD  34 million in 2014, respectively. FINANCIAL REPORT | NOTES TO THE NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 193 7. Earnings per Share Basic earnings per share (EPS) is calculated by dividing net For diluted EPS, the weighted average number of shares out- income attributable to shareholders of Novartis AG by the standing is adjusted to assume the vesting of all restricted weighted average number of shares outstanding in a report- shares and the conversion of all potentially dilutive shares aris- ing period. This calculation excludes the average number of ing from options on Novartis shares that have been issued. issued shares purchased by the Group and held as treasury shares. Diluted earnings per share 2015 2014 Basic earnings per share Weighted average number of shares outstanding (in millions) Net income/loss attributable to shareholders of Novartis AG (USD millions)    – Continuing operations    – Discontinued operations 2015 2014 Weighted average number of shares outstanding (in millions) 2 403 2 426 2 403 2 426 Adjustment for vesting of restricted shares and dilutive shares from options (in millions) Weighted average number of shares for diluted earnings per share (in millions) 35 44 2 438 2 470 7 025 10 654 10 758 – 444 Net income/loss attributable to shareholders of Novartis AG (USD millions)    – Total 17 783 10 210    – Continuing operations Basic earnings per share (USD)    – Continuing operations    – Discontinued operations    – Total 2.92 4.48 7.40    – Discontinued operations 4.39    – Total – 0.18 4.21 Diluted earnings per share (USD)    – Continuing operations    – Discontinued operations    – Total 7 025 10 654 10 758 – 444 17 783 10 210 2.88 4.41 7.29 4.31 – 0.18 4.13 No options were excluded from the calculation of diluted EPS in 2014 or 2015, as all options were dilutive in both years. 194 | Novartis Annual Report 2015 FINANCIAL REPORT 8. Changes in Consolidated Statements of Comprehensive Income The consolidated statements of comprehensive income include solidated income statement. These include fair value the Group’s net income for the year as well as all other valua- adjustments to financial instruments, actuarial gains or losses tion adjustments recorded in the Group’s consolidated bal- on defined benefit pension and other post-employment plans ance sheet but which under IFRS are not recorded in the con- and currency translation effects, net of tax. The following table summarizes these value adjustments and currency translation effects attributable to Novartis shareholders: Fair value Fair value adjustments adjustments on on marketable deferred cash Actuarial losses from defined flow hedges benefit plans Total value adjustments USD millions USD millions USD millions USD millions USD millions Cumulative currency translation effects securities value adjustments at January 1, 2014 Fair value adjustments on financial instruments Net actuarial losses from defined benefit plans 1 Currency translation effects 2 Total value adjustments in 2014 value adjustments at December 31, 2014 Fair value adjustments on financial instruments Net actuarial losses from defined benefit plans 1 Currency translation effects 2 Total value adjustments in 2015 Fair value adjustments related to divestments value adjustments at December 31, 2015 344 89 89 433 28 – 59 – 4 544 4 625 21 – 822 366 110 – 822 – 2 219 – 2 219 21 – 822 – 2 219 – 2 931 – 38 – 5 366 2 406 – 2 565 20 – 147 48 – 147 – 1 659 – 1 659 28 20 – 147 – 1 659 – 1 758 100 100 461 – 18 – 5 413 747 – 4 223 1 Net actuarial gains of USD 10 million are attributable to discontinued operations up to the respective divestment dates (2014: net actuarial losses of USD 65 million). 2 USD 29 million currency translation losses are attributable to discontinued operations up to the respective divestment dates (2014: losses of USD 37 million). 8.1) The 2015 and 2014 changes in the fair value of financial instruments were as follows: Fair value Fair value adjustments adjustments on on marketable deferred cash Total flow hedges USD millions USD millions USD millions securities Fair value adjustments at January 1, 2015 Changes in fair value:    – Available-for-sale marketable securities    – Available-for-sale financial investments    – Associated companies’ movements in comprehensive income Realized net gains transferred to the consolidated income statement:    – Marketable securities sold    – Other financial assets sold Amortized net losses on cash flow hedges transferred to the consolidated income statement Impaired financial assets transferred to the consolidated income statement Deferred tax on above items Fair value adjustments during the year Fair value adjustments at December 31, 2015 433 – 38 395 – 130 80 – 8 – 1 – 103 194 – 4 28 461 – 130 80 – 8 – 1 – 103 21 194 – 5 48 443 21 – 1 20 – 18 FINANCIAL REPORT | NOTES TO THE NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 195 Fair value Fair value adjustments adjustments on on marketable deferred cash Total flow hedges USD millions USD millions USD millions securities Fair value adjustments at January 1, 2014 Changes in fair value:    – Available-for-sale marketable securities    – Available-for-sale financial investments    – Associated companies’ movements in comprehensive income Realized net gains transferred to the consolidated income statement:    – Marketable securities sold    – Other financial assets sold Amortized net losses on cash flow hedges transferred to the consolidated income statement Impaired financial assets transferred to the consolidated income statement Deferred tax on above items Fair value adjustments during the year Fair value adjustments at December 31, 2014 344 – 59 285 – 3 91 5 – 4 – 81 87 – 6 89 433 23 – 2 21 – 38 – 3 91 5 – 4 – 81 23 87 – 8 110 395 8.2) The Group has investments in associated companies, 8.4) Remeasurements from defined benefit plans arise as principally Roche Holding AG and GlaxoSmithKline Consumer follows: Healthcare Holdings Ltd. The Group’s share in movements in these companies’ other comprehensive income are recognized 2015 2014 USD millions USD millions directly in the respective categories of the Novartis consolidated Defined benefit pension plans before tax – 252 – 999 statement of comprehensive income, net of tax. The currency translation effects and fair value adjustments of associated companies are included in the corresponding Group amounts. All other movements in these companies’ statements of com- prehensive income are recognized directly in the consolidated statement of comprehensive income under “Novartis share of Other post-employment benefit plans before tax Taxation on above items Total after tax 168 – 63 – 147 – 235 412 – 822 other items recorded in comprehensive income recognized by 8.5) The following table shows contributions of associated associated companies, net of taxes”. These amounted to a loss companies to other comprehensive income: of USD 48 million (2014: loss of USD 5 million). 8.3) In 2015, cumulative currency translation losses of USD 10 million have been recycled through the income statement as a result of the divestments of subsidiaries (2014: nil). Currency translation losses of associated companies of USD 97 million were recognized in 2015 (2014: loss of USD 31 million). Fair value adjustments attributable to associated companies Novartis share of other items recorded in comprehensive income recognized by associated companies, net of taxes Currency translation adjustments 2014 2015 Note USD millions USD millions – 8 5 8.2 – 48 – 97 – 5 – 31 Other comprehensive income attributable to associated companies 4 – 153 – 31 196 | Novartis Annual Report 2015 FINANCIAL REPORT 9. Changes in Consolidated Equity 9.1) A dividend of CHF 2.60 per share was approved at the 9.4) In 2014, Novartis has entered into an irrevocable, non-dis- 2015 Annual General meeting for the year ended December cretionary arrangement with a bank to repurchase Novartis 31, 2014, resulting in a total dividend payment of USD 6.6 bil- own shares on the second trading line under its USD 5 billion lion in 2015 (2014: the CHF 2.45 per share dividend amounted share buy-back as well as to mitigate dilution from equi- to USD 6.8 billion). The amount available for distribution as a ty-based participation plans. The commitment under this dividend to shareholders is based on the available distribut- arrangement amounted to USD 658 million as of December able retained earnings of Novartis AG determined in accor- 31, 2014, reflecting the expected purchases by the bank under dance with the legal provisions of the Swiss Code of Obliga- such trading plan over a rolling 90 days period. This trading tions. plan was fully executed and has expired. As a result, there is no contingent liability related to this plan as of December 2015. 9.2) During 2015, 63.6 million shares were purchased for USD 6.1 billion (2014: 79.2 million shares for USD 6.9 billion). 9.5) 27.0 million shares were delivered as a result of options These share purchases comprise of 9.6 million shares which being exercised related to equity-based participation plans were repurchased for USD  897 million on the SIX Swiss and delivery of treasury shares, which contributed Exchange first trading line (2014: 46.8 million shares for USD 1.6  billion (2014: 41.4 million shares for USD 2.4 billion). USD 4.1 billion), 4.1 million shares were acquired for USD 417 The average share price of the shares delivered was signifi- million from employees which were previously granted to them cantly below market price reflecting the strike price of the under the respective programs (2014: 5.4 million shares for options exercised. USD 473 million), and in addition, Novartis repurchased 49.9 million shares for USD 4.8 billion on the SIX Swiss Exchange 9.6) Equity-settled share-based compensation is expensed in second trading line under the USD 5 billion share buy-back the consolidated income statement in accordance with the announced in November 2013, which was completed in vesting period of the share-based compensation plans. The November 2015, and also to offset the dilutive impact from value for the shares and options granted is credited to consol- equity-based participation plans (2014: 27.0 million shares for idated equity over the respective vesting period. In 2015, USD 2.4 billion). 11.9 million shares were transferred to associates as part of equity-settled compensation (2014: 10.3 million shares). In 9.3) In 2015, Novartis reduced its share capital by cancelling addition, tax benefits arising from tax deductible amounts a total of 29.2 million shares which were repurchased during exceeding the expense recognized in the income statement 2013 and 2014 on the SIX Swiss Exchange second trading line. are credited to equity. 9.7) Changes in non-controlling interests in subsidiaries resulted in a reduction in consolidated equity of USD 10 million (2014: reduction of USD 120 million). FINANCIAL REPORT | NOTES TO THE NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 197 10. Property, Plant & Equipment Movements Land Total USD millions USD millions USD millions USD millions USD millions Buildings Construction in progress Machinery & other equipment 2015 Cost January 1 Reclassifications 1 Additions Disposals and derecognitions 2 Currency translation effects December 31 Accumulated depreciation January 1 Depreciation charge Accumulated depreciation on disposals and derecognitions 2 Impairment charge Reversal of impairment charge Currency translation effects December 31 Net book value at December 31 744 11 312 3 985 15 387 31 428 12 4 – 41 – 31 688 1 833 – 2 601 408 – 332 – 364 1 665 – 59 – 180 756 442 2 519 – 704 – 1 136 – 788 – 1 363 12 857 2 810 15 093 31 448 – 30 – 5 093 – 37 – 10 285 – 15 445 – 3 2 – 12 3 – 40 648 – 462 246 – 37 9 149 – 1 005 – 1 470 594 – 82 46 501 874 – 135 55 655 32 – 4 2 – 5 188 – 7 – 10 231 – 15 466 7 669 2 803 4 862 15 982 Net book value of property, plant & equipment under finance lease contracts Commitments for purchases of property, plant & equipment 85 359 1 Reclassifications between various asset categories due to completion of plant and other equipment under construction. 2 Derecognition of assets that are no longer used and are not considered to have a significant disposal value or other alternative use. Borrowing costs on new additions to property, plant and equipment eligible for capitalization have been capitalized and amounted to USD 21 million in 2015 (2014: USD 20 million). The capitalization rate used to determine the amount of borrow- ing costs eligible for capitalization is 25% (2014: 25%) and the interest rate used is 4% (2014: 4%). 198 | Novartis Annual Report 2015 FINANCIAL REPORT 10. Property, Plant & Equipment Movements (Continued) Land Total USD millions USD millions USD millions USD millions USD millions Buildings Construction in progress Machinery & other equipment 2014 Cost January 1 920 12 933 3 635 17 813 35 301 Cost of assets related to discontinued operations – 115 – 1 175 – 445 – 1 597 – 3 332 Reclassifications 1 Additions 2 Disposals and derecognitions 3 Currency translation effects December 31 Accumulated depreciation January 1 Accumulated depreciation on assets related to discontinued operations Depreciation charge 4 Accumulated depreciation on disposals and derecognitions 3 Impairment charge Reversal of impairment charge Currency translation effects December 31 Net book value at December 31 455 113 – 127 – 887 – 1 291 2 397 836 389 – 15 – 544 2 904 – 694 – 296 – 1 510 – 2 751 11 312 3 985 15 387 31 428 5 – 8 – 58 744 – 29 – 5 560 – 29 – 11 486 – 17 104 1 – 3 1 – 1 1 – 30 714 377 – 450 91 – 10 459 4 827 1 209 – 1 133 – 1 586 – 37 21 4 464 – 18 1 556 – 66 22 1 060 1 524 – 5 093 – 37 – 10 285 – 15 445 6 219 3 948 5 102 15 983 Net book value of property, plant & equipment under finance lease contracts Commitments for purchases of property, plant & equipment 1 826 1 Reclassifications between various asset categories due to completion of plant and other equipment under construction. 2 Additions in discontinued operations, for the period from January 1, 2014 to the portfolio transformation announcement on April 22, 2014, were USD 50 million. 3 Derecognition of assets that are no longer used and are not considered to have a significant disposal value or other alternative use. 4 Depreciation charge in discontinued operations, for the period from January 1, 2014 to the portfolio transformation announcement on April 22, 2014, was USD 66 million. FINANCIAL REPORT | NOTES TO THE NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 199 11. Goodwill and Intangible Assets Movements Total of intangible intangible assets other assets than goodwill USD millions USD millions USD millions USD millions USD millions USD millions USD millions USD millions marketed Marketing know-how Goodwill development brand name Technologies Acquired research & Currently products Other Alcon 2015 Cost January 1 29 737 2 843 2 980 6 658 20 916 5 960 1 251 40 608 Impact of business combinations 2 438 Reclassifications 1 Additions Disposals and derecognitions 2 730 – 36 881 – 294 12 970 5 217 – 26 Currency translation effects – 590 – 5 – 95 – 697 15 31 61 – 4 – 13 13 715 1 159 – 324 – 810 December 31 31 585 4 119 2 980 6 563 33 385 5 960 1 341 54 348 Accumulated amortization January 1 Amortization charge Accumulated amortization on disposals and derecognitions 2 Impairment charge Reversal of impairment charge Currency translation effects – 426 – 685 – 2 539 – 11 684 – 954 – 914 – 16 776 – 580 – 2 848 – 238 – 89 – 3 755 68 – 33 15 49 241 – 164 40 194 4 – 9 10 313 – 206 40 253 December 31 – 411 – 650 – 3 070 – 14 221 – 1 192 – 998 – 20 131 Net book value at December 31 31 174 3 469 2 980 3 493 19 164 4 768 343 34 217 1 Reclassifications between various asset categories as a result of product launches of acquired In-Process Research & Development. 2 Derecognitions of assets that are no longer used or being developed and are not considered to have a significant disposal value or other alternative use. SEGMENTATION OF GOODWILL AND INTANGIBLE ASSETS The net book values at December 31, 2015 of goodwill and intangible assets are allocated to the Group’s reporting segments as summarized below. Total of intangible intangible assets other assets than goodwill USD millions USD millions USD millions USD millions USD millions USD millions USD millions USD millions marketed Marketing know-how Goodwill development brand name Technologies Acquired research & Currently products Other Alcon Pharmaceuticals 5 530 2 511 13 13 151 140 15 815 Alcon Sandoz Corporate Total Potential impairment charge, if any, if discounted cash flows fell by 5% Potential impairment charge, if any, if discounted cash flows fell by 10% 17 947 7 690 7 461 490 7 2 980 2 850 4 435 4 768 163 15 657 630 1 578 22 18 2 720 25 31 174 3 469 2 980 3 493 19 164 4 768 343 34 217 4 9 200 | Novartis Annual Report 2015 FINANCIAL REPORT 11. Goodwill and Intangible Assets Movements (Continued) Total of intangible intangible assets other assets than goodwill USD millions USD millions USD millions USD millions USD millions USD millions USD millions USD millions marketed Marketing know-how Goodwill development brand name Technologies Acquired research & Currently products Other Alcon 2014 Cost January 1 31 554 2 648 2 980 7 104 24 160 5 960 1 479 44 331 – 346 – 2 833 – 359 – 3 563 Cost of assets related to discontinued operations – 1 222 Impact of business combinations 131 Reclassifications 1 Additions 2 Disposals and derecognitions 3 – 25 248 – 139 405 – 159 – 125 125 234 95 216 – 286 482 799 – 463 – 978 169 53 – 18 – 73 Currency translation effects – 726 – 135 – 100 – 670 December 31 29 737 2 843 2 980 6 658 20 916 5 960 1 251 40 608 Accumulated amortization January 1 Accumulated amortization of assets related to discontinued operations Amortization charge 4 Accumulated amortization on disposals and derecognitions 3 Impairment charge Reversal of impairment charge Currency translation effects – 528 – 575 – 2 168 – 11 953 – 715 – 1 079 – 16 490 61 13 167 1 369 213 1 762 – 587 – 1 868 – 239 – 81 – 2 775 159 – 271 41 – 11 49 283 – 46 70 461 17 459 – 30 – 347 70 545 46 December 31 – 426 – 685 – 2 539 – 11 684 – 954 – 914 – 16 776 Net book value at December 31 29 311 2 158 2 980 4 119 9 232 5 006 337 23 832 1 Reclassifications between various asset categories as a result of product launches of acquired In-Process Research & Development. 2 Additions in discontinued operations, for the period from January 1, 2014 to the portfolio transformation announcement on April 22, 2014, were USD 11 million. 3 Derecognitions of assets that are no longer used or being developed and are not considered to have a significant disposal value or other alternative use. 4 Amortization charge in discontinued operations, for the period from January 1, 2014 to the portfolio transformation announcement on April 22, 2014, was USD 77 million. The Pharmaceuticals, Alcon and Sandoz divisions’ cash gen- In 2015, intangible asset impairment charges for continuing erating units, to which indefinite life intangibles and/or good- operations of USD  206 million were recognized, of which will are allocated, each comprise a group of smaller cash gen- USD  120 million were recorded in the Alcon Division and erating units. The valuation method of the recoverable amount USD 86 million in total in the Pharmaceuticals and Sandoz of the cash generating units, to which indefinite life intangibles divisions. and/or goodwill are allocated, is based on the fair value less In 2014, intangible asset impairment charges in continu- costs of disposal. The following assumptions are used in the ing operations amounted to USD 347 million (USD 302 mil- calculations: lion in the Pharmaceuticals Division and USD 45 million in Cash flows growth rate assumptions after forecast period Discount rate (post-tax) Pharmaceuticals % Alcon % Sandoz % total in the Sandoz and Alcon divisions). In 2015, the reversal of prior year impairment charges amounted to USD 40 million (2014: USD 70 million). 1 6 3 6 0 to 2 6 FINANCIAL REPORT | NOTES TO THE NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 201 12. Deferred Tax Assets and Liabilities Property, plant & equipment Pensions and other benefit Intangible obligations assets of associates Other assets, provisions Inventories carryforwards and accruals Tax loss Valuation allowance Total USD millions USD millions USD millions USD millions USD millions USD millions USD millions USD millions Gross deferred tax assets at January 1, 2015 268 214 1 749 3 470 Gross deferred tax liabilities at January 1, 2015 – 639 – 4 242 – 410 – 578 Net deferred tax balance at January 1, 2015 – 371 – 4 028 1 339 2 892 85 – 3 82 2 601 – 606 1 995 – 14 8 373 – 6 478 – 14 1 895 At January 1, 2015 – 371 – 4 028 1 339 2 892 82 1 995 – 14 1 895 Credited/(charged) to income – 57 296 83 376 – 22 – 129 – 3 Charged to equity (Charged)/credited to other comprehensive income – 63 Impact of business combinations Other movements 390 – 9 5 – 30 – 12 Net deferred tax balance at December 31, 2015 – 423 – 3 351 1 329 3 256 – 216 29 – 13 73 1 739 – 3 57 12 – 5 544 – 216 – 34 377 36 2 602 Gross deferred tax assets at December 31, 2015 216 611 1 730 3 821 62 2 871 – 5 9 306 Gross deferred tax liabilities at December 31, 2015 – 639 – 3 962 – 401 – 565 – 5 – 1 132 – 6 704 Net deferred tax balance at December 31, 2015 – 423 – 3 351 1 329 3 256 57 1 739 – 5 2 602 After offsetting USD 349 million of deferred tax assets and liabilities within the same tax jurisdiction the balance amounts to: Deferred tax assets at December 31, 2015 Deferred tax liabilities at December 31, 2015 Net deferred tax balance at December 31, 2015 8 957 – 6 355 2 602 Gross deferred tax assets at January 1, 2014 159 270 1 515 3 026 142 2 651 – 22 7 741 Gross deferred tax liabilities at January 1, 2014 – 886 – 4 796 – 448 – 514 – 4 – 622 – 7 270 Net deferred tax balance at January 1, 2014 – 727 – 4 526 1 067 2 512 138 2 029 – 22 471 At January 1, 2014 – 727 – 4 526 1 067 2 512 138 2 029 – 22 471 Net deferred tax balance related to discontinued operations Credited/(charged) to income Credited to equity 39 256 92 525 Credited/(charged) to other comprehensive income Impact of business combinations – 159 Other movements 61 40 – 61 25 Net deferred tax balance at December 31, 2014 – 371 – 4 028 1 339 2 892 – 40 395 – 19 – 60 – 73 17 389 – 93 – 60 157 – 8 – 1 – 29 – 94 – 5 1 068 157 381 – 130 42 13 1 995 – 14 1 895 30 – 7 82 Gross deferred tax assets at December 31, 2014 268 214 1 749 3 470 85 2 601 – 14 8 373 Gross deferred tax liabilities at December 31, 2014 – 639 – 4 242 – 410 – 578 Net deferred tax balance at December 31, 2014 – 371 – 4 028 1 339 2 892 – 3 82 – 606 1 995 – 6 478 – 14 1 895 After offsetting USD 379 million of deferred tax assets and liabilities within the same tax jurisdiction the balance amounts to: Deferred tax assets at December 31, 2014 Deferred tax liabilities at December 31, 2014 Net deferred tax balance at December 31, 2014 7 994 – 6 099 1 895 202 | Novartis Annual Report 2015 FINANCIAL REPORT 12. Deferred Tax Assets and Liabilities (Continued) A reversal of valuation allowance could occur when circum- The gross value of tax-loss carry-forwards that have, or have stances make the realization of deferred taxes probable. This not, been capitalized as deferred tax assets, with their expiry would result in a decrease in the Group’s effective tax rate. dates is as follows: Deferred tax assets of USD 3.9 billion (2014: USD 3.6 bil- lion) and deferred tax liabilities of USD  5.8 billion (2014: USD 5.6 billion) are expected to have an impact on current taxes payable after more than twelve months. One year Two years At December 31, 2015, unremitted earnings of USD 65 bil- Three years lion (2014: USD 55 billion) have been retained by consolidated entities for reinvestment. Therefore, no provision is made for Four years Five years income taxes that would be payable upon the distribution of More than five years these earnings. If these earnings were remitted, an income tax Total charge could result based on the tax statutes currently in effect. Not capitalized 2015 total USD millions USD millions USD millions Capitalized 22 80 37 54 222 465 880 39 25 6 7 712 789 61 105 43 61 222 1 177 1 669 2015 2014 USD millions USD millions In 2015, USD 13 million (2014: USD 14 million) of tax-loss car- Temporary differences on which no deferred tax has been provided as they are permanent in nature related to:    – Investments in subsidiaries 2 644 7 802    – Goodwill from acquisitions – 28 202 – 28 567 ry-forwards expired. One year Two years Three years Four years Five years More than five years Total Not capitalized 2014 total USD millions USD millions USD millions Capitalized 12 22 14 13 52 345 458 3 26 5 8 396 438 15 48 14 18 60 741 896 Deferred tax assets related to taxable losses of relevant Group entities are recognized to the extent it is considered probable that future taxable profits will be available against which such losses can be utilized in the foreseeable future. 13. Financial and Other Non-Current Assets FINANCIAL ASSETS OTHER NON-CURRENT ASSETS Available-for-sale long-term financial investments Long-term receivables from customers Minimum lease payments from finance lease agreements Contingent consideration receivables Long-term loans, advances and security deposits Total financial assets 2015 2014 USD millions USD millions 1 263 317 216 550 1 008 334 199 120 179 2 466 1 720 Deferred compensation plans Prepaid post-employment benefit plans Other non-current assets Total other non-current assets 2015 2014 USD millions USD millions 409 36 156 601 381 37 136 554 FINANCIAL REPORT | NOTES TO THE NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 203 MINIMUM FINANCE LEASE PAYMENTS The following table shows the receivables of the gross investments in finance leases and the net present value of the minimum lease payments, as well as unearned finance income. The finance income is recorded in “Other income”. USD millions Not later than one year 1 Between one and five years Later than five years Total Total future payments Unearned interest income 89 221 61 371 – 6 – 17 – 5 – 28 2015 Present value 83 204 56 343 Provision Net book value – 1 – 10 – 34 – 45 82 194 22 298 1 The current portion of the minimum lease payments is recorded in trade receivables or other current assets (to the extent not yet invoiced). USD millions Not later than one year 1 Between one and five years Later than five years Total Total future payments Unearned interest income 50 149 69 268 – 3 – 8 – 5 – 16 2014 Present value 47 141 64 252 Provision Net book value – 1 – 6 – 7 46 135 64 245 1 The current portion of the minimum lease payments is recorded in trade receivables or other current assets (to the extent not yet invoiced). 14. Inventories Raw material, consumables Finished products and work in progress Total inventories 2015 2014 USD millions USD millions 658 5 568 6 226 756 5 337 6 093 The reversals mainly result from the release of products initially requiring additional quality control inspections and from the reassessment of inventory values manufactured prior to reg- ulatory approval but for which approval was subsequently received. The amount of inventory recognized as an expense in “Cost of goods sold” in the consolidated income statements during 2015 amounted to USD 10.5 billion (2014: USD 11.6 billion). The group recognized inventory provisions amounting to USD 356 million (2014: USD 1.1 billion) and reversed inven- tory provisions amounting to USD 148 million (2014: USD 379 million). 204 | Novartis Annual Report 2015 FINANCIAL REPORT 15. Trade Receivables Total gross trade receivables Provisions for doubtful trade receivables Total trade receivables, net 2015 2014 USD millions USD millions 8 322 – 142 8 180 8 431 – 156 8 275 Trade receivable balances include sales to drug wholesalers, retailers, private health systems, government agencies, man- aged care providers, pharmacy benefit managers and govern- ment-supported healthcare systems. Novartis continues to monitor sovereign debt issues and economic conditions in Greece, Italy, Portugal, Spain (GIPS) and other countries where The following table summarizes the movement in the provision the trade receivables are due directly from local governments for doubtful trade receivables: 2015 2014 USD millions USD millions or from government-funded entities, and evaluates trade receivables in these countries for potential collection risks. Deteriorating credit and economic conditions and other fac- January 1 – 156 – 195 tors in these countries have resulted in, and may continue to Provisions for doubtful trade receivables related to discontinued operations Provisions for doubtful trade receivables charged to the consolidated income statement Utilization or reversal of provisions for doubtful trade receivables Currency translation effects December 31 result in an increase in the average length of time that it takes 15 to collect these trade receivables and may require Novartis to re-evaluate the collectability of these trade receivables in future – 68 – 92 periods. 71 11 101 15 – 142 – 156 With regard to the GIPS countries, the majority of the out- standing trade receivables from these countries are due directly from local governments or from government-funded entities. The gross trade receivables from GIPS countries at December 31, 2015 amount to USD 920 million (2014: USD 915 The following sets forth details of the age of trade receivables million), of which USD 58 million are past due for more than that are not overdue as specified in the payment terms and one year (2014: USD 69 million) and for which provisions of conditions established with Novartis customers as well as an USD 37 million have been recorded (2014: USD 48 million). analysis of overdue amounts and related provisions for doubtful At December 31, 2015 amounts past due for more than one trade receivables: year are not significant in any of the GIPS countries on a stand- Not overdue Past due for not more than one month Past due for more than one month but less than three months Past due for more than three months but less than six months Past due for more than six months but less than one year Past due for more than one year 2015 2014 USD millions USD millions 7 318 265 7 406 334 255 193 156 135 275 174 102 140 Provisions for doubtful trade receivables Total trade receivables, net – 142 8 180 – 156 8 275 alone basis. Trade receivables include amounts denominated in the following major currencies: Currency CHF CNY EUR GBP JPY USD Other Total trade receivables, net 2015 2014 USD millions USD millions 124 244 184 238 1 536 1 562 187 740 3 311 2 038 8 180 184 951 3 059 2 097 8 275 FINANCIAL REPORT | NOTES TO THE NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 205 16. Marketable Securities, Commodities, Time Deposits, Derivative Financial Instruments and Cash and Cash Equivalents MARKETABLE SECURITIES, COMMODITIES, TIME DEPOSITS AND DERIvATIvE FINANCIAL INSTRUMENTS At December 31, 2015 all debt securities are denominated in USD except for USD 22 million in EUR (2014: USD 25 million). 2015 2014 USD millions USD millions In addition, at December 31, 2014 debt securities of 1 million are denominated in CHF. Debt securities Equity securities Fund investments Total available-for-sale marketable securities Commodities Time deposits with original maturity more than 90 days Derivative financial instruments Accrued interest on debt securities and time deposits Total marketable securities, commodities, time deposits and derivative financial instruments 339 6 33 378 86 164 143 2 327 15 35 377 97 6 356 3 773 839 CASH AND CASH EQUIvALENTS Current accounts Time deposits and short-term investments with original maturity less than 90 days Total cash and cash equivalents 2015 2014 USD millions USD millions 3 074 3 607 1 600 9 416 4 674 13 023 17. Other Current Assets VAT receivable Withholding tax recoverable Income tax receivables Reimbursements from insurers Prepaid expenses    – Third parties    – Associated companies Other receivables    – Third parties    – Associated companies Total other current assets 2015 2014 USD millions USD millions 609 97 171 617 4 509 144 202 87 547 3 1 463 1 033 31 5 2 992 2 530 206 | Novartis Annual Report 2015 FINANCIAL REPORT 18. Details of Share capital and Share Movements The following table shows the movement in the share capital: Share capital Treasury shares Outstanding share capital Dec 31, 2013 USD millions Movement in year USD millions Dec 31, 2014 USD millions Movement in year USD millions Dec 31, 2015 USD millions 1 001 – 89 912 – 14 – 14 1 001 – 103 898 – 10 2 – 8 991 – 101 890 The following table shows the movement in the shares: Dec 31, 2013 Movement in year Dec 31, 2014 Movement in year Dec 31, 2015 Number of shares 1 Total Novartis shares Total treasury shares 2 706 193 000 2 706 193 000 – 29 200 000 2 676 993 000 – 280 108 692 – 27 458 051 – 307 566 743 4 468 560 – 303 098 183 Total outstanding shares 2 426 084 308 – 27 458 051 2 398 626 257 – 24 731 440 2 373 894 817 1 All shares are voting shares, which are registered, authorized, issued and fully paid. In 2015, Novartis reduced its share capital by cancelling a total 2013, which was completed in November 2015, and also to of 29.2 million shares which were repurchased during 2013 offset the dilutive impact from equity-based participation plans and 2014 on the SIX Swiss Exchange second trading line. (2014: 27.0 million shares). With these transactions, the total During 2015, 38.9 million treasury shares were delivered number of shares outstanding was reduced by 24.7 million as a result of options being exercised and physical share deliv- shares in 2015 (2014: reduction of 27.5 million shares) and eries related to equity-based participation plans (2014: 51.7 the sixth share buy-back program which was approved by the million shares). 9.6 million shares were repurchased on the shareholders at the AGM 2008 has been completed. The mar- SIX Swiss Exchange first trading line (2014: 46.8 million). 4.1 ket maker has acquired 7 million written call options, originally million shares were acquired from employees which were pre- issued as part of the share-based compensation for associ- viously granted to them under the respective programs (2014: ates that have not yet been exercised. The weighted average 5.4 million). In addition, Novartis repurchased 49.9 million exercise price of these options is USD 58.27 and they have shares on the SIX Swiss Exchange second trading line under contractual lives of 10 years. the USD  5 billion share buy-back announced in November FINANCIAL REPORT | NOTES TO THE NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 207 19. Non-Current Financial Debt Straight bonds Liabilities to banks and other financial institutions 1 Finance lease obligations Total, including current portion of non-current financial debt Less current portion of non-current financial debt Total non-current financial debts Straight bonds    3.625% CHF 800 million bond 2008/2015 of Novartis AG,    Basel, Switzerland, issued at 100.35%    5.125% USD 3 000 million bond 2009/2019 of Novartis Securities Investment Ltd.,    Hamilton, Bermuda, issued at 99.822%    4.25% EUR 1 500 million bond 2009/2016 of Novartis Finance S.A.,    Luxembourg, Luxembourg, issued at 99.757%    2.9% USD 2 000 million bond 2010/2015 of Novartis Capital Corporation,    New York, United States, issued at 99.522%    4.4% USD 1 000 million bond 2010/2020 of Novartis Capital Corporation,    New York, United States, issued at 99.237%    2.4% USD 1 500 million bond 2012/2022 of Novartis Capital Corporation,    New York, United States, issued at 99.225%    3.7% USD 500 million bond 2012/2042 of Novartis Capital Corporation,    New York, United States, issued at 98.325%    3.4% USD 2 150 million bond 2014/2024 of Novartis Capital Corporation,    New York, United States, issued at 99.287%    4.4% USD 1 850 million bond 2014/2044 of Novartis Capital Corporation,    New York, United States, issued at 99.196%    0.75% EUR 600 million bond 2014/2021 of Novartis Finance S.A.,    Luxembourg, Luxembourg, issued at 99.134%    1.625% EUR 600 million bond 2014/2026 of Novartis Finance S.A.,    Luxembourg, Luxembourg, issued at 99.697%    0.25% CHF 500 million bond 2015/2025 of Novartis AG,    Basel, Switzerland, issued at 100.64%    0.625% CHF 550 million bond 2015/2029 of Novartis AG,    Basel, Switzerland, issued at 100.502%    1.050% CHF 325 million bond 2015/2035 of Novartis AG,    Basel, Switzerland, issued at 100.479%    3.0% USD 1 750 million bond 2015/2025 of Novartis Capital Corporation,    New York, United States, issued at 99.010%    4.0% USD 1 250 million bond 2015/2045 of Novartis Capital Corporation,    New York, United States, issued at 98.029% Total straight bonds 1 Average interest rate 0.7% (2014: 0.9%) The following tables provide a breakdown of total non-current financial debt, including current portion by maturity and cur- Breakdown by currency USD rency: Breakdown by maturity 2015 2016 2017 2018 2019 2020 After 2020 2015 2014 USD millions USD millions 1 659 170 335 3 161 998 11 663 2 989 1 838 175 342 3 068 1 004 7 372 Total Total 17 986 16 788 EUR JPY CHF Others 2015 2014 USD millions USD millions 17 193 15 982 706 87 803 3 17 986 16 788 – 1 659 – 2 989 16 327 13 799 807 2 993 2 991 1 639 1 821 1 999 994 993 1 488 1 486 488 488 2 130 2 128 1 823 1 823 721 725 650 652 507 557 329 1 726 1 217 17 193 15 982 2015 2014 USD millions USD millions 12 946 11 912 2 981 3 329 665 1 393 1 669 807 71 17 986 16 788 208 | Novartis Annual Report 2015 FINANCIAL REPORT 19. Non-Current Financial Debt (Continued) Fair value comparison 2014 2015 Balance sheet Fair values USD millions USD millions USD millions USD millions 2014 Fair values Balance sheet 2015 Straight bonds 17 193 17 770 15 982 17 013 Others Total 793 793 806 806 17 986 18 563 16 788 17 819 2014. The Group’s collateralized non-current financial debt consists of loan facilities at usual market conditions. The percentage of fixed rate financial debt to total finan- cial debt was 82% at December 31, 2015 and December 31, The fair values of straight bonds are determined by quoted only general default covenants. The Group is in compliance market prices. Other financial debts are recorded at notional with these covenants. amounts which are a reasonable approximation of the fair The average interest rate on total financial debt in 2015 values. was 2.9% (2014: 3.4%). Financial debts, including current financial debts, contain Collateralized non-current financial debt and pledged assets 2015 2014 USD millions USD millions Total amount of collateralized non-current financial debts Total net book value of property, plant & equipment pledged as collateral for non-current financial debts 7 1 112 184 20. Provisions and Other Non-Current Liabilities 2015 2014 USD millions USD millions in the adjacent border areas in Switzerland, Germany and France. The provisions are re-assessed on a yearly basis and Accrued liability for employee benefits:    Defined benefit pension plans 3 952 3 839    Other long-term employee benefits    and deferred compensation    Other post-employment benefits Environmental remediation provisions Provisions for product liabilities, governmental investigations and other legal matters Contingent consideration Other non-current liabilities 507 960 791 451 712 671 518 1 054 828 521 465 447 Total 8 044 7 672 are adjusted as necessary. In the United States, Novartis has been named under fed- eral legislation (the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended) as a potentially responsible party (PRP) in respect of certain sites. Novartis actively participates in, or monitors, the clean-up activities at the sites in which it is a PRP. The provision takes into consideration the number of other PRPs at each site and the identity and financial position of such parties in light of the joint and several nature of the liability. The following table shows the movements in the environ- mental liability provisions during 2015 and 2014: ENvIRONMENTAL REMEDIATION PROvISIONS The material components of the environmental remediation provisions consist of costs to sufficiently clean and refurbish January 1 contaminated sites to the extent necessary and to treat and Cash payments where necessary continue surveillance at sites where the envi- ronmental remediation exposure is less significant. The Releases Additions provision recorded at December 31, 2015 totals USD 0.9 billion Currency translation effects (2014: USD 0.9 billion) of which USD 80 million (2014: USD 95 December 31 million) is current. Less current provision 2015 2014 USD millions USD millions 923 – 52 – 5 6 – 1 871 – 80 1 061 – 33 – 6 2 – 101 923 – 95 A substantial portion of the environmental remediation provisions relate to the remediation of Basel regional landfills Non-current environmental remediation provisions at December 31 791 828 FINANCIAL REPORT | NOTES TO THE NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 209 The expected timing of the related cash outflows as of Decem- closed with respect to the nature of the contingency, but no ber 31, 2015 is currently projected as follows: disclosure is provided as to an estimate of the possible loss or Expected cash outflows USD millions range of possible loss. LEGAL MATTERS Due within two years Due later than two years, but within five years Due later than five years but within ten years Due after ten years Total environmental remediation liability provisions 180 118 457 116 871 PROvISIONS FOR PRODUCT LIABILITIES, GOvERNMENTAL INvESTIGATIONS AND OTHER LEGAL MATTERS A number of Novartis companies are, and will likely continue to be, subject to various legal proceedings and investigations that arise from time to time, including proceedings regarding product liability, sales and marketing practices, commercial disputes, employment, and wrongful discharge, antitrust, secu- rities, health and safety, environmental, tax, international trade, privacy, and intellectual property matters. As a result, the Group may become subject to substantial liabilities that may not be covered by insurance and could affect our business and Novartis has established provisions for certain product liabil- reputation. While Novartis does not believe that any of these ities, governmental investigations and other legal matters, legal proceedings will have a material adverse effect on its including provisions for expected legal costs where a potential financial position, litigation is inherently unpredictable and cash outflow is probable and Novartis can make a reliable esti- large judgments sometimes occur. As a consequence, Novartis mate of the amount of the outflow. These provisions represent may in the future incur judgments or enter into settlements of the Group’s current best estimate of the total financial effect claims that could have a material adverse effect on its results for the matters listed below and for other less significant mat- of operations or cash flow. ters. Potential cash outflows reflected in a provision might be Governments and regulatory authorities around the world fully or partially off-set by insurance in certain circumstances. have been stepping up their compliance and law enforcement Novartis has not established provisions for potential damage activities in recent years in key areas, including marketing prac- awards for certain additional legal claims against our subsid- tices, pricing, corruption, trade restrictions, embargo legisla- iaries if Novartis currently believes that a payment is either not tion, insider trading, antitrust, cyber security and data privacy. probable or cannot be reliably estimated. In total, these Further, when one government or regulatory authority under- not-provisioned-for matters include fewer than 500 individual takes an investigation, it is not uncommon for other govern- product liability cases and certain other legal matters. Plain- ments or regulators to undertake investigations regarding the tiffs’ alleged claims in these matters, which Novartis does not same or similar matters. Responding to such investigations is believe to be entirely remote but which do not fulfill the con- costly and requires an increasing amount of management’s ditions for the establishment of provisions, currently aggregate time and attention. In addition, such investigations may affect to, according to Novartis’ current best belief, approximately our reputation, create a risk of potential exclusion from gov- USD 1.2 billion. In addition, in some of these matters there are ernment reimbursement programs in the US and other coun- claims for punitive or multiple (treble) damages, civil penalties tries, and may lead to (or arise from) litigation. These factors and disgorgement of profits that in Novartis’ view are either have contributed to decisions by Novartis and other co mpanies wholly or partially unspecified or wholly or partially unquanti- in the healthcare industry, when deemed in their interest, to enter fiable at present; the Group believes that information about into settlement agreements with governmental authorities these amounts claimed by plaintiffs generally is not meaning- around the world prior to any formal decision by the authori- ful for purposes of determining a reliable estimate of a loss ties or a court. Those government settlements have involved that is probable or more than remote. A number of other legal and may continue to involve, in current government investiga- matters are in such early stages or the issues presented are tions and proceedings, large cash payments, sometimes in the such that the Group has not made any provisions other than hundreds of millions of dollars or more, including the poten- for legal fees since it cannot currently estimate either a poten- tial repayment of amounts allegedly obtained improperly and tial outcome or the amount of any potential losses. For these other penalties, including treble damages. In addition, settle- reasons, among others, the Group generally is unable to make ments of government healthcare fraud cases often require a reliable estimate of possible loss with respect to such cases. companies to enter into corporate integrity agreements, which It is therefore not practicable to provide information about the are intended to regulate company behavior for a period of potential financial impact of those cases. There might also be years. Our affiliate Novartis Pharmaceuticals Corporation is a cases for which the Group was able to make a reliable estimate party to such an agreement, which will expire in 2020. Also, of the possible loss or the range of possible loss, but the Group matters underlying governmental investigations and settle- believes that publication of such information on a case-by- ments may be the subject of separate private litigation. case basis would seriously prejudice the Group’s position in The following is a summary of significant legal proceed- ongoing legal proceedings or in any related settlement discus- ings to which Novartis or its subsidiaries are a party or were sions. Accordingly, in such cases, information has been dis- a party and that concluded in 2015. 210 | Novartis Annual Report 2015 FINANCIAL REPORT 20. Provisions and Other Non-Current Liabilities (Continued) INvESTIGATIONS AND RELATED LITIGATIONS SDNY Gilenya investigation Southern District of New York (SDNY) marketing practices investigation and litigation In 2013, NPC received a civil investigative demand from the USAO for the SDNY requesting the production of documents In April 2013, the US government filed a civil complaint in inter- and information relating to marketing practices for Gilenya, vention to an individual qui tam action against Novartis Phar- including the remuneration of healthcare providers in connec- maceuticals Corporation (NPC) in the United States District tion therewith. NPC is cooperating with this civil investigation. Court (USDC) for the SDNY involving several of NPC’s cardio- vascular medications. The suit is related to a previously dis- New York state investigation closed 2011 investigation of the United States Attorney’s Office In November 2014, ALI received a civil subpoena from the New (USAO) for the SDNY relating to marketing practices, includ- York state attorney general relating to an investigation into a ing the remuneration of healthcare providers, in connection unilateral pricing policy program. ALI is cooperating with this with three NPC products (Lotrel, Starlix and Valturna). The com- civil investigation. plaint, as subsequently amended, asserts federal False Claims Act and common law claims with respect to speaker programs Lucentis/Avastin® matters in Italy and France and other promotional activities for certain NPC cardiovascu- In 2013, the Italian Competition Authority (ICA) opened an lar medications allegedly serving as mechanisms to provide investigation to assess whether Novartis Farma S.p.A., Novartis kickbacks to healthcare professionals. It seeks unspecified AG (NAG), F. Hoffmann-La Roche AG, Genentech Inc. and Roche damages, which according to the complaint are “substantial”, S.p.A. colluded to artificially preserve the market positions of including treble damages and maximum civil penalties per Avastin® and Lucentis. In March 2014, the ICA imposed a fine claim, as well as disgorgement of Novartis profits from the equivalent to USD 125 million on NAG and Novartis Farma alleged unlawful conduct. In August 2013, New York State filed S.p.A. and a fine on F. Hoffmann-La Roche AG and Roche S.p.A. a civil complaint in intervention asserting similar claims. Nei- equivalent to USD  122 million. As required by Italian law, ther government complaint in intervention adopted the indi- Novartis has paid the ICA fine, subject to the right to later claim vidual relator’s claims with respect to off-label promotion of recoupment. In February 2015, Novartis appealed at the coun- Valturna, which were subsequently dismissed with prejudice cil of state the decision of the Tribunale amministrativo regio- by the court. The individual relator continues to litigate the nale (TAR) del Lazio which had upheld the fines. The decision kickback claims on behalf of other states and municipalities. is pending. Novartis’ appeal of a decision by the Italian Medi- NPC vigorously contests the SDNY, New York State and indi- cines Agency to include Avastin® in a list of drugs to be reim- vidual claims, both as to alleged liability and amount of dam- bursed off-label for age-related macular degeneration (AMD) ages and penalties. SDNY / Western District of New York healthcare fraud investigation was rejected by the TAR Lazio in January 2016. Novartis will appeal this decision. In the second quarter of 2014, the Italian Ministry of Health (MoH) indicated in a letter that it intended to seek a total equivalent of approximately USD 1.3 billion in In 2011, Alcon Laboratories, Inc. (ALI) received a subpoena damages from Novartis and Roche entities based on the above from the United States Department of Health & Human Ser- allegations, and in the first quarter of 2015 the Lombardia vices relating to an investigation into allegations of healthcare region sent a payment request equivalent to approximately fraud. The subpoena requests the production of documents USD  63 million. Novartis vigorously contests the MoH and relating to marketing practices, including the remuneration of Lombardia claims. healthcare providers, in connection with certain ALI products In France, Novartis’ appeal is pending against an inspec- (Vigamox, Nevanac, Omnipred, Econopred; surgical equipment). tion in April 2014 by the French Competition Authority on the ALI is cooperating with the investigation, which is civil in nature. premises of Novartis Groupe France and Roche with respect to the French market for anti-vascular endothelial growth fac- Northern District of Texas (NDTX) investigation tor (VEGF) products indicated for the treatment of wet AMD. In 2012, Alcon was notified that the USAO for the NDTX is con- Also in France, Novartis is appealing a temporary recommen- ducting an investigation relating to the export of Alcon prod- dation of use and reimbursement of off-label Avastin® for neo- ucts to various countries subject to United States trade sanc- vascular AMD by hospital ophthalmologists, in force since Sep- tions, including Iran, allegedly in violation of applicable trade tember 2015, as well as the decree on which the sanctions, and received a grand jury subpoena requesting the recommendation is based. In both Italy and France, Novartis production of documents for a period beginning in 2005 relat- believes that allowing the widespread off-label use and reim- ing to this investigation. Alcon is cooperating with the investi- bursement of Avastin®, despite the presence of available gation. licensed alternatives, would result in a breach of applicable regulations. FINANCIAL REPORT | NOTES TO THE NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 211 Japan investigation Tekturna/Rasilez/Valturna product liability litigation In December 2015, trial started against a former Novartis NPC and certain other Novartis affiliates are defendants in 12 Pharma K.K. (NPKK) employee, and also NPKK under the dual individual lawsuits pending in the USDC for the District of New liability concept in Japanese law, over allegations brought by Jersey (DNJ), and one in Alberta, Canada, claiming that treat- the Tokyo District Public Prosecutor Office in two counts for ment with Tekturna, Rasilez and/or Valturna caused renal fail- alleged manipulation of data in sub-analysis publications of ure, kidney disease or stroke. The claims are being vigorously the Kyoto Heart Study regarding valsartan. The charges against contested. NPKK are subject to a maximum total fine of JPY 4 million. In February 2015, the Japanese Ministry of Health, Labor ARBITRATION and Welfare (MHLW) issued a business suspension order for Equa arbitration failure to report adverse events, which required NPKK to halt In 2013, Sanofi K.K. (Sanofi) commenced an arbitration against manufacturing and sales in Japan for the period from March NPKK relating to the termination of a co-promotion agreement 5 to 19, 2015. NPKK has implemented a corrective and pre- in Japan of Equa (Galvus), which is used to treat type 2 diabe- ventive action plan in response to a business improvement tes. Sanofi seeks an award equivalent to USD 356 million, at order and instruction issued by the MHLW in the fourth quar- a minimum, together with a request for payment of additional ter of 2015 regarding additional instances of delayed adverse interest and expenses as well as legal and other costs of the events reporting. proceedings. NPKK is vigorously defending the action as well as prosecuting a counterclaim against Sanofi. Internal travel agencies investigation After reports of Chinese government investigations of compet- OTHER MATTERS itors for alleged improper use of certain China-based travel Average Wholesale Price (AWP) litigation agencies to reward healthcare providers, Novartis commenced Claims have been brought by various US state governmental an internal investigation in 2013 concerning its local affiliates’ entities against various pharmaceutical companies, including relationships with China-based travel agencies (and other ven- certain Sandoz entities and NPC, alleging that they fraudu- dors). Novartis is communicating with the US Securities and lently overstated the AWP that is or has been used by payors, Exchange Commission (SEC) about this internal investigation. including state Medicaid agencies, to calculate reimburse- Italy MF59 investigation ments to healthcare providers. NPC and Sandoz reached set- tlements in the first, third, and fourth quarters of 2015 of the In May 2014, the public prosecutor of Siena initiated a crimi- Wisconsin and Utah claims against them for amounts that are nal investigation with respect to allegations that the transfer not material to Novartis. Sandoz has filed a motion for recon- price of the adjuvant MF59 was unlawfully marked up. The sideration against a Mississippi Supreme Court decision which investigation concerns whether the Focetria and Fluad vaccines in the fourth quarter of 2015 upheld the USD 30 million Chan- sold to the government were over-priced and whether the Ital- cery Court verdict against it. NPC remains a defendant in an ian Ministry of Health paid an inflated amount in a dispute set- action brought by the state of Illinois and in a putative class tlement relating to the supply of Focetria during the 2009 pan- action brought by private payors in New Jersey. The claims are demic. being vigorously contested. PRODUCT LIABILITY MATTERS Qui tam actions Reclast/Aclasta product liability litigation NPC is a defendant in a relator’s qui tam action in the USDC NPC is a defendant in 21 US product liability actions involving for the Eastern District of Pennsylvania asserting federal and Reclast and alleging atypical femur fracture injuries, most of state False Claims Act claims relating to certain alleged mar- which are in New Jersey state or federal court coordinated with keting practices involving Elidel®. The federal government and claims against other bisphosphonate manufacturers. There several states declined to intervene in the relator’s action. NPC are also three Canadian putative class actions brought against is vigorously contesting the claims. numerous bisphosphonate manufacturers including NPC, Novartis Pharmaceuticals Canada Inc. and Novartis Interna- In 2006, 2010 and 2012, qui tam complaints were filed in the tional AG in Quebec, Alberta and Saskatchewan. All claims are District of Massachusetts (D. Mass.) asserting various federal being vigorously contested. False Claims Act and state claims relating to certain alleged improper marketing practices involving Xolair against various Metoclopramide product liability litigation Novartis, Genentech and Roche entities. In 2011, the US and Sandoz is a defendant, along with numerous manufacturers various state governments declined to intervene in the rela- of brand pharmaceuticals, in 395 product liability actions in tors’ actions, and closed their investigations. In June 2014, the the state courts in Pennsylvania and California claiming that relator in the 2010 action voluntarily dismissed his complaint the use of metoclopramide, the generic version of the brand with prejudice; the US and various states subsequently con- name drug Reglan®, caused personal injuries including tardive sented to the dismissal. In the first quarter of 2015, the USDC dyskinesia. Sandoz denies the allegations and is vigorously for the D. Mass. dismissed with prejudice all claims in connec- contesting the claims. tion with alleged improper marketing practices asserted by 212 | Novartis Annual Report 2015 FINANCIAL REPORT 20. Provisions and Other Non-Current Liabilities (Continued) the relators and dismissed without prejudice all claims asserted two affiliates and two former officers of Sandoz AG asserting in the name of the federal and various state governments. The various common law and statutory contract, fraud and negli- relators have appealed. Novartis continues to vigorously con- gent misrepresentation claims arising out of the Sandoz Inc. test the claims. Antitrust class actions purchase of Oriel Therapeutics, Inc. In March 2015, the court dismissed all claims except a breach of contract claim against Sandoz Inc. Sandoz Inc. continues to vigorously contest the Since the third quarter of 2013, approximately sixteen puta- claim. tive class action complaints have been filed against manufac- turers of the brand drug Solodyn® and its generic equivalents, Eye drop products consumer class actions including Sandoz Inc. The cases have been consolidated and Since November 2012, six putative consumer fraud class action transferred for pretrial purposes to a federal district court in litigations were commenced against Alcon (and in four cases Massachusetts. The plaintiffs purport to represent direct and Sandoz) in federal courts in the Southern Districts of Illinois indirect purchasers of Solodyn® branded products and assert (S.D. Ill.) and Florida and the Districts of Missouri, Massachu- violations of federal and state antitrust laws, including allega- setts and New Jersey. They claim that Alcon’s, Sandoz’s and tions in connection with separate settlements by Medicis with many other manufacturers defendants’ eye drop products each of the other defendants, including Sandoz Inc., of patent were deceptively designed so that the drop dosage is more litigation relating to generic Solodyn®. Sandoz is vigorously than necessary to be absorbed in the eye or there is too much contesting the claims. solution in each bottle for the course of the treatment, leading to wastage and higher costs to patient consumers. Three cases Since March 2015, more than 50 putative class action com- remain pending in the S.D. Ill., D. Mass. and DNJ. Novartis is plaints have been filed in several courts across the US naming vigorously contesting the claims. contact-lens manufacturers, including ALI, and alleging viola- tions of federal antitrust law as well as state antitrust, con- Employment action sumer protection and unfair competition laws of various states In March 2015, ALI and NC were sued in an individual and col- in connection with the sale of contact lenses. The cases have lective action filed in the SDNY. The parties negotiated a class been consolidated in the Middle District of Florida by the Judi- settlement and a settlement for the individual plaintiffs (exclud- cial Panel on Multidistrict Litigation and the claims are being ing one plaintiff) for an amount that is not material to Novartis, vigorously contested. which settlements and amended complaint were filed with the court for approval in December 2015. The claims assert inter Since June 2015, NPC, Novartis Corporation (NC) and NAG alia gender discrimination, pay discrimination and retaliation have been sued in five putative class action complaints brought at Alcon. The one remaining individual claim continues to be in federal district court in Massachusetts on behalf of pro- vigorously contested. posed classes of all direct and indirect purchasers, including end-payors, of Gleevec. The complaints assert violations of CONCLUDED LEGAL MATTERS federal antitrust law and various state laws, and seek to pre- Western District of Kentucky (WDKY) investigation vent Novartis from enforcing a previously reported 2014 agree- In 2012, NPC received a subpoena from the USAO for the WDKY ment under which Sun Pharmaceuticals agreed not to launch requesting the production of documents relating to marketing a generic version of Gleevec, until February 1, 2016, as well as practices, including alleged remuneration of healthcare pro- damages and other relief. The claims are being vigorously con- viders and off-label promotion, in connection with certain NPC tested. products (including Tekturna, Valturna, Reclast, Exelon Patch and other products). In the third quarter of 2015, the USAO In October 2015, Sandoz and Momenta Pharmaceuticals were declined to intervene in the relators’ complaint and has closed sued in a putative antitrust class action in federal court in Ten- the investigation. nessee alleging that Momenta and Sandoz engaged in anti- competitive conduct with regard to sales of enoxaparin, and SDNY specialty pharmacies investigation and litigation the same allegations were made by Amphastar in a lawsuit In April 2013, the US government filed a civil complaint in inter- filed in federal court in California (Sandoz, Momenta Pharma- vention to a qui tam action against NPC in the USDC for the ceuticals and Amphastar are currently engaged in litigation SDNY. The complaint, as subsequently amended, asserted fed- concerning certain enoxaparin patents in federal court in Mas- eral False Claims Act and state law claims related to alleged sachusetts). The claims are being vigorously contested. unlawful contractual discounts and rebates to specialty phar- Oriel litigation macies in connection with Myfortic, and alleged unlawful con- tractual discounts, rebates and patient referrals to one spe- In October 2013, Shareholder Representative Services LLC cialty pharmacy in connection with Exjade. In January 2014, filed a complaint in New York State Court against Sandoz Inc., eleven states filed three complaints in intervention asserting FINANCIAL REPORT | NOTES TO THE NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 213 similar claims related to Exjade; and the qui tam relator served prevailed at the trial level remain on appeal, and one other on NPC an amended complaint also asserting similar claims case remains pending. The remaining claims are being vigor- with respect to Myfortic and Exjade, as well as claims involving ously contested, but they are not material to Novartis. Tasigna, Gleevec and TOBI that the federal and various state governments declined to pursue. In the second half of 2015, Solodyn® Federal Trade Commission (FTC) investigation NPC reached a settlement with all plaintiffs, including the The conduct challenged in the above-described Solodyn® anti- United States Department of Justice, 45 states (made up of trust class actions has also been the subject of an FTC inves- the eleven intervening states, as well as all the other states tigation. In the fourth quarter of 2015, the FTC closed the inves- which were either part of the relator’s complaint, or which reim- tigation with no finding of an infringement or a fine. This bursed prescriptions of Myfortic and Exjade during the rele- matter is therefore concluded. vant time period), the District of Columbia and the qui tam relator. This resolves all the above-described claims related to Excedrin consumer class actions Myfortic, Exjade, Tasigna, Gleevec and TOBI. As part of the set- Four putative class actions were brought in December 2013 tlement, NPC agreed to pay USD 390 million plus additional and January 2014 against Novartis and its consumer health legal expenses to plaintiffs, and agreed with the Office of unit. They generally claim that it was a deceptive practice to Inspector General of the US Department of Health & Human sell Excedrin Migraine at a higher price than Excedrin Extra Services on an amendment and extension of its current Cor- Strength when the two have the same active ingredients, even porate Integrity Agreement until 2020. though the products have different labels and clearly disclose DNJ investigation their active ingredients. In 2014, three of the four putative class actions were dismissed; the remaining one is not material to In late September 2014, ALI received a subpoena from the Novartis. USAO for the DNJ relating to an investigation of Alcon sales practices. In the third quarter of 2015, the USAO declined to proceed, and no charges were brought or sanctions imposed. The relator dismissed the complaint voluntarily. SUMMARY OF PRODUCT LIABILITY, GOvERNMENTAL INvESTIGATIONS AND OTHER LEGAL MATTERS PROvISION MOvEMENTS Italy Sandostatin investigation In January 2014, the ICA opened an investigation to assess whether Novartis Farma S.p.A. and Italfarmaco S.p.A. colluded on the supply of octreotide acetate (Sandostatin LAR and Lon- gastatina® LAR, respectively). In consideration of commitments to amend certain provisions of the co-marketing agreement with Italfarmaco, the ICA decided to close the investigation with no finding of an infringement and thus without a fine. The decision became final in October 2015. January 1 Provisions related to discontinued operations Cash payments Releases of provisions Additions to provisions Currency translation effects December 31 Less current portion 2015 2014 USD millions USD millions 849 924 – 256 – 223 832 – 8 1 194 – 743 – 37 – 454 – 135 549 2 849 – 328 Zometa/Aredia product liability litigation NPC had been a defendant in more than 880 cases brought in US courts in which plaintiffs generally claimed to have expe- Non-current product liabilities, governmental investigations and other legal matters provisions at December 31 451 521 rienced osteonecrosis of the jaw or atypical femur fracture Novartis believes that its total provisions for investigations, after treatment with Zometa or Aredia, which are used to treat product liability, arbitration and other legal matters are ade- patients whose cancer has spread to the bones. Nearly all the quate based upon currently available information. However, cases have been resolved through voluntary dismissals, pre- given the inherent difficulties in estimating liabilities, there can trial motion practice, trial, or settlements, the payments of be no assurance that additional liabilities and costs will not be which were not material to Novartis. Three cases where NPC incurred beyond the amounts provided. 214 | Novartis Annual Report 2015 FINANCIAL REPORT 21. Current Financial Debt and Derivative Financial Instruments Interest-bearing accounts of associates payable on demand Bank and other financial debt Commercial paper Current portion of non-current financial debt Fair value of derivative financial instruments Total current financial debt and derivative financial instruments 2015 2014 USD millions USD millions 1 645 1 185 1 085 1 651 1 272 648 1 659 2 989 The consolidated balance sheet amounts of current financial debt, other than the current portion of non-current financial debt, approximate the estimated fair value due to the short- term nature of these instruments. The weighted average interest rate on the bank and other current financial debt (including employee deposits from the compensation of associates employed by Swiss entities) was 30 52 2.7% in 2015 and 2.6% in 2014. 5 604 6 612 Details on commercial papers are provided in Note 29 – Liquidity risk. 22. Provisions and Other Current Liabilities 2015 2014 USD millions USD millions 551 260 1 124 550 3 790 549 333 1 076 561 3 533 PROvISION FOR DEDUCTIONS FROM REvENUE The following table shows the movement of the provision for deductions from revenue: January 1 Provisions related to discontinued operations 2015 2014 USD millions USD millions 3 533 4 182 – 234 1 932 1 968 Impact of business combinations 3 Taxes other than income taxes Restructuring provisions Accrued expenses for goods and services received but not invoiced Accruals for royalties Provisions for revenue deductions Accruals for compensation and benefits including social security Environmental remediation liabilities Deferred income Provision for product liabilities, governmental investigations and other legal matters Accrued share-based payments Contingent considerations Commitment for repurchase of own shares (see Note 9) 80 385 743 209 78 95 329 328 248 291 658 479 Other payables 1 017 Total provisions and other current liabilities 10 719 10 448 Provisions are based upon management’s best estimate and adjusted for actual experience. Such adjustments to the historic estimates have not been material. Additions Payments/utilizations Changes in offset against gross trade receivables Currency translation effects December 31 15 603 14 119 – 15 218 – 13 907 50 – 181 3 790 – 420 – 207 3 533 RESTRUCTURING PROvISION MOvEMENTS January 1, 2014 Provisions related to discontinued operations Additions Cash payments Releases Currency translation effects December 31, 2014 Additions Cash payments Releases Currency translation effects December 31, 2015 USD millions 174 – 4 504 – 295 – 52 6 333 399 – 435 – 36 – 1 260 FINANCIAL REPORT | NOTES TO THE NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 215 In 2015, additions to provisions of USD 399 million in continu- in Development totaling USD 72 million was targeted at estab- ing operations were to a large extent related to reorganizations lishing an organizational model for the development activities in the Pharmaceuticals Division. Thereby two initiatives total- which allows for greater focus on high priority programs in ing USD 106 million were targeted at efficiency gains in the specialty medicines, more flexibility to adapt to changes in the business franchises other than Oncology and Cell and Gene portfolio, and which strengthens operational excellence. Therapies. The integration of the Oncology business acquired Activities in the Pharmaceuticals Division were also subject to from GSK resulted in restructuring expenses of USD 78 mil- a restructuring program totaling USD 286 million which was lion. Alcon extended its initiative to realize productivity oppor- targeted at increasing operational leverage. Alcon has estab- tunities (USD 45 million). Finally group wide initiatives to sim- lished a USD 56 million initiative to realize productivity oppor- plify the organizational structure (USD 159 million), mainly tunities. related to the manufacturing footprint and support services The releases to income in 2015 of USD  36 million in as well as a NIBR initiative (USD  11 million) resulted in an continuing operations and in 2014 of USD 52 million in con- increase of the provision. tinuing operations and USD 5 million in discontinued opera- In 2014, additions to provisions of USD 504 million in con- tions for the entire Group were mainly due to settlement of tinuing operations were mainly related to reorganizations in liabilities at lower amounts than originally anticipated. the Pharmaceuticals Division. In Pharmaceuticals an initiative Third party costs 1 Termination costs Additions to provision 2015 2014 USD millions USD millions USD millions USD millions USD millions USD millions 2015 2015 2014 2014 Restructuring initiatives Pharmaceuticals – Research & Development Pharmaceuticals – Business Franchises Pharmaceuticals – GSK Oncology Integration Alcon initiative to increase operating leverage Various Group initiatives to simplify organizational structure – including manufacturing sites and support services Total 31 31 1 Third party costs are mainly associated with lease and other obligations due to abandonment of certain facilities. 11 106 78 45 128 368 72 278 56 89 495 11 106 78 45 159 399 72 286 56 90 504 8 1 9 216 | Novartis Annual Report 2015 FINANCIAL REPORT 23. Details to the Consolidated Cash Flow Statements 23.1) ADJUSTMENTS FOR NON-CASH ITEMS FROM 23.2) CASH FLOWS FROM CHANGES IN WORKING CAPITAL AND OTHER OPERATING ITEMS INCLUDED IN OPERATING CASH FLOW FROM CONTINUING OPERATIONS Increase in inventories Increase in trade receivables Increase in trade payables Change in other net current assets and other operating cash flow items Total 2015 2014 USD millions USD millions – 482 – 513 378 – 246 – 863 – 506 – 367 142 106 – 625 CONTINUING OPERATIONS Taxes Depreciation, amortization and impairments on:    Property, plant & equipment    Intangible assets    Financial assets 1 2015 2014 USD millions USD millions 1 106 1 545 1 550 3 921 104 1 630 3 052 69 Income from associated companies – 266 – 1 918 Gains on disposal of property, plant & equipment, intangible, financial and other non-current assets, net Equity-settled compensation expense Change in provisions and other non-current liabilities Net financial income Total 1 Including unrealized fair value gains – 869 773 1 642 1 109 9 070 – 622 744 1 490 735 6 725 In 2015, the Group acquired property, plant and equipment of USD 85 million through finance lease contracts. 23.3) CASH FLOW ARISING FROM ACQUISITIONS AND DIvESTMENTS OF BUSINESSES The following is a summary of the cash flow impact of acquisitions and divestments. The most significant transactions are described in Note 2. 2015 2014 2015 Acquisitions Divestments Acquisitions Divestments USD millions USD millions USD millions USD millions 2014 Property, plant & equipment Currently marketed products (Acquired)/divested research & development Technologies Other intangible assets Financial and other assets including deferred tax assets 1 Inventories Trade receivables and other current assets Cash and cash equivalents Current and non-current financial debts Trade payables and other liabilities including deferred tax liabilities Net identifiable assets (acquired) or divested Currency translation effects Acquired/(divested) liquidity Subtotal Refinancing of intercompany financial debt, net Goodwill 1 Divestment gain Taxes paid and other portfolio transformation related cash flows Receivables and payables contingent consideration, net Prepaid/deferred portion of sales price 2 Net cash flow Of which:    Net cash flow from discontinued operations    Net cash flow used in continuing operations – 12 970 – 730 – 15 – 555 – 3 – 25 212 – 14 086 25 – 14 061 – 2 438 – 8 – 16 507 1 000 646 13 113 86 40 893 529 311 – 601 – 841 2 189 98 – 479 1 808 578 1 042 7 401 – 1 337 – 519 – 49 8 924 145 91 7 87 159 – 50 439 – 3 – 234 – 248 – 53 – 1 – 3 – 2 186 – 355 2 – 353 436 – 131 153 267 876 – 566 47 – 331 1 060 8 924 1 060 – 16 507 – 331 1 2014 Acquisitions include an adjustment regarding a previous acquisition to deferred tax assets of USD 21 million and goodwill of USD 135 million. 2 Divestments include USD 49 million proceeds for the divestment of the Animal Health business received in 2014. Notes 2 and 24 provide further information regarding acquisitions and divestments of businesses. All acquisitions were for cash. FINANCIAL REPORT | NOTES TO THE NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 217 23.4) CASH FLOW FROM DISCONTINUED OPERATIONS Cash flows used in operating activities Purchase of property, plant & equipment Proceeds from sales of property, plant & equipment Purchase of intangible assets Proceeds from sales of intangible assets Purchase of financial and other non-current assets, net Divestments of businesses 1 Cash flows from investing activities Total net cash flows from discontinued operations 2015 2014 USD millions USD millions – 188 – 41 1 – 2 8 924 8 882 8 694 – 1 – 223 4 – 18 79 – 13 1 060 889 888 1 Includes proceeds of USD 10 925 million reduced by USD 2 001 million, for payments of taxes, transaction-related costs and purchase price adjustments. 24. Acquisitions of Businesses ASSETS AND LIABILITIES ARISING FROM ACQUISITIONS Fair value Currently marketed products Acquired research & development Other intangible assets Deferred tax assets 1 Inventories Trade receivables and other current assets Cash and cash equivalents Payables and other liabilities including deferred tax liabilities Net identifiable assets acquired Acquired liquidity Goodwill 1 Net assets recognized as a result of business combinations 2015 2014 USD millions USD millions 12 970 730 15 555 3 25 234 248 53 1 3 2 – 212 – 186 14 086 – 25 2 438 16 499 355 – 2 131 484 1 2014 includes an adjustment regarding a previous acquisition to deferred tax assets of USD 21 million and goodwill of USD 135 million. Note 2 details significant acquisition of businesses, which in 2015, were the GSK Oncology products, Spinifex and Admune. The goodwill arising out of these acquisitions is attributable to buyer specific synergies, assembled workforce and to the account- ing for deferred tax liabilities on the acquired assets. Goodwill of USD 2.4 billion is tax deductible. In 2014 the significant trans- actions related to CoStim Pharmaceuticals and WaveTec. 218 | Novartis Annual Report 2015 FINANCIAL REPORT 25. Post-Employment Benefits for Associates DEFINED BENEFIT PLANS All benefits granted under Swiss pension plans are vested In addition to the legally required social security schemes, the and Swiss legislation prescribes that the employer has to con- Group has numerous independent pension and other post-em- tribute a fixed percentage of an associate’s pay to an external ployment benefit plans. In most cases these plans are exter- pension fund. Additional employer’s contributions may be nally funded in entities which are legally separate from the required whenever the plan’s statutory funding ratio falls below Group. For certain Group companies, however, no independent a certain level. The associate also contributes to the plan. The plan assets exist for the pension and other post-employment pension plans are run by separate legal entities, each governed benefit obligations of associates. In these cases the related by a Board of Trustees which for the principal plans consists unfunded liability is included in the balance sheet. The defined of representatives nominated by Novartis and by the active benefit obligations (DBO) of all major pension and other insured associates. The Boards of Trustees are responsible for post-employment benefit plans are reappraised annually by the plan design and the asset investment strategy. independent actuaries. Plan assets are recognized at fair value. In June 2015 the Board of Trustees of the Novartis Swiss The major plans are based in Switzerland, United States, United Pension Fund agreed to adjust the annuity conversion rate at Kingdom, Germany and Japan, which represent 95% of the retirement with effect from January 1, 2016. This amendment Group’s total DBO for pension plans. Details of the plans in the does not have an impact on existing members receiving ben- two most significant countries of Switzerland and the US are efits or on plan members, born before January 1, 1956. This provided below. amendment resulted in a net pre-tax curtailment gain of Swiss-based pension plans represent the most significant USD 110 million (CHF 103 million). portion of the Group’s total DBO and plan assets. For the active The US pension plans represent the second largest com- insured members born on or after January 1, 1956, or having ponent of the Group’s total DBO and plan assets. The princi- joined the plans after December 31, 2010 the benefits are pal plans (Qualified Plans) are funded whereas plans provid- partially linked to the contributions paid into the plan. Certain ing additional benefits for executives (Restoration Plans) are features of Swiss pension plans required by law preclude the unfunded. Employer contributions are required for Qualified plans being categorized as defined contribution plans. These Plans whenever the statutory funding ratio falls below a cer- factors include a minimum interest guarantee on retirement tain level. Furthermore, associates in the US are covered under savings accounts, a pre-determined factor for converting the other post-employment benefit plans and post-retirement accumulated savings account balance into a pension and medical plans. embedded death and disability benefits. FINANCIAL REPORT | NOTES TO THE NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 219 The following tables are a summary of the funded and unfunded defined benefit obligation for pension and other post- employment benefit plans of associates at December 31, 2015 and 2014: Pension plans Other post-employment benefit plans 2015 2014 USD millions USD millions USD millions USD millions 2014 2015 Benefit obligation at January 1 Benefit obligations related to discontinued operations Current service cost Interest cost Past service costs and settlements Administrative expenses Remeasurement (gains)/losses arising from changes in financial assumptions Remeasurement (gains)/losses arising from changes in demographic assumptions Experience related remeasurement losses/(gains) Currency translation effects Benefit payments Contributions of associates Effect of acquisitions, divestments or transfers Benefit obligation at December 31 Fair value of plan assets at January 1 Plan assets related to discontinued operations Interest income Return on plan assets excluding interest income Currency translation effects Novartis Group contributions Contributions of associates Settlements Benefit payments Effect of acquisitions, divestments or transfers Fair value of plan assets at December 31 Funded status Limitation on recognition of fund surplus at January 1 Change in limitation on recognition of fund surplus (incl. exchange rate differences) Interest income on limitation of fund surplus Limitation on recognition of fund surplus at December 31 1 069 – 21 35 49 – 89 164 121 – 22 – 5 – 48 1 253 209 10 28 24 178 24 801 1 253 451 399 – 138 23 – 16 – 41 56 – 848 418 654 6 21 2 129 229 – 14 – 358 – 2 156 – 1 406 – 1 282 223 31 210 10 32 46 – 34 – 30 – 110 – 14 – 50 39 23 402 24 178 1 132 20 434 21 481 199 300 – 530 550 – 286 1 442 – 223 – 1 917 494 223 – 3 485 210 – 9 6 – 6 23 – 1 406 – 1 282 – 50 – 48 3 4 19 536 20 434 172 199 – 3 866 – 3 744 – 960 – 1 054 – 58 12 – 4 – 50 – 45 – 9 – 4 – 58 Net liability in the balance sheet at December 31 – 3 916 – 3 802 – 960 – 1 054 220 | Novartis Annual Report 2015 FINANCIAL REPORT 25. Post-Employment Benefits for Associates (Continued) The reconciliation of the net liability from January 1 to December 31 is as follows: Pension plans Other post-employment benefit plans 2015 2014 USD millions USD millions USD millions USD millions 2015 2014 Net liability at January 1 Less: Net liability related to discontinued operations Current service cost Net interest expense Administrative expenses Past service costs and settlements Remeasurements Currency translation effects Novartis Group contributions Effect of acquisitions, divestments or transfers Change in limitation on recognition of fund surplus Net liability at December 31 Amounts recognized in the consolidated balance sheet Prepaid benefit cost Accrued benefit liability – 3 802 – 3 365 – 1 054 – 860 – 451 – 103 – 23 135 318 – 418 – 108 – 21 – 15 – 32 – 40 21 – 35 – 39 89 – 285 – 902 168 – 235 135 494 – 28 12 239 485 – 6 – 9 5 14 23 – 39 – 3 916 – 3 802 – 960 – 1 054 36 37 – 3 952 – 3 839 – 960 – 1 054 The following table shows a breakdown of the DBO for pension plans by geography and type of member and the breakdown of plan assets into the geographical locations in which they are held: 2015 USD millions 2014 USD millions Switzerland US Rest of the World Total Switzerland US Rest of the World Total Benefit obligation at December 31 15 453 3 783 4 166 23 402 15 578 4 092 4 508 24 178 Thereof unfunded By type of member    Active    Deferred pensioners    Pensioners 736 466 1 202 820 484 1 304 6 196 990 909 1 392 8 578 6 268 1 182 1 502 1 489 2 398 947 1 499 8 952 2 446 9 257 1 884 1 285 12 426 9 310 1 963 1 507 12 780 Fair value of plan assets at December 31 14 347 2 358 2 831 19 536 14 869 2 521 3 044 20 434 Funded Status – 1 106 – 1 425 – 1 335 – 3 866 – 709 – 1 571 – 1 464 – 3 744 The following table shows the principal weighted average actuarial assumptions used for calculating defined benefit plans and other post- employment benefits of associates: Weighted average assumptions used to determine benefit obligations at December 31 Discount rate Expected rate of pension increase Expected rate of salary increase Interest on savings account Pension plans Other post-employment benefit plans 2015 % 2014 % 2015 % 2014 % 4.4% 3.8% 1.8% 0.4% 2.9% 0.8% 1.8% 0.4% 3.2% 0.9% Current average life expectancy for a 65-year-old male/female 21/24 years 21/24 years 21/23 years 22/24 years FINANCIAL REPORT | NOTES TO THE NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 221 Changes in the above-mentioned actuarial assumptions can Assumptions regarding life expectancy significantly impact result in significant volatility in the accounting for the Group’s the DBO. An increase in longevity increases the DBO. There is pension plans in the consolidated financial statements. This no offsetting impact from the plan assets as no longevity bonds can result in substantial changes in the Group’s other or swaps are held by the pension funds. Generational mortal- comprehensive income, long-term liabilities and prepaid ity tables are used where this data is available. pension assets. The following table shows the sensitivity of the defined The DBO is significantly impacted by assumptions regard- benefit pension obligation to the principal actuarial assumptions ing the rate that is used to discount the actuarially determined for the major plans in Switzerland, United States, United post-employment benefit liability. This rate is based on yields Kingdom, Germany and Japan on an aggregated basis: of high quality corporate bonds in the country of the plan. Decreasing corporate bond yields decrease the discount rate, so that the DBO increases and the funded status decreases. In Switzerland an increase in the DBO due to lower dis- count rates is slightly offset by lower future benefits expected to be paid on the associate’s savings account where the assumption on interest accrued changes in line with the discount rate. The impact of decreasing interest rates on a plan’s assets is more difficult to predict. A significant part of the plan assets is invested in bonds. Bond values usually rise when interest rates decrease and may therefore partially compensate for the decrease in the funded status. Furthermore, pension assets Change in 2015 year end defined benefit pension obligation USD millions 25 basis point increase in discount rate 25 basis point decrease in discount rate 1 year increase in life expectancy 25 basis point increase in rate of pension increase 25 basis point decrease in rate of pension increase 25 basis point increase of interest on savings account 25 basis point decrease of interest on savings account 25 basis point increase in rate of salary increase 25 basis point decrease in rate of salary increase – 736 781 797 491 – 111 61 – 60 69 – 71 also include significant holdings of equity instruments. Share The healthcare cost trend rate assumptions for other post- prices tend to rise when interest rates decrease and therefore employment benefits are as follows: often counteract the negative impact of the rising defined ben- efit obligation on the funded status although correlation of interest rates with equities is not as strong as with bonds, espe- cially in the short term. The expected rate for pension increases significantly affects the DBO of most plans in Switzerland, Germany and the United Kingdom. Such pension increases also decrease the funded status although there is no strong correlation between the value of the plan assets and pension/inflation increases. Healthcare cost trend rate assumptions used 2015 2014 Healthcare cost trend rate assumed for next year Rate to which the cost trend rate is assumed to decline Year that the rate reaches the ultimate trend rate 7.5% 7.0% 5.0% 5.0% 2022 2021 The following table shows the weighted average plan asset allocation of funded defined benefit pension plans at December 31, 2015 and 2014: Equity securities Debt securities Real estate Alternative investments Cash and other investments Total Pension plans Long-term target % 2015 % 2014 % 15–40 20–60 5–20 0–20 0–15 34 35 14 14 3 35 34 13 10 8 100 100 222 | Novartis Annual Report 2015 FINANCIAL REPORT 25. Post-Employment Benefits for Associates (Continued) Cash, as well as most of the equity and debt securities have a The expected future cash flows in respect of pension and quoted market price in an active market. Real estate and alter- other post-employment benefit plans at December 31, 2015 native investments, which include hedge fund and private were as follows: equity investments usually do not have a quoted market price. The strategic allocation of assets of the different pension plans are determined with the objective of achieving an invest- ment return which, together with the contributions paid by the Group and its associates, is sufficient to maintain reasonable control over the various funding risks of the plans. Based upon the market and economic environments, actual asset alloca- tions may temporarily be permitted to deviate from policy tar- gets. The asset allocation currently includes investments in shares of Novartis AG which totaled at December 31, 2015, 11 million shares with a market value of USD 1.0 billion (2014: 11 million shares with a market value of USD  1.0 billion). The weighted average duration of the defined benefit obligation is 14.1 years (2014: 14.3 years). The Group’s ordinary contribu- tion to the various pension plans are based on the rules of Novartis Group contributions 2016 (estimated) Expected future benefit payments 2016 2017 2018 2019 2020 2021–2025 Pension plans USD millions Other post- employment benefit plans USD millions 531 1 201 1 232 1 239 1 243 1 236 6 113 58 58 61 64 66 68 361 each plan. Additional contributions are made whenever this is DEFINED CONTRIBUTION PLANS required by statute or law; i.e. usually when statutory funding In many subsidiaries associates are covered by defined levels fall below pre-determined thresholds. The only signifi- contribution plans. Contributions charged to the 2015 consol- cant plans that are foreseen to require additional funding are idated income statement for the defined contribution plans those in UK. were USD  359 million (2014: USD  348 million). The 2015 amount excludes USD 1 million (2014: USD 14 million) related to discontinued operations. 26. Equity-Based Participation Plans for Associates The expense related to all equity-based participation plans in not carry any dividend, dividend equivalent or voting rights. the 2015 consolidated income statement was USD 968 mil- The executives may elect to also receive their cash incentive lion (2014: USD 1.1 billion) resulting in total liabilities arising partially or fully in shares which will not be subject to vesting from equity-based payment transactions of USD 209 million conditions. In 2015, 14 executives received 0.1 million restricted (2014: USD 277 million of which USD 248 million were recog- shares and RSUs. nized in continuing operations). Out of the total expense, an amount of USD 903 million (2014: USD 1.0 billion) was recog- SHARE SAvINGS PLANS nized in continuing operations and USD  65 million (2014: A number of associates in certain countries and certain key USD 124 million) was recognized in discontinued operations. executives worldwide are encouraged to invest their Annual Equity-based participation plans can be separated into the Incentive, and in the United Kingdom also their salary, in a following plans. ANNUAL INCENTIvE share savings plan. Under the share savings plan, participants may elect to receive their Annual Incentive fully or partially in Novartis shares in lieu of cash. As a reward for their participa- The Annual Incentive of the CEO and other key executives is tion in the share savings plan, at no additional cost to the par- paid 50% in cash in February or March of the year following ticipant, Novartis matches their investments in shares after a the performance period, and 50% in Novartis restricted shares holding period of three or five years. or Restricted Share Units (RSUs) that are deferred and restricted for three years. Each restricted share is entitled to Novartis currently has three share savings plans: voting rights and payment of dividends during the vesting — Worldwide 37 key executives were invited to participate period. Each RSU is equivalent in value to one Novartis share in the Leveraged Share Savings Plan (LSSP) based on and is converted into one share at the vesting date. RSUs do their performance in 2014. At the participant’s election, FINANCIAL REPORT | NOTES TO THE NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 223 the Annual Incentive is awarded partly or entirely in Tradable share options expire on their 10th anniversary shares. The elected number of shares was delivered in from the grant date. Each tradable share option entitles the 2015 and is subject to a holding period of five years. At holder to purchase after vesting (and before the 10th anniver- the end of the holding period, Novartis will match the sary from the grant date) one Novartis share at a stated exer- invested shares at a ratio of 1-to-1 (i.e. one share cise price that equals the closing market price of the underly- awarded for each invested share). In the US both the ing share at the grant date. LSSP award and the corresponding match are cash The terms and conditions of the Novartis Equity Plan settled. “Select” outside North America are substantially equivalent — In Switzerland, the Employee Share Ownership Plan to the Novartis Equity Plan “Select” for North America. (ESOP) was available to 12 796 associates in 2014. ESOP participants may choose to receive their Annual Incen- tive (i) 100% in shares, (ii) 50% in shares and 50% in NOvARTIS EQUITY PLAN “SELECT” OUTSIDE NORTH AMERICA cash or (iii) 100% in cash. After expiration of a three- Participants in this plan were granted in 2015 a total of 1.7 year holding period for Novartis shares invested under million restricted shares and RSUs at CHF 84.75 (2014: 2.1 the ESOP, each participant will receive one matching million restricted shares and RSUs at CHF 73.75). share for every two Novartis shares invested. A total of The following table shows the activity associated with the 5 945 associates chose to receive shares under the share options during the period. The weighted average prices ESOP for their performance in 2014 and the invested in the table below are translated from Swiss Francs into USD shares were delivered in 2015. at historical rates. — In the United Kingdom, 1 618 associates can invest up to 5% of their monthly salary in shares (up to a maximum of GBP 125) and also may be invited to invest all or part of their net Annual Incentive in shares. Two invested shares are matched with one share with a holding period of three years. During 2015, 1 433 participants elected Options outstanding at January 1 2015 2014 Weighted average Weighted average Options exercise Options exercise (millions) price (USD) (millions) price (USD) 16.1 59.2 26.4 57.3 to participate in this plan. Sold or exercised – 4.1 56.7 – 9.8 Forfeited or expired – 0.3 66.0 – 0.5 54.0 62.2 Following the introduction of the new compensation programs Outstanding at December 31 11.7 59.9 16.1 59.2 in 2014, the CEO and the other Executive Committee mem- Exercisable at December 31 7.4 56.4 7.0 55.0 bers are no longer eligible to participate in the share savings plans. All share options were granted at an exercise price which was Associates may only participate in one of these plans in equal to the closing market price of the Group’s shares at the any given year. grant date. The weighted average exercise price during the During 2015, a total of 4.1 million shares (2014: 4.8 million period the options were sold or exercised in 2015 was shares) were delivered to associates in lieu of their annual USD 56.74. The weighted average share price at the dates of incentive (in the UK, also their salary). sale was USD 97.89. The following table summarizes information about share NOvARTIS EQUITY PLAN “SELECT” options outstanding at December 31, 2015: The Equity Plan “Select” is a global equity incentive plan under which eligible associates, including Executive Committee mem- bers up to performance year 2013, may annually be awarded a grant subject to a three year vesting period. For certain asso- ciates the grant is subject to the achievement of predetermined business and individual performance objectives typically set at the start of the calendar year prior to the date of grant. For these associates the Select award is capped at 200% of tar- get. No awards are granted for performance ratings below a certain threshold. The Equity Plan “Select” currently allows its participants Range of exercise prices (USD) 45–49 50–54 55–59 65–70 Total Options outstanding Number outstanding (millions) Average remaining contractual life (years) Weighted average exercise price (USD) 0.8 1.6 4.6 4.7 11.7 3.0 3.1 4.1 7.0 5.1 46.8 54.4 57.8 66.0 59.9 in Switzerland to choose the form of their equity compensa- NOvARTIS EQUITY PLAN “SELECT” FOR NORTH AMERICA tion in restricted shares or restricted share units (RSUs). In all Participants in this plan were granted a total of 3.9 million other jurisdictions, RSUs are typically granted. Until 2013, par- RSUs at USD 98.75 (2014: 5.1 million RSUs at USD 80.79). ticipants could also choose to receive part or the entire grant The following table shows the activity associated with the in the form of tradable share options. American Depositary Receipts (ADR) options during the period: 224 | Novartis Annual Report 2015 FINANCIAL REPORT 26. Equity-Based Participation Plans for Associates (Continued) 2015 2014 Weighted ADR average options exercise Weighted ADR average options exercise (millions) price (USD) (millions) price (USD) ning of the cycle, comprised of up to ten target milestones that represent the most important research and development proj- ect milestones for each division. At the end of the performance period, the Research & Development Committee assists the 44.4 59.6 58.8 58.9 Board of directors and the Compensation Committee in eval- Options outstanding at January 1 Sold or exercised – 11.8 57.8 – 12.2 Forfeited or expired – 0.7 63.3 – 2.2 55.5 62.6 uating performance against the innovation targets at the end of the cycle. The weighting of this measure is 25%. Outstanding at December 31 31.9 60.2 44.4 59.6 Until 2014 (2013 for the CEO and other key executives), Exercisable at December 31 19.2 56.3 16.3 54.7 the OLTPP was available. The rewards are based on rolling three year performance objectives focused on the Novartis All ADR options were granted at an exercise price which was Economic Value Added (NVA). The NVA is calculated based on equal to the closing market price of the ADRs at the grant date. Group operating income and income from associated compa- The weighted average exercise price during the period the ADR nies adjusted for interest, taxes and cost of capital charge. The options were sold or exercised in 2015 was USD 57.75. The performance realization of a plan cycle is obtained right after weighted average ADR price at the dates of sale or exercise the end of the third plan year by adding together the annual was USD 100.58. NVA realizations of all plan years of the plan cycle. The per- The following table summarizes information about ADR formance ratio for a plan cycle is obtained by dividing the per- options outstanding at December 31, 2015: formance realization for the plan cycle with the performance Range of exercise prices (USD) 45–49 50–54 55–59 65–69 Total ADR options outstanding Number outstanding (millions) Average remaining contractual life (years) Weighted average exercise price (USD) 2.4 3.1 12.7 13.7 31.9 3.0 3.5 5.0 7.0 5.6 46.4 53.8 58.0 66.1 60.2 target for the plan cycle, expressing the result as a percent- age. The OLTPP only allows a payout if the actual NVA exceeds predetermined target thresholds. The payout is capped at 200% of target. Under the LTPP and OLTPP, participants are granted a tar- get number of Performance Share Units (PSUs) at the begin- ning of every performance period, which are converted into Novartis shares after the performance period. PSUs do not carry voting rights, but do carry dividend equivalents that are reinvested in additional PSUs and paid at vesting to the extent that performance conditions have been met. PSUs granted LONG-TERM PERFORMANCE PLANS under the OLTPPs do not carry any dividend, dividend equiv- In 2014, a new LTPP was introduced for the CEO and other key alent or voting rights. executives designed to not only drive long-term shareholder At the end of the three-year performance period, the value, but also innovation. From 2015 onwards, this LTPP was Compensation Committee adjusts the target number of PSUs extended to all key executives who previously participated in earned based on actual performance. PSUs are converted into the now discontinued Old LTPP (OLTPP). unrestricted Novartis shares without an additional vesting The rewards of the LTPP are based on three year perfor- period. mance objectives focused on financial and innovation mea- In 2015, 0.4 million LTPP PSUs (2014: 0.3 million LTPP sures. The financial measure is Novartis Cash Value Added PSUs) based on achieving 100% of target were granted to (NCVA). The weighting of this measure is 75%. The NCVA tar- 164 key executives. No PSUs were granted in 2015 under the get is approved by the Board of Directors. OLTPP (2014: 0.2 million OLTPP PSUs). The innovation measure is based on a holistic approach under which divisional innovation targets are set at the begin- FINANCIAL REPORT | NOTES TO THE NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 225 LONG-TERM RELATIvE PERFORMANCE PLAN (LTRPP) The Long-Term Relative Performance Plan, was introduced in ALCON, INC., EQUITY PLANS GRANTED TO ASSOCIATES PRIOR TO THE MERGER 2014, and is an equity plan for the CEO and other key execu- At the completion of the merger of Alcon, Inc., into Novartis on tives. The target incentive is 100% of base compensation for April 8, 2011, all awards outstanding under the Alcon equity the CEO and ranges from 30% to 90% for other key execu- plans were converted into awards based upon Novartis shares tives. It is capped at 200% of target. LTRPP is based on the with a conversion factor of 3.0727 as defined in the Merger achievement of long-term Group Total Shareholder Return Agreement. There were no grants in 2015 and 2014, although (TSR) versus our peer group of 12 companies in the health- certain of the unvested awards under the Alcon equity plans care industry over rolling three-year performance periods. TSR continued to have expense in 2014. is calculated in USD as share price growth plus dividends over the three-year performance period. The calculation will be based on Bloomberg standard published TSR data, which is SHARE OPTIONS AND SHARE-SETTLED APPRECIATION RIGHTS publicly available. The position in the peer group determines Share options entitle the recipient to purchase Novartis shares the payout range. at the closing market price of the former Alcon, Inc., share on The fair value of the LTRPP award was determined to be the day of grant divided by the conversion factor. CHF 48.58 and USD 56.60 as of the grant date. In 2015, a total Share-settled appreciation rights (SSAR) entitle the par- of 0.1 million LTRPP PSUs (2014: 0.1 million LTRPP PSUs) ticipant to receive, in the form of Novartis shares, the differ- based on achieving 100% of target were granted to 12 exec- ence between the values of the former Alcon, Inc., share at the utives. date of grant, converted into Novartis shares using the con- version factor, and the Novartis share price at the date of exer- OTHER SHARE AWARDS cise. Selected associates, excluding the Executive Committee mem- The following table shows the activity associated with the bers, may exceptionally receive Special Share Awards of converted Novartis share options and SSARs during 2015 and restricted shares or RSUs. These Special Share Awards pro- 2014: vide an opportunity to reward outstanding achievements or exceptional performance and aim at retaining key contribu- tors. They are based on a formal internal selection process, in which the individual performance of each candidate is thor- oughly assessed at several management levels. Special Share Outstanding at January 1, 2014 Awards generally have a five-year vesting period. In exceptional Exercised circumstances, Special Share Awards may be rewarded to attract special expertise and new talents into the organization. These grants are consistent with market practice and Novartis’ philosophy to attract, retain and motivate best-in-class talents around the world. Outstanding at December 31, 2014 Exercisable at December 31, 2014 Outstanding at January 1, 2015 Worldwide 848 associates at different levels in the organi- Exercised zation were awarded 0.8 million restricted shares and RSUs in 2015 (2014: 0.8 million restricted shares and RSUs). In addition, in 2015, Board members received 32 087 unrestricted shares as part of their regular compensation. Outstanding at December 31, 2015 Exercisable at December 31, 2015 Weighted Weighted Number average Number of average of options exercise SSARs exercise (millions) price (USD) (millions) price (USD) 1.2 27.7 3.1 36.3 – 0.5 24.4 – 0.7 38.7 0.7 30.1 2.4 35.6 0.7 30.1 2.4 35.6 0.7 30.1 2.4 35.6 – 0.5 27.4 – 0.6 32.5 0.2 36.8 1.8 36.6 0.2 36.8 1.8 36.6 SUMMARY OF NON-vESTED SHARE MOvEMENTS The table below provides a summary of non-vested share movements (restricted shares, RSUs and PSUs) for all plans: 2015 2014 Number of shares Fair value in in millions USD millions Number of shares Fair value in in millions USD millions Non-vested shares at January 1 Granted Vested Forfeited 24.2 1 702.5 23.1 1 370.6 12.4 1 157.0 14.5 1 153.4 – 14.4 – 968.9 – 11.5 – 709.2 – 2.1 – 139.6 – 1.9 – 112.3 Non-vested shares at December 31 20.1 1 751.0 24.2 1 702.5 226 | Novartis Annual Report 2015 FINANCIAL REPORT 27. Transactions with Related Parties GENENTECH/ROCHE XOLAIR Novartis has two agreements with Genentech, Inc., USA, a In February 2004, Novartis Pharma AG, Genentech, Inc., and subsidiary of Roche Holding AG which is indirectly included in Tanox, Inc., finalized a three-party collaboration to govern the the consolidated financial statements using equity accounting development and commercialization of certain anti-IgE since Novartis holds 33.3% of the outstanding voting shares antibodies including Xolair and TNX-901. Under this agree- of Roche. LUCENTIS ment, all three parties co-developed Xolair. On August 2, 2007, Genentech, Inc. completed the acquisition of Tanox, Inc. and has taken over its rights and obligations. Novartis and Genen- Novartis has licensed the exclusive rights to develop and tech/Roche are co-promoting Xolair in the United States where market Lucentis outside the United States for indications Genentech/Roche records all sales. Novartis records sales related to diseases of the eye. As part of this agreement, outside of the United States. Novartis paid Genentech/Roche an initial milestone and shared Novartis markets Xolair and records all sales and related the cost for the subsequent development by making additional costs outside the United States as well as co-promotion costs milestone payments upon the achievement of certain clinical in the United States. Genentech/Roche and Novartis share the development points and product approval. Novartis also pays resulting profits from sales in the United States, Europe and royalties on the net sales of Lucentis products outside the other countries, according to agreed profit-sharing percent- United States. In 2015, Lucentis sales of USD 2.1 billion (2014: ages. In 2015, Novartis recognized total sales of Xolair of USD 2.4 billion) have been recognized by Novartis. USD 755 million (2014: USD 777 million) including sales to In November 2015, Genentech/Roche entered into an them for the United States market. agreement with Novartis resulting from an opt-in right related The net expense for royalties, cost sharing and profit shar- to Novartis entering into a Licensing and Commercialization ing arising out of the Lucentis and Xolair agreements with agreement with Ophthotech Corporation to commercialize Genentech/Roche totaled USD  309 million in 2015 (2014: pegpleranib (otherwise known as Fovista and OAP030) to treat USD 536 million). wet age-related macular degeneration (AMD) and various pre- Furthermore, Novartis has several patent license, supply sentations or combinations with pegpleranib outside of the and distribution agreements with Roche. United States. Pursuant to the agreement, Novartis and Genen- tech/Roche will share in some development costs related to pegpleranib and if development is successful, Novartis will pay royalties on the net sales of pegpleranib outside of the United States. EXECUTIvE OFFICER AND NON-EXECUTIvE DIRECTOR COMPENSATION During 2015, there were 11 Executive Committee members (“Executive Officers”), including those who stepped down during the year (14 members in 2014 also including those who stepped down). The total compensation for members of the Executive Committee and the 12 Non-Executive Directors (14 in 2014) using the Group’s accounting policies for equity-based compensation and pension benefits was as follows: Executive Officers Non-Executive Directors Total 2015 2014 USD millions USD millions USD millions USD millions USD millions USD millions 2015 2015 2014 2014 Benefits other than equity-based amounts Post-employment benefits Equity-based compensation Total 17.1 1.9 52.9 71.9 18.3 2.1 81.7 102.1 4.7 4.4 9.1 6.2 0.1 4.9 11.2 21.8 1.9 57.3 81.0 24.5 2.2 86.6 113.3 During 2015, there was a decrease in the IFRS compensation The disclosures required by the Swiss Code of Obligations expense for Executive Committee members compared to 2014 and in accordance with the Swiss Ordinance against Excessive mainly due to the decrease in number of Executive Commit- Compensation in Stock Exchange Listed Companies on Board tee members. and Executive compensation are shown in the Compensation The annual incentive award, which is fully included in Report. equity- based compensation even when paid out in cash, is granted in January in the year following the reporting period. FINANCIAL REPORT | NOTES TO THE NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 227 TRANSACTIONS WITH FORMER MEMBERS OF THE BOARD OF DIRECTORS Under this agreement, Dr. Vasella is compensated at a rate of USD 25 000 per day, with an annual guaranteed minimum fee During 2015 and 2014, no payments (or waivers of claims) of USD 250 000. This amount is in line with compensation were made to former Board members or to “persons closely” practices at other large companies when retired Chairmen or linked to them, except for the following amounts: CEOs were retained in consulting agreements after leaving the Prof. Dr. William R. Brody and Prof. Dr. Rolf M. Zinkerna- board of directors. gel, who stepped down from the Board of Directors at the 2014 In 2014, Dr. Vasella acquired an asset from a consolidated AGM, received delegated Board membership fees for their entity at fair value and exercised an option to acquire, at a work on the Boards of the Novartis Institute for Tropical Dis- future date, real estate in Risch, Zug, Switzerland. The real eases (Prof. Dr. Zinkernagel) and the Genomics Institute of the estate transaction closed in 2015 and Dr. Vasella acquired the Novartis Research Foundation (Prof. Dr. Brody and Prof. Dr. Group assets from a consolidated entity for an arm’s length Zinkernagel). During 2015, an amount of CHF 100 000 and transaction price determined on the basis of two independent CHF 200 000 was paid to Prof. Dr. Brody and Prof. Dr. Zinker- external assessments. nagel, respectively, for their work on these Boards. Their man- date on the Board of the Genomics Institute of the Novartis TRANSACTIONS WITH A FUTURE EXECUTIvE OFFICER Research Foundation ended as of November 19, 2015. As announced on September 24, 2015, Dr. James E. Bradner Dr. Alex Krauer, Honorary Chairman, is entitled to an will succeed Dr. Mark Fishman as President of the Novartis amount of CHF 60 000 for annual periods from one AGM to Institutes for BioMedical Research (NIBR) and member of the the next. This amount was fixed in 1998 upon his departure ECN with effect from March 1, 2016. In 2015, a subsidiary from the Board in 1999, and has not been revised since that acquired Dr. Bradner’s 10 million shares (7% interest) in a date. An amount of CHF 60 000 was paid to Dr. Krauer during non-material entity for USD 10 million. The arm’s length trans- 2015. Due to a change in the timing of payments, an amount action price was determined based on the most recent round of CHF 45 000 was paid to Dr. Krauer, during 2014. of financing of this entity. In 2015, Dr. Daniel Vasella, Honorary Chairman, received the contractual minimum compensation of USD  250 000 The above disclosures related to Dr. Vasella and Dr. Bradner (2014: USD 363 552) under an agreement which became effec- are made on a voluntary basis. tive on November 1, 2013 and will last until the end of 2016. 228 | Novartis Annual Report 2015 FINANCIAL REPORT 28. Commitments and Contingencies LEASING COMMITMENTS OTHER COMMITMENTS The Group has entered into various fixed term operational The Novartis Group entered into various purchase commit- leases, mainly for cars and real estate. As of December 31, ments for services and materials as well as for equipment in 2015 the Group’s commitments with respect to these leases, the ordinary course of business. These commitments are including estimated payment dates, were as follows: generally entered into at current market prices and reflect 2016 2017 2018 2019 2020 Thereafter Total Expense of current year 2015 USD millions 273 202 133 103 104 2 181 2 996 313 normal business operations. CONTINGENCIES Group companies have to observe the laws, government orders and regulations of the country in which they operate. The Group’s potential environmental remediation liability is assessed based on a risk assessment and investigation of the various sites identified by the Group as at risk for environ- mental remediation exposure. The Group’s future remediation expenses are affected by a number of uncertainties. These uncertainties include, but are not limited to, the method and extent of remediation, the percentage of material attributable RESEARCH & DEvELOPMENT COMMITMENTS to the Group at the remediation sites relative to that attribut- The Group has entered into long-term research agreements able to other parties, and the financial capabilities of the other with various institutions which provide for potential milestone potentially responsible parties. payments and other payments by Novartis that may be capi- A number of Group companies are currently involved in talized. As of December 31, 2015 the Group’s commitments administrative proceedings, litigations and investigations aris- to make payments under those agreements, and their estimated ing out of the normal conduct of their business. These litiga- timing, were as follows: Unconditional commitments Total 2015 USD millions USD millions USD millions Potential milestone payments 2016 2017 2018 2019 2020 Thereafter Total 88 61 86 65 200 150 650 601 343 438 152 474 397 689 404 524 217 674 547 2 405 3 055 tions include product liabilities, governmental investigations and other legal matters. While provisions have been made for probable losses, which management deems to be reasonable or appropriate, there are uncertainties connected with these estimates. Note 20 contains a more extensive discussion of these matters. A number of Group companies are involved in legal pro- ceedings concerning intellectual property rights.  The inher- ent unpredictability of such proceedings means that there can be no assurances as to their ultimate outcome. A negative result in any such proceeding could potentially adversely affect the ability of certain Novartis companies to sell their products or require the payment of substantial damages or royalties. In the opinion of management, however, the outcome of these actions will not materially affect the Group’s financial position but could be material to the results of operations or cash flow in a given period. FINANCIAL REPORT | NOTES TO THE NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 229 29. Financial Instruments – additional disclosures Cash and cash equivalents Financial assets – measured at fair value through other comprehensive income Available-for-sale marketable securities Debt securities Equity securities Fund investments Total available-for-sale marketable securities Available-for-sale long-term financial investments Equity securities Fund investments Contingent consideration receivables Total available-for-sale long-term financial investments 2014 2015 Note USD millions 1 USD millions 1 16 4 674 13 023 16 16 16 13 13 13 339 6 33 378 1 173 90 550 327 15 35 377 937 71 1 813 1 008 Total financial assets – measured at fair value through other comprehensive income 2 191 1 385 Financial assets – measured at amortized costs Trade receivables and other current assets (excluding pre-payments) 15/17 10 551 10 255 Accrued interest on debt securities and time deposits Time deposits with original maturity more than 90 days Long-term loans and receivables from customers and finance lease, advances, security deposits Total financial assets – measured at amortized costs Financial assets – measured at fair value through the consolidated income statement Associated companies at fair value through profit and loss Derivative financial instruments Total financial assets – measured at fair value through the consolidated income statement Total financial assets Financial liabilities – measured at amortized costs Current financial debt Interest bearing accounts of associates payable on demand Bank and other financial debt Commercial paper Current portion of non-current debt Total current financial debt Non-current financial debt Straight bonds Liabilities to banks and other financial institutions Finance lease obligations Current portion of non-current debt Total non-current financial debt 16 16 13 16 21 21 21 21 19 19 19 19 2 164 653 3 6 712 11 370 10 976 181 143 324 234 356 590 18 559 25 974 1 645 1 185 1 085 1 659 5 574 1 651 1 272 648 2 989 6 560 17 193 15 982 706 87 803 3 – 1 659 – 2 989 16 327 13 799 Trade payables and commitment for repurchase of own shares (see Note 22) 5 668 6 077 Total financial liabilites – measured at amortized costs 27 569 26 436 Financial liabilities – measured at fair value through the consolidated income statement Contingent consideration (see Note 20/22) and other financial liabilities Derivative financial instruments Total financial liabilities – measured at fair value through the consolidated income statement Total financial liabilities 1 Except for straight bonds (see Note 19) the carrying amount is a reasonable approximation of fair value. 21 1 105 30 1 135 756 52 808 28 704 27 244 230 | Novartis Annual Report 2015 FINANCIAL REPORT 29. Financial Instruments – additional disclosures (Continued) DERIvATIvE FINANCIAL INSTRUMENTS of business outstanding at the consolidated balance sheet date The following tables show the contract or underlying principal and do not represent amounts at risk. The fair values are amounts and fair values of derivative financial instruments determined by reference to market prices or standard pricing analyzed by type of contract at December 31, 2015 and 2014. models that use observable market inputs at December 31, Contract or underlying principal amounts indicate the volume 2015 and 2014. Contract or underlying principal amount Positive fair values Negative fair values 2015 2014 USD millions USD millions USD millions USD millions USD millions USD millions 2015 2015 2014 2014 Currency related instruments Forward foreign exchange rate contracts Over-the-Counter currency options Total of currency related instruments 8 795 10 072 459 1 715 9 254 11 787 142 1 143 283 73 356 – 30 – 52 – 30 – 52 Total derivative financial instruments included in marketable securities and in current financial debts 9 254 11 787 143 356 – 30 – 52 The following table shows by currency contract or underlying principal amount the derivative financial instruments at Decem- ber 31, 2015 and 2014: December 31, 2015 Currency related instruments Forward foreign exchange rate contracts Over-the-Counter currency options Total of currency related instruments Total derivative financial instruments December 31, 2014 Currency related instruments Forward foreign exchange rate contracts Over-the-Counter currency options Total of currency related instruments Total derivative financial instruments EUR Total USD millions USD millions USD millions USD millions USD millions Other USD JPY 2 828 4 713 42 1 212 459 3 287 3 287 4 713 4 713 42 42 1 212 1 212 8 795 459 9 254 9 254 EUR Total USD millions USD millions USD millions USD millions USD millions Other USD JPY 3 681 1 215 4 896 4 896 3 159 500 3 659 3 659 38 3 194 10 072 1 715 38 38 3 194 11 787 3 194 11 787 DERIvATIvE FINANCIAL INSTRUMENTS EFFECTIvE FOR HEDGE ACCOUNTING PURPOSES At the end of 2015 and 2014, there were no open hedging instruments for anticipated transactions. FAIR vALUE BY HIERARCHY The assets generally included in Level 2 fair value hierar- As required by IFRS, financial assets and liabilities recorded chy are foreign exchange and interest rate derivatives and cer- at fair value in the consolidated financial statements are tain debt securities. Foreign exchange derivatives and interest categorized based upon the level of judgment associated with rate derivatives are valued using corroborated market data. the inputs used to measure their fair value. There are three The liabilities generally included in this fair value hierarchy hierarchical levels, based on an increasing amount of consist of foreign exchange and interest rate derivatives. subjectivity associated with the inputs to derive fair valuation Level 3 inputs are unobservable for the asset or liability. for these assets and liabilities, which are as follows: The assets generally included in Level 3 fair value hierarchy The assets carried at Level 1 fair value are equity and debt are various investments in hedge funds and unquoted equity securities listed in active markets. security investments. Contingent consideration carried at fair value is included in this category. FINANCIAL REPORT | NOTES TO THE NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 231 2015 Financial assets Debt securities Equity securities Fund investments Total available-for-sale marketable securities Time deposits with original maturity more than 90 days Derivative financial instruments Accrued interest on debt securities Total marketable securities, time deposits and derivative financial instruments Available-for-sale financial investments Fund investments Contingent consideration receivables Long-term loans and receivables from customers and finance lease, advances, security deposits Financial investments and long-term loans Associated companies at fair value through profit and loss Financial liabilities Contingent consideration payables Other financial liabilities Derivative financial instruments Total financial liabilities at fair value 2014 Financial assets Debt securities Equity securities Fund investments Total available-for-sale marketable securities Time deposits with original maturity more than 90 days Derivative financial instruments Accrued interest on debt securities Total marketable securities, time deposits and derivative financial instruments Available-for-sale financial investments Fund investments Long-term loans and receivables from customers and finance lease, advances, security deposits Financial investments and long-term loans Associated companies at fair value through profit and loss Financial liabilities Contingent consideration payables Derivative financial instruments Total financial liabilities at fair value Level 1 Total USD millions USD millions USD millions USD millions USD millions Level 2 Valued at Level 3 amortized cost 316 6 29 351 351 700 700 23 23 143 166 – 30 – 30 4 4 4 473 90 550 1 113 181 – 790 – 315 – 1105 164 2 166 653 653 339 6 33 378 164 143 2 687 1173 90 550 653 2 466 181 – 790 – 315 – 30 – 1135 Level 1 Total USD millions USD millions USD millions USD millions USD millions Level 2 Valued at Level 3 amortized cost 26 26 356 382 301 15 29 345 345 605 605 66 6 6 6 332 71 403 168 6 3 9 712 712 – 52 – 52 – 756 – 756 327 15 35 377 6 356 3 742 937 71 712 1 720 234 – 756 – 52 – 808 The analysis above includes all financial instruments including those measured at amortized cost or at cost. 232 | Novartis Annual Report 2015 FINANCIAL REPORT 29. Financial Instruments – additional disclosures (Continued) The change in carrying values associated with Level 3 financial instruments using significant unobservable inputs during the year ended December 31 are set forth below: 2015 January 1 Impact of business combinations Fair value gains and other adjustments, including from divestments recognized in the consolidated income statement Fair value losses (including impairments and amortizations) and other adjustments recognized in the consolidated income statement Gains recognized in the consolidated statement of comprehensive income Purchases Cash receipts and payments Proceeds from sales At equity investments reclassified due to loss of significant influence Reclassification Currency translation effects December 31 Contingent Consideration Contingent Receivables consideration payables Available- and other for-sale financial financial liabilities investments USD millions USD millions USD millions USD millions USD millions and other current financial assets Associated Companies at fair value through profit and loss Fund investments 168 77 332 756 75 9 7 41 1 000 – 25 62 – 1 17 24 – 35 22 142 – 15 – 56 – 33 – 15 18 9 – 75 644 – 450 255 – 550 181 94 473 550 1 105 Total of fair value gains and losses recognized in the consolidated income statement for assets and liabilities held at December 31, 2015 – 16 6 6 925 644 2014 January 1 Fair value gains recognized in the consolidated income statement Fair value losses (including impairments and amortizations) recognized in the consolidated income statement Gains recognized in the consolidated statement of comprehensive income Purchases Proceeds from sales Reclassification Currency translation effects December 31 Associated Companies at fair value through profit and loss Available- for-sale Contingent financial consideration Fund payables investments USD millions USD millions USD millions USD millions USD millions Equity securities investments 0 12 – 24 27 – 26 179 26 3 – 29 168 0 63 2 3 7 – 9 16 – 5 77 366 17 – 51 7 140 – 23 – 114 – 10 332 572 51 – 20 153 756 Total of fair value gains and losses recognized in the consolidated income statement for assets and liabilities held at December 31, 2014 – 12 2 – 34 31 No significant transfers from one level to the other occurred respectively, this would change the amounts recorded in the during the reporting period. Realized gains and losses asso- consolidated statement of comprehensive income by USD 75 ciated with Level 3 available-for-sale marketable securities are million. recorded in the consolidated income statement under “Other For the determination of the fair value of a contingent financial income and expense” and realized gains and losses consideration various unobservable inputs are used. A change associated with Level 3 available-for-sale financial investments in these inputs might result in a significantly higher or lower are recorded in the consolidated income statement under fair value measurement. The significance and usage of these “Other income” or “Other expense”, respectively. inputs may vary amongst the existing contingent consider- If the pricing parameters for the Level 3 input were to ations due to differences in the triggering events for payments change for associated companies at fair value through profit or in the nature of the asset the contingent consideration and loss, equity securities, fund investments and for available- relates to. Amongst others, the inputs used are the probabil- for-sale financial investments by 10% positively or negatively, ity of success, sales forecast and assumptions regarding the FINANCIAL REPORT | NOTES TO THE NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 233 discount rate, timing and different scenarios of triggering The most significant country in this respect is Venezuela, where events. The inputs are interrelated. If the most significant the Group has an equivalent of approximately USD 0.2 billion parameters for the Level 3 input were to change by 10% pos- of cash in local currency, which is only slowly being approved itively or negatively, or where the probability of success (POS) for remittance outside of the country. As a result, the Group is is the most significant input parameter 10% were added or exposed to a potential devaluation loss in the income state- deducted from the applied POS for contingent consideration ment on its total intercompany balances with its subsidiaries payables and other financial liabilities and contingent consid- in Venezuela, which at December 31, 2015 amounted to eration receivables and other current financial assets, this USD 0.3 billion. would change the amounts recorded in the consolidated In 2014 and through October 2015, the exchange rate used income statement by USD 201 million and USD 196 million, by the Group for consolidation of the financial statements of respectively. NATURE AND EXTENT OF RISKS ARISING FROM FINANCIAL INSTRUMENTS MARKET RISK its Venezuela subsidiaries was the official exchange rate for the Venezuela bolivar (VEF) of VEF 6.3/USD, which is available for imports of specific goods and services of national priority, including medicines and medical supplies, as published by the Centro Nacional de Comercio Exterior (CENCOEX, formerly Novartis is exposed to market risk, primarily related to foreign CADIVI). currency exchange rates, interest rates and the market value In November 2015, a Venezuela subsidiary of the Group of the investments of liquid funds. The Group actively moni- agreed with CENCOEX to settle a substantial part of our inter- tors and seeks to reduce, where it deems it appropriate to do company trade payables dated on or before December 31, so, fluctuations in these exposures. It is the Group’s policy and 2014 in a transaction that required the Venezuela subsidiary practice to enter into a variety of derivative financial instru- to purchase a USD denominated bond at par value issued by ments to manage the volatility of these exposures and to Petróleos de Venezuela (PDVSA), with a coupon rate of 6% per enhance the yield on the investment of liquid funds. It does annum maturing in 2024. In Venezuela there are differing offi- not enter any financial transactions containing a risk that can- cial exchange rates against the USD and for the settlement of not be quantified at the time the transaction is concluded. In these intercompany trade payables, through the purchase of addition, it does not sell short assets it does not have, or does the USD bond, CENCOEX set the exchange rate at VEF 11.0/ not know it will have, in the future. The Group only sells exist- USD.  As a result, from November 2015 the Group changed its ing assets or enters into transactions and future transactions exchange rate used for consolidation of the financial state- (in the case of anticipatory hedges) that it confidently expects ments of its Venezuela subsidiaries. The use of the new it will have in the future, based on past experience. In the case exchange rate by the Venezuela subsidiaries resulted in a of liquid funds, the Group writes call options on assets it has USD 211 million loss from the re-measurement of the intra- or it writes put options on positions it wants to acquire and Group and third party liabilities. has the liquidity to acquire. The Group expects that any loss Novartis seeks to manage currency exposure by engaging in value for these instruments generally would be offset by in hedging transactions where management deems appropri- increases in the value of the underlying transactions. ate. Novartis may enter into various contracts that reflect the changes in the value of foreign currency exchange rates to pre- FOREIGN CURRENCY EXCHANGE RATE RISK serve the value of assets, commitments and anticipated trans- The Group uses the USD as its reporting currency. As a result, actions. Novartis also uses forward contracts and foreign cur- the Group is exposed to foreign currency exchange move- rency option contracts to hedge. ments, primarily in European, Japanese and emerging market Net investments in subsidiaries in foreign countries are currencies. Fluctuations in the exchange rates between the US long-term investments. Their fair value changes through move- dollar and other currencies can have a significant effect on ments of foreign currency exchange rates. The Group only both the Group’s results of operations, including reported sales hedges the net investments in foreign subsidiaries in excep- and earnings, as well as on the reported value of our assets, tional cases. liabilities and cash flows. This in turn may significantly affect the comparability of period-to-period results of operations. COMMODITY PRICE RISK Because our expenditures in Swiss francs are significantly The Group has only a very limited exposure to price risk related higher than our revenues in Swiss francs, volatility in the value to anticipated purchases of certain commodities used as raw of the Swiss franc can have a significant impact on the reported materials by the Group’s businesses. A change in those prices value of our earnings, assets and liabilities, and the timing and may alter the gross margin of a specific business, but gener- extent of such volatility can be difficult to predict. In addition, ally by not more than 10% of the margin and thus below the there is a risk that certain countries could take other steps Group’s risk management tolerance levels. Accordingly, the which could significantly impact the value of their currencies. Group does not enter into significant commodity futures, for- The Group is exposed to a potential adverse devaluation ward and option contracts to manage fluctuations in prices of risk on its intercompany funding and total investment in cer- anticipated purchases. tain subsidiaries operating in countries with exchange controls. 234 | Novartis Annual Report 2015 FINANCIAL REPORT 29. Financial Instruments – additional disclosures (Continued) INTEREST RATE RISK that feature a strong credit rating. For short-term investments The Group addresses its net exposure to interest rate risk of less than six months of maturity, the counterparty must be mainly through the ratio of its fixed rate financial debt to vari- at least A-1/P-1/F-1 rated. Exposure to these risks is closely able rate financial debt contained in its total financial debt monitored and kept within predetermined parameters. The portfolio. To manage this mix, Novartis may enter into interest limits are regularly assessed and determined based upon rate swap agreements, in which it exchanges periodic payments credit analysis including financial statement and capital ade- based on a notional amount and agreed upon fixed and variable quacy ratio reviews. In addition, reverse repurchasing agree- interest rates. EQUITY RISK ments are contracted and Novartis has entered into credit sup- port agreements with various banks for derivative transactions. The Group’s cash and cash equivalents are held with major The Group may purchase equities as investments of its liquid regulated financial institutions, the three largest ones hold funds. As a policy, it limits its holdings in an unrelated com- approximately 21.8%, 9.6% and 8.6%, respectively (2014: pany to less than 5% of its liquid funds. Potential investments 11.8%, 7.7% and 7.7%, respectively). are thoroughly analyzed. Call options are written on equities The Group does not expect any losses from non-perfor- that the Group owns, and put options are written on equities mance by these counterparties and does not have any signif- which the Group wants to buy and for which cash is available. icant grouping of exposures to financial sector or country risk. CREDIT RISK LIQUIDITY RISK Credit risks arise from the possibility that customers may not Liquidity risk is defined as the risk that the Group could not be able to settle their obligations as agreed. To manage this be able to settle or meet its obligations on time or at a reason- risk the Group periodically assesses the financial reliability of able price. Group Treasury is responsible for liquidity, funding customers, taking into account their financial position, past as well as settlement management. In addition, liquidity and experience and other factors. Individual risk limits are set funding risks, related processes and policies are overseen by accordingly. management. Novartis manages its liquidity risk on a consol- The Group’s largest customer accounted for approximately idated basis based on business needs, tax, capital or regula- 14% of net sales, and the second and third largest customers tory considerations, if applicable, through numerous sources account for 11% and 5% of net sales, respectively (2014: 12%, of financing in order to maintain flexibility. Management mon- 11% and 5% respectively). No other customer accounts for 5% itors the Group’s net debt or liquidity position through rolling or more of net sales, in either year. forecasts on the basis of expected cash flows. The highest amounts of trade receivables outstanding were Novartis has two US commercial paper programs under for these same three customers. They amounted to 13%, 9% which it can issue up to USD 9 billion in the aggregate of unse- and 6%, respectively, of the Group’s trade receivables at cured commercial paper notes. Novartis also has a Japanese December 31, 2015. There is no other significant concentra- commercial paper program under which it can issue up to JPY tion of credit risk (2014: 13%, 9% and 5% respectively). 150 billion (approximately USD 1.25 billion) of unsecured com- COUNTERPARTY RISK mercial paper notes. Commercial paper notes totaling USD 1.1 billion under these three programs were outstanding as per Counterparty risk encompasses issuer risk on marketable December 31, 2015. Novartis further has a committed credit securities and money market instruments, credit risk on cash, facility of USD 6 billion, entered into on September 23, 2015. time deposits and derivatives as well as settlement risk for dif- This credit facility is provided by a syndicate of banks and is ferent instruments. Issuer risk is reduced by only buying secu- intended to be used as a backstop for the US commercial paper rities which are at least A- rated. Counterparty credit risk and programs. It matures in September 2020 and was undrawn settlement risk are reduced by a policy of entering into trans- as per December 31, 2015. actions with counterparties (banks or financial institutions) FINANCIAL REPORT | NOTES TO THE NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 235 The following table sets forth how management monitors net debt or liquidity based on details of the remaining contractual maturities of current financial assets and liabilities excluding trade receivables and payables and contingent considerations at December 31, 2015 and 2014: December 31, 2015 Current assets Due later than Due later than Due later than one year one month three months Due within but less than but less than but less than five years one month Due after five years Total USD millions USD millions USD millions USD millions USD millions USD millions three months one year Marketable securities and time deposits 22 11 200 247 Commodities Derivative financial instruments and accrued interest Cash and cash equivalents Total current financial assets Non-current liabilities Financial debt Financial debt – undiscounted Total non-current financial debt Current liabilities Financial debt Financial debt – undiscounted Derivative financial instruments Total current financial debt 40 4 674 4 736 67 38 78 238 247 148 62 86 542 86 145 4 674 5 447 – 4 664 – 11 663 – 16 327 – 4 676 – 11 797 – 16 473 – 4 664 – 11 663 – 16 327 – 3 258 – 3 258 – 289 – 2 027 – 289 – 2 028 – 8 – 20 – 2 – 3 266 – 309 – 2 029 – 5 574 – 5 575 – 30 – 5 604 Net debt 1 470 – 231 – 1 791 – 4 417 – 11 515 – 16 484 December 31, 2014 Current assets Marketable securities and time deposits Commodities Derivative financial instruments and accrued interest Cash and cash equivalents Total current financial assets Non-current liabilities Financial debt Financial debt – undiscounted Total non-current financial debt Current liabilities Financial debt Financial debt – undiscounted Derivative financial instruments Total current financial debt Due later than Due later than Due later than one year one month three months Due within but less than but less than but less than five years one month three months Due after five years Total USD millions USD millions USD millions USD millions USD millions USD millions one year 68 37 181 76 21 97 161 9 623 9 902 72 126 3 400 3 594 383 97 359 13 023 109 181 76 13 862 – 5 423 – 8 376 – 13 799 – 5 434 – 8 470 – 13 904 – 5 423 – 8 376 – 13 799 – 2 678 – 2 678 – 335 – 3 547 – 335 – 3 549 – 18 – 32 – 2 – 2 696 – 367 – 3 549 – 6 560 – 6 562 – 52 – 6 612 Net debt 7 206 3 227 – 3 440 – 5 242 – 8 300 – 6 549 The consolidated balance sheet amounts of financial liabilities included in the above analysis are not materially different to the contractual amounts due on maturity. The positive and negative fair values on derivative financial instruments represent the net contractual amounts to be exchanged at maturity. 236 | Novartis Annual Report 2015 FINANCIAL REPORT 29. Financial Instruments – additional disclosures (Continued) The Group’s contractual undiscounted potential cash flows from derivative financial instruments to be settled on a gross basis are as follows: December 31, 2015 Derivative financial instruments and accrued interest on derivative financial instruments Due later than Due later than one month three months Due within but less than but less than one month one year three months Total USD millions USD millions USD millions USD millions Potential outflows in various currencies – from financial derivative liabilities – 1 418 – 2 800 – 1 602 – 5 820 Potential inflows in various currencies – from financial derivative assets 1 448 2 819 1 601 5 868 December 31, 2014 Derivative financial instruments and accrued interest on derivative financial instruments Due later than Due later than one month three months Due within but less than but less than one year one month Total USD millions USD millions USD millions USD millions three months Potential outflows in various currencies – from financial derivative liabilities – 3 549 – 3 695 – 2 527 – 9 771 Potential inflows in various currencies – from financial derivative assets 3 688 3 780 2 646 10 114 Other contractual liabilities which are not part of management’s monitoring of the net debt or liquidity consist of the following items: December 31, 2015 one month three months Due later than Due later than Due later than one year but less than but less than but less than three months Total five years USD millions USD millions USD millions USD millions USD millions Due after five years one year Contractual interest on non-current liabilities – 104 – 499 – 1 878 – 4 332 – 6 813 Trade payables – 5 668 – 5 668 December 31, 2014 one month three months Due later than Due later than Due later than one year but less than but less than but less than three months Total five years USD millions USD millions USD millions USD millions USD millions Due after five years one year Contractual interest on non-current liabilities – 154 – 436 – 1 778 – 3 087 – 5 455 Trade payables and commitment for repurchase of own shares (see Note 22) – 6 077 – 6 077 CAPITAL RISK MANAGEMENT A ten-day period is used because of an assumption that Novartis strives to maintain a strong credit rating. In manag- not all positions could be undone in one day given the size of ing its capital, Novartis focuses on maintaining a strong bal- the positions. Apart from contingent consideration, finance ance sheet. Moody’s rated the Group as Aa3 for long-term lease obligations, and long-term loans and receivables, maturities and P-1 for short-term maturities and Standard & advances and security deposits the VAR computation includes Poor’s had a rating of AA- for long-term and A-1+ for short- all financial assets and financial liabilities as set forth above in term maturities. Fitch had a long-term rating of AA and a short- this Note. Trade payables and receivables are considered only term rating of F1+. to the extent they comprise a foreign currency exposure. In The debt/equity ratio decreased to 0.28:1 at December addition, commodities are included in the computation.  31, 2015 compared to 0.29:1 at the beginning of the year. The VAR estimates are made assuming normal market con- vALUE AT RISK ditions, using a 95% confidence interval. The Group uses a “Delta Normal” model to determine the observed inter-rela- The Group uses a value at risk (VAR) computation to estimate tionships between movements in interest rates, stock markets the potential ten-day loss in the fair value of its financial instru- and various currencies. These inter-relationships are deter- ments. mined by observing interest rate, stock market movements FINANCIAL REPORT | NOTES TO THE NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 237 and forward foreign currency rate movements over a sixty-day The VAR computation is a risk analysis tool designed to period for the calculation of VAR amounts. statistically estimate the maximum potential ten day loss from The estimated potential ten-day loss in pre-tax income adverse movements in foreign currency exchange rates, equity from the Group’s foreign currency instruments, the estimated prices and interest rates under normal market conditions. The potential ten-day loss of its equity holdings, and the estimated computation does not purport to represent actual losses in potential ten-day loss in fair value of its interest rate sensitive fair value on earnings to be incurred by the Group, nor does instruments (primarily financial debt and investments of liquid it consider the effect of favorable changes in market rates. The funds under normal market conditions) as calculated in the Group cannot predict actual future movements in such mar- VAR model are the following: All financial instruments Analyzed by components: Instruments sensitive to foreign currency exchange rates Instruments sensitive to equity market movements Instruments sensitive to interest rates 2015 2014 USD millions USD millions ket rates and it does not claim that these VAR results are indic- ative of future movements in such market rates or to be rep- resentative of any actual impact that future changes in market 387 272 rates may have on the Group’s future results of operations or 224 50 353 272 48 254 financial position. In addition to these VAR analyses, the Group uses stress testing techniques that aim to reflect a worst case scenario on the marketable securities which are monitored by Group Trea- sury. For these calculations, the Group uses the six-month period with the worst performance observed over the past twenty years in each category. For 2015 and 2014, the worst The average, high, and low VAR amounts are as follows: case loss scenario was calculated as follows: 2015 Average Low USD millions USD millions USD millions High All financial instruments 337 387 237 All financial instruments Analyzed by components: Instruments sensitive to foreign currency exchange rates Instruments sensitive to equity market movements Instruments sensitive to interest rates 313 418 173 55 111 33 294 380 251 Analyzed by components: Instruments sensitive to foreign currency exchange rates Instruments sensitive to equity market movements Instruments sensitive to interest rates 2015 2014 USD millions USD millions 12 16 1 4 7 1 8 7 2014 Average Low USD millions USD millions USD millions High All financial instruments 240 306 193 Analyzed by components: Instruments sensitive to foreign currency exchange rates Instruments sensitive to equity market movements Instruments sensitive to interest rates 154 272 32 48 177 254 83 18 96 In the Group’s risk analysis, Novartis considered this worst case scenario acceptable as it could reduce income, but would not endanger the solvency or the investment grade credit standing of the Group. 238 | Novartis Annual Report 2015 FINANCIAL REPORT 30. Discontinued Operations DISCONTINUED OPERATIONS CONSOLIDATED INCOME STATEMENT SEGMENTATION (USD millions) Net sales to third parties of discontinued operations Sales to continuing segments Net sales of discontinued operations Other revenues Cost of goods sold Gross profit of discontinued operations Marketing & Sales Research & Development General & Administration Other income Other expense Operating income/loss of discontinued operations Income from associated companies Income/loss before taxes of discontinued operations Taxes Net income/loss of discontinued operations Vaccines Consumer Health1 Corporate (including eliminations) Total discontinued operations 2015 2014 2015 2014 2015 2014 2015 2014 145 1 537 456 4 279 18 65 1 13 163 1 602 457 4 292 18 32 5 33 – 192 – 1 336 – 184 – 1 737 – 11 – 57 298 278 2 588 – 280 – 187 – 1 532 – 151 – 545 – 26 – 118 – 30 – 32 – 312 – 313 601 5 816 19 78 620 5 894 23 65 – 376 – 3 073 267 2 886 – 244 – 1 812 – 181 – 58 – 857 – 431 2 870 905 10 558 99 – 8 3 13 420 1 007 – 57 – 812 – 14 – 60 – 656 – 274 – 727 – 1 146 2 568 – 552 10 573 470 – 664 – 271 12 477 – 353 2 2 2 2 12 479 – 351 – 1 713 – 96 10 766 – 447 1 Consumer Health is the aggregation of the OTC and Animal Health divisions. The following are included in net income from discontinued operations: Depreciation of property, plant & equipment Amortization of intangible assets Impairment charges on property, plant & equipment, net Impairment charges on intangible assets, net 2015 2014 USD millions USD millions – 66 – 77 83 – 736 – 405 – 14 Additions to restructuring provisions – 1 Equity-based compensation of Novartis equity plans – 65 – 124 FINANCIAL REPORT | NOTES TO THE NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 239 DISCONTINUED OPERATIONS CONSOLIDATED BALANCE SHEET Assets of disposal groups classified as discontinued operations Property, plant and equipment Goodwill Intangible assets other than goodwill Investments in associated companies Deferred tax assets Other non-current assets Inventories Trade receivables Other current assets Total Liabilities of disposal groups classified as discontinued operations Deferred tax liabilities Provisions and other non-current liabilities Trade payables Current income tax liabilities Provisions and other current liabilities Total 2014 USD millions 209 497 612 176 924 2 418 2014 USD millions 1 411 1 119 1 343 1 304 47 1 155 1 085 336 6 801 31. Events Subsequent to the December 31, 2015 Consolidated Balance Sheet Date DIvIDEND PROPOSAL FOR 2015 AND APPROvAL OF THE GROUP’S 2015 CONSOLIDATED FINANCIAL STATEMENTS On January 26, 2016, the Novartis AG Board of Directors proposed the acceptance of the 2015 consolidated financial statements of the Novartis Group for approval by the Annual General Meeting on February 23, 2016. Furthermore, also on January 26, 2016, the Board proposed a dividend of CHF 2.70 per share to be approved at the Annual General Meeting on February 23, 2016. If approved, total dividend payments would amount to approximately USD  6.6 billion (2014: USD  6.6 billion) using the CHF/USD December 31, 2015 exchange rate. 240 | Novartis Annual Report 2015 FINANCIAL REPORT 32. Principal Group Subsidiaries and Associated Companies The following table lists the principal subsidiaries controlled by Novartis and associated companies in which Novartis is deemed to have significant influence. The equity interest percentage shown in the table also represents the share in voting rights in those entities, except where explicitly noted. As at December 31, 2015 Algeria Société par actions SANDOZ, Algiers Share/paid-in Equity capital 1 interest % Activities DZD 650.0 m 100 u q As at December 31, 2015 Finland Novartis Finland Oy, Espoo Share/paid-in Equity capital 1 interest % Activities EUR 459 000 100 u EUR 1.0 m 100 u q p Gibraltar Novista Insurance Limited, Gibraltar CHF 130.0 m 100 n Argentina Novartis Argentina S.A., Buenos Aires Alcon Laboratorios Argentina S.A., Buenos Aires Sandoz S.A., Buenos Aires ARS 246.3 m ARS 83.9 m ARS 88.0 m 100 u p 100 u 100 u Australia Novartis Australia Pty Ltd., North Ryde, NSW Novartis Pharmaceuticals Australia Pty Ltd.,    North Ryde, NSW Alcon Laboratories (Australia) Pty Ltd.,    Frenchs Forest, NSW Sandoz Pty Ltd., North Ryde, NSW Austria Novartis Austria GmbH, Vienna Novartis Pharma GmbH, Vienna Alcon Ophthalmika GmbH, Vienna Sandoz GmbH, Kundl EBEWE Pharma Ges.m.b.H Nfg., Unterach am    Attersee Bangladesh Novartis (Bangladesh) Limited, Gazipur Belgium N.V. Novartis Pharma S.A., Vilvoorde S.A. Alcon-Couvreur N.V., Puurs N.V. Alcon S.A., Vilvoorde N.V. Sandoz S.A., Vilvoorde Bermuda Triangle International Reinsurance Ltd., Hamilton Novartis Securities Investment Ltd., Hamilton Novartis International Pharmaceutical Ltd.,    Hamilton Trinity River Insurance Co. Ltd., Hamilton Novartis Investment Limited, Hamilton Novartis Pharmaceutical Proprietary Ltd.,    Hamilton Brazil Novartis Biociências S.A., São Paulo Sandoz do Brasil Indústria Farmacêutica Ltda.,    Cambé, PR Canada Novartis Pharmaceuticals Canada Inc., Dorval/    Quebec Alcon Canada Inc., Mississauga, Ontario CIBA Vision Canada Inc., Mississauga, Ontario Sandoz Canada Inc., Boucherville, Quebec Chile Novartis Chile S.A., Santiago de Chile Alcon Laboratorios Chile Limitada,    Santiago de Chile AUD 11.0 m 100 n AUD 3.8 m 100 u p AUD 2.6 m AUD 11.6 m 100 u 100 u EUR 1.0 m EUR 1.1 m EUR 36 336.4 EUR 32.7 m 100 n 100 u 100 u 100 n u q p BDT 162.5 m 60 u q EUR 7.1 m EUR 360.6 m EUR 141 856 EUR 19.2 m 100 u 100 u q 100 u 100 u CHF 1.0 m CHF 30 000 100 n 100 n CHF 100 000 USD 370 000 USD 30 000 100 n u q p 100 n 100 n CHF 100 000 100 n u q p BRL 265.0 m 100 u q BRL 190.0 m 100 u q p CAD 0 2 CAD 0 2 CAD 1 CAD 76.8 m 100 u p 100 u 100 q 100 u q p CLP 2.0 bn 100 u CLP 2.0 bn 100 u China USD 30.0 m Beijing Novartis Pharma Co., Ltd., Beijing Novartis Pharmaceuticals (HK) Limited, Hong Kong HKD 200 China Novartis Institutes for BioMedical Research    Co., Ltd., Shanghai Suzhou Novartis Pharma Technology Co., Ltd., USD 103.4 m    Changshu USD 3.1 m Shanghai Novartis Trading Ltd., Shanghai HKD 77 000 Alcon Hong Kong Limited, Hong Kong Alcon (China) Ophthalmic Product Co., Ltd., Beijing USD 2.2 m Sandoz (China) Pharmaceutical Co., Ltd.,    Zhongshan USD 260.0 m USD 36.5 m 100 u q 100 u 100 p 100 q 100 u q 100 u 100 u 100 u q Colombia Novartis de Colombia S.A., Santafé de Bogotá Laboratorios Alcon de Colombia S.A.,    Santafé de Bogotá Croatia Sandoz d.o.o., Zagreb Czech Republic Novartis s.r.o., Prague Sandoz s.r.o., Prague Alcon Pharmaceuticals (Czech Republic) s.r.o.,    Prague Denmark Novartis Healthcare A/S, Copenhagen Alcon Nordic A/S, Copenhagen Sandoz A/S, Copenhagen Ecuador Novartis Ecuador S.A., Quito Egypt Novartis Pharma S.A.E., Cairo Sandoz Egypt Pharma S.A.E., New Cairo COP 7.9 bn 100 u COP 20.9 m 100 u HRK 25.6 m 100 u CZK 51.5 m CZK 44.7 m 100 u 100 u CZK 31.0 m 100 u DKK 14.0 m DKK 0.5 m DKK 10.0 m 100 u 100 u 100 u USD 4.0 m 100 u EGP 33.8 m EGP 250 000 99 u q 100 u France Novartis Groupe France S.A., Rueil-Malmaison Novartis Pharma S.A.S., Rueil-Malmaison Laboratoires Alcon S.A., Rueil-Malmaison Sandoz S.A.S., Levallois-Perret EUR 103.0 m EUR 43.4 m EUR 12.9 m EUR 5.4 m 100 n 100 u q p 100 u q 100 u p Germany EUR 155.5 m Novartis Deutschland GmbH, Wehr EUR 25.6 m Novartis Pharma GmbH, Nuremberg EUR 2.0 m Novartis Pharma Produktions GmbH, Wehr EUR 512 000 Alcon Pharma GmbH, Freiburg EUR 6.6 m WaveLight GmbH, Erlangen EUR 15.4 m CIBA Vision GmbH, Grosswallstadt EUR 100 000 Sandoz International GmbH, Holzkirchen Sandoz Industrial Products GmbH, Frankfurt a. M. EUR 2.6 m EUR 26 000 1 A Pharma GmbH, Oberhaching EUR 42.1 m Salutas Pharma GmbH, Barleben EUR 93.7 m Hexal AG, Holzkirchen 100 n 100 u p 100 q 100 u 100 u 100 u q p 100 n 100 u q 100 u 100 u q 100 n u q p Greece Novartis (Hellas) S.A.C.I., Metamorphosis/Athens EUR 23.4 m Alcon Laboratories Hellas Commercial & Industrial    S.A., Maroussi/Athens EUR 5.7 m 100 u 100 u Hungary Novartis Hungary Healthcare Limited Liability    Company, Budapest Sandoz Hungary Limited Liability Company,    Budapest India Novartis India Limited, Mumbai Novartis Healthcare Private Limited, Mumbai Alcon Laboratories (India) Private Limited,    Bangalore Sandoz Private Limited, Mumbai Indonesia PT Novartis Indonesia, Jakarta PT CIBA Vision Batam, Batam Ireland Novartis Ireland Limited, Dublin Novartis Ringaskiddy Limited, Ringaskiddy,    County Cork Alcon Laboratories Ireland Limited, Cork City Israel Novartis Israel Ltd., Petach Tikva Italy Novartis Farma S.p.A., Origgio Alcon Italia S.p.A., Milan Sandoz S.p.A., Origgio Sandoz Industrial Products S.p.A., Rovereto Japan Novartis Holding Japan K.K., Tokyo Novartis Pharma K.K., Tokyo Alcon Japan Ltd., Tokyo Sandoz K.K., Tokyo HUF 545.6 m 100 u HUF 883.0 m 100 u INR 159.8 m INR 60.0 m 75 u 100 u p INR 1.1 bn INR 32.0 m 100 u 100 u q IDR 7.7 bn IDR 11.9 bn 100 u q 100 q EUR 25 000 100 u EUR 2.0 m EUR 541 251 100 q 100 q ILS 1 000 100 u p EUR 18.2 m EUR 3.7 m EUR 1.7 m EUR 2.6 m 100 n u q p 100 u 100 u 100 q JPY 10.0 m JPY 6.0 bn JPY 500.0 m JPY 100.0 m 100 n 100 u p 100 u 100 u q p Luxembourg Novartis Investments S.à r.l., Luxembourg-Ville USD 100.0 m USD 100 000 Novartis Finance S.A., Luxembourg-Ville 100 n 100 n Malaysia Novartis Corporation (Malaysia) Sdn. Bhd.,    Kuala Lumpur Alcon Laboratories (Malaysia) Sdn. Bhd.,    Petaling Jaya CIBA Vision Johor Sdn. Bhd., Gelang Patah MYR 3.3 m 100 u MYR 1.0 m MYR 5.0 m 100 u 100 q Mexico Novartis Farmacéutica, S.A. de C.V., Mexico City MXN 205.0 m MXN 5.9 m Alcon Laboratorios, S.A. de C.V., Mexico City MXN 468.2 m Sandoz, S.A. de C.V., Mexico City 100 u q 100 u q 100 u q Morocco Novartis Pharma Maroc SA, Casablanca MAD 80.0 m 100 u q Netherlands Novartis Netherlands B.V., Arnhem Novartis Pharma B.V., Arnhem Alcon Nederland B.V., Breda Sandoz B.V., Almere New Zealand Novartis New Zealand Ltd., Auckland Norway Novartis Norge AS, Oslo EUR 1.4 m EUR 4.5 m EUR 18 151 EUR 907 560 100 n 100 u p 100 u 100 u q NZD 820 000 100 u NOK 1.5 m 100 u p FINANCIAL REPORT | NOTES TO THE NOvARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS Novartis Annual Report 2015 | 241 Share/paid-in Equity capital 1 interest % Activities As at December 31, 2015 Share/paid-in Equity capital 1 interest % Activities EUR 4.5 m EUR 499 900 100 u 100 u United Arab Emirates Novartis Middle East FZE, Dubai As at December 31, 2015 Pakistan Novartis Pharma (Pakistan) Limited, Karachi Panama Novartis Pharma (Logistics), Inc.,    Ciudad de Panama Alcon Centroamerica S.A., Ciudad de Panama Philippines Novartis Healthcare Philippines, Inc.,    Makati/Manila Sandoz Philippines Corporation, Manila Alcon Laboratories (Philippines), Inc., Manila Poland Novartis Poland Sp. z o.o., Warszawa Alcon Polska Sp. z o.o., Warszawa Sandoz Polska Sp. z o.o., Warszawa Lek S.A., Strykow Portugal Novartis Portugal SGPS Lda., Porto Salvo Novartis Farma – Produtos Farmacêuticos S.A.,    Porto Salvo Alcon Portugal-Produtos e Equipamentos    Oftalmologicos Lda., Porto Salvo Sandoz Farmacêutica Lda., Porto Salvo Puerto Rico Alcon (Puerto Rico) Inc., Catano Romania Sandoz S.R.L., Targu-Mures Novartis Pharma Services Romania S.R.L.,    Bucharest Alcon Romania S.R.L., Bucharest Russian Federation Novartis Pharma LLC, Moscow Alcon Farmacevtika LLC, Moscow ZAO Sandoz, Moscow Novartis Neva LLC, St. Petersburg PKR 3.9 bn 100 u USD 10 000 PAB 1 000 100 u 100 u PHP 298.8 m PHP 30.0 m PHP 16.5 m 100 u 100 u q 100 u PLN 44.2 m PLN 750 000 PLN 25.6 m PLN 11.4 m 100 u p 100 u 100 u 100 u q EUR 500 000 100 n EUR 2.4 m 100 u USD 15.5 100 u RON 105.2 m 100 u q RON 3.0 m RON 10.8 m 100 u 100 u RUB 20.0 m RUB 44.1 m RUB 57.4 m RUB 1.3 bn SGD 100 000 SGD 45.0 m SGD 39.0 m 100 u 100 u 100 u 100 q 75 u 100 u 100 q 100 u q SGD 2 004 100 p SGD 101 000 SGD 1.0 m SGD 164 000 100 q 100 q 100 u Saudi Arabia Saudi Pharmaceutical Distribution Co. Ltd., Riyadh SAR 26.8 m Singapore Novartis (Singapore) Pte Ltd., Singapore Novartis Singapore Pharmaceutical Manufacturing    Pte Ltd., Singapore Novartis Asia Pacific Pharmaceuticals Pte Ltd.,    Singapore Novartis Institute for Tropical Diseases Pte Ltd.,    Singapore Alcon Singapore Manufacturing Pte Ltd.,    Singapore CIBA Vision Asian Manufacturing    and Logistics Pte Ltd., Singapore Alcon Pte Ltd., Singapore Slovakia Novartis Slovakia s.r.o., Bratislava Slovenia Lek Pharmaceuticals d.d., Ljubljana Sandoz Pharmaceuticals d.d., Ljubljana EUR 2.0 m 100 u EUR 48.4 m EUR 1.5 m 100 n u q p 100 u South Africa Novartis South Africa (Pty) Ltd., Kempton Park Alcon Laboratories (South Africa) (Pty) Ltd.,    Bryanston, Gauteng Sandoz South Africa (Pty) Ltd., Kempton Park ZAR 86.3 m 100 u ZAR 201 820 ZAR 3.0 m 100 u 100 u p South Korea Novartis Korea Ltd., Seoul Alcon Korea Ltd., Seoul Sandoz Korea Ltd., Seoul Spain Novartis Farmacéutica, S.A., Barcelona Alcon Cusi S.A., El Masnou Sandoz Farmacéutica, S.A., Madrid Sandoz Industrial Products, S.A., Les Franqueses    del Vallés/Barcelona Sweden Novartis Sverige AB, Täby/Stockholm Switzerland Novartis International AG, Basel Novartis Holding AG, Basel Novartis Research Foundation, Basel Novartis Foundation for Management    Development, Basel Novartis Foundation for Employee Participation,    Basel Novartis Sanierungsstiftung, Basel Novartis Pharma AG, Basel Novartis Pharma Services AG, Basel KRW 24.5 bn KRW 33.8 bn KRW 17.8 bn 99 u 100 u 100 u EUR 63.0 m EUR 11.6 m EUR 270 450 100 n u q 100 u q p 100 u EUR 9.3 m 100 u q p SEK 5.0 m 100 u CHF 10.0 m CHF 100.2 m CHF 29.3 m 100 n 100 n 100 n CHF 100 000 100 n CHF 100 000 CHF 2.0 m CHF 350.0 m CHF 20.0 m 100 n 100 n 100 n u q p 100 u Switzerland (continued) Novartis Pharma Schweizerhalle AG, CHF 18.9 m    Schweizerhalle CHF 251 000 Novartis Pharma Stein AG, Stein CHF 5.0 m Novartis Pharma Schweiz AG, Rotkreuz CHF 100 000 Alcon Switzerland SA, Rotkreuz CHF 200 000 Alcon Pharmaceuticals Ltd., Fribourg ESBATech, a Novartis Company GmbH, Schlieren CHF 14.0 m CHF 5.0 m Sandoz AG, Basel CHF 100 000 Sandoz Pharmaceuticals AG, Risch CHF 160.0 m Roche Holding AG, Basel 100 q 100 q p 100 u p 100 u 100 n u q p 100 p 100 n u q p 100 u 33/6 3 n Taiwan Novartis (Taiwan) Co., Ltd., Taipei Thailand Novartis (Thailand) Limited, Bangkok Alcon Laboratories (Thailand) Ltd., Bangkok TWD 170.0 m 100 u THB 302.0 m THB 228.1 m 100 u 100 u Turkey Novartis Saglik, Gida ve Tarim Ürünleri Sanayi ve    Ticaret A.S., Istanbul Alcon Laboratuvarlari Ticaret A.S., Istanbul Sandoz Ilaç Sanayi ve Ticaret A.S., Istanbul TRY 98.0 m TRY 25.2 m TRY 165.2 m 100 u q 100 u 100 u q AED 7.0 m 100 u GBP 25.5 m United Kingdom Novartis UK Limited, Frimley/Camberley Novartis Pharmaceuticals UK Limited, GBP 5.4 m    Frimley/Camberley GBP 250.0 m Novartis Grimsby Limited, Frimley/Camberley Alcon Eye Care (UK) Limited, Frimley/Camberley GBP 550 000 GBP 2.0 m Sandoz Limited, Frimley/Camberley Glaxosmithkline Consumer Healthcare    Holdings Limited, Brentford, Middlesex GBP 100 000 100 n 100 u q p 100 q 100 u 100 u 36.5 n United States of America Novartis Corporation, East Hanover, NJ Novartis Finance Corporation, New York, NY Novartis Capital Corporation, New York, NY Novartis Pharmaceuticals Corporation,    East Hanover, NJ Novartis Institutes for BioMedical Research, Inc.,    Cambridge, MA CoStim Pharmaceuticals, Inc., Cambridge, MA Novartis Institute for Functional Genomics, Inc.,    San Diego, CA Genoptix, Inc., Carlsbad, CA Alcon Laboratories, Inc., Fort Worth, TX Alcon Refractive Horizons, LLC, Fort Worth, TX Alcon Research, Ltd., Fort Worth, TX Alcon LenSx, Inc., Alisio Viejo, CA WaveTec Vision Systems, Inc., Alisio Viejo, CA Sandoz Inc., Princeton, NJ Fougera Pharmaceuticals, Inc., Melville, NY Eon Labs, Inc., Princeton, NJ Novartis Vaccines and Diagnostics, Inc.,    Cambridge, MA Novartis Services, Inc., East Hanover, NJ venezuela Novartis de Venezuela, S.A., Caracas Alcon Pharmaceutical, C.A., Caracas USD 72.2 m USD 1 002 USD 1 100 n 100 n 100 n USD 5.2 m 100 u q p USD 1 USD 1 100 p 100 p USD 21 000 USD 1 USD 1 000 USD 10 USD 12.5 USD 100 USD 1 USD 25 000 USD 1 USD 1 100 p 100 u p 100 n u q 100 q 100 q p 100 q 100 u q p 100 u q p 100 u q p 100 u q USD 3.0 USD 1 100 u 100 n VEF 1.4 m VEF 5.5 m 100 u 100 u In addition, the Group is represented by subsidiaries and associated companies in the following countries: Bosnia/Herzegovina, Bulgaria, Dominican Republic, Guatemala, the Former Yugoslav Republic of Macedonia, Peru, Ukraine and Uruguay. 1 Share/paid-in capital may not reflect the taxable share/paid-in capital amount and does not include any paid-in surplus. 2 Shares without par value 3 Approximately 33% of voting shares; approximately 6% of total net income and equity attributable to Novartis m = million; bn = billion The following describe the various types of entities within the Group: n Holding/Finance: This entity is a holding company and/or performs finance functions for the Group. u Sales: This entity performs sales and marketing activities for the Group. q Production: This entity performs manufacturing and/or production activities for the Group. p Research and Development: This entity performs research and development activities for the Group.   242 | Novartis Annual Report 2015 FINANCIAL REPORT Report of Novartis Management on Internal Control over Financial Reporting The Board of Directors and management of the Group are Novartis Group management assessed the effectiveness of the responsible for establishing and maintaining adequate internal Group’s internal control over financial reporting as of Decem- control over financial reporting. The Novartis Group’s internal ber 31, 2015. In making this assessment, it used the criteria control system was designed to provide reasonable assurance established in Internal Control – Integrated Framework (2013) to the Novartis Group’s management and Board of Directors issued by the Committee of Sponsoring Organizations of the regarding the reliability of financial reporting and the Treadway Commission (COSO). Based on its assessment, preparation and fair presentation of its published consolidated management has concluded that, as of December 31, 2015, financial statements. the Novartis Group’s internal control over financial reporting was effective based on those criteria. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined PricewaterhouseCoopers AG, Switzerland, an independent to be effective may not prevent or detect misstatements and registered public accounting firm, has issued an opinion on can provide only reasonable assurance with respect to finan- the effec tiveness of the Group’s internal control over financial cial statement preparation and presentation. Also, projections reporting which is included in this financial report on the of any evaluation of effectiveness to future periods are subject following pages 243 and 244. to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. Joseph Jimenez Harry Kirsch Chief Executive Officer Chief Financial Officer Basel, January 26, 2016 FINANCIAL REPORT | REPORT OF THE STATUTORY AUDITOR ON THE CONSOLIDATED FINANCIAL STATEMENTS OF NOvARTIS AG AND INTERNAL CONTROL OvER FINANCIAL REPORTING Novartis Annual Report 2015 | 243 Report of the Statutory Auditor on the Consolidated Financial Statements of Novartis AG and Internal Control over Financial Reporting TO THE GENERAL MEETING OF NOvARTIS AG, BASEL An audit involves performing procedures to obtain audit REPORT OF THE STATUTORY AUDITOR ON THE CONSOLIDATED FINANCIAL STATEMENTS evidence about the amounts and disclosures in the consoli- dated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the As statutory auditor, we have audited the consolidated finan- risks of material misstatement of the consolidated financial cial statements of Novartis AG and its consolidated subsidiar- statements, whether due to fraud or error. In making those risk ies (“Novartis Group”), which comprise the consolidated assessments, the auditor considers the internal control sys- income statements, consolidated statements of comprehen- tem relevant to the entity’s preparation and fair presentation sive income, consolidated statements of changes in equity, of the consolidated financial statements in order to design consolidated balance sheets, consolidated cash flow state- audit procedures that are appropriate in the circumstances. ments and notes (pages 172 to 241), for the year ended Decem- An audit also includes evaluating the appropriateness of the ber 31, 2015. accounting policies used and the reasonableness of account- ing estimates made, as well as evaluating the overall presen- BOARD OF DIRECTORS’ RESPONSIBILITY tation of the consolidated financial statements. We believe that The Board of Directors is responsible for the preparation and the audit evidence we have obtained is sufficient and appro- fair presentation of the consolidated financial statements in priate to provide a basis for our audit opinion. accordance with International Financial Reporting Standards (IFRS) and the requirements of Swiss law (SCO). This respon- OPINION sibility includes designing, implementing and maintaining an In our opinion, the consolidated financial statements for the internal control system relevant to the preparation and fair year ended December 31, 2015 present fairly, in all material presentation of consolidated financial statements that are free respects, the financial position, the results of operations and from material misstatement, whether due to fraud or error. the cash flows in accordance with International Financial The Board of Directors is further responsible for selecting and Reporting Standards (IFRS) as issued by the International applying appropriate accounting policies and making account- Accounting Standards Board and comply with Swiss law. ing estimates that are reasonable in the circumstances. REPORT ON OTHER LEGAL REQUIREMENTS AUDITOR’S RESPONSIBILITY We confirm that we meet the legal requirements on licensing Our responsibility is to express an opinion on these consoli- according to the Auditor Oversight Act (AOA) and indepen- dated financial statements based on our audit. We conducted dence (article 728 SCO and article 11 AOA) and that there are our audit in accordance with Swiss law, Swiss Auditing Stan- no circumstances incompatible with our independence. dards, International Standards on Auditing and the standards In accordance with article 728a paragraph 1 item 3 SCO of the Public Company Accounting Oversight Board of the and Swiss Auditing Standard 890, we confirm that an internal United States of America. Those standards require that we control system exists which has been designed for the prepa- plan and perform the audit to obtain reasonable assurance ration of consolidated financial statements according to the whether the consolidated financial statements are free from instructions of the Board of Directors. material misstatement. We recommend that the consolidated financial statements submitted to you be approved. 244 | Novartis Annual Report 2015 FINANCIAL REPORT REPORT ON THE EFFECTIvENESS OF INTERNAL CONTROL OvER FINANCIAL REPORTING tions and dispositions of the assets of the company; (ii) pro- vide reasonable assurance that transactions are recorded as We have also audited the effectiveness of Novartis Group’s necessary to permit preparation of financial statements in internal control over financial reporting as of December 31, accordance with the applicable accounting standards, and that 2015, based on criteria established in Internal Control – Inte- receipts and expenditures of the company are being made grated Framework (2013) issued by the Committee of Sponsor- only in accordance with authorizations of management and ing Organizations of the Treadway Commission (COSO). directors of the company; and (iii) provide reasonable assur- The Board of Directors and management of Novartis Group ance regarding prevention or timely detection of unauthorized are responsible for maintaining effective internal control over acquisition, use, or disposition of the company’s assets that financial reporting and management is responsible for the could have a material effect on the financial statements. assessment of the effectiveness of internal control over finan- Because of its inherent limitations, internal control over cial reporting included in the accompanying Report of Novartis financial reporting may not prevent or detect misstatements. Management on Internal Control Over Financial Reporting in this Also, projections of any evaluation of effectiveness to future financial report on page 242. Our responsibility is to express periods are subject to the risk that controls may become inad- an opinion on the effectiveness of Novartis Group’s internal equate because of changes in conditions, or that the degree control over financial reporting based on our integrated audit. of compliance with the policies or procedures may deteriorate. We conducted our audit of internal control over financial In our opinion, Novartis Group maintained, in all material reporting in accordance with the standards of the Public Com- respects, effective internal control over financial reporting as pany Accounting Oversight Board of the United States of Amer- of December 31, 2015, based on criteria established in Inter- ica. Those standards require that we plan and perform the nal Control – Integrated Framework (2013) issued by the COSO. audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial PricewaterhouseCoopers AG reporting included obtaining an understanding of internal con- trol over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and oper- ating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding Bruno Rossi Stephen Johnson the reliability of financial reporting and the preparation of Audit expert Global relationship partner financial statements for external purposes in accordance with Auditor in charge the applicable accounting standards. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, Basel, January 26, 2016 in reasonable detail, accurately and fairly reflect the transac- FINANCIAL REPORT | FINANCIAL STATEmENTS OF NOvARTIS AG Novartis Annual Report 2015 | 245 FINANCIAL STATEMENTS OF NOVARTIS AG INCOmE STATEmENTS (For the years ended December 31, 2015 and 2014)    Income from investment in Group subsidiaries    License income    Gain from disposal of intangibles assets    Other income Total income    Amortization of goodwill and other intangible assets    Administrative expenses    Other expenses Total expenses Operating income Financial income Financial expenses Income before extraordinary income and taxes Extraordinary income, net Extraordinary expenses, net Income before taxes Direct taxes Net income of the year The accompanying Notes form an integral part of these financial statements. 2014 2015 Note CHF millions CHF millions 6 168 1 098 558 8 6 869 1 340 272 4 7 832 8 485 3 – 1 143 – 1 154 – 27 – 31 – 27 – 11 – 1 201 – 1 192 6 631 562 – 253 6 940 1 422 – 56 8 306 – 265 8 041 7 293 589 – 287 7 595 32 7 627 – 148 7 479 4 4 246 | Novartis Annual Report 2015 FINANCIAL REPORT BALANCE SHEETS (At December 31, 2015 and 2014) ASSETS Current assets Cash and cash equivalents Receivables    Group subsidiaries    Third parties Total current assets Non-current assets Financial assets    Group subsidiaries    Third parties Investments    Group subsidiaries    Third parties Goodwill and other intangible assets Total non-current assets Total assets LIABILITIES AND EQUITY Current liabilities Interest-bearing current liabilities    Bonds Other current liabilities    Group subsidiaries    Third parties Accrued expenses Deferred income Total current liabilities Non-current liabilities Interest-bearing non-current liabilities    Bonds Non-current provisions Total non-current liabilities Equity Share capital Legal capital reserves – Capital contribution reserve    General reserve    Reserve for treasury shares held by subsidiaries Total legal retained earnings Free reserves    Retained earnings    Net income of the year Retained earnings available for distribution at the end of the year Total unappropriated earnings Treasury shares held by Novartis AG Total equity Total liabilities and equity The accompanying Notes form an integral part of these financial statements. 2014 2015 Note CHF millions CHF millions 103 51 3 318 15 410 159 44 3 580 15 505 15 884 5 571 24 5 10 996 10 708 0 0 3 16 647 17 925 43 527 34 228 47 107 49 733 6 799 224 73 199 60 1 355 77 118 378 55 628 6 1 378 505 1 883 499 499 7 1 338 1 353 198 320 4 009 4 329 198 320 4 522 4 842 8 9 34 560 36 380 806 8 041 8 847 7 479 7 479 43 407 43 859 8 – 4 676 – 2 373 44 596 47 879 47 107 49 733 FINANCIAL REPORT | NOTES TO THE FINANCIAL STATEmENTS OF NOvARTIS AG Novartis Annual Report 2015 | 247 NOTES TO THE FINANCIAL STATEMENTS OF NOVARTIS AG 1. Introduction The financial statements of Novartis AG, with registered office from marketable securities to equity. This reclassification in Basel, comply with the requirements of the new Swiss reduced the 2014 previously reported total current assets, accounting legislation, which became effective since January 1, total assets, total equity and total equity and liabilities by 2013 and required implementation in 2015, of the Swiss Code CHF 2 373 million. of Obligations (SCO). In accordance with the SCO, Novartis AG Novartis AG is presenting consolidated financial statements elected to restate the 2014 financial statements to be compa- according to IFRS. As a result, these financial statements and rable with the 2015 presentation. This resulted in changes to notes do not include additional disclosures, cash flow state- the presentation of the income statement and balance sheet ment and management report. and the reclassification of treasury shares held by Novartis AG 2. Accounting Policies FINANCIAL INCOmE AND EXPENSES INvESTmENTS Current assets and current liabilities denominated in foreign Investments are initially recognized at cost. Investments in currencies are converted at year-end exchange rates. Realized Novartis Group subsidiaries are assessed annually and exchange gains and losses as well as all unrealized exchange adjusted to their recoverable amount within their category. losses arising from these as well as those from business trans- actions are recorded net as financial income or financial GOODWILL AND OTHER INTANGIBLE ASSETS expenses. Goodwill and other intangible assets are capitalized and amor- tized over a period of between five and twenty years. Goodwill DERIvATIvE FINANCIAL INSTRUmENTS and other intangible assets are reviewed for impairment on a Derivative financial instruments are used for hedging purposes. yearly basis. If necessary an impairment loss is recognized. These instruments are valued at fair value. When different accounting policies apply for the hedged item and the deriv- BONDS ative financial instrument, hedge accounting is applied through Bonds are valued on an amortized cost basis such that addi- measuring the hedged item together with the derivative finan- tional interest is accrued over the duration of the bonds so cial instrument. FINANCIAL ASSETS that at maturity the balance sheet amount will equal the amount that is due to be paid. Financial assets are valued at acquisition cost less adjustments PROvISIONS for foreign currency losses and any other impairment of value. Provisions are made to cover general business risks of the Group. 248 | Novartis Annual Report 2015 FINANCIAL REPORT 3. Goodwill and Other Intangible Asset Movements Goodwill Gross cost 1 Accumulated amortization January 1 Amortization charges December 31 2015 2014 CHF millions CHF millions 22 350 22 350 – 4 560 – 3 420 – 1 143 – 1 140 – 5 703 – 4 560 Net book value at December 31 16 647 17 790 Other intangible assets Cost January 1 Additions Disposal as a result of the Novartis OTC divestment to GSK December 31 Accumulated amortization January 1 Amortization charges Disposal as a result of the Novartis OTC divestment to GSK December 31 Net book value at December 31 255 – 244 11 242 13 255 – 120 – 3 – 106 – 14 112 – 11 0 – 120 135 Goodwill and other intangible assets Net book value at December 31 16 647 17 925 1 There was no change to cost value of Goodwill during 2015 and 2014 4. Extraordinary Income and Expenses, Net Novartis AG realized a net divestment gain of CHF 1 422 million due to the Novartis Animal Health divestment to Eli Lilly and Company, USA in 2015. In 2015, an extraordinary expense related to prior year direct taxes of CHF 56 million (2014: extraor- dinary income of CHF 32 million) was recorded. 5. Investments The principal direct and indirect subsidiaries and other holdings of Novartis AG are shown in Note 32 to the Group’s consoli- dated financial statements. A reclassification of CHF 3 725 million has been made within non-current assets from investments in Group subsidiaries to financial assets Group subsidiaries in 2014 to be comparable with the 2015 presentation. FINANCIAL REPORT | NOTES TO THE FINANCIAL STATEmENTS OF NOvARTIS AG Novartis Annual Report 2015 | 249 6. Bonds Straight bonds    3.625% CHF 800 million bond    2008/2015 of Novartis AG, Basel,    Switzerland, issued at 100.35%    0.250% CHF 500 million bond    2015/2025 of Novartis AG, Basel,    Switzerland, issued at 100.64%    0.625% CHF 550 million bond    2015/2029 of Novartis AG, Basel,    Switzerland, issued at 100.502%    1.050% CHF 325 million bond    2015/2035 of Novartis AG, Basel,    Switzerland, issued at 100.479% Total straight bonds 2015 2014 CHF millions CHF millions Breakdown by maturity 2015 2014 CHF millions CHF millions 799 2015 After 2015 Total 1 378 1 378 799 799 502 551 325 1 378 Fair value comparison 2015 Balance sheet 2014 Fair values CHF millions CHF millions CHF millions CHF millions 2014 Fair values Balance sheet 2015 Straight bonds 1 378 1 356 799 Total 1 378 1 356 799 799 813 813 On June 26, 2008, Novartis AG issued a CHF 800 million bond bearing interest at 3.625% per annum. The bond was repaid on June 26, 2015. On February 13, 2015, Novartis AG issued three new bonds of CHF 500 million (bearing interest at 0.25% per annum), CHF 550 million (bearing interest at 0.625% per annum) and CHF 325 million (bearing interest at 1.050% per annum). The bonds are valued on an amortized cost basis. 7. Share Capital January 1 2 706 193 000 1 353 2 706 193 000 Number of shares canceled/capital reduced during the period – 29 200 000 – 15 2015 Number of shares Share capital CHF millions 2014 Number of shares Share capital CHF millions 1 353 December 31 2 676 993 000 1 338 2 706 193 000 1 353 The Novartis AG share capital consists of registered shares In 2014, Novartis has entered into an irrevocable, non-dis- with a nominal value of CHF 0.50 each. cretionary arrangement with a bank to repurchase own shares The total share capital decreased from CHF 1 353.1 million on the second trading line under its USD 5 billion share buy- at December 31, 2014 to CHF 1 338.5 million at December 31, back as well as to mitigate dilution from employee participa- 2015 due to a share capital reduction as a result of the can- tion programs. The commitment under this arrangement cellation of 29.2 million repurchased shares with a nominal amounted to CHF 652 million as of December 31, 2014, reflect- value of CHF 14.6 million. The cancellation was approved at ing the expected purchases by the bank under such trading the Annual General Meeting of February 27, 2015 and became plan over a rolling 90 days period. This trading plan was fully effective on May 6, 2015. During 2014, the total share capital executed and has expired. As a result, there is no contingent of Novartis AG was unchanged. liability related to this plan as of December 31, 2015. 250 | Novartis Annual Report 2015 FINANCIAL REPORT 8. Reserve for Treasury Shares Treasury shares held by subsidiaries 1 January 1 Number of shares purchased/sold; reserves transferred December 31 1 excluding foundations 2015 2014 Reserve for treasury shares held by subsidiaries CHF millions Number of shares Reserve for treasury shares held by subsidiaries CHF millions Number of shares 73 564 212 – 8 387 829 65 176 383 4 522 – 513 4 009 77 844 615 – 4 280 403 73 564 212 4 590 – 68 4 522 2015 2014 Reserve for treasury shares held by Novartis AG CHF millions Number of shares Reserve for treasury shares held by Novartis AG CHF millions Number of shares Treasury shares held by Novartis AG January 1 80 507 458 Number of shares purchased/canceled; reserves transferred 20 678 180 December 31 101 185 638 2 373 2 303 4 676 53 467 458 27 040 000 80 507 458 178 2 195 2 373 Total treasury shares 1 January 1 Total number of shares purchased/sold or canceled; reserves transferred December 31 1 excluding foundations 2015 Number of shares Total reserve for treasury shares CHF millions 2014 Number of shares Total reserve for treasury shares CHF millions 154 071 670 6 895 131 312 073 12 290 351 166 362 021 1 790 8 685 22 759 597 154 071 670 4 768 2 127 6 895 Novartis AG has met the legal requirements for legal reserves cle 659b SCO. At December 31, 2015, treasury shares held by under Articles 659 et. seq. and 663b.10 SCO for the treasury Novartis AG and its subsidiaries totaled 166 362 021. As per shares. the dividend payment date, Novartis AG and its subsidiaries Treasury share purchases during 2015 totaled 63.6 mil- are expected to hold 156 147 021 shares. These shares are lion (2014: 41.8 million) with an average purchase price of non-dividend bearing shares. It should be noted that within CHF 93 (2014: CHF 81), treasury share sales totaled 27.0 mil- the Novartis Group’s IFRS consolidated financial statements lion (2014: 8.2 million) with an average sale price of CHF 56 some entities are included in the consolidation scope, mainly (2014: CHF 57) and share-based compensation transactions foundations, which do not qualify as subsidiaries in the sense totaled 11.3 million shares (2014: 10.8 million shares). of Article 659b SCO. The number of treasury shares held by the Company and its subsidiaries meet the definitions and requirements of Arti- 9. Free Reserves January 1 2015 2014 CHF millions CHF millions 36 380 37 028 Reduction due to cancellation of treasury shares (CHF 2 348 million of repurchased shares less their nominal value of CHF 15 million) – 2 333 Transfer from reserve for treasury shares 513 Use of free reserves for divided payment 68 – 716 December 31 34 560 36 380 FINANCIAL REPORT | NOTES TO THE FINANCIAL STATEmENTS OF NOvARTIS AG Novartis Annual Report 2015 | 251 10. Contingent Liabilities Guarantees in favor of subsidiaries to cover capital and interest of bonds, credit facilities and commercial paper programs – total maximum amount CHF 38 445 million (2014: CHF 30 420 million) Other guarantees in favor of subsidiaries, associated companies and others – total maximum amount CHF 2 707 million (2014: CHF 2 551 million) Total contingent liabilities Dec 31, 2015 Dec 31, 2014 CHF millions CHF millions 16 850 15 765 1 672 1 389 18 522 17 154 Novartis AG is part of the Swiss Novartis value added tax (VAT) group and is therefore jointly liable for existing and future VAT claims from the Swiss Federal Tax Administration. 11. Registration, Voting Restrictions and Major Shareholders The Company’s Articles of Incorporation state that no person Furthermore, there are the following other significant or entity shall be registered with the right to vote for more than share holders: 2% of the share capital as set forth in the Commercial Regis- ter. In particular cases the Board of Directors may allow exemp- Shareholders registered as nominees: tions from the limitation for registration in the share register. — Chase Nominees Ltd., London1, holds 8.8% (2014: 9.1%). According to the share register, shareholders owning 2% — Nortrust Nominees, London, holds 3.2% (2014: 3.2%). or more of the Company’s capital at December 31, excluding — The Bank of New York Mellon, New York, holds 4.6% treasury shares held by Novartis AG and other Novartis (2014: 4.6%) through its Nominees Mellon Bank, Everett, subsidiaries, are as follows: % holding of share capital % holding of share capital December 31, 2015 December 31, 2014 with a holding of 1.7% (2014: 2.6%) and The Bank of New York Mellon, Brussels, with a holding of 2.9% (2014: 2.0%). Novartis Foundation for Employee Participation, Basel, Switzerland Emasan AG, Basel, Switzerland Shareholder acting as American Depositary Share (ADS) 2.6 3.3 3.2 3.3 depo sitary: — JPMorgan Chase Bank, New York, holds 11.2% (2014: 11.4%). Shareholders disclosed through notifications filed with Novartis AG and the SIX Swiss Exchange: — Capital Group Companies, Inc., Los Angeles, holds between 3% and 5%. — BlackRock, Inc., New York, holds between 3% and 5%. 1 Previously reported as JPMorgan Chase Bank, New York, but changed to its affiliate Chase Nominees Ltd, London, which is entered as nominee in the Novartis Share Register. 252 | Novartis Annual Report 2015 FINANCIAL REPORT 12. Equity Instrument Disclosures of Board of Directors and Executive Committee members SHARE OWNERSHIP REQUIREmENTS FOR BOARD mEmBERS SHARE OWNERSHIP REQUIREmENTS FOR EXECUTIvE COmmITTEE mEmBERS The Chairman is required to own a minimum of 30 000 shares, Executive Committee members are required to own at least a and other members of the Board of Directors are required to minimum multiple of their annual base compensation in own at least 4 000 Novartis shares within three years after Novartis shares or share options within three years of hire or joining the Board of Directors, to ensure alignment of their promotion, as set out in the table below. interests with shareholders. Board members are prohibited from hedging or pledging their ownership positions in Novartis shares that are part of their guideline share ownership require- ment, and are required to hold these shares for 12 months after retiring from the Board of Directors. As of December 31, CEO 5 x base compensation Executive Committee members 3 x base compensation 2015, all members of the Board of Directors who have served In the event of a substantial rise or drop in the share price, the at least three years on the Board of Directors have complied Board of Directors may, at its discretion, amend that time with the share ownership guidelines. period accordingly. The determination of equity amounts against the share SHARES, ADRS AND SHARE OPTIONS OWNED BY BOARD mEmBERS ownership requirements is defined to include vested and unvested Novartis shares or ADRs, as well as RSUs acquired The total number of vested Novartis shares and ADRs owned under the compensation plans, but excluding unvested match- by members of the Board of Directors and “persons closely ing shares granted under the Leveraged Share Savings Plan linked” 1 to them as of December 31, 2015 is shown in the table (LSSP) and the Employee Share Ownership Plan (ESOP), and below. unvested PSUs from LTPP and LTRPP. The determination As of December 31, 2015, no members of the Board of includes other shares as well as vested options of Novartis Directors together with “persons closely linked”1 to them shares or ADRs that are owned directly or indirectly by “per- owned 1% or more of the outstanding shares (or ADRs) of sons closely linked” 1 to them. The Compensation Committee Novartis. As of the same date, no members of the Board of reviews compliance with the share ownership guideline on an Directors held any share options. annual basis. SHARES AND ADRS OWNED BY BOARD mEmBERS 1 Number of shares 2 At At December 31, December 31, 2014 2015 As of December 31, 2015, all members who have served at least three years on the Executive Committee have met or exceeded their personal Novartis share ownership require- ments. As of January 1, 2016, to better align with prevalent mar- ket practice and the change to our compensation system, Exec- Joerg Reinhardt 480 404 466 951 utive Committee members will be required to meet their share Ulrich Lehner (until February 26, 2015) NA 36 405 ownership requirement within five years of hire/promotion. Enrico Vanni Nancy Andrews (from February 27, 2015) Dimitri Azar Verena A. Briner Srikant Datar Ann Fudge Pierre Landolt 3 Charles L. Sawyers Andreas von Planta William T. Winters Total 4 15 566 13 805 609 9 292 6 429 NA 7 258 4 845 32 629 30 792 15 605 14 112 54 866 52 290 4 252 2 933 124 868 122 709 5 998 3 590 SHARES, ADRS, EQUITY RIGHTS AND SHARE OPTIONS OWNED BY EXECUTIvE COmmITTEE mEmBERS The following tables show the total number of shares, ADRs, other equity rights and share options owned by Executive Com- mittee members and “persons closely linked” 1 to them as of December 31, 2015. As of December 31, 2015, no Executive Committee mem- bers together with “persons closely linked” to them owned 1% or more of the outstanding shares (or ADRs) of Novartis, either 750 518 755 690 directly or through share options. NA – Not applicable. 1 Includes holdings of “persons closely linked” to Board members (see definition in this Note 12) 2 Each share provides entitlement to one vote. 3 According to Pierre Landolt, the Sandoz Family Foundation is the economic beneficiary of the shares. 4 Ulrich Lehner stepped down from the Board of Directors on February 26, 2015. At February 26, 2015, Ulrich Lehner owned 37 263 shares. The market value of share options (previously granted) is calculated using an option pricing valuation model as at the grant date. 1 “Persons closely linked” are (I) their spouse, (II) their children below age 18, (III) any legal entities that they own or otherwise control, and (IV) any legal or natural person who is acting as their fiduciary. FINANCIAL REPORT | NOTES TO THE FINANCIAL STATEmENTS OF NOvARTIS AG Novartis Annual Report 2015 | 253 SHARES, ADRS AND OTHER EQUITY RIGHTS OWNED BY EXECUTIvE COmmITTEE mEmBERS 1 Vested shares and ADRs Unvested shares Total at and other December 31, 2015 equity rights 2 Vested shares and ADRs Unvested shares Total at and other December 31, 2014 equity rights 2 Joseph Jimenez Steven Baert Felix R. Ehrat David Epstein Mark C. Fishman Richard Francis Jeff George Harry Kirsch Brian McNamara (until March 1, 2015) Andrin Oswald (until March 1, 2015) André Wyss Total 4 284 405 322 200 606 605 256 685 399 811 656 496 1 700 44 977 46 677 0 41 476 41 476 92 435 107 870 200 305 48 398 95 424 143 822 70 371 230 535 3 300 906 72 222 267 940 3 340 162 52 242 276 622 3 328 864 45 054 342 493 3 387 547 14 357 37 722 52 079 0 46 282 46 282 119 247 99 373 218 620 69 457 128 420 197 877 46 579 100 359 146 938 31 860 90 650 122 510 NA NA NA NA NA NA 19 216 62 511 81 727 86 305 115 863 202 168 44 660 79 917 124 577 25 940 68 598 94 538 725 996 1 299 575 2 025 571 655 137 1 659 468 2 314 605 NA – Not applicable. 1 Includes holdings of “persons closely linked” to Executive Committee members (see definition in this Note 12) 2 Includes restricted shares, RSUs and target number of PSUs. Matching shares under the ESOP, LSSP, and target number of PSUs are disclosed pro-rata to December 31, unless the award qualified for full vesting under the relevant plan rules. Awards under all other incentive plans are disclosed in full. 3 Includes both deferred and unvested cash-settled equity awards and holdings of Novartis shares in US-defined contribution plans. 4 As a result of the GlaxoSmithKline transaction, Brian McNamara and Andrin Oswald stepped down from the Executive Committee on March 1, 2015. Brian McNamara owned 52 251 vested shares and 15 200 unvested shares and other equity rights at March 1, 2015. Andrin Oswald owned 122 892 vested shares and 41 547 unvested shares and other equity rights at March 1, 2015. SHARE OPTIONS OWNED BY EXECUTIvE COmmITTEE mEmBERS 1 Number of share options 2 2013 2012 2011 2010 2009 Total at Total at December 31, December 31, 2014 2015 Other Joseph Jimenez Steven Baert Felix R. Ehrat David Epstein Mark C. Fishman Richard Francis Jeff George Harry Kirsch Brian McNamara (until March 1, 2015) Andrin Oswald (until March 1, 2015) André Wyss Total 3 0 0 0 0 0 0 0 0 NA NA 0 0 0 0 0 0 0 0 0 0 NA NA 0 0 0 0 0 0 0 0 141 396 0 NA NA 0 141 396 0 0 0 0 0 0 0 0 NA NA 0 0 0 0 0 0 0 0 0 0 NA NA 0 0 0 0 0 0 0 0 0 0 NA NA 0 0 0 0 0 0 157 266 0 0 0 0 0 141 396 141 396 0 0 NA 50 764 NA 0 378 390 378 390 658 313 378 390 519 786 1 007 739 NA – Not applicable. 1 The last share option grants under the Novartis Equity Plan Select were made in January 2013. 2 Share options disclosed for a specific year were granted in that year under the Novartis Equity Plan Select. The column “Other” refers to share options granted in 2008 or earlier, to share options granted to these executives while they were not Executive Committee members, and to share options bought on the market by the Executive Committee members or “persons closely linked” to them (see definition in this Note 12). 3 As a result of the GlaxoSmithKline transaction, Brian McNamara and Andrin Oswald stepped down from the Executive Committee on March 1, 2015. At March 1, 2015, Brian McNamara and Andrin Oswald did not own any share options. 254 | Novartis Annual Report 2015 FINANCIAL REPORT APPROPRIATION OF AVAILABLE EARNINGS OF NOVARTIS AG AS PER BALANCE SHEET AND DECLARATION OF DIVIDEND Available unappropriated earnings Balance brought forward Net income of the year Total available earnings at the disposal of the Annual General meeting Appropriation proposed by the Board of Directors Payment of a gross dividend (before taxes and duties) of CHF 2.70 (2014: CHF 2.60) on 2 520 845 979 (2014: 2 566 521 330) dividend bearing shares1 with a nominal value of CHF 0.50 each Balance to be carried forward 1 No dividend will be declared on treasury shares held by Novartis AG, and certain treasury shares held by other Group companies. 2015 CHF 2014 CHF 805 551 128 8 040 648 710 7 478 506 586 8 846 199 838 7 478 506 586 – 6 806 284 143 – 6 672 955 458 2 039 915 695 805 551 128 Assuming that this proposal by the Board of Directors is 2016. The last trading day with entitlement to receive the div- approved by the Annual General Meeting of shareholders, idend is February 24, 2016. As from February 25, 2016 the payment of the dividend will be made as from February 29, shares will be traded ex-dividend. FINANCIAL REPORT | REPORT OF THE STATUTORY AUDITOR ON THE FINANCIAL STATEmENTS OF NOvARTIS AG Novartis Annual Report 2015 | 255 Report of the Statutory Auditor on the Financial Statements of Novartis AG TO THE GENERAL mEETING OF NOvARTIS AG, BASEL OPINION REPORT OF THE STATUTORY AUDITOR ON THE FINANCIAL STATEmENTS As statutory auditor, we have audited the financial statements In our opinion, the financial statements for the year ended December 31, 2015 comply with Swiss law and the Company’s articles of incorporation. of Novartis AG, which comprise the income statements, balance REPORT ON OTHER LEGAL REQUIREmENTS sheets and notes (pages 245 to 253), for the year ended We confirm that we meet the legal requirements on licensing December 31, 2015. according to the Auditor Oversight Act (AOA) and indepen- dence (article 728 SCO and article 11 AOA) and that there are BOARD OF DIRECTORS’ RESPONSIBILITY no circumstances incompatible with our independence. The Board of Directors is responsible for the preparation of In accordance with article 728a paragraph 1 item 3 SCO the financial statements in accordance with the requirements and Swiss Auditing Standard 890, we confirm that an internal of Swiss law (SCO) and the Company’s articles of incorpora- control system exists which has been designed for the prepa- tion. This responsibility includes designing, implementing and ration of financial statements according to the instructions of maintaining an internal control system relevant to the prepa- the Board of Directors. ration of financial statements that are free from material We further confirm that the proposed appropriation of misstatement, whether due to fraud or error. The Board of available earnings complies with Swiss law and the Company’s Directors is further responsible for selecting and applying articles of incorporation. We recommend that the financial appropriate accounting policies and making accounting statements submitted to you be approved. estimates that are reasonable in the circumstances. AUDITOR’S RESPONSIBILITY PricewaterhouseCoopers AG Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Swiss law and Swiss Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the financial state- ments are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s Bruno Rossi Stephen Johnson judgment, including the assessment of the risks of material Audit expert Global relationship partner misstatement of the financial statements, whether due to fraud Auditor in charge or error. In making those risk assessments, the auditor considers the internal control system relevant to the entity’s preparation of the financial statements in order to design audit Basel, January 26, 2016 procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control system. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made, as well as evaluating the overall presentation of the financial state- ments. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 256 | Novartis Annual Report 2015 Alcon, the eye care division of Novartis, has a long- standing partnership with Surgical Eye Expeditions (SEE) International and is one of the primary contri bu tors of medication and other supplies p CONTINUED FROm PAGE 139 After such an exhausting schedule, anyone would deserve a break – but many of their vacations are also spent performing eye surgery in countries as far afield as Syria, Mongolia, Vietnam and Peru. It makes for a family holiday with a difference, as their daughters, ages 12 and 16, sometimes join them and help by preparing patients for surgery, fetching supplies for the operating theater and cleaning instruments. Their extraordinary work is facilitated by SEE International, a not-for-profit organization that provides eye surgery in developing countries through a network of 650 medical professionals known as “SEE Docs.” The acronym stands for Surgical Eye Expeditions, and in the 40 years of its existence, these volunteers have examined around 3.6 million patients and performed more than 440 000 sight-restoring operations in 80 countries. Alcon, the eye care division of Novartis, has a long-standing partnership with SEE International and is one of the primary contributors of medication and other supplies. Janak Shah is the most prolific of all the SEE Docs, having conducted more than 130 clinics in India and abroad. Preeti joins him whenever possible and they operate side-by-side, sometimes by the light of headlamps in areas where electricity 1 2 supplies are unreliable. A typical clinic takes place at a rural hospital where eye surgery is either unavailable or too expensive for ordinary people. Hundreds of candidates are screened beforehand and the Shahs each operate on as many as 30 patients during a weekend visit. Even simple surgery, such as the removal of cataracts, can make a tremendous difference to patients by giving them the chance of leading a normal working and family life. Treating children is especially rewarding, as they will benefit for decades. “The patients are overwhelmed because they can’t see any- thing and then suddenly they can see the world,” says Janak. “There’s no greater bliss than coming out of the darkness and into the light.” 1 Bhanti Shankar Kali, 5, was born with congenital cataracts. Her parents brought her to the eye hospital to have them removed. 2 Drs. Janak and Preeti Shah assess a patient receiving eye surgery at one of their weekend clinics in Darjeeling. 3 Dr. Shah evaluates a patient. 4 The Shahs and their team work together on a young patient whose life could be transformed by the treatment they provide. Novartis Annual Report 2015 | 257 5 6 3 4 258 | Novartis Annual Report 2015 OTHER INFORMATION OTHER INFORMATION Novartis Annual Report 2015 | 259 Each year, Novartis commissions a photographer to portray a unique, personal and artistic perspective of healthcare around the world. Depicting the diversity of patients, medical professionals, researchers and care- givers, the photographs demonstrate the complex realities of global healthcare. We are grateful to Brent Stirton and to those who shared their experiences for the Annual Report 2015. BRENT STIRTON Brent Stirton is a South African industry- leading documentary photographer working with Getty Images Reportage agency. His work has been published by National Geographic magazine, Human Rights Watch, TIME, News- week, The New York Times Magazine, The Sunday Times Magazine, GEO, CNN and many other leading titles. Mr. Stirton has photographed extensive essays on HIV/AIDS issues across multiple countries in an ongoing long-term project. He currently spends most of his time working on long- term investigative projects for National Geographic magazine and global NGOs, remaining committed to issues relating to health, diminishing cultures, sustainability and the environ- ment. Mr. Stirton has worked for the Ford, Clinton and Gates foundations, the Nike Foundation and the World Economic Forum – for which he was elected a Young Global Leader in 2008. He is also a Canon Ambassador, one of 12 photographers representing Canon photography. Mr. Stirton has received seven World Press Photo awards, seven awards from Pictures of the Year International, six Lucie Awards, and others from the Overseas Press Club, the Front- line Club, the Deadline Club, DAYS JAPAN, China International Photo Awards, the Leads Awards Germany, Graphis, the London Association of Photographers, Communication Arts, American Photography, American Photo, and the American Society of Publication Designers. Additionally, he received two awards from the United Nations for work on the environment and HIV/ AIDS, and won the Visa D’Or at Visa Pour L’Image. He also won the National Magazine Award for his work in the Democratic Republic of Congo. We would like to acknowledge the assistance of Mr. Stirton’s colleague at Getty Images, Tom Stoddart, who kindly replaced him on short notice to photograph home healthcare workers in Switzerland. Two ethnic H’mong women pose for pictures after a day of work in the rice paddies below. The terraced rice fields are part of the breathtaking scenery of Mù Cang Chai in northeast Vietnam and attract tourists from around the world. 260 | Novartis Annual Report 2015 Key dates for 2016 Contact information ANTICIPATED REPORTING DATES For further information regarding Novartis, Annual General Meeting February 23, 2016 First quarter 2016 results April 21, 2016 Novartis investor event in Switzerland May 24-25, 2016 Second quarter and first half 2016 results July 19, 2016 Third quarter and first nine months 2016 results October 25, 2016 please contact Novartis International AG CH-4002 Basel, Switzerland GENERAL INFORMATION Tel: +41 61 324 11 11 Fax: +41 61 324 80 01 INVESTOR RELATIONS Tel: +41 61 324 79 44 Fax: +41 61 324 84 44 Email: investor.relations@novartis.com SHARE REGISTRY Tel: +41 61 324 72 04 Fax: +41 61 324 32 44 Email: share.registry@novartis.com MEDIA RELATIONS Tel: +41 61 324 22 00 Fax: +41 61 324 90 90 Email: media.relations@novartis.com FURTHER DETAIL www.novartis.com www.novartis.com/annualreport2015 www.novartis.com/order2015annualreport All product names printed in italics in this Annual Report are trademarks owned by or licensed to the Novartis Group. The use of the registered trademark ® in combination with products in normal script indicates third-party brands. The business policy of Novartis takes into account the OECD’s Guidelines for Multinational Enterprises, with their recommen- dations on the disclosure of information. Our Annual Report is published in English; a German translation is also available. Publisher: Novartis International AG, Basel, Switzerland Designer: Addison Group, London, United Kingdom Production and Artwork: phorbis Communications AG, Basel Management Photography: Thomas Stöckli, Zürich, Switzerland Printer: Neidhart + Schön Group, Zürich, Switzerland © Novartis AG, 2016 Forward-looking statements These materials contain forward-looking statements that can be identified by terminology such as such as “potential,” “expected,” “will,” “planned,” or similar expressions, or by express or implied discussions regarding potential new products, potential new indications for existing products, or regarding potential future revenues from any such products; potential shareholder returns or credit ratings; or regarding any potential financial or other impact on Novartis or any of our divi- sions of the strategic actions announced in January 2016 to focus our divisions, integrate certain functions and leverage our scale; or regarding any potential financial or other impact on Novartis as a result of the creation and operation of NBS; or regarding the potential financial or other impact on Novartis of the transactions with GSK, Lilly or CSL; or regarding potential future sales or earnings of the Novartis Group or any of its divisions; or by discussions of strategy, plans, expectations or intentions. You should not place undue reliance on these statements. Such forward looking statements are based on the current beliefs and expectations of management regarding future events, and are subject to significant known and unknown risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those set forth in the forward looking statements. There can be no guarantee that any new products will be approved for sale in any market, or that any new indications will be approved for any existing products in any market, or that any approvals which are obtained will be obtained at any particular time, or that any such products will achieve any particular revenue levels. Nor can there be any guarantee that Novartis will be able to realize any of the potential strategic benefits, synergies or opportuni- ties as a result of the strategic actions announced in January 2016, the creation and operation of NBS, or the transactions with GSK, Lilly and CSL. Neither can there be any guarantee that Novartis or any of the businesses involved in the transactions will achieve any particular financial results in the future. Neither can there be any guarantee that shareholders will achieve any particular level of shareholder returns. Nor can there be any guarantee that the Group, or any of its divisions, will be commercially successful in the future, or achieve any particular credit rating. In particular, management’s expectations could be affected by, among other things: unexpected regulatory actions or delays or government regulation generally; the potential that the strategic benefits, synergies or opportunities expected from the strategic actions announced in January 2016, the creation and operation of NBS, or the transactions with GSK, Lilly and CSL may not be realized or may take longer to realize than expected; the inherent uncertainties involved in predicting shareholder returns or credit ratings; the uncertainties inherent in research and development, including unexpected clinical trial results and additional analysis of existing clinical data; our ability to obtain or maintain proprietary intellectual property protection, including the ultimate extent of the impact on Novartis of the loss of patent protection and exclusivity on key products which commenced in prior years and will continue this year; unexpected safety, quality or manufacturing issues; global trends toward health care cost containment, including ongoing pricing pressures, in particular from increased publicity on pharmaceuticals pricing; uncertainties regarding actual or potential legal proceedings, including, among others, actual or potential product liability litigation, litigation and investigations regarding sales and marketing practices, government investigations and intellectual property disputes; general economic and industry conditions, including uncertainties regarding the effects of the persistently weak economic and financial environment in many countries; uncertainties regarding future global exchange rates, including the continued significant increase in value of the US dollar, our reporting currency, against a number of currencies; uncertainties regarding future demand for our products; uncertainties involved in the development of new healthcare products; uncertainties regarding potential significant breaches of data security or disruptions of our information technology systems; and other risks and factors referred to in Novartis AG’s current Form 20-F on file with the US Securities and Exchange Commission. Novartis is providing the information in these materials as of this date and does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise. Photo on the right An Indian child wears glasses to protect her eyes following surgery. The operation was supported by the charity SEE International, which provides sight-saving treatment to people in remote regions of the world, and which receives support from the Alcon Division of Novartis. Back cover A scientist wears protective clothing as part of a strict anti-contamination protocol at a Novartis cell processing facility in the US state of New Jersey. 

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