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.