Annual Report
2016
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
A fitness trainer strives to keep his
mother’s mind limber k page 12
Fighting respiratory disease at
the source k page 20
A cellular drama at the heart of a
researcher’s family k page 38
Cover image: Nurse Evelin Alvarado Fuentes drew blood from Maria
Magdelena Vasquez Lopez as part of a study of chronic obstructive
pulmonary disease in rural Guatemala, where widespread use of wood
fires for cooking contributes to respiratory disease.
Helping Syrian refugees manage chronic
diseases k page 58
Novartis Annual Report 2016 | 1
Contents
CHAIRMAN’S LETTER
CHIEF EXECUTIVE OFFICER’S LETTER
KEY PERFORMANCE INDICATORS – CONSOLIDATED HIGHLIGHTS
2016 AT A GLANCE
STRATEGIC OVERVIEW
Our environment
Our strategy
Our culture and values
Our structure
PERFORMANCE
Performance summary
Innovative Medicines
Sandoz
Alcon
INNOVATION
Innovation
Pipeline
CORPORATE RESPONSIBILITY
Corporate responsibility strategy and governance
Expanding access to healthcare
Novartis access approaches: KPIs 2016
Doing business responsibly
CORPORATE GOVERNANCE
Letter from the Chairman
Summary of our corporate governance approach
Our shares and our shareholders
Our Board of Directors
Our management
Our independent external auditors
Our corporate governance framework
Further information
COMPENSATION REPORT
Compensation Committee Chairman’s letter
2016 Executive Committee compensation system
2016 CEO compensation
2017 Executive Committee compensation system
2016 Board compensation system
2016 Board compensation
Compensation governance
FINANCIAL REPORT
Operating and financial review 2016
Novartis Group consolidated financial statements
Financial statements of Novartis AG
OTHER INFORMATION
Key dates for 2017, contact information and
forward-looking statements
2
4
6
8
15
17
18
19
23
32
34
36
40
52
61
63
65
68
76
79
80
86
98
104
105
106
110
116
123
136
137
138
141
146
178
255
270
Coping with eye disease and fading
vision late in life k page 74
A researcher seeks the roots of plants’
healing power k page 108
A groundskeeper tackles cancer in
several ways k page 145
2 | Novartis Annual Report 2016
Chairman’s letter
Dear shareholder,
In 2016, Novartis continued to strengthen its business,
accelerate innovation and further sharpen its organiza-
tional structure. These steps are primarily designed to
enhance our scientific and operating capabilities. They
are also intended to help us address the medical and
economic challenges of a rapidly aging global popula-
tion, as well as improve our ability to develop important
healthcare solutions and make them available to as many
patients as possible around the world. We are confident
that our strategy of using science-based innovation to
deliver better health outcomes for patients will reinforce
our market position and increase sales, profits and
shareholder value in the long term.
Novartis continued to strengthen its
business, accelerate innovation and further
sharpen its organizational structure
Last year Novartis confronted several pressing issues,
including the loss of US patent protection for our cancer
therapy Gleevec, returning our eye care division to
growth, and accelerating the uptake of our heart failure
medicine Entresto. We were able to maintain our sales
momentum despite these challenges, although we saw
a decline in operating income.
Guided by a strong executive team with five new
leaders, we launched new products, stepped up cross-
divisional collaboration, and paved the way for future
efficiency gains following the global integration of our
technical and service functions.
Joerg Reinhardt
As part of our efforts to accelerate collaboration
across our organization, we are strengthening the con-
nection between the Novartis Institutes for BioMedical
Research and our newly formed Global Drug Develop-
ment unit. These efforts are intended to expedite the
transition of experimental therapies from our labs in
Cambridge, Basel and Shanghai to the clinical setting,
and broaden our industry-leading pipeline. Last year we
received five breakthrough therapy designations from
the US Food and Drug Administration in inflammatory
diseases and oncology, including our investigational
cancer compound LEE011 (ribociclib).
To stay at the forefront of medical science, we are
also expanding our partnerships with leading academic
and private research institutes, with the aim of advancing
developments in emerging frontiers such as gene editing
CHAIRMAN’S LETTER
Novartis Annual Report 2016 | 3
Our strategic approach
Our mission is to discover new ways to improve and extend people’s lives.
Our focus on scientific research and willingness to partner with global technology
leaders aim to keep Novartis at the forefront of medical innovation, and support
our efforts to create long-term value for our shareholders and society.
We strive to be a trusted global healthcare leader and cultivate a corporate
culture of high ethical standards. We promote innovation, quality, collaboration,
performance, courage and integrity, which we regard as essential values and
behaviors in our interactions with patients, healthcare partners and society at large.
For further detail, see
k Our strategy page 17
and immuno-oncology. Partnerships are also vital for
our activities in digital health, where we are working to
improve evidence-based information about our products
and to continue exploring pay-for-performance pricing
models.
Improving access to healthcare in developing coun-
tries is a priority for us, and we are playing our part in
helping to achieve the United Nations Sustainable Devel-
opment Goals. We focus on our longstanding work in the
area of tropical diseases, where we advanced the devel-
opment of our investigational malaria treatment KAF156.
We have also made encouraging progress with our
recently launched Novartis Access portfolio, which aims
to help combat the rise of noncommunicable disea ses
in lower-income countries.
We constantly evolve our corporate governance in an
open dialogue with our stakeholders. In consultation with
them, the Board of Directors has worked to further refine
the compensation system and compliance framework of
Novartis to position our company as a trusted global
healthcare leader and strengthen our market position in
2017.
I thank you for the confidence you have placed in our
company and am pleased to be able to propose a
dividend increase of 2% to CHF 2.75 at the next Annual
General Meeting.
Sincerely,
Joerg Reinhardt
Chairman of the Board of Directors
4 | Novartis Annual Report 2016
Chief Executive
Officer’s letter
Dear shareholder,
Recently, a heart failure patient named John wrote me a
letter. He wanted to thank our company for making him
feel like he had a new lease on life at the age of 54. He
explained how quickly his diagnosis turned his life upside
down, but he now hopes to be around for a long time
thanks to Novartis.
Stories like John’s remind us of our mission, which is
to discover new ways to improve and extend people’s
lives. Last year our products touched nearly a billion
people globally. This is incredible reach. But when you
think that there are 6 billion people who haven’t had the
benefit of a Novartis product, there’s still huge oppor-
tunity to touch the lives of many more people.
This is why I am excited about the future of our
company. Our focus on innovation will be especially
important as the world’s population grows and ages,
driving an increase in chronic illnesses like heart disease
and cancer. This is where Novartis can have even greater
impact, as we strive to use the power of science to
address tough healthcare challenges.
However, the same factors that are driving increased
demand for healthcare are also putting unprecedented
pressure on healthcare systems around the world. The
result is greater focus on cost control and increasing
pressure on prices.
In an effort to build Novartis into a company that can
thrive no matter what the future holds, we made significant
changes in 2016 to create a more sustainable company.
We are working to ensure we have the global scale and
innovation power needed to remain competitive in a
changing world.
In an effort to build Novartis into a company
that can thrive no matter what the future
holds, we made significant changes in 2016
to create a more sustainable company
Last year we reshaped Novartis from a group of loosely
affiliated divisions into an integrated company, consoli-
dating several functions. We created a Global Drug
Development organization to better share expertise,
ensure optimal resource allocation, and leverage new
technology platforms across divisions. At the same time,
we created a single drug manufacturing organization that
can better optimize production capacity and utilization,
while taking steps to lower our costs.
We also sharpened the focus of our business units.
For example, within our Innovative Medicines Division,
Joseph Jimenez
the Novartis Oncology business unit, with its unique
custo mer base, now reports directly to me, given its
growing importance. We also consolidated all of our eye
care drugs into the Novartis Pharmaceuticals business
unit, and focused Alcon solely on surgical and vision care.
In addition, we shifted some mature products from
Novartis Pharmaceuticals to Sandoz, where they can
benefit from our generics division’s expertise.
We continue to work hard to create the right culture
in our company. The revised Novartis Values and
Behaviors, introduced in 2015, are the foundation for our
performance management and succession planning.
In the midst of these organizational changes, I’m
proud that our teams delivered solid performance in
2016. Sales of USD 48.5 billion were in line with a year
ago in constant currencies (cc) – a significant achieve-
ment given the loss of US patent protection for Gleevec.
Products launched recently helped fill the gap. They
included Cosentyx, a treatment for psoriasis and other
autoimmune disorders, which became a billion-dollar
product; and Gilenya, our oral therapy for multiple
sclerosis, which continued double-digit growth. Our
heart failure medication Entresto continued to grow
CHIEF EXECUTIVE OFFICER’S LETTER
Novartis Annual Report 2016 | 5
Our commitment to R&D continues to deliver results
Research and development (R&D) is at the
core of our company and central to our
strategy. The changes we are making to
improve the efficiency and effectiveness of
Novartis should free resources that will help
us continue to make significant investments
in innovation.
Our R&D teams made good progress in
2016. We had 16 approvals in major markets
and 24 applications for marketing approval.
We also received five breakthrough therapy
designations from the US Food and Drug
Administration.
We have a strong pipeline. We believe
12 of our compounds in development
could become blockbusters. Among
the most promising are LEE011
(ribociclib) in combination with letrozole
for breast cancer patients with a
specific genetic mutation; BAF312
(siponimod) for a type of multiple
sclerosis with few effective treatment
options; AMG 334 (erenumab)
for chronic migraines; and RLX030
(serelaxin) for acute heart failure.
For further detail, see
k Innovation page 40
steadily, with approvals in more than 70 countries to date
and solid progress with reimbursement around the world.
We also saw strong performance for oncology products
Tafinlar + Mekinist, a combination therapy for advanced
melanoma, and Jakavi, for blood cancers.
One area where we fell short in 2016 was Alcon. We
started the year with the ambition of returning the busi-
ness to growth. While we were successful in returning
the Vision Care segment to growth in the second half,
the Surgical business is taking longer than expected and
is preventing a positive growth rate for the overall Alcon
Division. We will continue to diligently execute the growth
plan in 2017.
Our core operating income of USD 13.0 billion
declined 2% (cc), as we expected, reflecting generic
competition and growth investments, partially offset by
productivity initiatives.
We made further progress on expanding access to
healthcare. In its first full year of operation, our Novartis
Access program launched in three lower-income coun-
tries, while laying the foundation for expansion to about
30 countries in a few years. Our efforts were reflected
in the latest Access to Medicine Index, where we moved
up one place to No. 3.
As we look ahead, we are excited about the future.
We look forward to delivering further innovation that
could change the practice of medicine for patients
around the world.
We expect 2017 to be another challenging year as
we continue to work through the Glivec patent expiration
in Europe. But we also feel confident that we are
positioned for a new phase of growth beginning in 2018.
I’d like to thank our employees for their dedication
and you, our shareholders, for your continued confidence
in the future of our company.
Sincerely,
Joseph Jimenez
Chief Executive Officer
6 | Novartis Annual Report 2016
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 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 (%)
For further detail, see
k Our performance page 22
k Our Financial Report page 146
% Change
Constant
currencies
0
– 3
1
– 59
2
– 59
– 2
– 3
– 2
USD
– 2
– 8
– 5
– 62
– 3
– 62
– 6
– 6
– 5
2
5
% Change
– 15
– 15
2
2016
48 518
8 268
17.0
6 698
6 698
2.82
2.82
12 987
26.8
11 314
4.75
9 455
9 455
2016
74.10
72.84
2.75
96
96
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
92
36
1 This Annual Report includes non-IFRS financial measures such as core results,
5 Payout ratio 2016 is calculated by converting into USD the proposed total gross
constant currencies and free cash flow. Novartis believes that investor understanding
of the Group’s performance is enhanced by disclosing these non-IFRS measures. A
definition of non-IFRS measures used by Novartis, and further details, including
reconciliation tables, can be found starting on page 171.
2 Net income from discontinued operations and net income of the Group in 2015 include
exceptional divestment gains. Continuing and discontinued operations are defined on
page 154.
3 2016 weighted average number of shares outstanding: 2 378 million (2015: 2 403
million)
4 Dividend 2016: proposal to shareholders for approval at the Annual General Meeting
on February 28, 2017
dividend amount in CHF at the CHF-USD exchange rate of December 31, 2016, 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 2016 consolidated financial
statements.
KEY PERFORMANCE INDICATORS CONSOLIDATED HIGHLIGHTS
Novartis Annual Report 2016 | 7
Innovation
Key figures 1
Projects entering development pipeline 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
New molecular entity (NME) approvals 7
Social8
Access
Total patients reached (millions)
Patients reached through access programs (millions)
People reached through training, health education and service delivery (millions)
People
Full-time equivalent positions / headcount 9
Turnover: % voluntary / % overall
Women in management: % of management10 / % of Board of Directors
Ethics
2016
5
29
5
24
16
3
2016
965
52
17
2015
8
37
0
14
20
6
2015
972
66
12
118 393 / 122 985
118 700 / 122 966
7.4 / 12.2
42 / 25
7.3 / 13.5
41 / 27
Misconduct cases reported / allegations substantiated 11
1 707 / 893
1 300 / 1 010
Health, safety and environment 12
Lost-time injury and illness rate (per 200 000 hours worked) 13
Greenhouse gas emissions, total Scope 1 and Scope 2 (1 000 t) 14
0.08
1 352.7
0.11
1 362.1
For further detail, see
k Innovation page 40
k Social page 60 (corporate responsibility)
1 Includes Innovative Medicines and Sandoz biosimilars only
2 Includes programs entering confirmatory development, based on internal R&D
activities. First patient, first visit (FPFV) has occurred in post-proof-of-concept stage.
Includes 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 line vs. second line). Counted by indication and not
compound
3 This number has been adjusted due to the revised definition of projects entering
portfolio. In 2015, we reported it as 25.
4 Includes projects with FPFV in a Phase III study but not yet filed in the US, EU or Japan
5 Number of breakthrough therapy designations by the US Food and Drug Administration
for therapies under development by Novartis
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 line
vs. second line)
7 Includes NMEs such as small molecules, biologics; in the EU, new fixed-dose
combinations of existing APIs
8 Continuing operations
9 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
10 Management defined locally
11 The number of misconduct cases reported may change as matters may be reassessed
in the course of the case lifecycle. The number of substantiated allegations may
change due to the fact that investigation reports with assessments are received on an
ongoing basis, which potentially leads to a difference in numbers at a later stage. In
2016, the Business Practices Office (BPO) received a total of 3 595 complaints of
alleged misconduct, of which 1 888 were deemed not to be related to misconduct and
were delegated for review and action outside the BPO investigative process. The BPO
initiated investigations of 1 707 reported cases related to misconduct; 893 were
substantiated, including 401 that resulted in dismissals or resignations.
12 2016 environmental sustainability data published in the Annual Report are actual data
for the period from January through September, and best estimates for the period from
October through December. They will be updated with actual data in the first quarter of
2017. Significant deviations will be reported on our website and restated in next year’s
Annual Report.
13 Data include Novartis associates and third-party personnel managed by Novartis
associates.
14 Scope 1: combustion and process, and vehicles; Scope 2: purchased energy
8 | Novartis Annual Report 2016
2016 at a glance
Who we are
Our environment
Employees worldwide (headcount)
123 000
155
Countries where Novartis
products are available
Net sales (USD)
48.5 bn
172.0 bn
Market capitalization (USD)
on Dec. 31, 2016
Growing and aging populations worldwide are driving
change in healthcare, presenting both new opportunities
and new challenges for Novartis. The global population
will increase by more than 1 billion people by 2030,
predicts the United Nations, with most of that growth
occurring in developing countries. People over age 60
are the fastest-growing population segment, expected
to add 500 million people and reach 1.4 billion by 2030.
This is driving an increase in chronic illnesses across the
globe.
These factors contribute to increasing demand for
healthcare worldwide, which is putting cost pressure on
health systems. Governments and health insurers are
increasingly searching for ways to keep spending in
check. They are focusing on the value they receive, based
on the benefits for patients and healthcare systems.
These developments validate our focus on innovation
to produce significant medical advances, and global
scale to further improve our efficiency and effectiveness.
Growing and aging populations
2010–2050 (in billions) and % of population over 60
Novartis is a global healthcare company based in Basel,
Switzerland, with a history going back more than 150
years. We provide healthcare solutions that address the
evolving needs of patients and societies worldwide.
Novartis products are available in about 155 countries
and they reached nearly 1 billion people globally in 2016.
About 123 000 people of 142 nationalities work at
Novartis around the world.
For further detail, visit
k www.novartis.com/about-us
10
9
8
7
6
5
9.72
9.16
8.50
7.76
6.93
20%
15%
10%
2010
2020
2030
2040
2050
TOTAL POPULATION
PERCENTAGE OF POPULATION AGE 60 AND OVER
Source: United Nations
For further detail, see
k Our environment page 15
2016 AT A GLANCE
Novartis Annual Report 2016 | 9
Our strategy
Our structure
We believe Novartis is well prepared for a world with a
growing, aging population and evolving healthcare needs.
Our mission, vision and strategy support the creation of
long-term value for our company, our shareholders and
society.
Our mission is to discover new ways to improve and
extend people’s lives. Our vision is to be a trusted leader
in changing the practice of medicine. Our strategy is to
use science-based innovation to deliver better patient
outcomes in growing areas of healthcare.
We maintain strong investment in research and devel-
opment focused on areas of unmet medical need.
Our mission is to discover new ways to
improve and extend people’s lives. Our
vision is to be a trusted leader in changing
the practice of medicine
Our values
Strong values shape our culture and help us implement
the Novartis strategy in line with our mission and vision.
They describe the professional behavior we expect from
employees: innovation, quality, collaboration, perfor-
mance, courage and integrity.
Integrated company
Novartis made organizational changes in 2016 aimed at
reinforcing innovation and improving the efficiency and
effectiveness of our operations. Novartis is now a more
integrated company with a revised operating model.
We created global functional organizations for drug
development and manufacturing, combining units that
were previously dedicated to individual divisions.
The Global Drug Development organization and
Novartis Technical Operations join the Novartis Institutes
for BioMedical Research and Novartis Business Services
as global functional units that are better able to exploit
the company’s scale, share best practices, and pursue
excellence in their areas of expertise.
We adjusted the structure of Novartis divisions and
business units, reinforcing their focus on our customers
and on patients.
In our Innovative Medicines Division, we created two
business units reporting to the CEO of Novartis: Novartis
Oncology and Novartis Pharmaceuticals. This new
struc ture reflects the increasing scale and importance
of our Oncology business. We sharpened the focus of
our Alcon Division on eye care devices, and shifted
responsibility for ophthalmic pharmaceuticals to Novartis
Pharmaceuticals. Our Sandoz Division remains dedicated
to high-quality, more affordable generic medicines and
biosimilars.
Functional organizations with global scale
Our global functional organizations help drive efficiency
and promote functional excellence.
The Novartis Institutes for BioMedical Research
(NIBR) is the innovation engine of Novartis, focused on
dis covering new drugs that can change the practice of
medicine.
The Global Drug Development (GDD) organization
oversees the clinical development of new medicines
discovered by our research teams and external partners.
Novartis Technical Operations (NTO) brings together
all drug manufacturing at Novartis.
Novartis Business Services (NBS) consolidates sup-
port services across the company.
For further detail, see
k Our strategy page 17
k Our culture and values page 18
k Our structure page 19
k Global functions page 19
10 | Novartis Annual Report 2016
2016 at a glance
continued
Performance highlights
Financial
Net sales (USD)
Total free cash flow (USD)
48.5 bn
9.5 bn
13.0 bn
8.3 bn
6.7 bn
Core operating income (USD)
Operating income (USD)
Net income (USD)
Novartis had solid performance in 2016, supported by a
20% increase in sales of our growth products1 as we
navigated the US patent expiration of our pioneering
cancer drug Gleevec. This underscores our ability to
refresh our product portfolio. Our Innovative Medicines
and Sandoz Divisions performed well in a challenging
environment. We were unsuccessful in returning our
Alcon Division to growth, but the growth plan initiated in
2016 is starting to bear fruit.
Novartis net sales in 2016 were USD 48.5 billion, down
2% in reported terms, but flat in constant currencies (cc).
Our growth products1 – including Gilenya, Cosentyx and
several cancer treatments acquired in 2015 – contributed
USD 17.1 billion, or 35% of net sales. Operating income
in 2016 was USD 8.3 billion (–8%, –3% cc), down mainly
due to patent expirations, and increased investments
related to new product launches and the Alcon growth plan.
2016 net sales from continuing operations
by division
(in USD millions, growth in % cc2 and divisional share of net sales)
INNOVATIVE MEDICINES
67%
SANDOZ
21%
ALCON
12%
32 562 / 0%
10 144 / 2%
5 812 / – 2%
TOTAL
48 518 / 0%
Net income was USD 6.7 billion, down 5% in reported
terms, but up 1% in constant currencies, due to higher
income from associated companies. Earnings per share
were USD 2.82 (–3%, +2% cc), up more than net income
due to fewer outstanding shares. Free cash flow was
USD 9.5 billion, up 2%, reflecting lower net investment
in property, plant and equipment.
We also present core results,3 which exclude the
impact of significant disposals, acquisitions, restructur-
ings and other items. Core operating income was USD
13.0 billion (–6%, –2% cc). Core operating income mar-
gin (cc) declined 0.7 percentage points, due to the
Gleevec patent expiration and our investments in new
product launches and the Alcon growth plan. Exchange
rates had a further negative impact of 0.4 percentage
points, resulting in a net decrease of 1.1 percentage
points to 26.8% of net sales. Core net income was USD
11.3 billion (–6%, –3% cc). Core earnings per share were
USD 4.75 (–5%, –2% cc).
Innovation
Projects in clinical development
200 +
9.0 bn
Research and development spend (USD)
1 “Growth products” are an indicator of the rejuvenation of the portfolio, and comprise products
launched in a key market (EU, US, Japan) in 2011 or later, or products with exclusivity in key
markets until at least 2020 (except Sandoz, which includes only products launched in the
last 24 months). They include the acquisition effect of the GSK oncology assets.
2 In constant currencies and for continuing operations
3 Core results are a non-IFRS measure. A definition of non-IFRS measures used by Novartis,
and further details, including reconciliation tables, can be found starting on page 171.
Research and development activities produced 16 major
approvals and 24 major submissions in 2016. We received
US regulatory approval for Cosentyx to treat ankylosing
spondylitis and psoriatic arthritis. We filed for approval
2016 AT A GLANCE
Novartis Annual Report 2016 | 11
populous region. The program uses smartphones and
tablet computers to improve access to medicines and
increase disease surveillance.
We improved the environmental footprint of our
operations, reducing carbon emissions by 10 kilotons in
2016.
We continue our efforts to strengthen integrity and
compliance across Novartis. We updated our Anti-
Bribery Policy and launched a global online tool to handle
conflicts of interest across the company. To ensure
accountability of local country organizations, we include
integrity and compliance in standard business reviews.
We began using virtual meeting technology to supple-
ment face-to-face meetings as we develop better, more
inclusive ways of educating medical professionals about
our products.
In 2016, Novartis was recognized in several corpo-
rate responsibility rankings, including the Access to
Medicine Index, where Novartis ranked No. 3, moving up
one place versus 2014. And we received an A- rating
and were recognized among category leaders in health-
care in the 2016 CDP Climate Score.
For further detail, see
k Our performance page 22
Governance and compensation
We maintained our excellence in corporate governance
in 2016. We refreshed the Board of Directors with new
members, adding Elizabeth Doherty and Ton Buechner,
and reinforcing our Board’s experience in the areas of
accounting and management.
Key focus areas for our Board in 2016 included
strategy, the culture of our company, our corporate
responsibility programs, compliance and our compen-
sation system.
In 2016, we continued to evaluate the effectiveness
of our compensation programs to further align with our
business strategy and shareholder interests. We also
reported the results from the first cycle of our Long-Term
Incentive plan introduced in 2014.
For further detail, see
k Governance page 76
k Compensation page 110
in the US and EU for our Tafinlar + Mekinist combination
to treat non-small cell lung cancer; for PKC412
(mido staurin) in combination with standard chemother-
apy to treat acute myeloid leukemia; and for LEE011
(ribociclib) in combination with letrozole for the treatment
of a particular type of breast cancer.
Novartis received five breakthrough therapy desig-
nations from the US Food and Drug Administration in
2016.
Sandoz continued to lead in biosimilars with US
approval for Erelzi (etanercept-szzs) to treat inflammatory
diseases, although its launch has been delayed by litiga-
tion. Our biosimilar Binocrit (epoetin alfa) was approved
in the EU for a new route of administration. And our filings
seeking marketing approval were accepted in the EU for
biosimilars pegfilgrastim and rituximab.
Alcon received US regulatory approval for the
CyPass Micro-Stent to treat glaucoma, and launched the
NGENUITY 3D Visualization System for vitreoretinal
surgery.
Social
52 m
Patients reached through access
programs
17 m
People reached through health
education programs
Novartis Access, our portfolio of medicines to fight key
chronic diseases in lower-income countries, is offered
to governments and public-sector customers at a price
of USD 1 per treatment per month. Since launch, it has
delivered more than 120 000 treatments to Kenya,
Lebanon and Ethiopia, each providing a one-month
supply of medicine. In September, we signed a memo-
randum of understanding for the implementation of
Novartis Access in Rwanda, and we expect the first
product delivery in early 2017. To prepare for implemen-
tation elsewhere, we filed for approval to sell Novartis
Access drugs in 21 countries.
The Novartis Malaria Initiative achieved another mile-
stone in 2016, having delivered more than 800 million
treatments without profit since 2001. Novartis expanded
its partnership with the Medicines for Malaria Venture to
develop antimalarial compound KAF156. SMS for Life
2.0 launched in Kaduna State, Nigeria’s third most
12 | Novartis Annual Report 2016
PHOTO ESSAY
A fitness trainer
strives to keep his
mother’s mind limber
On Friday nights, 41-year-old Juan Pedro
García Hernández goes dancing. From a
working-class suburb of Madrid, Spain, he
takes the Metro downtown where a friend
DJs. “I escape by dancing,” he says.
1
It’s a precious getaway. Mr. García spends most of
his waking hours caring for his 81-year-old mother,
Antonina Hernández, who suffers from Alzheimer’s
disease.
Mr. García, a fitness trainer, first noticed her
decline four years ago. Every day on the phone she
described eating identical meals. He checked her
refrigerator and it was nearly empty. He saw that
she was losing track of time and forgetting to eat. A
neurologist soon diagnosed Alzheimer’s, a disease
Ms. Hernández shares with an estimated 44 million
others around the world.
In the early days, she could manage on her own,
with steady prompts and visits from Mr. García, who
lived next door. But two years ago, he saw that she
needed help with the most basic tasks and so he
moved into her two-bedroom apartment. He dropped
most of the clients in his fitness classes and became
a full-time caregiver.
Mr. García relentlessly consults the Internet for
advice. The most important point, he says, is to build
routines for his mother, to keep her engaged. “If I’m
cooking, I have her peel the vegetables, and when I
wash the dishes, she dries them,” he says. “It takes
much more time than it would to do it myself.” But
the activities keep her busy and distract her from
the growing gaps in her memory, which can produce
frustration, anger and despair.
He creates daily worksheets for her, and has her
circle words or draw a wavering line through a maze.
He also leads her in exercises. She mirrors her son’s
movements, lifting small pink weights in each hand.
Ms. Hernández is vaguely aware of her situation.
She struggles to remember basic words and is aware
and embarrassed that she forgets so much. She often
hallucinates, returning in her mind to the farm where
she grew up in the tiny town of Villatoro, northwest
of Madrid. She worries if the chickens are fed, and
even on sweltering summer days, she bundles up for
the cold mountain nights of her childhood.
Like so many other caregivers, Mr. García feels
terribly alone and vulnerable. “The worst part is the
stress,” he says. He frets that his mother will slip out of
the house when he’s not looking and get lost or suffer
an accident. “You’re on alert for 24 hours,” he says.
The impact of this disease on people and society
will likely increase, unless research now underway
at Novartis and elsewhere yields a breakthrough in
treatment options. As the world’s population ages,
Alzheimer’s cases are projected to grow rapidly,
reaching 65 million by 2030. This will require more
caregivers, who may face increasing stress and their
own medical problems. Some 40% of caregivers,
according to the Alzheimer’s Association, report
suffering from depression. And there are financial
concerns, as many of them forfeit paying jobs to
care for loved ones.
Indeed, this is one of Mr. García’s challenges. He
scrapes together enough money to send his mother
for a few hours every week to a therapeutic center
run by the city. That frees him up to give a few fitness
classes. He also makes some money by selling comic
books on eBay. But for now, his full-time job is taking
care of his mother. She stands by the sink with a
dish towel and a far-away expression. She’s waiting,
and it’s up to him to give her tomatoes to wash or
bowls to dry.
For detail on Alzheimer’s research k page 49
2
4
PHOTO ESSAY
Novartis Annual Report 2016 | 13
3
1
2
3
4
For Juan Pedro García Hernández, getting his mother
out into their neighborhood in Madrid, Spain, is a daily
routine.
Mr. García started to notice her memory lapses four
years ago, and moved into her apartment to give
full-time care two years later.
Mr. García leads his mother through regular exercises.
They keep her engaged and raise her spirits.
Ms. Hernández and her son inspect the haircut
he has just given her. As her disease progresses,
she relies more on him for routine care.
14 | Novartis Annual Report 2016
Strategic overview
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.
1 bn
The expected increase in
the global population by 2030,
to a total of 8.5 billion people
500 m
The expected increase in people
over the age of 60 worldwide
by 2030, to a total of 1.4 billion
people
+ 46 %
The rise in the average yearly
number of US approvals for new
molecules in the years 2012-2016,
compared to 2007-2011
Our strategic framework
Our mission
Our vision
Discover new ways
to improve and extend
people’s lives
Be a trusted leader
in changing the
practice of medicine
Our strategy
Science-based
innovation
Better patient
outcomes
In growing
areas of healthcare
Our values
Innovation
Quality
Collaboration
Performance
Courage
Integrity
Long-term value creation
k page 17
Our culture and values
Our structure
Our culture supports the success of the enterprise
through clear values to guide our people in their work.
k page 18
Novartis took significant further steps in a transformation begun
three years ago, resulting in revisions to our structure and
operating model.
k page 19
Strategic overview
our environment
Novartis Annual Report 2016 | 15
Our environment
Powerful trends in society and our industry continue
to shape healthcare globally, and these trends seem
in some cases to be accelerating. Medical innovation
is racing ahead at a time when populations are grow-
ing and graying, boosting demand for healthcare. the
increasing cost of caring for people around the world
is raising pressure on healthcare systems.
This opens new possibilities for healthcare companies
to further improve health outcomes for patients. It is also
attracting technology companies to the healthcare
industry. Their special skills make them potential partners
for science-based companies like Novartis, which have
skills they lack, such as deep clinical and regulatory
expertise.
Golden age for medical research
Innovation in medical science is accelerating, driven by
new therapeutic approaches. The number of new treat-
ments underscores this trend. For instance, the average
annual number of new drug molecules approved by the
US Food and Drug Administration from 2012 through
2016 increased 46% compared to the prior five years.
Researchers are developing exciting new ways to
treat diseases. Examples include gene editing and gene
therapies, as well as RNA-based treatments that can
intervene in how cells create specific proteins. Oncology
is a particularly fast-evolving field and includes advances
such as cell therapies to attack cancer cells, and vaccines
that help people ward off the development of cancer in
the first place.
The sophisticated new treatment approaches emerg-
ing from this golden age of medical research offer society
and patients new hope for tackling the many diseases
that still lack effective treatments.
Digital technology is also playing an increasingly
important role in healthcare. Remote monitoring of
patients, advanced data analytics, and other digital
applications are changing the way clinical trials are
conducted, as well as the way patients are treated.
Technology is also being used to augment the effective-
ness of traditional medicines.
The sophisticated new treatment
approaches emerging from this golden
age of medical research offer society and
patients new hope for tackling the many
diseases that still lack effective treatments
Growing and graying populations
The world’s population continues to grow, with an addi-
tional 1 billion people expected to join the human race by
2030, bringing the total number of inhabitants to about
8.5 billion, predicts the United Nations. Most of this
population growth is expected to be in the developing
world, where there continues to be tremendous unmet
medical need. The world’s population also continues to
age rapidly, with the number of people aged 60 or older
expected to increase by more than 500 million by 2030,
to 1.4 billion people.
At the same time, millions of people are migrating
from rural areas to cities, sparking changes in lifestyle
and diet that over time can affect their health. More than
half the world’s population now lives in cities and towns,
and this number is expected to grow to about 5 billion
people by 2030.
These trends are fueling a global increase in chronic
diseases such as diabetes and heart disease that may
require patients to follow years or even decades of treat-
ment. Cancer and cardiovascular diseases will cause half
of all deaths worldwide by 2025, predicts the World
Health Organization.
Rising pressure on healthcare costs
These factors are contributing to higher demand for
healthcare worldwide and putting healthcare systems
under increasing cost pressure. Healthcare costs glob-
ally have risen at a rate of about 10% annually in recent
years, according to Aon Hewitt, well above the general
inflation rate. In many countries, overall spending on
healthcare continues to grow as a proportion of total
economic activity. The US spends the most, at 17% of all
the goods and services produced in the country, accord-
ing to the Organization for Economic Cooperation and
Development.
Responding to the world’s rising healthcare needs
represents a significant opportunity for healthcare com-
panies such as Novartis in the coming years and decades.
However, healthcare companies also have an important
role to play in ensuring healthcare systems are sustain-
able over the long haul.
16 | Novartis Annual Report 2016
Our environment
continued
The pressure on healthcare systems already has
governments and health insurers looking for ways to slow
the rise in spending, while still providing quality care for
as many people as possible. In some cases, they are
employing tough tactics, from limiting access to treat-
ment and slowing the uptake of innovative new medi-
cines, to shifting more of the cost to individual patients.
This trend means healthcare companies increasingly
find themselves squeezed by conflicting demands to
provide cost-effective treatments, while at the same time
continuing to use the latest technology to pursue break-
through medicines and devices. Rising costs have also
helped fuel a heated public debate about the pharma-
ceutical industry’s pricing practices and have prompted
a heightened level of scrutiny.
Indeed, the possibility of political or regulatory action
on drug prices has become a greater risk for the entire
industry, including Novartis. Such action could take a
variety of forms, from restrictions on price increases and
mandates to provide broad access to treatments, to
changes in intellectual property laws. For more on the
risks Novartis faces and the steps we are taking to address
them, please see page 167. One response to rising costs
that is gaining momentum with governments, insurers and
healthcare companies is to shift healthcare systems
toward a focus on producing better health outcomes,
rather than simply paying for pills and healthcare services.
For instance, the European Commission has sanc-
tioned a value-based tendering approach for medical
devices that allows companies to include measures of
health outcomes in their price calculations. Elsewhere,
the US Centers for Medicare & Medicaid Services is a year
ahead of schedule in reaching its target of converting 50%
of spending to quality-based payments that take into
account both health outcomes and cost-effectiveness.
Novartis has also advocated a value-based approach
as a way of improving efficiency in healthcare, and has
agreed to be reimbursed for certain products based
partly on health outcomes.
Novartis has also advocated a value-based
approach as a way of improving efficiency
in healthcare, and has agreed to be
reimbursed for certain products based
partly on health outcomes
Taken together, the evolving trends we see in society
and the healthcare industry reinforce our conviction
that our strategy of focusing on innovation and improved
health outcomes for patients is the correct one to steer
us through a shifting healthcare landscape. Our atten-
tion remains on executing our strategy as effectively as
possible.
Yuko Yoshikawa participates
in daily morning exercises near
her home in Tokyo, Japan. She
has been treated for age-
related macular degeneration
for more than 10 years.
Strategic overview
our strategy
Novartis Annual Report 2016 | 17
Our strategy
we have a consistent strategy that helps us navigate
a world with a growing, aging population and 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 share-
holders and society.
The Novartis mission, vision and strategy are all anchored
in our company’s tradition of leadership in innovation. We
believe our mission accurately describes why we exist
as a company, while our vision expresses an ambitious
aspiration to strive for. Along with our strategy, they effec-
tively guide our path to the future.
Our mission is to discover new ways
to improve and extend people’s lives
Our vision is to be a trusted leader in
changing the practice of medicine
Our strategy is to use science-based
innovation to deliver better patient
outcomes in growing areas of healthcare
Our strategy has remained consistent. The trends we
see in society and the healthcare industry convince us
our direction is appropriate. Our strategy and its imple-
mentation have been strongly endorsed in annual
reviews by the Executive Committee of Novartis and the
Board of Directors.
ScieNce-BaSeD iNNovatioN
Innovation that produces breakthrough medicines and
products will be more important than ever in the health-
care industry in the coming years. We maintain strong
investment in research and development to address
unmet medical needs. Our product pipeline is fed by a
research and development approach that uses the latest
science to advance the most promising projects.
Our research strategy aims to increase collaboration
across traditional scientific and organizational boundar-
ies, and focus on powerful new technologies that have
the potential to help produce therapeutic breakthroughs.
We are organizing our early discovery efforts around
chemical biology, a scientific approach that brings
together experts from different fields, including biology,
chemistry and computer science, to create new types
of molecules and use them to probe biological systems.
In drug development, we pursue promising therapies
where we can leverage the scale and expertise of Novartis
to bring important treatments to patients globally.
Better PatieNt oUtcoMeS
We seek to develop medicines and products that can
produce positive real-world outcomes for patients and
healthcare providers. The benefits can range from im -
pro ving the cost-effectiveness of high-quality care to
prolonging lives. We are developing services and tech-
nologies to augment the benefits of our core products,
often in collaboration with healthcare providers and tech-
nology companies.
growiNg areaS oF HeaLtHcare
We aim to develop innovative products in growing areas
of healthcare where we can make a real difference. We
focus on patented medicines, generic medicines and eye
care – segments where we have the innovation power
and global scale necessary to compete effectively. At
the same time, we are expanding our presence in the
emerging markets of Asia, Africa and Latin America,
where populations are growing fastest and where
demand for access to high-quality medicines and health-
care is also likely to continue to increase.
For further detail, see
k Innovation page 40
18 | Novartis Annual Report 2016
Our culture and values
talented, committed and responsible people from
diverse backgrounds are essential for successfully
implementing our strategy. we foster a company cul-
ture that supports the success of the enterprise
through clear values to guide our people in their work.
Our culture
We continue to reinforce a company culture that supports
our people as they face new challenges in a rapidly evolv-
ing healthcare environment.
Our values define our culture and help us execute the
Novartis strategy in line with our mission and vision. They
describe the professional behavior we expect from our
employees. We use six values to inform our recruitment
activities, shape employee development programs, and
help guide individual performance assessments and
decisions about bonuses and other rewards. Compre-
hensive training programs ensure our people are famil-
iar with these values and know how to apply them in their
jobs.
Our values
iNNovatioN
Innovation founded in strong science is at the heart of
Novartis and key for our strategy and success. We
nurture a culture of innovation by encouraging people to
experiment and take smart risks. Our aim is to foster
crea tive thinking that leads to practical solutions to
healthcare and business challenges.
Jennifer Allport-Anderson, a cell biologist who leads a
heart failure and in vivo pharmacology team at the
Novartis Institutes for BioMedical Research (NIBR) in
Cambridge, Massachusetts in the US, walks through
one of NIBR’s new buildings.
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 excel-
lence includes continuously enhancing our standards,
technology and training for our people.
coUrage
We want our associates to speak out, challenge conven-
tional thinking, and stand up for their ideas. We also want
them to have the courage to do the right thing in the face
of resistance or moral dilemmas. They need the fortitude
to take smart risks, even when the chance of failure is
high.
coLLaBoratioN
We foster teamwork among our employees to swiftly and
efficiently deliver innovative new products to patients and
healthcare providers. This capitalizes on the diversity
and creativity of our global staff.
PerForMaNce
People at Novartis are known for their focus on deliver-
ing results – and they often make extraordinary efforts
to achieve their goals. We aim to reinforce that focus on
personal and collective achievement, while maintaining
high ethical standards.
iNtegritY
High performance with integrity is fundamental to the
way we operate at Novartis and is critical to maintaining
the support of society and governments. Our Code of
Conduct sets high ethical standards, and comprehen-
sive training ensures our associates know how to apply
these standards in their work. We also enforce our code,
investigating allegations of wrongdoing and taking
decisive corrective action when needed.
For further detail, see
k People page 27
Strategic overview
our structure
Novartis Annual Report 2016 | 19
Our structure
in 2016, Novartis took significant further steps in a trans-
formation we began three years ago. the changes rep-
resent a shift in our operating model – one that we believe
enables us to more effectively implement our strategy
and create long-term value. the company has been
reshaped from a diverse group of largely independent
divisions into a more focused, more integrated company
that is better able to deliver innovative products, exploit
global scale, and respond to new opportunities and risks.
Revised structure
Novartis completed a series of organizational changes
in 2016 aimed at reinforcing innovation and making the
company more efficient and more nimble. We created
two new global functional organizations – one for drug
development and one for manufacturing – combining
units that were previously dedicated to individual divi-
sions. The Global Drug Development organization and
Novartis Technical Operations join the Novartis Institutes
for BioMedical Research and Novartis Business Services
as global functional units that are better able to exploit
the company’s scale, share best practices, and pursue
excellence in their areas of expertise. The Head of Global
Drug Development also joined the Executive Committee
of Novartis, adding the new development organization’s
insights to the company’s top leadership team.
We adjusted the structure of Novartis divisions and
business units in 2016 to reinforce their focus on our
customers and patients, as well as to speed decision-
making. In our Innovative Medicines Division, we created
two business units reporting to the CEO of Novartis:
Novartis Oncology and Novartis Pharmaceuticals. The
new structure reflects the scale and importance to
Novartis of our Oncology business, which is one of the
world’s biggest providers of cancer treatments, following
the acquisition of oncology products from GlaxoSmith-
Kline in 2015. The Novartis Pharmaceuticals business
unit focuses on patented treatments in the areas of
cardio-metabolic, respiratory, neuroscience, ophthal-
mology, and immunology and dermatology. Both units
are represented on the Executive Committee of Novartis.
We sharpened the focus of our Alcon Division on eye
care devices, and shifted responsibility for ophthalmic
pharmaceuticals to Novartis Pharmaceuticals, where
they can benefit from the scale and expertise of that
business unit.
Our Sandoz Division remains dedicated to the fast-
growing market for more affordable, high-quality generic
medicines and biosimilars, which help health systems
broaden access to treatment while managing their costs.
During 2016, we shifted some established medicines
from Novartis Pharmaceuticals to Sandoz, where there
is a better fit with the portfolio.
Functional organizations with global scale
NovartiS iNS titUteS For BioMeDicaL reSearcH
The Novartis Institutes for BioMedical Research (NIBR),
with more than 6 000 scientists, physicians and business
professionals worldwide, is the innovation engine of
Novartis. NIBR focuses on discovering new drugs that
can change the practice of medicine.
gLoBaL DrUg DeveLoPMeNt
The Global Drug Development organization oversees
the development of new medicines discovered by our
research teams and external partners. Bringing to -
gether drug development at Novartis facilitates regular
evaluation of the new products in our pipeline, as well as
optimum allocation of resources to the most promising
projects. It also supports common standards and pro-
cedures, and the broad adoption of best practices, all of
which we believe will lead to greater efficiency and effec-
tiveness.
Oncology
business unit
Innovative Medicines
rate fu n c ti o n s
o
p
r
o
C
R & D
Manufa c t u r i n g
B
u
si
n
e
s
s
s
e
r
v
i
c
e
s
Sandoz
Alcon
Pharmaceuticals
business unit
NovartiS tec HNicaL oP eratioNS
The global Technical Operations unit brings together all
drug manufacturing at Novartis. We expect this organi-
zation to improve resource allocation, optimize capacity
planning, and further improve quality.
NovartiS BUSiNeSS ServiceS
Novartis Business Services (NBS) consolidates support
services across Novartis divisions, helping drive effi-
ciency, simplification, standardization and quality. NBS
includes six service domains: financial reporting and
accounting operations, human resources services,
information technology, procurement, product lifecycle
services, and real estate and facility management. Its
role in generating productivity gains supports our con-
tinued investment in research and development, and
underpins our financial results.
20 | Novartis Annual Report 2016
1
2
PHOTO ESSAY
3
Fighting respiratory
disease at the source
When Guatemalan social worker Eduardo
Canuz teaches rural women how to cook their
tamales on a gas stove, he is taking on more
than a thousand years of history. The Maya
people of Guatemala’s highlands have been
cooking over wood fires and bathing in wood-
heated saunas, known as temazcales, since
the dawn of their civilization. But the smoke
is unhealthy and especially dangerous for
women and children.
That’s where Mr. Canuz comes in, with his supply
of gas stoves and tanks of liquid propane. He’s the
field coordinator for a pilot research program called
NACER (“to be born” in Spanish). In San Lorenzo and
nearby mountain villages, Mr. Canuz and his team
have installed gas stoves in the homes of 50 pregnant
women. The goal is to monitor air quality in their homes
through the course of their pregnancies, and then to
study the health and development of their babies.
This is a crucial challenge, one that extends far
beyond Guatemala. More than 3 billion people around
the world cook and heat their homes with open fires
and simple stoves, according to the World Health
Orga nization (WHO). This contributes to respiratory
illness, including lung cancer, asthma and chronic
obstructive pulmonary disease. The WHO estimates
that these diseases kill as many as 2 million people
every year.
Guatemala’s Department of Public Health dis
patches young doctors to monitor pulmonary disease
in rural villages like those around San Lorenzo. They
administer common medicines and send more serious
cases to hospitals. But they’re understaffed and many
villagers continue to treat diseases with traditional
remedies, including nearly 60 different plants. Studies
indicate that some of them have antibacterial powers
– but often not enough.
PHOTO ESSAY
Novartis Annual Report 2016 | 21
1
2
3
4
5
Smoke from fires used for cooking and heating
in Guatemala and much of the developing world
contributes to respiratory illness, especially
among infants.
Project manager Eduardo Canuz helps families
in San Lorenzo and nearby villages replace
wood fires with cleaner burning gas stoves.
Field worker Expedita Ramírez
Marroquín fits a woman with a vest to
monitor the levels of carbon monoxide she
experiences during the day.
The hope is that cleaner household air, along
with better care, will improve infant health.
A new gas stove attracts a crowd.
4
5
In Guatemalan health clinics, infants account for
more than 60% of respiratory cases. However, coaxing
their families away from stoves isn’t easy. First, there’s
the challenge of establishing a distribution network
for propane canisters so that the women can count
on timely refills and at prices that compete with wood.
The NACER team also struggles to open up space
in small kitchens for the new equipment. And they
must remind the women to wear small backpacks
equipped with sensors to monitor the air and measure
the particulates floating in it.
But perhaps the biggest challenge is cultural.
Most of the people around San Lorenzo speak a
Mayan language, Mam, and view the Spanishspeaking
researchers as outsiders. And traditionalists – often
husbands and mothersinlaw – tend to resist the new
and cleaner technology. “It’s hard to convince people
over 50,” Mr. Canuz says. “They want to keep burning
wood.” To convince these diehards, NACER gives
cooking classes and holds contests where people
compete to make gascooked delicacies.
Lisa Thompson, coordinator of the doctoral
program in global health services at the University
of California, San Francisco, in the US, is running the
pilot project around San Lorenzo. In the early 2000s,
she led a preliminary effort to reduce smoke in villages
by replacing open fires with woodburning stoves
called planchas. These stoves had chimneys, which
routed some of the smoke out of the homes. Still, San
Lorenzo and nearby villages remained polluted, with
lots of smoke making its way into homes – and young
lungs. So Ms. Thompson turned to gas.
The work, she says, doesn’t end when babies are
born. Field workers pay home visits to check on the
babies’ health, and new mothers are taught to look
for early symptoms of pneumonia. If their babies are
feverish and breathing fast, they’re urged to rush to
a clinic for treatment.
In addition to installing stoves, the NACER team is
working to discourage pregnant women from bathing
in the temazcales. These steamy huts, where water
is splashed on heated stones, have skyhigh levels of
carbon monoxide (CO), which is especially dangerous
for developing fetuses. Pregnant women often take
a bath in the evening, right before going to bed. The
combination of heat and CO induces sleep, Ms.
Thompson says. “It’s a very hard thing to change.”
The San Lorenzo project is tiny, but the health risk
of smoke inhalation is global. Ms. Thompson hopes that
data from San Lorenzo, as well as lessons learned, will
pave the way for a much larger effort featuring 3 200
pregnant women in Ghana, Rwanda, India and Peru.
For detail on respiratory disease research k page 47
22 | Novartis Annual Report 2016
Performance
Novartis delivered solid performance in 2016 while navigating the patent
expiration of our biggest-selling drug. Growth products helped offset the
impact of generic competition. Research and development continued to
yield good results, with 16 major product approvals in 2016 and important
advances in our pipeline. We also made progress with efforts to improve
access to medicines worldwide.
48.5 bn
Net sales (USD)
9.5 bn
Free cash flow (USD)
6.7 bn
Net income (USD)
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 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
2016
48 518
8 268
17.0
6 698
6 698
2.82
2.82
12 987
26.8
11 314
4.75
9 455
9 455
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
% Change
USD
– 2
– 8
– 5
– 62
– 3
– 62
– 6
– 6
– 5
2
5
Constant
currencies
0
– 3
1
– 59
2
– 59
– 2
– 3
– 2
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. A definition of non-IFRS measures used by Novartis, and further details, including reconciliation tables, can be
found starting on page 171.
2 Net income from discontinued operations and net income of the Group in 2015 include exceptional divestment gains. Continuing and discontinued operations are defined on page 154.
3 2016 weighted average number of shares outstanding: 2 378 million (2015: 2 403 million)
Performance
Performance summary
Novartis Annual Report 2016 | 23
net sales, operating income, core operating
income,1 research & development, marketing &
sales from continuing operations as % of net sales
(% of net
sales)
51.1
51.9
52.2
49.4
48.5
35
30
25
20
15
10
5
0
2012
2013
2014
2015
2016
NET SALES (USD billion)
CORE OPERATING INCOME1
OPERATING INCOME
RESEARCH & DEVELOPMENT
MARKETING & SALES
2016 net sales from continuing operations
by geographical region
(% of net sales and in USD millions)
UnITeD STaTeS
35%
eUroPe
35%
aSIa / afrIca / aUSTraLaSIa
22%
canaDa anD LaTIn amerIca
8%
17 117
17 079
10 441
3 881
ToTaL
48 518
Performance
summary
Financial performance
Novartis delivered solid results in 2016, countering much
of the effects of the loss of US patent protection during
the year for our pioneering leukemia drug, Gleevec. This
underscores the strength of our pipeline and our ability in
recent years to renew our product portfolio and control
costs to manage through important patent expirations.
Gleevec follows Diovan, which lost exclusivity in 2011 in
the EU and in 2012 in the US.
Our Innovative Medicines and Sandoz Divisions
performed well under challenging circumstances. We
were not successful in returning Alcon to growth in 2016,
although we have begun to see the first results from the
growth plan implemented during the year.
Net sales for Novartis in 2016 were USD 48.5 billion,
down 2% in reported terms, but flat measured in constant
currencies (cc) to remove the impact of fluctuations in
exchange rates. While volumes grew 6 percentage
points, that was offset by the negative impacts of 4 per-
centage points due to generic competition and 2 per-
centage points from lower prices.
We continued to face headwinds in 2016 from cur-
rency fluctuations, with the rising value of the dollar
adversely affecting our reported sales and income. This
continues a trend we have seen for several years, par-
ticularly in 2015 when currency fluctuations had a neg-
ative 10% impact on sales. To help investors assess the
impact of exchange rates on our performance, we also
indicate growth rates in constant currencies.
In 2016, our growth products2 contributed USD 17.1 bil-
lion, or 35% of net sales. These include Gilenya for multi-
ple sclerosis, up 14% (cc) to USD 3.1 billion; Cosentyx for
psoriasis and two other immune-related illnesses, which
reached blockbuster status with sales of USD 1.1 billion;
Jakavi for blood cancer, up 45% to USD 581 million;
and the combination cancer therapy Tafinlar + Mekinist,
acquired from GSK during 2015 (USD 672 million).
Biopharmaceutical products from Sandoz also contin-
ued to be a bright spot, rising 31% (cc) to USD 1.0 billion.
Sales of heart failure drug Entresto grew steadily
during the year and totaled USD 170 million. We contin-
ued to increase our investment in its launch, devoting
additional resources during the year to educating doctors
and patients about its benefits.
Operating income in 2016 was USD 8.3 billion (–8%, –3%
cc), down mainly due to the effects of patent expirations and
increased investments related to new product launches,
including Entresto and Cosentyx, and the Alcon growth plan.
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. A
definition of non-IFRS measures used by Novartis, and further details, including
reconciliation tables, can be found starting on page 171.
2 “Growth products” are an indicator of the rejuvenation of the portfolio, and comprise
products launched in a key market (EU, US, Japan) in 2011 or later, or products with
exclusivity in key markets until at least 2020 (except Sandoz, which includes only
products launched in the last 24 months). They include the acquisition effect of the
GSK oncology assets.
24 | Novartis Annual Report 2016
Performance summary
continued
Net income from continuing operations was USD 6.7 bil-
lion, down 5% in reported terms, but up 1% in constant
currencies, due to higher income from associated com-
panies. Earnings per share from continuing operations
were USD 2.82 (–3%, +2% cc), up more than net income
due to a reduction in the average number of shares out-
standing.
Free cash flow from continuing operations was USD
9.5 billion, up 2%, reflecting lower net investment in prop-
erty, plant and equipment.
To help investors track our underlying performance, we
also present our core results, which exclude the impact of
disposals, acquisitions, restructurings and other significant
items.
Core operating income was USD 13.0 billion (–6%,
–2% cc). Our core operating income margin measured
in constant currencies declined 0.7 percentage points,
due to the Gleevec patent expiration and our investments
in new product launches and the Alcon growth plan.
Changing exchange rates had a further negative impact
of 0.4 percentage points, resulting in a net decrease of
1.1 percentage points to 26.8% of net sales.
Core net income was USD 11.3 billion (–6%, –3% cc).
Core earnings per share were USD 4.75 (–5%, –2% cc),
declining less than core net income due to fewer out-
standing shares.
contribution of growth products1
(continuing operations net sales in USD millions, % of continuing
operations net sales)
51 080
51 869
52 180
49 414
48 518
30%
33%
33%
34%
35%
2012
2013
2014
2015
2016
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 24
months).
In Brisbane, Australia, groundskeeper and skin
cancer survivor Malcolm Caddies protects
himself from the sun as he prepares the field
for a rugby match at Suncorp Stadium.
Productivity
Efforts to improve productivity are delivering results.
Novartis Business Services (NBS), our shared services
organization, continued to leverage the global scale of
Novartis to streamline and consolidate our operations.
For example, we reduced the number of information
technology applications we use, consolidated facilities
services from more than 100 suppliers to just three, and
initiated the standardization of infrastructure services at
selected manufacturing sites, among other steps. In
addition, NBS continued to optimize its footprint through
selective offshoring to five global service centers.
NBS, as well as our newly created Global Drug De -
velopment (GDD) organization and global Novartis
Technical Operations (NTO) group, will continue to drive
the pursuit of greater efficiency and effectiveness. We
anticipate that the benefits of the new GDD and NTO
organizations will yield more than USD 1 billion in annual
cost savings by 2020.
Performance
Performance summary
Novartis Annual Report 2016 | 25
Innovation performance
We made significant progress in research and develop-
ment in 2016, with 16 major approvals in key markets and
24 major submissions. We also reported positive clinical
data for key molecules, helping to bolster our broad pipe-
line of products in development. We believe we have up
to 12 drugs in our pipeline with the potential to become
blockbusters.
We believe we have up to 12 drugs in
our pipeline with the potential to become
blockbusters
Oncology
Several targeted therapies designed to tackle abnormal-
ities in cancer cells achieved significant milestones in
2016. We filed for regulatory approval in the US and
EU to market LEE011 (ribociclib) in combination with
letrozole for the treatment of a particular type of breast
cancer. In a pivotal Phase III trial, LEE011 plus letrozole
significantly extended progression-free survival over
letrozole alone in postmenopausal women with hormone
receptor-positive (HR+)/human epidermal growth factor
receptor 2-negative (HER2-) advanced or metastatic
breast cancer, which tends to be aggressive and difficult
to treat. The study evaluated the combination as a first-
line treatment. The US Food and Drug Administration
(FDA) granted priority review for LEE011 plus letrozole
after designating the combination a breakthrough ther-
apy for the disease. Such designations are intended to
expedite the development and review of potential new
medicines that treat serious or life-threatening conditions.
We also filed to market targeted therapies in lung and
blood cancer. We filed our ALK inhibitor Zykadia in the
US and EU for a new indication as a first-line treatment
for ALK+ non-small cell lung cancer. Approximately 2–7%
of people with the disease have the ALK gene rearrange-
ment. Our Tafinlar + Mekinist combination was filed in
the US and EU with a new indication as a first-line treat-
ment for non-small cell lung cancer patients with a BRAF
V600 mutation. BRAF V600 mutations promote tumor
growth. In addition, PKC412 (midostaurin) in combination
with standard induction and consolidation chemother-
apy was filed in the US and EU for adult patients with
newly diagnosed acute myeloid leukemia (AML) with an
FLT3 mutation. Like BRAF V600 mutations, FLT3 muta-
tions promote tumor growth.
Ruxolitinib was designated a breakthrough therapy
by the FDA for acute graft-versus-host disease (GVHD),
a dangerous complication of stem cell transplants.
Ruxolitinib, originally developed by Incyte Corporation,
is marketed by Incyte Corporation as Jakafi® in the
US and by Novartis as Jakavi outside the US to treat
blood cancers myelofibrosis and polycythemia vera. We
have now acquired rights to develop and commercialize
this therapy for GVHD outside the US.
Novartis also made progress beyond targeted thera-
pies for cancer. We reported pivotal clinical data on
CTL019 – a personalized cell therapy developed in colla-
boration with the University of Pennsylvania in the US –
in pediatric and young adult patients with relapsed/
refractory B-cell acute lymphoblastic leukemia, and we
plan to file for marketing approval in early 2017. CTL019
harnesses the body’s immune system to fight cancer
cells and is among the first personalized cell therapies
for cancer to be developed in the world.
Immunology and dermatology
We continue to build on the launch of Cosentyx, the first
approved fully human monoclonal antibody that selec-
tively binds to circulating interleukin-17A, which plays an
important role in driving the body’s immune response in
several disorders. In 2016, we received FDA approval for
Cosentyx to treat patients with ankylosing spondylitis
(AS) and psoriatic arthritis (PsA), which are both painful
and debilitating inflammatory diseases that affect the
joints and/or spine. The two new indications follow FDA
and EU approvals in January 2015 for Cosentyx to treat
moderate-to-severe plaque psoriasis, and European
approval in November 2015 to treat AS and PsA.
Novartis also expanded the use of Ilaris, an inter-
leukin-1 beta inhibitor. In 2016, the European Commission
approved a license extension for Ilaris to treat patients
with adult-onset Still’s disease, and the FDA approved
the drug for three rare and distinct types of periodic fever
syndromes, also known as hereditary periodic fevers.
Earlier in the year, Ilaris was granted breakthrough
therapy status and priority review by the FDA for each
of the three periodic fever syndromes.
Neuroscience
We reported positive clinical trial results for two import-
ant molecules in our neuroscience pipeline: BAF312
(siponimod) and AMG 334 (erenumab). A Phase III study
showed that BAF312 reduces the risk of disability pro-
gression in patients with secondary progressive multiple
sclerosis, a condition with few available treatment
options. We also announced positive results for two
Phase III studies of AMG 334 in episodic migraine
prevention, and for a Phase II study of AMG 334 in
chronic migraine prevention. In these studies, patients
who received AMG 334 experienced fewer monthly
migraine days than patients who received placebo.
26 | Novartis Annual Report 2016
Performance summary
continued
Elsa Anderson and her
classmates prepare for a
choral performance in
Rockport, Massachusetts in
the US. Her mother, Jennifer
Allport-Anderson, is a
researcher at the Novartis
Institutes for BioMedical
Research (NIBR) in Cam-
bridge, Massachusetts.
Eye care
In 2016, we received EU approval for Lucentis (ranibi-
zumab) – an anti-vascular endothelial growth factor
agent – in a new indication. Originally approved for wet
age-related macular degeneration, the drug can now be
used to treat a wide range of conditions that share a
common feature: the growth of abnormal blood vessels
under the retina. The latest approval is for the treatment
of visual impairment due to choroidal neovascularization
associated with causes other than neovascular age-
related macular degeneration or secondary pathologic
myopia. Genentech has commercial rights to Lucentis in
the US, and Novartis has exclusive rights in the rest of
the world.
Our eye care division, Alcon, launched two new sur-
gical technologies – the CyPass Micro-Stent and the
NGENUITY 3D Visualization System – for the treatment
of eye diseases. The CyPass Micro-Stent, approved by
the FDA in July, is a minimally-invasive glaucoma surgery
device that is implanted at the time of cataract surgery.
It is designed to lower pressure in the eye and thereby
help reduce the potential for tissue damage that’s
characteristic of primary open-angle glaucoma. The
NGENUITY 3D Visualization System is an imaging
platform that helps vitreoretinal surgeons better visual-
ize the delicate tissues at the back of the eye during
surgery.
We also launched Dailies Total1 Multifocal and Air
Optix plus HydraGlyde, contact lenses featuring new
technologies.
Biosimilars
The FDA approved our biosimilar Erelzi (etanercept-szzs)
to treat multiple inflammatory diseases. Erelzi is the
second biosimilar from our Sandoz Division to be
approved in the US under the new biosimilar pathway
created in the Biologics Price Competition and Inno-
vation Act of 2009. A confirmatory clinical safety and
efficacy study demonstrated that Erelzi is equivalent to
reference product Enbrel®. The biosimilar launch is
pending litigation with Amgen, the manufacturer of
Enbrel®.
Our biosimilar Binocrit (epoetin alfa) was approved
in the EU for a new route of administration based on data
from a study in pre-dialysis and dialysis patients with
anemia associated with chronic kidney disease. We are
currently evaluating options for an epoetin alfa filing in
the US.
Filings were accepted in the EU in 2016 for our peg-
filgrastim and rituximab biosimilars. In 2017, we plan to
submit filings for adalimumab in the US and EU, rituximab
in the US, and infliximab in the EU. We remain on track
to launch five major biosimilars across both key geo-
graphies by 2020, adding to the three Sandoz biosimilars
already on the market worldwide.
Performance
Performance summary
Novartis Annual Report 2016 | 27
Operations
In 2016, we centralized all drug manufacturing operations
into a new organization with the aim of optimizing capacity
planning and improving efficiency and effectiveness,
further supporting our ability to implement the Novartis
strategy. Novartis Technical Operations (NTO) includes
about 28 000 employees and nearly 70 manufacturing
sites supplying products worldwide.
The new unit has been organized by technology plat-
forms to facilitate simplification, standardization and
procurement savings. The technology platforms include
Chemical Operations, Anti-Infectives, Aseptics, Bio-
logics, Solids and External Supply Operations. They are
supported by the Global Engineering and Supply Chain
Management functions.
An early benefit of integration has been better
resource allocation. The larger scale of NTO allows for
more flexible capacity planning, and provides the oppor-
tunity to further consolidate our supplier base and
improve cost and performance. For instance, the Bio-
logics platform, which was formed before the official
launch of NTO, has used its experience in balancing
manufacturing capacity and sharing knowledge across
its network to respond to greater-than-expected demand
for products such as Cosentyx.
Additionally, the new structure has made it easier to
invest in future manufacturing technologies, such as
innovative solutions in biologics.
Novartis also began a realignment of its quality orga-
nization in 2016. We are creating an integrated, enter-
prise-wide organization, replacing the prior divisional
structure. This change, like others Novartis made last year,
aims to maximize the benefits of the company’s global
scale.
Out of a total of 206 inspections in 2016, all
but four (98%) were without major findings
The Group Quality function operates under single lead-
ership within Novartis, built around teams responsible for
quality within GDD, NTO and NBS, and for coordinating
quality activities in the countries. New leadership positions
were created, including Head of Quality for GDD, Head of
Quality for NTO, and Head of Country Quality.
This integrated model enables the quality organiza-
tion to simplify and standardize processes and systems,
strengthening its partnership with other functions in the
company. It also supports our long-standing commitment
to quality improvement, offering new opportunities for
sharing knowledge and best practices, and facilitating
the exchange of skills and expertise.
The results of inspections by regulatory agencies in
2016 were consistent with the year before. Out of a total
of 206 inspections, all but four (98%) were without major
findings.
People
Our ability to effectively implement the Novartis strategy
depends on the performance of our people. In 2016, we
focused on introducing our company’s new operating
model in a way that enables employees to respond to
new opportunities and challenges. We also strengthened
the company’s leadership team and made progress in
developing our diverse pipeline of talented people.
People performance indicators 1
Full-time equivalent positions / headcount 2
Turnover: % voluntary / % overall
Voluntary turnover of high performers (%) 3
Internal hires / external hires (%)
Women in management: % of management4 / % of Board of Directors
Associate nationalities / associate nationalities in management 4
Annual training hours per employee
2016
2015
118 393 / 122 985
118 700 / 122 966
7.4 / 12.2
7.3 / 13.5
5.8
5.5
47.0 / 53.0
44.8 / 55.2
42 / 25
142 / 109
27.8
41 / 27
145 / 109
27.3
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 We have refined the high-performer definition methodology to reflect the focus on Values and Behaviors, and have restated 2015 data.
4 Management defined locally
28 | Novartis Annual Report 2016
Performance summary
continued
Organizational design and change management
In 2016, Novartis implemented significant changes to the
company structure. When our new structure went live on
July 1, 38 000 employees – or about a third of the work-
force – were realigned to new business organizations.
We took significant steps to prepare for this transition
for our employees and our business. Human resources
professionals received tools to help them partner effec-
tively with business managers. In addition, online train-
ing courses guided managers and employees through
the challenges they could encounter. More than 9 300
managers and staff have completed this training since it
was introduced in 2014.
Throughout the year, we sought feedback from
employees in a series of surveys, focus groups and inter-
views. For example, a survey of leadership teams found
that 84% of respondents understood the rationale
behind the changes at Novartis.
Our new structure and operating model require
employees to work in new ways, collaborating across
organizational boundaries. The cultural shift is being
driven by our senior leaders, 260 of whom met in Sep-
tember to align on the future direction of the company,
define roles and responsibilities, and discuss how the
culture needed to evolve with an emphasis on collabo-
ration. Following the meeting, participants received
materials and workshop tools that enabled them to edu-
cate and motivate their teams about the new operating
model and to align their teams around strategic priori-
ties. The rollout began in late 2016 and will extend into
early 2017.
Our new structure and operating model
require employees to work in new
ways, collaborating across organizational
boundaries
Reinforcing talent, capabilities and leadership
In 2016, Novartis also made significant changes to its
leadership team, including establishing new heads of the
Novartis Institutes for BioMedical Research (NIBR), the
Novartis Pharmaceuticals business unit and our Alcon
Division, as well as a new Chief Ethics and Compliance
Officer and Head of Litigation. In addition, the heads of
GDD and the Novartis Oncology business unit became
members of the Executive Committee of Novartis
(ECN), in view of those organizations’ importance to the
company’s future.
The Board of Directors had a detailed review of suc-
cession plans for the ECN and also received an update
on our overall progress in the area of talent management.
Our five-year integrated talent and leadership strat-
egy, introduced in 2015, guides the identification, assess-
ment and development of high-potential employees.
Some 74% of Novartis Top Leader positions (the com-
pany’s 360 most senior executives) were filled internally
in 2016, reflecting our commitment to developing tal-
ented individuals within the organization and accelerat-
ing their careers. To further strengthen succession plans
for key leadership positions, we introduced assessment
centers to identify and develop people with high poten-
tial. In 2016, 48 people were enrolled.
In tandem, the strategy focuses on identifying tal-
ented individuals outside the organization. This enables
the proactive management of openings, and reduces the
time necessary to fill senior positions.
The company is investing in data analytics to predict
future workforce needs and help understand recruitment
trends. Two pilots were conducted with NIBR in 2016.
The first examined turnover data to identify people who
were more or less likely to leave, and helped us to engage
and retain key staff. The second addressed diversity, and
identified ways to attract more female employees and
help them progress further in the organization. We will
scale up the use of data analytics tools in 2017.
The talent strategy also aims to increase manage-
ment accountability for developing diverse teams and
creating an inclusive work environment. Starting in 2016,
the appraisal framework for all managers included a
mandatory 20% objective measuring their people-
related performance.
Reflecting this priority, we launched the Novartis
Leadership Series in 2016 to improve the management
capabilities of everyone leading a team of five or more
people. These online training materials feature Novartis
leaders and external experts sharing their experience
and giving practical advice to help managers expand
their knowledge and skills. The materials were used by
9 100 employees.
We made further progress in 2016 in diversifying our
workforce. We achieved our initial aspiration of 25%
female representation among Novartis Top Leaders. And
we have 42% female representation in management.
Measures we are taking include acquiring new talent,
using focus group discussions to identify potential bar-
riers to advancement, mentoring, and expanding leader-
ship programs.
For example, we are expanding the Executive Female
Leadership Program (EFLP) begun in the Pharmaceuticals
Division in 2010. This year-long program offers intensive
leadership experience for women, including coaching,
workshops, and senior sponsorship and mentorship.
Since inception, 147 female leaders have been involved
Performance
Performance summary
Novartis Annual Report 2016 | 29
Voluntary turnover of high performers was 5.8% –
compared to 5.5% in 2015. Voluntary turnover of Novartis
Top Leaders was 5.6%. The ECN analyzed the risk of
these people leaving and initiated mitigation plans where
appropriate.
Strengthening the Novartis culture
The new Novartis structure and operating model have
led to an even greater focus on the revised set of Novartis
Values and Behaviors (V&Bs) introduced in 2015. These
define the professional behavior we expect from our
employees and highlight the need for collaboration, as
well as innovation, quality, performance, courage and
integrity. V&Bs are now incorporated into all people
processes at Novartis, from recruitment to performance
assessment. For more on our culture and values, see page
18. For more on doing business responsibly, see page 68.
Social performance
Expanding access to healthcare
In 2016, we combined several of our innovative access
programs into a single group under unified leadership.
Novartis Access, the Novartis Malaria Initiative, and
Group social business (which operates in four countries
under the name Healthy Family) now belong to a new
unit called Novartis Social Business, led by a single
individual: the Global Head of Novartis Social Business.
Each program uses innovative approaches and business
models to increase the health and well-being of patients
in lower-income countries. By combining them, we aim
to better leverage experience, learning and synergies
across the programs.
More than 120 000 Novartis Access
treatments were delivered to Kenya,
Lebanon and Ethiopia since launch
Novartis Access, which focuses on the affordability and
availability of 15 on- and off-patent medicines addressing
key noncommunicable diseases (NCDs), launched in
Kenya in 2015. It is offered to governments and public-
sector customers in low- and lower-middle-income coun-
tries at a price of USD 1 per treatment per month. The first
treatments were delivered to Kenya in February 2016. In
total, more than 120 000 Novartis Access treatments
were delivered to Kenya, Lebanon and Ethiopia since
launch, each providing a one-month supply of medicine.
NIBR researcher Jennifer Allport-Anderson
participates in a half-marathon in Ipswich,
Massachusetts in the US.
in the program. Of these, 74% have since been promoted
or moved roles, with a 91% retention rate. The EFLP and
similar programs in other parts of the company are being
expanded in 2017 to cover the whole of Novartis.
We are also pursuing greater cultural diversity. We
implemented Emerging Market Talent Boards in Asia and
Latin America, which facilitated 37 senior-level moves of
talented individuals to new roles in 2016. In addition, our
12-month Emerging Market Early Talent Program had 22
participants in 2016.
Novartis continues to be recognized for its efforts
in diversity and inclusion. Novartis Pharmaceuticals
Corporation placed second in the US on DiversityInc’s
2016 “Top 50 Companies for Diversity” list. Additionally,
we ranked third in the Thomson Reuters global Diver-
sity & Inclusion Index, and we were included in Working
Mother’s 2016 “100 Best Companies” list in the US.
Novartis also ranked No. 11 on a list of the most empathetic
global companies that was published in the Harvard
Business Review.
Staff turnover rose modestly in 2016. Voluntary turn-
over of all staff was 7.4% in 2016 – versus 7.3% the prior
year. That compares with an average 9.7% for the
industry. However, we saw pockets of higher turnover in
areas such as our global sales force and in some
emerging markets with sharp competition for talent,
including Thailand, Taiwan and China. Regular analysis
has helped us better forecast groups at higher risk of
leaving and enabled targeted retention efforts.
30 | Novartis Annual Report 2016
Performance summary
continued
In September, we signed a memorandum of understand-
ing for the implementation of Novartis Access in Rwanda,
and we expect the first product delivery in early 2017.
We also signed a broad memorandum of understanding
with the government of Vietnam, which covers NCD inter-
ventions such as Novartis Access. At the same time, to
prepare for implementation elsewhere, we filed 370
applications for marketing authorizations for Novartis
Access drugs with health authorities in 21 countries.
In 2016, the Novartis Malaria Initiative achieved
an other treatment milestone, having delivered more than
800 million treatments without profit – including more
than 300 million dispersible pediatric treatments – mostly
to the public sector of malaria-endemic countries since
2001. In December, we launched SMS for Life 2.0 in
Kaduna State, Nigeria’s third most populous region, in
collaboration with the Kaduna State Ministry of Health.
The program aims to increase the availability of essential
medicines and to improve care for patients across the
region by using simple, available and affordable tech-
nology.
In June, Novartis expanded its partnership with the
Medicines for Malaria Venture (MMV) to develop next-
generation antimalarial treatments. Novartis will lead the
development of antimalarial compound KAF156 with sci-
entific and financial support from MMV (in collaboration
with the Bill & Melinda Gates Foundation).
The results of a small proof-of-concept study of our
experimental antimalarial compound KAF156 were
published in The New England Journal of Medicine in
September, showing that KAF156 demonstrated activity
against both vivax and falciparum malaria, including
parasites resistant to today’s artemisinin-based thera-
pies. KAF156 is currently entering Phase IIb clinical
development.
Our Healthy Family programs, which are innovative
business models to reach more patients in rural areas in
the developing world, continued their expansion. In 2016,
they reached more than 7.7 million people through
health education sessions in India, Kenya, Vietnam and
Indonesia. Nearly 610 000 people attended specific
health camps.
Novartis Oncology Access – a patient assistance
program in emerging countries for Glivec, Tasigna and
Exjade (our treatments for certain cancers and blood
disorders) – and the Glivec International Patient Assistance
Program (GIPAP) together reached more than 80 000
patients worldwide in 2016. Given changes in the health-
care environment since GIPAP was launched 14 years
ago, starting in 2017, our longtime partner The Max Foun-
dation will assume full responsibility for development and
management of the program. Novartis Oncology will
donate Glivec to The Max Foundation to supply patients
Researcher Edmund Ekuadzi, an expert on
the medical properties of plants, examines a
specimen gathered in his homeland of Ghana.
currently eligible for GIPAP, and provide funding to The
Max Foundation to support program operations.
In 2016, Sandoz further expanded New Life & New
Hope, a program launched in 2015 in Ethiopia to improve
maternal and child health and to reduce mortality asso-
ciated with childbirth. The company supported a second
wave of training for another 100 midwives in three new
regions where the highest need to improve delivery skills
was identified.
In 2016, our eye care division Alcon supported 646
medical missions, reaching more than 480 000 patients
with eye conditions, and restoring sight for 58 000
patients through surgery. Through the US patient assis-
tance program, Alcon also helped nearly 6 000 patients
get the sight-saving medications they needed.
Doing business responsibly
In late 2015, we launched our Vision 2030 on Environ-
mental Sustainability, which is underpinned by a set of
environmental sustainability targets in four areas: energy
and climate, water and micropollutants, materials and
waste, and environmental sustainability management.
Throughout 2016, a cross-divisional team began to
select major facility and infrastructure projects and
measures necessary to achieve our 2020 goals, based
on the savings as determined by our internal carbon price
Performance
Performance summary
Novartis Annual Report 2016 | 31
of USD 100/tCO2e. We are identifying opportunities for
contracting renewable wind and solar electricity as
priority actions. At the same time, we found ways to
improve our environmental footprint in our day-to-day
operations, contributing to a reduction in carbon emis-
sions of 10 kilotons in 2016.
Novartis has a number of initiatives to engage our
associates, helping us to attract and develop talented
people, strengthen our company’s culture, and support
our ability to execute our strategy. In 2015, we put in place
a corporate volunteering platform through which Novartis
associates can register a potential corporate respon-
sibility project idea or sign up to become a corporate
volunteer. The program expanded significantly in 2016,
launching in several markets including low- and middle-
income countries. The scope of projects in the platform
is broad and includes partnerships with global chari table
organizations, remote and on-the-ground capability
building, one-time and recurring pro bono services, and
local efforts to support smaller-scale foundations and
institutions.
Ethics
To achieve our aspiration of being a trusted leader in
changing the practice of medicine, we must act in ways
that earn and maintain the trust of patients, governments
and society. Operating ethically is simply the right thing
to do and is fundamental to our success as a business.
Strengthening our culture of integrity
To continue to strengthen integrity and compliance
across the company, we took a series of new steps in
2016. We updated and re-launched our Anti-Bribery
Policy. We also launched a global online tool to handle
actual, potential and perceived conflicts of interest
transparently across the company. Additionally, we
developed integrity case studies, inspired by real-life
scenarios, for managers to use in discussions with their
teams. To ensure accountability of local country orga ni-
zations, our management includes integrity and compli-
ance questions as part of standard business reviews.
One of our goals in 2016 was to find better and more
inclusive ways to reach a broader cross-section of the
medical community with information about our products.
We began employing technology to supplement face- to-
face meetings. For example, at meetings for the American
Society of Clinical Oncology, the European School for
Advanced Studies in Ophthalmology, and the American
Society of Hematology, we used virtual conference plat-
forms so that more doctors could access evidence-based
data and product information without traveling to the
venue.
Integrity and compliance training
All Novartis Group company associates are required to
complete integrity and compliance training. The compli-
ance e-training curriculum provides information to enable
associates to make the right choices within their role and
to perform with integrity.
In 2016, three courses were available: Code of
Conduct, Social Media and Information Management.
Three shorter and/or refresher courses were also deliv-
ered: Adverse Events, Data Privacy and Anti-Bribery.
Cases of misconduct
We take allegations of any inappropriate behavior very
seriously, actively investigate them, and take appropriate
disciplinary action. Associates can report suspected
misconduct to the Business Practices Office (BPO) – an
independent team that reports to the Group General
Counsel. In 2016, the BPO initiated investigations of 1 707
reported cases related to misconduct; 893 were sub-
stantiated, including 401 that resulted in dismissals or
resignations.
We will continue to invest significant efforts to embed
a culture of compliance throughout our organization. For
instance, we are strengthening the Integrity & Compli-
ance (I&C) function, which now has approximately 375
full-time-equivalent employees who are dedicated to
integrity and compliance at the local, regional and global
levels. Of these employees, 175 were added in the past
three years.
Recognition
In 2016, Novartis was recognized in several corporate
responsibility rankings, including the Access to Medicine
Index, where Novartis ranked No. 3, moving up one place
versus 2014; Newsweek’s Green Rankings; Corporate
Knights’ Global 100 Most Sustainable Corporations in
the World Index; and the Dow Jones Sustainability World
Index. Novartis also ranked as the second-highest
pharmaceutical company in Fortune’s 2016 “World’s
Most Admired Companies” list, and received an A- rating
and recognition among category leaders in healthcare
in the 2016 CDP Climate Score.
Novartis ranked No. 3 in the Access to
Medicine Index, moving up one place
versus 2014
32 | Novartis Annual Report 2016
Innovative Medicines
In 2016, the Innovative medicines Division offset the
effects of the US patent expiration of Gleevec with
increased sales of growth products, measured in con-
stant currencies. This was a significant achievement
and underscores our ability to renew our product port-
folio.
The Innovative Medicines Division includes the Novartis
Oncology and Novartis Pharmaceuticals business units.
Novartis Pharmaceuticals focuses on the franchises of
Neuroscience, Ophthalmology, Immunology and Derma-
tology, Respiratory, Cardio-Metabolic and Established
Medicines. Novartis Oncology focuses on treatments for
a variety of cancers and rare diseases.
Following changes to the divisional structure of
Novartis in 2016, results for the Innovative Medicines
Division include ophthalmic pharmaceuticals products
transferred from Alcon. They also exclude some mature
products that were transferred to Sandoz.
Innovative medicines 2016 net sales
by business unit and franchise
(in USD millions and growth in % cc2)
noVarTIS oncoLoGY
BUSIneSS UnIT
39%
12 790 / – 2%
noVarTIS PHarmaceUTIcaLS
BUSIneSS UnIT
61%
19 772 / 1%
oPHTHaLmoLoGY
5 463 / – 6%
neUroScIence
ImmUnoLoGY anD
DermaToLoGY
3 677 / 2%
3 015 / 44%
reSPIraTorY
1 521 / 15%
carDIo-meTaBoLIc
1 377 / 20%
eSTaBLISHeD meDIcIneS
4 719 / – 15%
Performance
ToTaL
32 562 / 0%
Growth products contributed USD 14.8 billion, up 24%
in constant currencies. These products – which include
Gilenya, Cosentyx, Entresto, Tasigna, Jakavi, and the
combination of Tafinlar + Mekinist – represented 45% of
net sales, compared to 37% in 2015.
Operating income was USD 7.4 billion (–5%, 0% cc).
Core operating income, which excludes certain items,
was USD 10.4 billion (–5%, –1% cc). Core operating
income margin decreased 0.2 percentage points, mainly
due to launch investments for Entresto and Cosentyx,
but partially offset by productivity improvements. Fluc-
tuations in exchange rates had a further negative impact
of 0.6 percentage points, resulting in a net decrease of
0.8 percentage points to 31.8% of net sales.
14.8 bn (USD) Sales of
growth products such as Gilenya, Cosentyx,
Entresto, Tasigna, Jakavi, and Tafinlar +
Mekinist
Innovative Medicines Division sales were USD 32.6 bil -
lion, down 2% in reported terms, but in line with the prior
year in constant currencies (cc). A 7% increase in vol-
ume was offset by the impact of generic competition (–6
percentage points) and price declines (–1 percentage
point).
Sales performance varied by geography. Sales in
Europe were USD 11.2 billion, up 7% in constant curren-
cies, and reached USD 8.1 billion in emerging growth
markets, up 6% (cc). In the US, sales declined 8% (cc) to
USD 10.9 billion, mainly due to generic competition for
Gleevec following loss of patent protection there in
February. And in Japan, sales declined 10% (cc), due to
generic competition and divestments.
Key figures
(in USD millions, unless indicated otherwise)
Net sales
Operating income
Return on net sales (%)
% Change
2016
2015 1
USD
cc 2
32 562
33 345
7 426
22.8
7 815
23.4
– 2
– 5
0
0
Core operating income 2
10 354
10 862
– 5
– 1
Core return on net sales (%)
Core Research & Development 2
As a % of net sales
31.8
7 112
21.8
32.6
7 502
5
4
22.5
Net operating assets
41 904
43 971
– 5
1 Restated to reflect the new divisional structures and product transfers between
divisions, announced on January 27, 2016
2 Constant currencies (cc) and core results are non-IFRS measures. A definition of
non-IFRS measures used by Novartis, and further details, including reconciliation
tables, can be found starting on page 171.
Performance
Innovative medicines
Novartis Annual Report 2016 | 33
Novartis Pharmaceuticals business unit
Novartis Oncology business unit
Ophthalmology
Sales in Ophthalmology were USD 5.5 billion (–8%, –6%
cc), primarily reflecting declines in Lucentis (–11%, –8%
cc), which continues to see increasing competitive
pressure in Japan and some European countries.
Neuroscience
Neuroscience sales were USD 3.7 billion (+1%, +2% cc),
with increases for Gilenya (+12%, +14% cc) being offset
by lower sales of Exelon and Exelon Patch (–39%, –39%
cc), due to generic competition for Exelon Patch in the
US and EU.
Immunology and Dermatology
Sales in Immunology and Dermatology reached USD
3.0 billion (+41%, +44% cc). Sales of Cosentyx continued
to accelerate, reaching USD 1.1 billion, versus USD 261 mil-
lion in 2015. Gains for Ilaris (+20%, +22% cc) also helped
offset declines in other products due to generic compe-
tition.
Respiratory
Respiratory sales were USD 1.5 billion (+11%, +15% cc).
Our portfolio of drugs for chronic obstructive pulmonary
disease (COPD) – including Onbrez Breezhaler/Arcapta
Neohaler, Seebri Breezhaler and Ultibro Breezhaler –
achieved sales of USD 655 million (+14%, +16% cc). Sales
of Xolair, the first biologic drug approved for moder-
ate-to-severe allergic asthma, reached USD 835 million
(+11%, +15% cc), including as a treatment for chronic
hives.
Cardio-Metabolic
Sales for the franchise were USD 1.4 billion (+19%, +20%
cc). Entresto – which has been launched in more than 30
countries and benefited from a strong endorsement in
updated clinical practice guidelines in the US and EU –
continued to grow steadily and sales reached USD 170
million, up from USD 21 million in 2015. Galvus sales were
USD 1.2 billion (+5%, +6% cc).
Established Medicines
Established medicines such as Diovan (USD 1.1 billion,
–13% cc) and Exforge (USD 926 million, –8% cc) contin-
ued to see declines due to generic competition.
Oncology sales were USD 12.8 billion (–4%, –2% cc),
nearly even with the prior year, despite declining sales
of Gleevec/Glivec (–29%, –28% cc) due to generic com-
petition in the US. That decline was largely offset by
growth in other products. Products showing growth
included the combination therapy Tafinlar + Mekinist
(USD 672 million); Votrient (USD 729 million); Promacta/
Revolade (USD 635 million); and Jakavi, up 45% (cc) to
USD 581 million.
For further detail, see
k Condensed Financial Report at
www.novartis.com/investors
2016 news highlights
In January, Novartis received FDA
approval for Cosentyx for the treatment of
ankylosing spondylitis and psoriatic arthritis.
In May, Entresto was given a Class I
recommendation – the strongest
endorsement – in updated clinical practice
guidelines simultaneously released by the
American College of Cardiology, the
American Heart Association and the Heart
Failure Society of America in the US, as well
as the European Society of Cardiology.
In November, Novartis announced that
the FDA granted priority review for LEE011
(ribociclib) as first-line treatment of
postmenopausal women with HR+/HER2-
advanced or metastatic breast cancer in
combination with letrozole.
34 | Novartis Annual Report 2016
Sandoz
Sandoz had solid performance in 2016, supported by
continued growth in demand for its leading portfolio
of generic and biopharmaceutical medicines. Sales
increased in nearly every region, measured in constant
currencies, contributing to higher earnings.
Sandoz makes an important contribution to the overall
Novartis objective of expanding access to healthcare,
offering approximately 1 000 high-quality, affordable
medicines to patients and healthcare professionals
worldwide. The division has three global franchises:
Retail Generics, Biopharmaceuticals and Anti-Infectives.
Sandoz results include some mature products trans-
ferred from the Innovative Medicines Division during
2016.
Sandoz 2016 net sales by franchise
(in USD millions and growth in % cc2)
reTaIL GenerIcS
85%
BIoPHarmaceUTIcaLS
10%
anTI-InfecTIVeS
(partner label/API)
5%
8 623 / 1%
1 002 / 31%
519 / – 10%
ToTaL
10 144 / 2%
Performance
Sandoz net sales in 2016 were USD 10.1 billion (+1%, +2%
in constant currencies, or cc), with strong performance
particularly in biopharmaceuticals (+31% cc). An 8
percentage- point increase in volume more than offset
the negative 6 percentage-point effect of price erosion.
Sales rose in Central and Eastern Europe (+7% cc), West-
ern Europe (+3% cc), the US (+1% cc), Latin America (+11%
cc), and the Middle East and Africa (+6% cc). Sales in
Asia Pacific were comparable to the prior year (cc).
Operating income reached USD 1.4 billion, up 11%
(+14% cc). Core operating income, which excludes cer-
tain items, was USD 2.1 billion (+1%, +4% cc). Core oper-
ating income margin in constant currencies increased
0.2 percentage points. However, that gain was partly off-
set by the negative 0.1 percentage-point impact of
exchange rates, yielding a result of 20.4% of net sales.
Sandoz continued to build its portfolio of biopharma-
ceuticals, which now represents a USD 1 billion-plus
business, with roughly half of that coming from the US.
In 2016, our biosimilar Erelzi (etanercept-szzs) was
approved in the US to treat the same inflammatory dis-
eases as the reference product, Amgen’s Enbrel®, with
its launch pending litigation. In addition, our biosimilar
Binocrit (epoetin alfa) was approved in the EU for a new
route of administration. We are currently evaluating
options for an epoetin alfa filing in the US. Filings were
accepted in the EU for our pegfilgrastim and rituximab
biosimilars.
2.1 bn (USD) Sandoz core
operating income, supported by strong
sales growth in key markets
Key figures
(in USD millions, unless indicated otherwise)
Net sales
Operating income
% Change
2016
2015 1
USD
cc 2
10 144
10 070
1 445
1 300
1
11
2
14
Return on net sales (%)
14.2
12.9
Core operating income 2
2 071
2 045
1
4
Core return on net sales (%)
Core Research & Development 2
As a % of net sales
20.4
804
7.9
20.3
781
7.8
– 3
– 4
Net operating assets
14 443
14 985
– 4
1 Restated to reflect the new divisional structures and product transfers between
divisions, announced on January 27, 2016
2 Constant currencies (cc) and core results are non-IFRS measures. A definition of
non-IFRS measures used by Novartis, and further details, including reconciliation
tables, can be found starting on page 171.
Performance
Sandoz
Novartis Annual Report 2016 | 35
2016 news highlights
In May, Sandoz confirmed that the EMA
had accepted our regulatory submission
for rituximab, a biosimilar to Roche’s
EU-licensed MabThera®, a monoclonal
antibody used in oncology and
autoimmune diseases.
In August, the FDA announced that it had
approved Erelzi (etanercept-szzs) as the
second Sandoz biosimilar in the US. Erelzi is
a biosimilar to Amgen’s Enbrel®, which
treats multiple inflammatory diseases.
In September, Sandoz confirmed that
top-line results for a confirmatory clinical
study showed that our biosimilar infliximab
demonstrated equivalent efficacy to its
reference product, Remicade®, used to
treat autoimmune diseases. Sandoz
announced in February that it had acquired
rights from Pfizer to develop, commercialize
and manufacture its biosimilar infliximab in
the European Economic Area.
In September, Sandoz launched Sandoz
HACk – short for Healthcare Access
Challenge – a competition to generate,
incubate and deliver innovative ideas with
the potential to help solve global health
problems. Winners will be announced in
March 2017.
Mustafa plays in his temporary home in Bireh, Lebanon, where
he and his extended family have lived since their home was
destroyed in Homs, Syria, four years ago. His grandmother has
diabetes and receives treatment at a local Red Cross clinic.
Retail Generics
Sandoz markets active ingredients, intermediates and
finished dosage forms of pharmaceuticals. The Retail
Generics franchise includes products in the therapeutic
areas of dermatology, respiratory, oncology, transplan-
tation and ophthalmics, plus finished dosage forms of
anti-infectives sold under the Sandoz name. Franchise
sales reached USD 8.6 billion (+1% cc).
Biopharmaceuticals
Sandoz markets protein- and other biotechnology-based
products called biosimilars, as well as Glatopa, which
treats a relapsing form of multiple sclerosis. Global sales
of biopharmaceuticals grew 31% (cc) to USD 1.0 billion,
benefiting from the US launches in 2015 of Glatopa and
Zarxio, and the continued strong growth of other prod-
ucts already on the market.
Anti-Infectives
Sandoz sells pharmaceutical ingredients and intermediates
(mainly antibiotics) under the Sandoz name and to third-
party customers. Anti-infectives sold to third parties for
sale under their own name were USD 519 million, down 10%
(cc), because some low-margin products were discontin-
ued and also due to a weak flu season in the first quarter
of 2016. Total Anti-Infectives sales were USD 1.4 billion,
down 2% (cc), and included sales of finished dosage forms
sold under the Sandoz name of USD 860 million, up 4% (cc).
For further detail, see
k Condensed Financial Report at
www.novartis.com/investors
36 | Novartis Annual Report 2016
Alcon
2016 was a transition year at alcon. The division con-
centrated its focus on eye care devices, invested in
research and development to expand its product port-
folio, and introduced new systems and capabilities to
strengthen relationships with customers. although
we were unsuccessful in returning alcon to growth in
2016, our efforts are starting to bear fruit.
In a world with aging populations and growing needs for
eye care, Alcon continues to enhance people’s quality of
life by helping them see better. Alcon’s Surgical and
Vision Care businesses together offer one of the world’s
widest selections of eye care devices – from sophisti-
cated equipment for delicate eye surgery, to a wide port-
folio of advanced contact lenses.
Results for the division no longer include ophthalmic
pharmaceuticals products, which were transferred
during 2016 to the Innovative Medicines Division as part
of a change in the structure of Novartis.
Performance
Alcon implemented a growth plan in 2016 with emphasis
on three areas: accelerating innovation and sales,
strengthening customer relationships, and improving
operations. Alcon launched new products during the
year, including the CyPass Micro-Stent to treat glaucoma,
the NGENUITY 3D Visualization System for retinal surgery,
and a multifocal version of its innovative Dailies Total1
contact lenses. Increased advertising and promotion for
contact lenses helped return that segment to growth after
several weak quarters.
Key figures
(in USD millions, unless indicated otherwise)
Net sales
Operating loss/income
Return on net sales (%)
Core operating income 2
Core return on net sales (%)
Core Research & Development 2
As a % of net sales
2016
5 812
– 132
– 2.3
850
14.6
486
8.4
% Change
2015 1
USD
cc 2
5 999
281
4.7
– 3
nm
– 2
nm
1 235
– 31 – 27
20.6
455
– 7
– 7
7.6
Net operating assets
20 450
20 888
– 2
nm = not meaningful
1 Restated to reflect the new divisional structures and product transfers between
divisions, announced on January 27, 2016
2 Constant currencies (cc) and core results are non-IFRS measures. A definition of
non-IFRS measures used by Novartis, and further details, including reconciliation
tables, can be found starting on page 171.
alcon 2016 net sales by franchise
(in USD millions and growth in % cc2)
SUrGIcaL
61%
VISIon care
39%
3 518 / – 3%
2 294 / 0%
ToTaL
5 812 / – 2%
Alcon net sales in 2016 were USD 5.8 billion (–3%,
–2% in constant currencies, or cc). Operating loss was
USD 132 million, compared to income of USD 281 million
the year before.
Core operating income, which excludes certain items,
was USD 850 million (–31%, –27% cc), mainly due to
increased investment in research and development, as
well as higher spending on sales and marketing – both
activities that were part of the Alcon growth plan. Core
operating income margin in constant currencies de -
creased by 5.3 percentage points, and exchange rates
added another 0.7 percentage points of negative impact,
yielding a net decrease of 6 percentage points to 14.6%
of net sales.
5.8 bn (USD) Alcon net sales
Performance
alcon
Novartis Annual Report 2016 | 37
2016 news highlights
In July, Alcon received FDA approval for
Air Optix plus HydraGlyde, a silicone
hydrogel contact lens featuring HydraGlyde
Moisture Matrix technology for longer-
lasting lens surface moisture.
In July, Alcon introduced Dailies Total1
Multifocal contact lenses, which provide
seamless distant, intermediate and near
vision, and the comfort of the Dailies Total1
water-gradient lens technology.
In September, Alcon launched the
NGENUITY 3D Visualization System, a
platform for vitreoretinal surgery. The
system is designed to improve the surgeon
experience through high-resolution 3D
imaging of the back of the eye.
In October, Alcon launched the CyPass
Micro-Stent, a surgical device to treat
patients with glaucoma in conjunction with
cataract surgery. Alcon announced its
acquisition of Transcend Medical, which
developed CyPass, in the first quarter of
2016 and received FDA approval for
the device in July.
Yuko Yoshikawa, whose vision is affected by
eye disease, shelters her eyes from the sun as
she shops near her home in Tokyo, Japan.
Surgical
Surgical sales declined 3% (cc) to USD 3.5 billion, mainly
due to weaker performance of intraocular lenses, which
faced competitive pressures, and slowing equipment
sales (primarily LenSx for cataract surgery and Wavelight
for refractive surgery, which have reached high pene-
tration in their market segments). Those factors were
partially offset by continued solid growth in sales of cat-
aract disposable surgical supplies (4% cc). The Surgical
business is making progress, improving service and
supply levels in 2016 and laying the foundation for a
return to growth.
Vision Care
Vision Care sales were flat in constant currencies at
USD 2.3 billion. Growth in contact lenses offset a decline
in contact lens care products. Increased advertising and
promotion behind key brands helped return the contact
lens segment to growth after several weak quarters.
Dailies Total1, the first and only water-gradient lens, was
the key driver.
For further detail, see
k Condensed Financial Report at
www.novartis.com/investors
38 | Novartis Annual Report 2016
1
PHOTO ESSAY
A cellular drama
at the heart of a
researcher’s family
Early in her research career, Jennifer Allport-
Anderson lived human dramas on two vastly
different scales. One was at home, with her
husband and growing family, and the other was
in the laboratory, where she studied the biology
and behavior of our cells. At first, these two
worlds didn’t appear to have much in common.
The cellular world, in many ways, provided more
surprises. Ms. Allport-Anderson, a cell biologist who
now leads a heart failure and in vivo pharmacology
team at the Novartis Institutes for BioMedical Re-
search (NIBR) in Cambridge, Massachusetts in the
US, still describes cells as almost like people acting
in sweeping dramas. “I tend to anthropomorphize,”
she says. “I love to think of cells going about their
business.”
Thirteen years ago, her two worlds started to
merge as the cellular drama she was studying began
to play out in her own family. It started in 2003, when
her brother-in-law, Scott, barely in his 40s, suffered
a massive heart attack.
A year later, Ms. Allport-Anderson joined NIBR
to help discover new medicines for diseases such as
heart failure. Their relevance to her life was acute and
growing. Her mother-in-law fell into decline, eventually
dying at age 77, most likely from heart arrhythmia or
PHOTO ESSAY
Novartis Annual Report 2016 | 39
1
2
3
4
Jennifer Allport-Anderson sees life
dramas reflected in the cells she studies.
Her two daughters are on swimming
teams, supporting good heart health.
Here, 10-year-old Corinne heads to
swim practice.
Over the last 15 years, some family
members have suffered from cardio-
vascular disease and diabetes, adding
to the sense of urgency behind Ms.
Allport- Anderson’s research.
Family health issues prompted Ms.
Allport-Anderson to adopt an active
lifestyle. Here she runs a half-marathon
in Ipswich, Massachusetts in the US.
2
4
3
a stroke. And in 2005, her husband, Keith, was diag-
nosed with hypertension and prediabetes.
This led to changes. Ms. Allport-Anderson and
her husband both wanted to maximize the chances
that their two daughters would grow up healthy and
with healthy parents. He dieted and she focused on
healthy, home-cooked family meals. She also started
running. Within a couple of years, he had lost 125
pounds and she was running marathons. (She has
run five to date.)
Ms. Allport-Anderson’s two worlds each offered
their own response to cardiovascular disease. At
home, it was exercise and diet. At work, it was carrying
out early research for new treatments.
Heart failure is a complex disease, and the
underlying cause can vary from person to person.
Scientists – including Ms. Allport-Anderson and her
team – are working to uncover the cellular mechanisms
behind the disease and to identify new strategies for
treatment. Her group is particularly interested in
exploring cell-signaling pathways that drive heart
failure and finding ways to intervene.
On a spring evening, Ms. Allport-Anderson and
her family gather at their home in suburban Boston
to watch the Kentucky Derby horse race on TV. From
Ms. Allport-Anderson’s perspective, the room might
as well be a laboratory for coronary health. The adults
seated around the TV are on medications for various
illnesses, ranging from heart disease to diabetes.
But her two daughters appear poised to break
the pattern. They’re both competitive swimmers.
Ten-year-old Corinne is in near-constant motion and
at one point does a few pushups in front of the TV,
clapping her hands between each one. And that very
morning, Ms. Allport-Anderson ran a half-marathon.
Her strategy, after all, is to battle heart disease
from every angle, and the key – from home to the
laboratory – is to take action.
40 | Novartis Annual Report 2016
Innovation
Our researchers are reimagining medicine, working to invent and develop
treatments that could improve and extend people’s lives. In 2016, we updated
our research strategy in response to changes in the world of biomedical
research. We also aligned our research and development (R&D) activities to
more rapidly and efficiently translate discoveries into better options for doctors
and patients. Our teams made progress toward fighting devastating diseases
ranging from breast cancer to multiple sclerosis to malaria.
9.0 bn
Research and development
spending in 2016, amounting to
18.6% of net sales (USD)
23 000
Scientists, physicians and business
professionals working in research
and development worldwide
200 +
Projects in clinical development
Updated research
strategy
Global Drug
Development
Progress in key
disease areas
We updated our research strategy in
an effort to ensure that we remain a
discovery powerhouse. We are
increasing collaboration across
traditional scientific and organizational
boundaries, and focusing on powerful
new technologies.
k page 41
In 2016, we created a Global Drug
Development group to oversee
clinical development of new
medicines for all therapeutic areas,
with the aim of improving our
effectiveness and efficiency at
delivering important new treatments
to doctors and patients.
k page 42
We focus our R&D efforts on disease
areas where there is still significant
need for better treatment options and
where we believe our skills may help
bring new solutions.
k Oncology page 42
k Cardiovascular page 46
k Respiratory page 47
k Immunology and
dermatology page 47
k Neuroscience page 48
k Eye care page 50
k Biosimilars page 51
k Infectious diseases page 51
InnovatIon
Discovery
Novartis Annual Report 2016 | 41
Research and development remains the core of the
Novartis strategy and a foundation of our future. We
invested USD 9.0 billion on research and development
for new drugs and medical devices in 2016, or 18.6% of
net sales.
We also took significant steps aimed at further
improving the effectiveness and efficiency of our research
and development activities, which harness the talent of
23 000 scientists, physicians and business profession-
als. We refreshed our research focus in response to a
wave of scientific innovation that is opening new avenues
to creating novel therapies. We formed a Global Drug
Development (GDD) organization with representation on
the Executive Committee of Novartis to gain economies
of scale and facilitate optimum resource allocation to
the most promising new drug candidates. And we moved
to enhance collaboration between our research and
development organizations in an effort to ensure that
promising compounds coming out of the lab make it more
quickly into clinical development, with large-scale testing
in patients.
Our overall aim is to better leverage the scale of our
organization to bring important new treatments to market
faster and at a lower cost.
Our overall aim is to better leverage the
scale of our organization to bring important
new treatments to market faster and at a
lower cost
To focus our resources, we completed a portfolio prior-
itization exercise for projects in development, which led
to the acceleration of certain projects and the termina-
tion of others. For instance, we increased support for
the development of a molecule in early-phase testing for
fatty liver disease, a growing problem tied to the global
obesity epidemic, as well as for a portfolio of biosimilars
– biological medicines with comparable quality, safety
and efficacy to existing products – that could improve
access to important treatments. We’re concentrating on
therapies we believe have the greatest potential to
change the practice of medicine, with more than 200
projects in progress.
Discovery
The Novartis Institutes for BioMedical Research (NIBR)
is the innovation engine of Novartis. In 2016, we updated
our research strategy in an effort to ensure that we
remain a discovery powerhouse. We are increasing col-
laboration across traditional scientific and organizational
boundaries, with a focus on powerful new technologies
that have the potential to help produce therapeutic
breakthroughs.
Researchers have used the standard tools of biology
and chemistry to develop many successful treatments,
and we’ll continue to employ them. But we recognize that
these tools leave many drug targets – key proteins and
nucleic acids known to play a role in disease – out of
reach. We would like to hit these targets to fight disease,
but they’ve dodged the conventional molecules in our
arsenal. To address this challenge, we are blazing a new
path: organizing our early discovery efforts around a
scientific approach called chemical biology.
Chemical biology brings together experts from dif-
ferent fields – including biology, chemistry and computer
science – to create new types of molecules and use them
to probe biological systems. Our teams are increasingly
breaking down barriers between fields to make progress
toward tackling difficult targets. For instance, one team
includes biochemists, structural biologists and others,
all working to invent molecules that could influence the
cell’s own system for degrading proteins. The goal is to
degrade particular proteins that we can’t approach with
conventional molecules.
This approach to drug discovery requires research-
ers to make connections across the company and
beyond. We aim to strengthen ties to academic labs and
biotechnology companies generating disruptive tools
and technologies that may significantly accelerate our
work.
To encourage collaboration, we’re recruiting a faculty
of scholars, inviting some of the brightest minds in aca-
demia to work in our labs. We’re making it easier for
Novartis teams to share compounds with labs outside
the company to help advance science more quickly.
And we continue to form strategic alliances when
appropriate. In 2016, for example, Novartis signed a
deal with Xencor to access bispecific antibodies for
immuno-oncology. These antibodies latch onto two
targets instead of one to harness and direct the power
of the immune system against cancer.
Our brand of chemical biology is directed at the dis-
covery of potential therapies. When molecules are ready
for testing in humans, we organize proof-of-concept
studies enrolling small numbers of patients to make an
early assessment of a drug’s safety and effectiveness.
42 | Novartis Annual Report 2016
Innovation
continued
Development
After a successful proof-of-concept study, our develop-
ment team decides whether to begin larger clinical trials
to test effectiveness and safety in additional patients.
Development leaders attend key NIBR meetings so
they’re familiar with projects headed their way, enabling
them to act quickly. We pursue therapies where we can
leverage the scale and expertise of Novartis develop-
ment to bring important treatments to patients globally.
In 2016, we created a single GDD group to manage
development for all of our therapeutic areas, advancing
molecules ranging from checkpoint inhibitors for cancer
to a peptide for heart failure to biosimilars for a variety
of diseases. This work was previously conducted sepa-
rately by several organizations within the company. By
integrating our development organization, we aim to
leverage our collective strength. We can now look at our
entire mid-stage pipeline across our Innovative Medi-
cines and Sandoz businesses to identify projects that
hold the most promise and take steps to ensure they are
properly resourced.
We are also rethinking how we execute clinical trials,
seeking opportunities to improve and streamline our pro-
cesses. We’re evaluating how we structure teams, design
studies, select clinical sites, gather data and perform
other tasks, sharing lessons learned across GDD. We’re
also building world-class functions, including in clinical
sciences, biostatistics and project management, by
bringing together experts who were previously isolated
in pockets of the company.
Digital technologies play a major role in our efforts.
For example, they are helping us expand clinical trial
access beyond patients who can easily visit conventional
study sites. Through automated data capture and
advanced analytics, we can perform certain procedures
remotely, reducing the need for frequent in-person visits.
Such technologies have the potential to make an import-
ant contribution to improving the quality and efficiency
of our clinical trial operations.
Our goal is to bring more innovative medicines to
more patients more efficiently than any other drug
development organization in the world. By assessing our
operations and making adjustments, we can accelerate
the delivery of innovation across our therapeutic areas.
In 2016, we saw significant progress in several areas,
with important clinical trial readouts still on the horizon.
Highlights include filing for regulatory approval for
LEE011 (ribociclib) in hormone receptor-positive (HR+)/
human epidermal growth factor receptor 2-negative
(HER2-) advanced or metastatic breast cancer; gaining
approval of the CyPass Micro-Stent, a minimally-invasive
glaucoma surgery device; and achieving positive clinical
trial results for BAF312 (siponimod) in secondary pro-
gressive multiple sclerosis. We also look forward to
reporting pivotal data on RLX030 (serelaxin), a potential
treatment for heart failure, and on other key molecules,
including biosimilars, in 2017.
Oncology
Although cancer death rates have decreased in some
countries, the disease remains the world’s No. 2 killer.
New cases are expected to rise as the global population
grows and ages. In Europe, cancer recently passed car-
diovascular disease as the No. 1 killer.
Novartis remains a leader in developing targeted
therapies, which have improved the prognosis for cer-
tain cancers. We currently have 17 such compounds –
designed to exploit the genetic mutations of cancer cells
– in confirmatory development. We’re also investing in a
different approach: immunotherapy. A new wave of
cancer treatments harnesses the immune system to fight
the disease, and we’re growing a portfolio in this space,
with 12 assets in clinical testing.
A new wave of cancer treatments
harnesses the immune system to fight the
disease, and we’re growing a portfolio in
this space, with 12 assets in clinical testing
Existing immunotherapies work well in certain types of
cancer. In an effort to help more patients, we’re explor-
ing combinations of targeted therapies and immunothera-
pies, drawing on our deep pipeline to accelerate this
work. We’re concentrating on five tumor types: breast,
lung, skin, blood and kidney. Beyond these tumor types,
we are pursuing opportunities – including in rare diseases
– as they arise. The goal is to find the right molecule, or
combination of molecules, for each patient.
Breast cancer
Breast cancer is the most common cancer in women
and is responsible for more than 500 000 deaths world-
wide per year. We have six compounds in development
for the disease, with a focus on HR+ breast cancer. We’re
testing these compounds in more than 25 combinations,
which have the potential to prevent tumors from
InnovatIon
oncology
Novartis Annual Report 2016 | 43
becoming drug-resistant. While tumor cells can dodge
a targeted therapy by acquiring new mutations, lab
studies show that they struggle to evolve resistance
when faced with more than one therapy at a time.
In November, we announced that the US Food and
Drug Administration (FDA) granted priority review for
LEE011 as first-line treatment of postmenopausal women
with HR+/HER2- advanced or metastatic breast cancer
in combination with letrozole. A priority review desig-
nation requires the FDA to take action on an application
within six months of its filing, compared to 10 months
under standard review. We also announced in November
that the European Medicines Agency has accepted the
marketing authorization application for LEE011 plus
letrozole for review in the same patient population.
LEE011 – which is taken orally, once per day – works
by inhibiting cyclin-dependent kinase 4 and 6 (CDK4/6),
proteins that can enable cancer cells to grow and
divide too quickly when they’re over-activated. In a
pivotal Phase III trial, LEE011 plus letrozole significantly
extended progression-free survival over letrozole alone
in postmenopausal women with HR+/HER2- advanced
or metastatic breast cancer. The study evaluated the
combination as a first-line treatment. Based primarily
on the positive trial results, LEE011 plus letrozole was
designated a breakthrough therapy by the FDA in
August. According to the FDA, breakthrough therapy
desig nation is intended to expedite the development
and review of potential new medicines that treat seri-
ous or life-threatening conditions.
The FDA granted priority review for
LEE011 (ribociclib) as first-line treatment of
postmenopausal women with HR+/HER2-
advanced or metastatic breast cancer in
combination with letrozole
Phase III trials of the molecule are ongoing, including
one evaluating LEE011 in combination with fulvestrant in
men and postmenopausal women with HR+/HER2-
advanced breast cancer, and another evaluating LEE011
in combination with endocrine therapy and goserelin in
premenopausal women with HR+/HER2- advanced
breast cancer.
Another molecule in late-phase development is
BYL719 (alpelisib). It blocks the alpha version of a protein
called phosphoinositide 3-kinase (PI3K), which is fre-
quently mutated in HR+ breast cancer and is associated
with resistance to endocrine therapy. New approaches
are needed to prevent or delay resistance to existing
agents. We are testing BYL719 in combination with
fulvestrant in patients with HR+/HER2- advanced breast
cancer in a Phase III trial.
Skin cancer survivor Malcolm
Caddies, a groundskeeper at
Suncorp Stadium in Brisbane,
Australia, protects himself
from the sun and encourages
co-workers to do the same.
44 | Novartis Annual Report 2016
Innovation
continued
Lung cancer
Each year, 1.8 million people are diagnosed with lung
cancer, a leading cause of death in many countries. We
are investigating potential therapies for non-small cell
lung cancer, which accounts for approximately 85% of
lung cancer cases. Although a particular mutation may
be relatively rare in non-small cell lung tumors, it can still
represent a significant therapeutic opportunity because
there are so many patients with the disease.
In December, we submitted applications in the US
and EU to market Zykadia (ceritinib) as a first-line treat-
ment for anaplastic lymphoma kinase-positive (ALK+)
non-small cell lung cancer, based on data from a Phase
III clinical trial. In previously untreated patients, Zykadia,
our ALK inhibitor, extended progression-free survival
when compared with standard chemotherapy. Approxi-
mately 2–7% of people with the disease have the ALK
gene rearrangement. Zykadia is currently approved for
use in patients whose disease has progressed after first-
line therapy or who are intolerant to an existing therapy.
In addition to exploring the potential of Zykadia as a
first-line treatment, we are investigating whether it can
reduce brain metastases, a common and lethal compli-
cation of non-small cell lung cancer.
In 2016, we also filed in the US and EU to
market our Tafinlar (dabrafenib) + Mekinist
(trametinib) combination as a first-line
treatment in non-small cell lung cancer
patients with a mutation in BRAF V600
In 2016, we also filed in the US and EU to market our
Tafinlar (dabrafenib) + Mekinist (trametinib) combination
as a first-line treatment in non-small cell lung cancer
patients with a mutation in BRAF V600, which occurs in
1–2% of cases. A study demonstrated that our combina-
tion slows tumor growth more than chemotherapy in
patients with this aggressive form of the disease. Tafinlar
and Mekinist are both targeted agents that block pro-
teins – BRAF and MEK1/2, respectively – that are involved
in cell growth and division.
Finally, we presented data from early-phase trials for
INC280 (capmatinib), an oral c-MET inhibitor that we
licensed from Incyte Corporation. C-MET mutations can
play a role in driving both the disease and drug resis-
tance. INC280 demonstrated clinical activity as a single
agent and in combination with Iressa® (gefitinib), Astra-
Zeneca’s epidermal growth factor receptor (EGFR)
inhibitor, in subsets of non-small cell lung cancer patients.
It’s currently in Phase II trials.
Melanoma
Metastatic melanoma is the most serious and life-
threatening type of skin cancer and is associated with
low survival rates. Following the 2015 approval of our
Tafinlar + Mekinist combination for patients with a specific
form of metastatic melanoma, we continue to study its
effects in Phase III trials. In 2016, we reported that
patients with BRAF V600 mutations who received the
combination were significantly more likely to be alive at
three years than patients who received Tafinlar alone.
We’re exploring additional combinations with the
potential to improve outcomes for melanoma patients,
based on detailed knowledge of the biology driving the
disease. For instance, we’re testing Tafinlar + Mekinist in
combination with Merck & Co.’s Keytruda® (pembroli-
zumab) in patients with advanced melanoma in a Phase
II study.
Blood cancer
Acute myeloid leukemia (AML) has the lowest survival
rate of all adult leukemias, with a treatment strategy that
has remained unchanged for more than 25 years. In 2015,
we reported the positive results of a Phase III study of
PKC412 (midostaurin) in a form of AML, which enabled
us to file in the US and EU. In AML patients with FLT3
mutations, which occur in one-third of patients, PKC412
significantly improved overall survival rates in newly diag-
nosed adults when administered with standard induction
and consolidation chemotherapy followed by mono-
therapy for up to 12 months. PKC412 received FDA
priority review for the treatment of this form of AML and
advanced systemic mastocytosis, a rare disorder caused
by the presence of too many mast cells (immune cells).
The molecule was previously designated a breakthrough
therapy by the FDA for this form of AML.
For some blood cancer patients, stem cell transplants
offer the chance for a cure. Too often, however, the trans-
planted stem cells recognize patient tissue as “foreign”
and attack the tissue, resulting in a life-threatening
complication known as graft-versus-host disease
(GVHD). In 2016, ruxolitinib, a Janus kinase 1 and 2
(JAK1/2) inhibitor originally developed by Incyte Corpo-
ration, was designated a breakthrough therapy by the
InnovatIon
oncology
Novartis Annual Report 2016 | 45
and young adult patients. Although cancer in children
and adolescents is rare, ALL is the most common cancer
diagnosed in children, and new treatments are needed,
especially for patients with relapsed or refractory ALL.
In December, we presented positive results from a
global multicenter registration study. CTL019 was devel-
oped in collaboration with the University of Pennsyl vania
in the US.
We have a total of 12 immunotherapy assets in the
clinic, including three immunomodulators targeting the
checkpoint proteins PD-1, T-cell immunoglobulin and
mucin domain-3 (TIM-3), and lymphocyte activation
gene-3 (LAG-3). We’re studying these molecules as
single agents and/or in combination with other agents.
In 2016, we announced collaborations
and licensing agreements that bolster
our cancer immunotherapy pipeline
In 2016, we also announced collaborations and licens-
ing agreements that bolster our cancer immunotherapy
pipeline. Our agreement with Surface Oncology provides
access to four preclinical programs that are focused on
making the tumor more accessible to immune cells. With
Xencor, we will co-develop two bispecific antibodies
designed to engage T-cells to fight AML and B-cell malig-
nancies. We will also use Xencor’s antibody engineering
platform and potentially develop additional molecules.
Beyond our work in oncology and immuno-oncology,
we are developing medicines for rare diseases where we
have relevant expertise. For example, we are exploring
the potential of Votubia (everolimus) in the treatment of
refractory seizures in children and adults with tuberous
sclerosis complex, a rare disease that can cause non-
cancerous tumors to grow in vital organs. Votubia was
recently recommended for EU approval in this indi-
cation, based on safety and efficacy data from a pivotal
Phase III study.
FDA for acute GVHD. Ruxolitinib is marketed by Incyte
Corporation as Jakafi® in the US and by Novartis as
Jakavi outside the US to treat blood cancers myelo-
fibrosis and polycythemia vera. In April, we acquired
rights from Incyte Corporation to research, develop and
– upon regulatory approval – commercialize Jakavi for
GVHD outside the US.
We’re building on our work in chronic myelogenous
leukemia (CML), and currently market two targeted
therapies: Tasigna (nilotinib) and Gleevec/Glivec (imati-
nib). These products substantially prolong the lives of
many CML patients, but drug resistance sometimes
develops. We recently achieved a proof of concept with
a novel agent, ABL001, which targets the BCR-ABL
protein in a new way and may help combat resistance.
We’re also developing a potential treatment for a
debilitating complication of sickle cell disease, a hered-
itary blood disorder. Specifically, we’re developing an
anti-P-selectin antibody called SEG101 (crizanlizumab,
formerly SelG1) for sickle cell pain crises. We acquired
Selexys Pharmaceuticals Corporation and SEG101 in
November.
Renal cell carcinoma
We’re a leader in the development of medicines for renal
cell carcinoma (RCC), the most common type of kidney
cancer, with more than 300 000 new cases each year
worldwide. We’re exploring ways to combine targeted
therapies with immunotherapies to extend the benefits
of both in RCC. For example, one pairing that we’re study-
ing is Votrient (pazopanib), a vascular endothelial growth
factor (VEGF) receptor inhibitor that we acquired in 2015,
with Keytruda® (pembrolizumab), a programmed cell
death-1 (PD-1) checkpoint inhibitor from Merck & Co.
Immuno-oncology
Our researchers explore immunotherapy approaches
that fall into three main categories. First, they search for
ways to prime or educate the immune system so that it
can recognize cancer as a threat. Second, they attempt
to unleash immune cells that have already been primed.
This is called immunomodulation. And finally, they inves-
tigate ways to make the tumor more accessible to immune
cells.
We’re also looking for ways to bypass conventional
immune activation. Our investigational chimeric antigen
receptor T-cell (CAR-T) therapies fit the mold. These
involve taking patients’ white blood cells and reprogram-
ming them to hunt cells – including cancer cells – that
express a particular protein on their surface. We plan to
file our most advanced investigational CAR-T therapy,
CTL019, in the US in early 2017 for relapsed/refractory
B-cell acute lymphoblastic leukemia (ALL) in pediatric
46 | Novartis Annual Report 2016
Innovation
continued
Cardiovascular
Heart failure is a chronic condition that occurs when the
heart is unable to pump enough blood to meet the needs
of other organs in the body. It’s the leading cause of hos-
pitalization for older adults, and it’s also a leading cause
of death, with a mortality rate that is worse than many
cancers. About 50% of patients with heart failure die
within five years of diagnosis.
Following the 2015 approval of Entresto (sacubitril/
valsartan) for patients with heart failure with reduced
ejection fraction, we continue to explore its use for other
indications. For example, we are testing the medicine in
patients with heart failure with preserved ejection frac-
tion, and in patients at high risk of heart failure after a
heart attack.
Following the 2015 approval of Entresto for
patients with heart failure with reduced
ejection fraction, we continue to explore its
use in other indications
RLX030 (serelaxin) is another compound that potentially
holds promise in heart failure. RLX030 is a recombinant
version of a human hormone that’s believed to help reduce
stress on critical organs such as the heart and kidneys
during pregnancy. Our Phase III RELAX-AHF-2 trial in
patients hospitalized with acute heart failure is expected
to report results in 2017. The trial is designed to determine
if RLX030 reduces cardiovascular death and worsening
of heart failure.
Our cardiovascular research isn’t limited to heart
failure. After patients experience their first heart attack,
they may be at increased risk of further cardiac problems
due to vascular inflammation. We’re running a Phase III
trial, called CANTOS, of ACZ885 (canakinumab) – a
selective interleukin-1 beta inhibitor currently marketed
for the treatment of auto-inflammatory diseases – in
patients with a previous heart attack and a high degree
of vascular inflammation. The study, expected to read out
in 2017, is designed to determine if ACZ885 can reduce
the risk of stroke, heart attack or death.
Major risk factors for cardiovascular disease include
obesity, hypertension, diabetes and poor lipid profiles. We
are exploring potential therapies to help patients reduce
and control their cardiovascular risk. LIK066, designed to
block key receptors (SGLT1 and SGLT2) in the kidney and
intestine, achieved proof of concept in a small clinical trial
of overweight and obese patients with and without blood
sugar imbalances. Patients who received the compound
showed improvement in multiple risk factors. For instance,
they experienced significant weight loss and were better
able to control their blood sugar. Phase II clinical studies
are scheduled to begin in 2017.
NIBR researcher Jennifer
Allport-Anderson (left)
speaks with a Novartis
colleague before running a
half-marathon in Ipswich,
Massachusetts in the US.
InnovatIon
Respiratory
Novartis Annual Report 2016 | 47
Respiratory
Immunology and dermatology
Respiratory disease takes an immense toll on patients
and society. More than 400 million people suffer from
chronic obstructive pulmonary disease (COPD) or asthma,
and the simple act of breathing can be a struggle for
them. We are developing treatments that target both
conditions.
Patients with COPD, a progressive disease caused
mainly by smoking, experience symptoms ranging from
coughing to chest tightness and difficulty breathing. In
2016, new data was published on QVA149, a combina-
tion of two active substances that’s marketed as Ultibro
Breezhaler. In a large clinical trial called FLAME, QVA149
helped patients manage their disease better than the
standard treatment, Seretide® (fluticasone propionate/
salmeterol xinafoate). Patients who received QVA149
reported fewer COPD exacerbations – attacks of breath-
lessness and wheezing – than those who received
Seretide®.
Asthma patients experience recurrent exacerbations
that can be life-threatening. We are investigating the
potential of QAW039 (fevipiprant) to reduce the fre-
quency and duration of such attacks, particularly in
patients with severe asthma. Our compound is designed
to block the activity of T-helper type 2 (Th2) cells, which
are thought to contribute to the disease by releasing
signals that maintain eosinophilic airway inflammation.
In a recent Phase II study, QAW039 reduced the num-
ber of eosinophil cells in patients with persistent
moderate-to-severe asthma. QAW039 is a small mole-
cule taken as a pill, which is more convenient for patients
than an inhaler or an injectable medication. Pivotal Phase
III trials are underway in severe asthma.
QAW039 is a small molecule taken as
a pill, which is more convenient for patients
than an inhaler
In addition to focusing on COPD and asthma, we’re
exploring treatments for respiratory illnesses such as
cystic fibrosis (CF), a disease that’s well understood at
a genetic level. Our scientists are targeting the CF trans-
membrane conductance regulator (CFTR) protein that’s
defective in patients, hoping to eventually improve and
potentially extend their lives.
We continue to develop Cosentyx (secukinumab), an
approved treatment for moderate-to-severe plaque
psoriasis in adults. Psoriasis can significantly impact
quality of life and even life expectancy. A recent global
survey revealed that 84% of people with moderate-to-
severe psoriasis suffer discrimination and humiliation.
In January 2016, our fully human monoclonal anti-
body was approved by the FDA for use in adult patients
with ankylosing spondylitis (AS) and psoriatic arthritis
(PsA), conditions that can lead to irreversible joint and/
or spinal bone damage. This follows approval by EU
health authorities for AS and PsA in 2015. In June, we
presented new scientific evidence in these indications,
showing that up to 80% of AS patients and 84% of PsA
patients treated with Cosentyx at two years had no radio-
graphic progression in the spine or joints, respectively.
In November, we reported that Cosentyx delivers sus-
tained improvements in the signs and symptoms of PsA
– including patient- reported pain – over three years.
We’re also starting head-to-head studies in AS and PsA
to determine if Cosentyx is more effective than another
approved treatment for these diseases.
In December, we agreed to acquire Ziarco Group Ltd.,
a company focused on the development of novel treat-
ments in dermatology. Ziarco’s lead investigational
pro duct is ZPL389, a once-daily oral H4 receptor anta -
gonist that recently showed promise in atopic dermatitis,
also known as eczema. Eczema – a condition in which
skin becomes inflamed, red and itchy – poses a signi-
ficant burden on healthcare resources and patients’
quality of life.
Our interleukin-1 beta inhibitor Ilaris (canakinumab)
was granted three simultaneous FDA approvals for the
treatment of three rare and distinct periodic fever
syndromes, expanding its use. These approvals were
conducted under FDA priority review following break-
through therapy designations received earlier in the year.
Ilaris has been recommended for EU approval in the
same new indications.
We are also exploring potential treatments for non-
alcoholic steatohepatitis (NASH), which is an increas-
ingly common disease due to the worldwide obesity
epidemic. NASH is caused by the accumulation of fat in
the liver. The fatty liver becomes inflamed and damaged,
frequently resulting in scarring, or fibrosis. NASH is
predicted to become the leading cause of liver trans-
plantation by 2020. There are no approved therapies for
the disease. We plan to test a farnesoid X receptor (FXR)
agonist called LJN452 for NASH with liver fibrosis. The
compound is now in a Phase II trial and recently re-
ceived a fast track designation from the FDA. The pur-
pose of fast track is to get important new drugs to the
patient earlier.
48 | Novartis Annual Report 2016
Innovation
continued
We also signed an exclusive option, collaboration
and license agreement with Conatus Pharmaceuticals
Inc. to jointly develop emricasan – an investigational, oral
pan-caspase inhibitor – for the treatment of NASH with
advanced fibrosis and cirrhosis. Regulatory approval is
required to exercise the option.
In a Phase III trial, BAF312 (siponimod)
reduced the risk of disability progression
in patients with secondary progressive
multiple sclerosis
Neuroscience
Brain disorders affect hundreds of millions of people
worldwide and represent a major threat to public health.
We’re discovering and developing therapies for a variety
of mental and neurological diseases.
We’re also working to overcome obstacles to inno-
vation in neuroscience. It’s always been difficult, for
example, to access brain tissue from patients, so we’re
investing in stem cell technology to convert patients’ skin
cells – which are easy to harvest – into neurons. Our
scientists are coaxing these neurons to self-organize
and form structures that resemble those found in a
human brain, providing a powerful tool for research.
Multiple sclerosis
Approximately 2.3 million people worldwide are affected
by multiple sclerosis (MS). In this disease, the patient’s
immune system attacks the protective coating of nerve
fibers, interfering with the transmission of electrical
signals and causing symptoms ranging from fatigue to
difficulty walking to memory issues. We are testing
Gilenya (fingolimod) – a sphingosine 1-phosphate (S1P)
receptor modulator approved for use in relapsing MS –
in an important indication: pediatric MS. We are also test-
ing other new experimental therapies, including one
focused on patients with progressive forms of the
disease for which there are limited treatment options.
In 2016, a Phase III study showed that BAF312
(siponimod) reduces the risk of disability progression in
patients with secondary progressive multiple sclerosis
(SPMS), a condition with few available treatments. The
study, called EXPAND, included 1 651 people from 31
countries, and represents the largest randomized,
controlled study of SPMS to date. BAF312 is a second-
generation selective S1P1/5 receptor modulator.
We also started two Phase III trials to test ofatumumab,
a human monoclonal antibody targeting the CD20
protein on B-cells, in patients with relapsing MS. B-cell
therapies have the potential to play an important role in
treating the disease. Ofatumumab can be administered
by subcutaneous injection.
Novartis is collaborating with Microsoft Research and
university hospitals to develop a device called Assess
MS that will enable physicians to quantitatively assess
motor function in MS patients. The device records patient
movement in three dimensions and employs machine
learning for data analysis. If the prototype proves suc-
cessful, the new tool is expected to streamline clinical
trials in MS, support clinical neurologists in monitoring
their patients, and bring expert assessments to currently
underserved areas.
Migraine
More than 10% of the population worldwide suffers from
migraine headaches, which have a profound impact on
the ability to carry out everyday tasks. Severe head pain
– which is often accompanied by nausea and sensitivity
to light, sound and odors – makes it difficult for people
to function.
AMG 334 (erenumab) is a fully human monoclonal
antibody designed to block the calcitonin gene-related
peptide (CGRP) receptor, which is believed to play a
critical role in mediating the incapacitating pain of
migraine. We are exploring its potential in collaboration
with Amgen. In 2016, we announced positive results for
a Phase II study of AMG 334 in chronic migraine pre-
vention and for two Phase III studies of AMG 334 in
episodic migraine prevention. In these studies, patients
who received AMG 334 experienced fewer monthly
migraine days than patients who received placebo. The
safety profile of the molecule was comparable to pla-
cebo in the trials.
In addition to developing AMG 334, Novartis is
collaborating with Amgen to explore the therapeutic
potential of a second monoclonal antibody called AMG
301. For both molecules, Novartis will have global co-
development rights and commercial rights outside the
US, Canada and Japan.
InnovatIon
neuroscience
Novartis Annual Report 2016 | 49
Antonina Hernández (left),
who suffers from Alzheimer’s
disease, shares a two-bed-
room apartment in Madrid,
Spain, with her son Juan
Pedro García Hernández, a
fitness trainer who is also her
full-time caregiver.
Alzheimer’s disease
There are approximately 47 million people worldwide
with dementia, and Alzheimer’s disease is the most com-
mon cause. We are collaborating on compounds designed
to interfere with the amyloid cascade, a biological pro-
cess that researchers believe may be responsible for the
development of Alzheimer’s disease. Two experimental
treatments, CNP520 and CAD106, are being adminis-
tered in a trial to cognitively healthy adults who have a
genetic risk of developing Alzheimer’s disease. CNP520
is an oral therapy being developed in collaboration with
Amgen. CAD106 is an immunotherapy. We are working
with the Banner Alzheimer’s Institute in the US, leader
of the Alzheimer’s Prevention Initiative, to identify trial
participants – through an innovative genetic screening
program – and test the molecules.
Novartis is preparing to start two
Phase II studies to assess the potential
of EMA401 – a novel angiotensin II type 2
receptor (AT2R) antagonist – in peripheral
neuropathic pain
Neuropathic pain
When nerve fibers are damaged, they can send incor-
rect signals to the brain, producing a complex chronic
pain state. Although the underlying cause of the nerve
fiber damage varies among patients, the result is often
the same: pain that makes it difficult to function and lead
a normal life. Such neuropathic pain affects up to 7–8%
of the adult population, and 40% of patients do not
respond to existing treatments.
Novartis is preparing to start two Phase II studies to
assess the potential of EMA401 – a novel angiotensin II
type 2 receptor (AT2R) antagonist – in peripheral neu-
ropathic pain. In the first study, EMA401 will be tested in
patients with nerve damage caused by diabetes (diabetic
neuropathy). In the second, the agent will be tested in
patients with chronic nerve damage caused by shingles.
EMA401 acts outside the blood brain barrier, so patients
may avoid significant central nervous system side effects.
50 | Novartis Annual Report 2016
Innovation
continued
Eye care
Approximately 285 million people around the world live
with low vision and blindness. Many more rely on correc-
tive lenses. Our broad eye care portfolio includes phar-
maceuticals, surgical devices and platforms, intraocular
lenses, contact lenses and lens care solutions that
enhance quality of life by helping people see better.
Ophthalmic pharmaceuticals
Retinal diseases are the primary cause of blindness in
industrialized countries and are growing more common
in developing countries. Novartis has compounds in
development for retinal diseases, with a focus on a form
of age-related macular degeneration (AMD).
Patients with AMD lose vision as the center of the ret-
ina, or macula, degenerates. In the wet form of the disease,
abnormal blood vessels grow under the retina and leak,
forming lesions. Our novel anti-VEGF agent RTH258
(brolucizumab) is being tested in wet AMD patients.
RTH258 is a single chain antibody fragment that may be
longer acting than approved treatments for AMD, poten-
tially enabling patients to go longer between treatments.
We expect to report the results of two Phase III trials in
2017.
We continue to develop Lucentis (ranibizumab), an
anti-VEGF agent that was originally approved for wet
AMD. In 2016, we received EU approval for the drug in a
new indication. It can now be used to treat visual impair-
ment due to choroidal neovascularization associated
with causes other than wet AMD or secondary patho-
logic myopia. Lucentis is the only treatment available for
a wide range of conditions that share a common feature:
the growth of abnormal blood vessels under the retina.
Genentech has commercial rights to Lucentis in the US,
and Novartis has exclusive rights in the rest of the world.
In addition to addressing retinal diseases, we recently
entered a new therapy area. In December, we announced
an agreement for the acquisition of Encore Vision Inc.
and UNR844, a potential treatment for presbyopia, the
age-related loss of near-distance vision. More than 80%
of adults over the age of 45 develop presbyopia. Admin-
istered as eye drops, UNR844 – a combination of lipoic
acid and choline – recently showed promise in a proof-
of-concept study.
We’re also exploring potential new therapies for glau-
coma, dry eye and other ocular conditions.
Surgical
In 2016, our eye care division, Alcon, launched new sur-
gical technologies for the treatment of glaucoma and
other diseases. Glaucoma – a leading cause of irrevers-
ible blindness globally – is characterized by optic nerve
damage, which is associated with elevated intraocular
pressure. Our CyPass Micro-Stent, approved by the FDA
Yuko Yoshikawa, who suffers from an eye
disease that affects her vision, takes care while
navigating the streets of Tokyo, Japan.
in July, is part of a new class of treatments known as
minimally-invasive glaucoma surgery. It is intended for
adult patients with mild to moderate open-angle glau-
coma who are also receiving cataract surgery. Implanted
just below the surface of the eye, the CyPass Micro-Stent
is designed to lower intraocular pressure by enhancing
the natural drainage pathways of the eye.
For vitreoretinal surgeons, viewing the delicate struc-
tures and tissue layers at the back of the eye is critical.
To improve visualization during surgery, Alcon introduced
the NGENUITY 3D Visualization System. It includes a
high dynamic range camera that provides excellent res-
olution, image depth, clarity and color contrast, with
real-time images displayed on a 55 inch (140 cm) 3D
monitor placed in the operating room. The NGENUITY
3D Visualization System also enables surgeons to oper-
ate without having to bend or hunch over a traditional
microscope, which may help minimize the back and
neck issues that are common among ophthalmologists
who have been operating for more than a decade.
Our CyPass Micro-Stent, approved by
the FDA in July, is part of a new class of
treatments known as minimally-invasive
glaucoma surgery
InnovatIon
Biosimilars
Novartis Annual Report 2016 | 51
Infectious diseases
Bacteria, viruses and other micro-organisms continue to
wreak havoc on human health, despite major medical
advances. Infectious diseases remain the leading cause
of death in children and adolescents, and one of the lead-
ing causes of death in adults. We’re working across the
spectrum of these diseases.
We’re researching potential therapies for tropical
diseases that can be devastating. Malaria alone kills
approximately 430 000 people each year, most of them
children. Patients often fail to complete a full course of
treatment, and drug-resistant parasites are spreading in
certain regions, so new drugs are needed. We have two
compounds in Phase II development for the disease:
KAF156 and KAE609.
In September, the results of a proof-of-concept study
for KAF156 were published. Malaria parasites, including
parasites resistant to the standard treatment, were
observed to disappear rapidly from the blood of patients
who received either multiple or single doses of the
compound in an exploratory Phase II clinical trial. We will
lead the development of KAF156 with scientific and
financial support from the Medicines for Malaria Venture
(in collaboration with the Bill & Melinda Gates Founda-
tion). We are exploring ways to combine it with another
agent in an effort to achieve a new treatment option for
malaria, activity against drug-resistant parasites, and
potentially a single-dose malaria cure. KAE609 contin-
ues to be characterized for the role that it may play in the
battle against the disease.
We also reported a new target for three neglected
diseases: African sleeping sickness, leishmaniasis and
Chagas disease. Clinically, these diseases – responsible
for 50 000 deaths annually – seem quite distinct, but
they’re all caused by parasites called kinetoplastids that
belong to the same class of single-celled organisms.
Working in lab models, our researchers demonstrated
that it may be possible to treat all three diseases with a
single class of compound that blocks cellular machinery
known as the proteasome.
Drug-resistant bacteria are an emerging threat to
public health. In 2016, we began a first-in-human clinical
trial to test an injectable compound designed to kill
drug-resistant gram-negative bacteria.
Vision care
Alcon develops and markets a variety of contact lenses
designed for daily, weekly and monthly wear. In 2016,
we launched Dailies Total1 Multifocal, the first water-
gradient, daily disposable contact lenses for people with
presbyopia, which typically develops as people age. In
presbyopia, the eye loses its ability to focus up close,
resulting in the need for bifocals or reading glasses.
Dailies Total1 Multifocal lenses are designed to address
both presbyopia and the end-of-day dryness and dis-
comfort that many contact lens wearers experience after
age 40.
We also launched Air Optix plus HydraGlyde for pa-
tients in the monthly replacement contact lens segment.
These silicone hydrogel contact lenses feature technol-
ogy that surrounds the lens with a layer of moisture to
help improve comfort for users.
Biosimilars
Sandoz is the pioneer and global leader in biosimilars,
which are biological medicines with comparable quality,
safety and efficacy to approved reference products.
Patents are due to expire on a number of important
biological medicines in the next few years, creating a
singular opportunity for us to further expand access to
these high-quality, life-enhancing treatments. Bio similars
can generate significant savings for healthcare systems,
freeing up resources for novel therapies. We plan to
launch five major biosimilars in oncology and immunol-
ogy in the EU and US by 2020, adding to the three Sandoz
biosimilars already on the market worldwide.
Our biosimilar Erelzi (etanercept-szzs) was
approved in the US to treat multiple
inflammatory diseases
In 2016, our biosimilar Erelzi (etanercept-szzs) was approved
in the US to treat multiple inflammatory diseases, all of
the indications for which the reference product Enbrel®
was approved. In addition, our biosimilar Binocrit (epoetin
alfa) was approved in the EU for a new route of admin-
istration based on data from a study in pre-dialysis and
dialysis patients with anemia associated with chronic
kidney disease. Filings were accepted for our pegfilgras-
tim and rituximab molecules in the EU. We plan to build
on this momentum in 2017 with additional biosimilar
filings in key geographies.
52 | Novartis Annual Report 2016
Pipeline
novartis is consistently rated as having one
of the industry’s most respected develop-
ment pipelines, with more than 200 projects
in clinical development, as of December 31,
2016.
Many of these projects, which include new
molecular entities as well as additional indica-
tions and different formulations for marketed
products, are for potentially best-in-class or
first-in-class medicines that could significantly
advance treatment standards for patients
world wide. This table provides an overview of
selected projects in confirmatory development.
We use the traditional pipeline model as a
platform (e.g., Phase I-III). However, we have
tailored the process to be simpler, more flexi-
ble and more efficient.
Glossary
Project/product Project refers to the Novartis
reference code (combination of three letters
and three numbers) used for projects in devel-
opment. Product refers to the brand name for
a marketed product.
Common name Official international non-
proprietary name or generic name for an indi-
vidual molecular entity as designated by the
World Health Organization
Major development projects
Project/product
Common name
Mechanism of action
Oncology
ABL001
PIM447
CTL019
INC280
BYL719
Jakavi
LCI699
asciminib
BCR-ABL inhibitor
–
Pan-PIM inhibitor
tisagenlecleucel-T
CD19-targeted chimeric antigen receptor
T-cell immunotherapy
capmatinib
c-MET inhibitor
alpelisib
PI3Kα inhibitor
ruxolitinib
JAK1/2 inhibitor
osilodrostat
Aldosterone synthase inhibitor
Promacta/Revolade
eltrombopag
Thrombopoietin receptor agonist
SEG101
Arzerra
LEE011
crizanlizumab
P-selectin inhibitor
ofatumumab
Anti-CD20 monoclonal antibody
ribociclib
CDK4/6 inhibitor
PKC412
midostaurin
Signal transduction inhibitor
Signifor LAR
pasireotide
Somatostatin analogue
Tafinlar + Mekinist
dabrafenib + trametinib
BRAF inhibitor + MEK inhibitor
Zykadia
ceritinib
ALK inhibitor
Afinitor/Votubia
everolimus
mTOR inhibitor
Glossary continued on page 54
Tasigna
nilotinib
BCR-ABL 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 the lead indication in development.
3 Non-steroidal aromatase inhibitor
4 Submission pending acceptance by the FDA
InnovatIon
Pipeline
Novartis Annual Report 2016 | 53
Potential indication/disease area
Route of
administration
Planned
filing dates 1,2
PHaSE l
PHaSE ll
PHaSE lll
SUBMISSIon
Chronic myeloid leukemia (CML), 3rd line
Hematologic tumors
Oral
Oral
2020
≥2021
PHASE l
PHASE l
Pediatric acute lymphoblastic leukemia [lead indication];
diffuse large B-cell lymphoma
Intravenous infusion
2017
Non-small cell lung cancer (NSCLC) [lead indication]; NSCLC (EGFRm) Oral
Hormone receptor-positive (HR+)/human epidermal growth
factor receptor 2-negative (HER2-) advanced breast cancer
(postmenopausal women), 2nd line (+ fulvestrant)
Graft-versus-host disease [lead indication]; early myelofibrosis
Cushing’s disease
Severe aplastic anemia, 1st line
Oral
Oral
Oral
Oral
2018
2019
2019
2018
2017
Sickle cell disease
Intravenous infusion
2020
Refractory non-Hodgkin’s lymphoma
Oral
2018
PHASE ll
PHASE ll
PHASE lll
PHASE lll
PHASE lll
PHASE lll
PHASE lll
PHASE lll
HR+/HER2- advanced breast cancer (postmenopausal women),
1st line (+ letrozole) [lead indication]; HR+/HER2- advanced breast cancer
(postmenopausal women), 1st/2nd line (+ fulvestrant); HR+/HER2-
advanced breast cancer (premenopausal women), 1st line (+ tamoxifen
+ goserelin or NSAI3 + goserelin); HR+/HER2- breast cancer (adjuvant)
Oral
US/EU registration
SUBMISSION
Acute myeloid leukemia (AML) [lead indication];
advanced systemic mastocytosis; AML (FLT3 wild type)
Oral
US/EU registration
Cushing’s disease
Long-acting release/
intramuscular injection
US/EU registration4
BRAF V600+ NSCLC [lead indication];
BRAF V600+ melanoma (adjuvant); BRAF V600+ colorectal cancer
ALK+ advanced NSCLC (1st line, treatment naïve)
[lead indication]; ALK+ NSCLC (brain metastases)
Tuberous sclerosis complex seizures
CML treatment-free remission
Oral
Oral
Oral
Oral
US/EU registration
US/EU registration
EU registration
US 2017
EU registration
US 2017
SUBMISSION
SUBMISSION
SUBMISSION
SUBMISSION
SUBMISSION
SUBMISSION
54 | Novartis Annual Report 2016
Pipeline
continued
Mechanism of action Specific biochemical
interaction with a molecular target such as a
receptor or enzyme, through which a drug sub-
stance 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 me di-
ci nal 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 phar-
macologic 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 Large-scale clinical studies with
several hundred to several thousand patients,
which are conducted to establish the safety
and efficacy of the drug in specific indications
for regulatory approval. Phase III trials also may
be used to compare a new drug against a cur-
rent standard of care to evaluate the overall
benefit-risk relationship of the new medicine.
Glossary continued on page 56
Major development projects
Project/product
Common name
Mechanism of action
Cardiovascular and metabolism
LIK066
ACZ885
Entresto
RLX030
Respiratory
QBW251
QMF149
QAW039
QVM149
–
SGLT1/2 inhibitor
canakinumab
Anti-interleukin-1ß monoclonal antibody
valsartan, sacubitril
(as sodium salt complex)
Angiotensin receptor/neprilysin inhibitor
serelaxin
Recombinant form of human
relaxin-2 hormone
–
CFTR potentiator
indacaterol, mometasone
furoate (in fixed-dose
combination)
Long-acting beta2-agonist and
inhaled corticosteroid
fevipiprant
CRTH2 antagonist
indacaterol, mometasone
furoate, glycopyrronium
bromide (in fixed-dose
combination)
Long-acting beta2-agonist,
long-acting muscarinic antagonist
and inhaled corticosteroid
Immunology and dermatology
CJM112
QAW039
LJN452
VAY736
QGE031
–
Anti-interleukin-17 monoclonal antibody
fevipiprant
CRTH2 antagonist
–
–
FXR agonist
Anti-BAFF (B-cell-activating factor)
monoclonal antibody
ligelizumab
High-affinity anti-IgE monoclonal antibody
Cosentyx
secukinumab
Anti-interleukin-17 monoclonal antibody
Ilaris
canakinumab
Anti-interleukin-1ß monoclonal antibody
Neuroscience
CAD106
CNP520
EMA401
BYM338
BAF312
FTY720
AMG 334
OMB157
amilomotide
Beta-amyloid-protein therapy
–
–
BACE inhibitor
Angiotensin ll receptor antagonist
bimagrumab
Inhibitor of activin type II receptor
siponimod
fingolimod
erenumab
Sphingosine-1-phosphate receptor modulator
Sphingosine-1-phosphate receptor modulator
Selective CGRP receptor antagonist
ofatumumab
Anti-CD20 monoclonal antibody
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 the lead indication in development.
5 Ongoing discussions with health authorities to agree on next steps
InnovatIon
Pipeline
Novartis Annual Report 2016 | 55
Potential indication/disease area
Route of
administration
Planned
filing dates 1,2
PHaSE l
PHaSE ll
PHaSE lll
SUBMISSIon
Weight loss
Oral
≥2021
PHASE ll
Secondary prevention of cardiovascular events
Subcutaneous injection
2017
Chronic heart failure with preserved ejection fraction
[lead indication]; post-acute myocardial infarction
Oral
2019
Acute heart failure
Intravenous infusion
2017
Cystic fibrosis
Asthma
Asthma
Asthma
Oral
Inhalation
Oral
Inhalation
≥2021
2019
2019
2019
Immune disorders
Atopic dermatitis
Non-alcoholic steatohepatitis
Subcutaneous injection
≥2021
Oral
Oral
≥2021
≥2021
Primary Sjoegren’s syndrome
Subcutaneous injection
≥2021
Chronic spontaneous urticaria;
chronic idiopathic urticaria
Subcutaneous injection
2020
PHASE ll
PHASE ll
PHASE ll
PHASE ll
PHASE ll
PHASE ll
PHASE lll
PHASE lll
PHASE lll
PHASE lll
PHASE lll
PHASE lll
Non-radiographic axial spondyloarthritis [lead indication];
psoriatic arthritis head-to-head study versus adalimumab;
ankylosing spondylitis head-to-head study versus adalimumab
Subcutaneous injection
2018
PHASE llI
Periodic fever syndromes
Subcutaneous injection
US approved
EU registration
SUBMISSION
Alzheimer’s disease
Alzheimer’s disease
Neuropathic pain
Intramuscular injection
≥2021
Oral
Oral
≥2021
≥2021
Hip fracture; sarcopenia
Intravenous infusion
≥2021
Secondary progressive multiple sclerosis
Pediatric multiple sclerosis
Migraine
Oral
Oral
20195
2017
Subcutaneous injection
2017
Relapsing multiple sclerosis
Subcutaneous injection
2019
PHASE ll
PHASE ll
PHASE ll
PHASE ll
PHASE lll
PHASE lll
PHASE lll
PHASE lll
56 | Novartis Annual Report 2016
Pipeline
continued
advanced development Medical device pro-
ject for which a positive proof of concept has
been established, and clinical and non-clinical
studies are being conducted to establish the
device’s safety, efficacy or performance. This
is needed to address regulatory requirements
for obtaining marketing authorization.
Submission Application for marketing appr o-
val 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 authorization
from both regulatory agencies. The application
contains comprehensive data and information
gathered during human clinical trials and ani-
mal studies conducted through the various
phases of drug development.
Major development projects
Project/product
Common name
Mechanism of action
Infectious diseases
KAF156
KAE609
LAM320
Ophthalmology
RTH258
Lucentis
Clareon Monofocal IOL
CyPass Micro-Stent
A02238
A00717
A01660
AcrySof IQ PanOptix IOL
AcrySof IQ PanOptix
Toric IOL
AcrySof IQ ReSTOR
Toric 2.5 D IOL
Biosimilars
GP1111
GP2017
HX575
GP2013
GP2015
–
cipargamin
clofazimine
Imidazolopiperazines derivative
PfATP4 inhibitor
Mycobacterial DNA binding
brolucizumab
Anti-vascular endothelial growth factor
(VEGF) single-chain antibody fragment
ranibizumab
Anti-VEGF monoclonal antibody fragment
–
–
–
–
–
–
–
–
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
infliximab
TNF-α inhibitor
adalimumab
TNF-α inhibitor
epoetin alfa
Erythropoiesis-stimulating agent
rituximab
Anti-CD20 monoclonal antibody
etanercept
TNF-α inhibitor
LA-EP2006
pegfilgrastim
Pegylated granulocyte
colony-stimulating 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 the lead indication in development.
6 Resubmission to address FDA complete response letter
InnovatIon
Pipeline
Novartis Annual Report 2016 | 57
Potential indication/disease area
Route of
administration
Planned
filing dates 1,2
PHaSE l
PHaSE ll
PHaSE lll
SUBMISSIon
Malaria
Malaria
Multi-drug resistant tuberculosis
Oral
Oral
Oral
≥2021
≥2021
2018
PHASE ll
PHASE ll
Neovascular age-related macular degeneration [lead indication];
diabetic macular edema
Intravitreal injection
2018
Retinopathy of prematurity
Intravitreal injection
2018
PHASE lll
PHASE lll
PHASE lll
Next-generation IOL
Cataract implant
EU 2017
US 2019
ADVANCED DEVELOPMENT
Micro-invasive glaucoma surgical device for implant during
cataract surgery
Glaucoma implant
EU 2017
ADVANCED DEVELOPMENT
Mid-tier phacoemulsification device
Cataract equipment
Daily disposable line extension
New daily disposable lens
Vision care
Vision care
US 2018
EU 2018
US 2018
EU 2018
US 2018
EU 2018
ADVANCED DEVELOPMENT
ADVANCED DEVELOPMENT
ADVANCED DEVELOPMENT
Trifocal IOL
Cataract implant
US 2019
ADVANCED DEVELOPMENT
Trifocal IOL for astigmatism
Cataract implant
US 2019
ADVANCED DEVELOPMENT
Multifocal IOL for astigmatism
Cataract implant
US
SUBMISSION
Inflammatory bowel disease; rheumatoid arthritis; plaque psoriasis
(same as originator)
Intravenous
EU 2017
Arthritides (rheumatoid arthritis, ankylosing spondylitis, psoriatic
arthritis); plaque psoriasis and others (same as originator)
Subcutaneous
2017
Anemia in chronic kidney disease; chemotherapy-induced anemia
and others (same as originator)
Subcutaneous
and intravenous
US 2017
Non-Hodgkin’s lymphoma; chronic lymphocytic leukemia;
rheumatoid arthritis; granulomatosis with polyangiitis;
microscopic polyangiitis (same as originator)
Intravenous
Arthritides (rheumatoid arthritis, ankylosing spondylitis, psoriatic
arthritis); plaque psoriasis and others (same as originator)
Subcutaneous
Chemotherapy-induced neutropenia and others
(same as originator)
Subcutaneous
EU registration
US 2017
US approved
EU registration
EU registration
US 20186
PHASE III
PHASE lll
PHASE lll
SUBMISSION
SUBMISSION
SUBMISSION
58 | Novartis Annual Report 2016
1
2
PHOTO ESSAY
Helping Syrian
refugees manage chronic
diseases
Among the many Syrians uprooted by armed
conflict are thousands of people with chronic
conditions – such as diabetes and heart disease –
whose treatment was disrupted when they fled.
Many have settled in Lebanon, where chronic diseases
already place a major burden on the healthcare
system, accounting for an estimated 85% of deaths.
Now health facilities have been further stretched by
the influx of people fleeing Syria, who have swelled
the population by a third.
The company is supplying medications for high
blood pressure and diabetes through Novartis Access,
an innovative business approach that offers medicines
for chronic diseases to governments and public-sector
customers in lower-income countries at a cost of USD 1
per treatment per month.
To help tackle this problem, Novartis last year
began working with the International Committee of
the Red Cross (ICRC) to support improved access to
medicines and medical care for refugees in Lebanon.
The situation in Lebanon is just one example of
the growing challenges posed by chronic illnesses
as populations age. These conditions account for 38
million deaths worldwide every year – 75% of them in
PHOTO ESSAY
Novartis Annual Report 2016 | 59
1
2
3
4
Syrian refugees ponder an uncertain future:
Zakiya, one of the daughters of Hamid, with her
son Waleed, age 10, in their makeshift home.
ICRC health workers visit the home of a refugee
named Ziad in southern Lebanon.
ICRC patient Elham (center) with some of
her children and their families after fleeing
from Syria
Mohammad peers into a building used as a
mosque by Syrian refugees.
3
4
low- and middle-income countries. Chronic diseases
require early detection and sustained treatment, so
migrant populations are particularly at risk.
Take 58-year-old Hamid and his wife Hamida,
who farmed near the Syrian city of Homs until they
were driven out by fierce fighting in 2012.
They now live in Lebanon with two daughters and
two grandsons, who rely on casual work to pay for
food and lodging. Health inevitably suffers in this
hand-to-mouth existence, and Hamid, who has lived
with diabetes for 20 years, found himself unable to
pay for drugs that were free in Syria.
After six weeks without insulin, he lost so much
weight that he was forced to seek help, and the local
ICRC-supported clinic provided a lifeline by supplying
drugs and regular checkups. His wife also received
treatment after she was diagnosed with diabetes.
They were among more than 270 000 people
who sought treatment at ICRC-supported healthcare
facilities in 2016. The organization aims to provide
diagnosis, treatment and follow-up for Syrian and
underserved Palestinian refugees as well as Lebanese
patients affected by chronic illnesses, to prevent long-
term complications such as stroke or kidney disease.
The most deadly chronic condition worldwide
is heart disease. The ICRC provides vital care for
refugees such as Ziad, who suffers from high blood
pressure and fled with his wife and children in 2014
when the Damascus suburb where they lived was
badly damaged.
He now struggles to make a living as a laborer,
and believes the trauma caused by the devastation of
his homeland has worsened problems. “Sometimes it
hurts me like a disease, seeing the news on television
about Syria,” he says.
Gaining access to care is critical for survival
for some refugees. Elham, the widowed matriarch
of a large extended family, has both heart disease
and diabetes – as do her brother and their cousin,
Mohammad, who is an imam.
Elham’s open heart surgery was funded by the
Office of the United Nations High Commissioner for
Refugees, while Mohammad has also undergone a
series of operations. All three family members rely on
continued treatment provided by the ICRC.
While aid is vital, clearly peace and stability are
key to a long-term solution to the difficulties faced
by many refugees.
60 | Novartis Annual Report 2016
Corporate responsibility
We focus our corporate responsibility work in two key areas:
expanding access to healthcare and doing business responsibly.
This combination of responsible business and making our
medicines accessible is directly linked to our company mission,
vision and strategy. We put access to healthcare at the heart of our
business strategy, looking for new ways to deliver medicines to as
many people as possible.
Expanding access
52 m
Patients reached through access
programs
120 000
The number of Novartis Access
treatments delivered to Kenya,
Lebanon and Ethiopia since launch,
each providing a one-month supply
of medicine
2/4
Novartis leads two of the four most
advanced malaria development
programs underway worldwide:
KAF156 and KAE609
Doing business responsibly
120
Pilots ongoing or completed to find
new and improved ways to engage
with healthcare professionals
9 800
Doctors and other participants
globally received access to webcasts
of industry meetings in 2016, part of
our efforts to do business differently
10 000 tns
Net reduction in CO2 emissions
Corporate responsibility
Corporate responsibility strategy and governance
Novartis Annual Report 2016 | 61
Mountaha and her 4-year-old daughter Mona are
among thousands of displaced people who have
settled in Lebanon, where Novartis is working with
the Red Cross to support treatment for chronic
diseases among refugees.
Taking action on what matters most
Our activities and how we carry them out have an impact
beyond our business performance. In late 2016, we
kicked off our second full CR materiality assessment to
help us understand the CR issues that matter to key inter-
nal and external stakeholders, as well as stakeholders’
needs and expectations. We began conducting inter-
views – aiming to reach approximately 400 individuals
worldwide – including executives across our company;
customers; academics; and representatives of patient
organizations, nongovernmental organizations, health
institutions, and other groups considered important to
the industry and our business.
We will use the findings, which will be available in 2017,
to guide our strategy, track issues of concern, inform and
prioritize our CR programs, establish meaningful metrics
against which to measure our CR performance, and fur-
ther integrate CR into our standard business processes.
This assessment follows the first CR materiality analysis
from 2013, which was refreshed in 2015.
In late 2016, we kicked off our second full
CR materiality assessment to help us
further integrate CR topics that matter into
our standard business processes
Corporate responsibility strategy and
governance
We use our expertise and skills in two key areas, which
are the focus of our corporate responsibility (CR) efforts:
expanding access to healthcare and doing business
responsibly. This combination of responsible business
and making medicines accessible is an important element
supporting our company mission, vision and strategy.
To help us achieve our goal of finding new ways to
deliver breakthrough treatments to as many people as
possible, our access efforts include an array of approaches
such as innovative business models, equitable commer-
cial models, zero-profit initiatives, patient assistance
programs and strategic philanthropy.
Moreover, to help us become a trusted leader in
changing the practice of medicine, we are taking steps
to ensure our standards align with society’s increasingly
high expectations for ethical behavior.
Corporate responsibility is embedded throughout our
company. The Head of Corporate Responsibility reports
directly to the CEO of Novartis, and our CR efforts are
overseen by the Governance, Nomination and Corporate
Responsibilities Committee of the Novartis Board of
Directors. This commitment from senior management
and the Board helps us make the strategic decisions nec-
essary to successfully integrate CR into our business.
The engagement and dedication of all our associates
are essential to bring CR initiatives to life.
62 | Novartis Annual Report 2016
Corporate responsibility
continued
Novartis contributes to achieving the UN
Sustainable Development Goals
The United Nations Sustainable Development Goals urge
countries to “leave no one behind.” The third development
goal specifically focuses on ensuring healthy lives and
promoting well-being for all people of all ages, while many
others such as goal 1 (no poverty), goal 6 (clean water and
sanitation), and goal 10 (reduced inequalities) are inextri-
cably linked to health, either directly or indirectly.
Ensuring good health and well-being is aligned with our mission.
As a leading healthcare company, ensuring good
health and well-being (goal 3) is at the core of our busi-
ness and is aligned with our mission to improve and extend
people’s lives. Through our business operations and
ongoing activities, we make essential contributions to
goals 8, 9, 13 and 17.
Our mission is to improve and extend people’s lives. We pursue a combination of approaches to improve access to our
medicines for underserved populations. We also work to improve disease diagnosis and management through disease
awareness, training and education programs.
Through our business operations and ongoing activities, we make essential contributions to goals 8, 9 and 13.
Novartis employs 123 000 people worldwide.
Our products are available in about 155 coun-
tries, and they reached nearly 1 billion people
in 2016. We are committed to providing
decent employment and promoting a diverse
and inclusive working environment.
Innovation is at the core of what we do. We
use science-based innovation to discover
and develop breakthrough treatments, and
we pioneer sustainable business models to
deliver them to as many people as possible.
Our capability-building efforts focus on
patient care, research and development, and
business skills, aiming to improve health out-
comes and strengthen healthcare systems.
Climate change threatens development
and dispropor tionately burdens the
poorest and most vulnerable, while posing
clear health risks. We strive to reduce
our carbon emissions and minimize our
overall environmental footprint.
Partnerships are at the heart of everything we do.
Novartis seeks effective partnerships to deliver treatments and quality care to as many people as possible. We partner with
governments and the public sector, nongovernmental organizations, local communities and health workers, and research
and academic institutes.
Corporate responsibility
expanding access to healthcare
Novartis Annual Report 2016 | 63
Expanding access to healthcare
While significant progress has been made in tackling
some of the world’s greatest healthcare challenges, bil-
lions of people still lack adequate access to medicines.
We are working on ways to reimagine access to health-
care through programs that help patients worldwide get
the medicines they need, when they need them, at prices
they can afford.
Pioneering innovative social business models
In late 2016, we marked the one-year anniversary of the
launch of Novartis Access, our portfolio of medicines to
fight key chronic diseases. This portfolio includes 15 on-
and off-patent medicines addressing cardiovascular
diseases, type 2 diabetes, breast cancer and respiratory
illnesses. It is offered to governments and public-sector
customers in low- and lower-middle-income countries at
a price of USD 1 per treatment per month.
The first treatments were delivered to Kenya in
February and distributed by our local partner, Mission
for Essential Drugs and Supplies (MEDS). Kenya received
a total of four shipments in 2016. In total, more than
120 000 Novartis Access treatments were delivered to
Kenya, Lebanon and Ethiopia, each providing a one-
month supply of medicine. In September, we signed a
memorandum of understanding for the implementation
of Novartis Access in Rwanda, and we expect the first
product delivery in early 2017. We also signed a broad
memorandum of understanding with the government of
Vietnam, which also covers noncommunicable disease
interventions such as Novartis Access.
30 Countries are targeted for
the rollout of Novartis Access in the
coming years
We plan to roll out Novartis Access in 30 countries in
the coming years based on government and stakeholder
demand. The Novartis Access team is currently in talks
with governments and local stakeholders in more than 10
priority countries in sub-Saharan Africa, Southeast Asia,
Central America, and Central and Eastern Europe.
Additionally, Novartis Access filed 370 submissions
for marketing authorization with health authorities in 21
countries. As we are required to register each Novartis
Access portfolio product in all relevant formulations and
dosage forms, we have taken this step proactively to facil-
itate the swift rollout of the program.
loCal partnersHips CritiCal to sUCCess
Our experience thus far shows that most healthcare
systems in lower-income countries are geared toward
tackling infectious diseases and are ill-equipped to
address the needs of patients with chronic illnesses.
This cannot be solved by one organization alone, so we
partner with organizations that can contribute their
skills and capabilities. Our distribution partners include
MEDS and the Kenya Red Cross. We are also working
with Management Sciences for Health to assess the
supply chains in public and faith-based healthcare facil-
ities in Kenya and to identify risks that may be detrimen-
tal to product integrity. In addition, we are teaming up
with the Christian Health Association of Kenya, the
Kenya Conference of Catholic Bishops, and the Kenya
Red Cross to build capacity among healthcare workers
to diagnose and manage chronic diseases in local facil-
ities across the country.
HelpinG reFUGees in lebanon
In March, the International Committee of the Red Cross
and Novartis Access launched a pilot to improve access
to treatment for Syrian refugees in Lebanon – as well as
for underserved Lebanese and Palestinian patients –
suffering from type 2 diabetes and high blood pressure.
Together, these two diseases account for more than 50%
of deaths in Lebanon.
eXpanDinG tHe HealtHy FaMily proGraMs
Healthy Family is an innovative business model that aims
to reach more patients in rural areas in the developing
world. In 2016, it continued its expansion to reach more
than 7.7 million people through health education sessions
in India, Kenya, Vietnam and Indonesia. Nearly 610 000
patients attended specific health camps. Healthy Family
is profitable in India and on track to break even in Kenya
in 2017.
64 | Novartis Annual Report 2016
Corporate responsibility
continued
In November, Sandoz announced a new collabora-
tion to increase access to medicines by donating up to
USD 10 million of products annually to Americares – a
health-focused relief and development organization that
responds to people affected by poverty or disaster with
life-changing health programs, medicine and medical
supplies. The initial donation will include more than 25
Sandoz products to treat infections; cardiovascular, eye
and skin conditions; and musculoskeletal pain.
In December, Sandoz signed a sub-licensing agree-
ment with the Medicines Patent Pool to help produce
much-needed hepatitis C treatments for developing
countries. Specifically, Sandoz will manufacture daclat-
asvir, a new direct-acting antiviral that – when used in
combination with other treatments – is proven to cure
multiple genotypes of the hepatitis C virus.
Patient assistance programs
In 2016, our worldwide patient assistance programs
helped more than 130 000 people access medicines
they could not afford due to financial hardship, lack of
insurance, or inadequate reimbursement. One of our key
programs is Novartis Oncology Access, or NOA. NOA is
designed to improve access in countries that have
challenging healthcare environments or very limited
healthcare reimbursement systems. Today, NOA offers
assistance to emerging nations in Asia, the Middle
East, Central and Eastern Europe, Africa and Latin
America. In addition to Glivec, NOA programs include
patient access to Tasigna and Exjade. NOA and the
Glivec International Patient Assistance Program (GIPAP)
combined reached more than 80 000 patients around
the world in 2016.
Given changes in the healthcare environment since
GIPAP was launched 14 years ago, starting in 2017, our
longtime partner The Max Foundation will assume full
responsibility for development and management of the
program. Novartis Oncology will donate Glivec to The
Max Foundation to supply patients currently eligible for
GIPAP, and provide funding to The Max Foundation to
support program operations.
To improve the quality and impact of the Healthy
Family activities, we reassessed and adjusted, where
relevant, various program parameters. Specifically, we
adjusted the disease area focus, simplified the referral
process, capped the number and size of health camps to
increase the quality and length of the consultations, and,
in some cases, initiated agreements with new partners.
As a result, the total number of patients reached in 2016
was smaller than in previous years.
Equitable commercial models in lower-income
countries
Our access strategy framework was approved by the
Access to Medicine Committee in 2015. This defines a
set of tools to develop equitable pricing strategies for
lower-income countries, according to the purchasing
power of patients and payors. These strategies are sys-
tematically applied to key innovative pharmaceutical
products that address the disease priorities in countries.
The goal is to maximize patient reach through sustainable
commercial models, while minimizing the lag time between
introduction in higher- and lower-income countries.
We are tracking the implementation of these efforts
through a set of indicators that measure the number of
patients with access to our products, as well as the price
that patients actually pay for them. As affordability is also
impacted by factors outside of our control – including
markups, taxes, tariffs, etc. – our local teams use this data
to engage with distribution partners in an effort to reduce
markups on Novartis products before they reach patients.
Sandoz: generating new ideas to make access
happen
Our generics division, Sandoz, combines its broad port-
folio of more than 1 000 off-patent medicines, covering
all major therapeutic areas, with CR programs to improve
access, medical information and medical capacity
building.
In September, Sandoz launched the Sandoz HACk,
short for Healthcare Access Challenge. This competi-
tion aimed to generate novel solutions to key healthcare
access challenges in local communities. Open to 18- to
35-year-olds from around the world, the Sandoz HACk
received 150 submissions, from which six finalist entries
were selected. After further refining ideas on the online
OpenIDEO platform, three winners will be chosen in the
first half of 2017. They will receive seed funding and
support from mentors to help bring their ideas to life.
Corporate responsibility
novartis access approaches: key performance indicators 2016
Novartis Annual Report 2016 | 65
Novartis access approaches: key performance indicators 2016
There is no one-size-fits-all solution for access to healthcare. We continue to pursue a combination of approaches – innovative
business models that provide tailored and scalable solutions, equitable commercial models, high-quality generics, patient assis-
tance programs, zero-profit models and drug donations, strategic philanthropy and emergency relief – to reach underserved patients.
Social business models
Novartis Access
Healthy Family (in India, Kenya,
Vietnam and Indonesia)
total
Patient assistance programs
Patients reached (thousands)
FTEs1
People reached (thousands)2
2016
8.4 3
609.6 4
618.0
2015
3.3 3
981.2
984.5
2016
14
495
509
2015
10
519
529
2016
2015
7 756.4
7 621.4
7 756.4
7 621.4
Novartis Patient Assistance
Foundation Inc. (US)
Oncology/hematology
LMIC patient assistance
Alcon US patient assistance
Patients reached (thousands)
Value USD (millions)5
2016
2015
2016
2015
45.4
42.6
1 115.0 6
707.0
83.3
5.8 7
80.6
7.8
1 579.1
1 523.5
9.7 7
13.2
total
134.5
131.0
2 703.8
2 243.7
Zero-profit model
Malaria/Coartem
total
Donations
Patients reached (thousands)
Value USD (millions)8
2016
2015
49 757.9 9
64 097.7
49 757.9
64 097.7
2016
80.7
80.7
2015
111.5
111.5
Patients reached (thousands)
Value USD (millions)5
Alcon medical missions 10
Leprosy (WHO)
Fascioliasis/Egaten 11
Medicine donations (emergency relief)
2016
484.0
290.0
276.2 12
2015
393.8
304.5
13.7
2016
73.0
4.4
<1
1.8
2015
43.0
5.6
<1
1.1
total
1 050.2
712.0
79.2
49.7
Health systems strengthening
Novartis Foundation
Novartis research capacity-building programs
total
Value USD (millions)13
FTEs1
People reached (thousands)2
2016
14.8
3.5
18.3
2015
12.0
5.5
17.5
2016
2015
2016
2015
14
6
20
10
6
16
8 908.6 14
4 456.0
1.0
1.0
8 909.6
4 457.0
Grand total
51 560.6
65 925.2
2 882.0
2 422.4
2016
2015
2016
2015
2016
529
2015
2016
2015
545
16 666.0
12 078.4
Patients reached (thousands)
Value USD (millions)5 8 13
FTEs1
People reached (thousands)2
1 Full-time equivalent positions and contractors
2 Via training and service delivery and through health awareness activities
3 The patient number was calculated based on treatments delivered and the following
elements: daily treatment doses, treatment duration, treatment adherence and
potential treatment overlap (as it is common for chronic patients to take several
drugs). The treatment adherence and treatment overlap factors are based on
assumptions from developed markets and will be revisited when we gain additional
insights from Novartis Access rollout countries.
4 Several strategic measures were implemented to improve the quality and impact of
the program (capping number and size of health camps, etc).
5 Wholesale acquisition cost (WAC) plus logistics costs for some programs
6 Integration of Alcon brands in the program as of August 2016 and a full-year impact of
GSK oncology medicines
7 Data reflects January to July 2016; as of August 2016, the program transitioned to the
Novartis Patient Assistance Foundation Inc. (US).
8 Coartem was provided without profit for public sector use and to donor-funded
programs in the private sector. The value of these shipments is calculated based on
the average ex-factory price of non-donor-funded Coartem to private-sector
purchasers in developing countries, minus payments received from the public sector
and donor-funded customers in the private sector.
9 Increased availability of generic options on the market
10 Retail value for surgical products
11 Manufacturing, testing and FTE costs
12 Some 2015 shipments shifted to 2016.
13 Operating costs
14 Programs at scale report the catchment of a population in the area where a program
has been implemented. Includes expanded nationwide catchment area of the
population in 25 districts of Ghana
66 | Novartis Annual Report 2016
Corporate responsibility
continued
Zero-profit models and product donations
The Novartis Malaria Initiative recently achieved another
treatment milestone: Since 2001, the initiative has deliv-
ered, without profit, more than 800 million antimalarial
treatments – including more than 300 million dispersible
pediatric treatments – mostly to the public sector of
malaria-endemic countries. In 2016, our malaria treat-
ments delivered at zero profit reached approximately
50 million patients.
In 2016, Novartis celebrated a 30-year commitment
to leprosy elimination. In total, since 2000, we have
donated multidrug therapy to 6 million leprosy patients
worldwide. The Novartis Foundation continues this
legacy by consistently devising novel strategies to fully
interrupt the transmission of the disease. At the 19th
International Leprosy Congress in September, the
foundation presented emerging evidence from the
leprosy post-exposure prophylaxis (LPEP) program.
LPEP evaluates the effect of providing preventative
medicines to close contacts of newly diagnosed
patients – such as family members or friends – to
decrease the risk of transmission. Partway through
the study, LPEP has already shown that its strategy of
contact tracing and preventative therapy is feasible
and efficient, meaning it could be integrated into
routine practice in endemic countries in the future.
Alcon: driving access to state-of-the-art
surgical eye care
For years, Alcon has partnered with Orbis, which oper-
ates a Flying Eye Hospital that provides hands-on training
to local eye care specialists and treats patients in some
of the world’s most underserved areas. Approximately
200 patients are treated during a typical Orbis program.
In 2016, Orbis launched its third-generation Flying Eye
Hospital, equipped with the latest technology. Alcon
supported the aircraft with equipment, products, vo lun-
teers and financial assistance. The new Flying Eye Hos-
pital completed its maiden program in Shenyang, China,
in September. During the three-week visit, the plane’s
medical volunteers treated 124 patients and provided
hands-on surgical training to 18 local doctors.
200 The number of patients
treated during a typical Orbis Flying Eye
Hospital program
In 2016, Novartis celebrated a 30-year
commitment to leprosy elimination. In total,
since 2000, we have donated multidrug
therapy to 6 million leprosy patients
worldwide
Effective partnerships to strengthen
healthcare systems
While increased availability of high-quality, affordable
me di cines is important, a holistic system approach is
needed to improve quality of care. Strong health services
and trained health workers are also critical. The Novartis
Foundation is pioneering solutions beyond treatment
by testing and validating innovative healthcare models
that have a transformational impact on the health of the
poorest populations.
In 2016, the Novartis Foundation, together with global
nonprofit PATH, local partners and government agen-
cies, launched an innovative blood pressure manage-
ment program in Vietnam called Communities for Healthy
Hearts. It is designed to improve the health of adults who
have high blood pressure and are living in low-income
households in four districts in Ho Chi Minh City, Vietnam’s
largest urban area. The program strengthens treatment
and referral services, partners with social enterprises
to improve blood pressure screening, and leverages
technology to help patients manage their disease.
Corporate responsibility
expanding access to healthcare
Novartis Annual Report 2016 | 67
In a village near San Lorenzo, Guatemala, field worker
Eduardo Canuz and nurse Evelin Alvarado Fuentes
discuss the hazards of wood-burning stoves with
Tomasa Carrete and her daughter Veronica Bulux.
In October, we announced that the Novartis Institute
for Tropical Diseases (NITD) will move its operations
and research programs from Singapore to Emeryville,
California in the US, where it will be co-located with the
infectious diseases research team of the Novartis
Institutes for BioMedical Research (NIBR). This move will
strengthen NITD for the future by enabling closer col-
laboration with the NIBR infectious diseases research
team and the San Francisco Bay Area life sciences
community. NITD will remain an institute within the global
research network of NIBR and continue to focus on the
discovery of new medicines to combat malaria and other
tropical diseases. The transition is expected to take
place over the next 15 months.
Adaptive R&D is the modification of an existing drug
to improve therapeutic efficacy, safety, and access to
medicine, and – most importantly – to generate a positive
health outcome. Most often, this work is done with a
specific focus on poor and vulnerable patient groups.
Our Established Medicines franchise manages a prod-
uct portfolio of more than 90 mature brands spanning
11 therapeutic areas. It also systematically evaluates its
portfolio and executes relevant adaptive R&D projects.
In addition, our Center of Excellence for Emerging
Markets collaborates closely with the global program
teams across the Innovative Medicines Division to
ensure that adaptive R&D considerations, especially
formulations for specific age groups or geographies, are
firmly embedded in the development plans for our new
products.
Science-based innovation to address the needs
of underserved populations
Bacteria, viruses and other micro-organisms continue to
wreak havoc on human health, despite major medical
advances. Infectious diseases remain the leading cause
of death in children and adolescents, and one of the leading
causes of death in adults. We are continuing to research
potential therapies for these neglected disea ses, which
can be devastating, especially in developing countries.
In August, we reported on a new target for three neg-
lec ted diseases: African sleeping sickness, leishmaniasis
and Chagas disease. Working in lab models, our research-
ers at the Genomics Institute of the Novartis Research
Foundation demonstrated that it may be possible to treat
all three diseases with a single class of compound that
blocks cellular machinery known as the proteasome.
Novartis leads two of the four most advanced malaria
development programs underway worldwide. Malaria still
kills approximately 430 000 people each year, most of
them children under 5 years old. In September, the results
of a proof-of-concept study for one compound, KAF156,
were published, and further development is ongoing. The
second compound, KAE609, continues to be evaluated
for the role it could play in the battle against the disease.
Read more about our antimalarial research and develop-
ment (R&D) efforts on page 51.
68 | Novartis Annual Report 2016
Corporate responsibility
continued
Doing business responsibly
We recognize that achieving our business goals requires
that we operate with high integrity, transparency and
environmental sustainability. We must meet society’s
increasing expectations in a way that builds and main-
tains trust.
Continuing to build a culture of integrity
It takes significant effort to truly and deeply embed a cul-
ture of integrity in a sustainable way across a large, com-
plex and multinational organization. As a result, we do still
uncover lapses. We take allegations of any inappropriate
behavior very seriously, actively investigate them, and
take appropriate disciplinary action. Associates can report
suspected misconduct to the Business Practices Office
(BPO) – an independent team that reports to the Group
General Counsel.
In 2016, the BPO received a total of 3 595 complaints
of alleged misconduct, of which 1 888 were deemed not
to be related to misconduct and were delegated for
review and action outside the BPO investigative process.
The BPO initiated investigations of 1 707 reported cases
related to misconduct; 893 were substantiated, including
401 that resulted in dismissals or resignations.
Following recent cases of misconduct, we have
further increased our focus on ensuring that lessons
learned are shared immediately and transparently
throughout the global organization to identify other sim-
ilar behaviors and enable intelligent risk mitigation. We
continue to invest significant efforts to embed a culture
of compliance throughout our organization.
Training and guiding associates
All Novartis Group company associates are required to
complete integrity and compliance training. In 2016, more
than 110 000 employees completed the Code of Con-
duct course.
Every year since 2012, global communications tool-
kits have been rolled out to support the launch and updat-
ing of policies and guidelines, and to reinforce ethical
behavior among associates. These toolkits include a
range of awareness-raising and educational materials
such as posters, videos, letters to internal stakeholder
groups, frequently asked questions and answers, train-
ing presentations and case materials.
Additionally, our CEO chaired a webcast on global
integrity and compliance to reinforce our commitment
to embed responsible business practices across our
organization and make leaders accountable. We also
developed integrity case studies – inspired by real-life
scenarios – for managers to use in discussions with their
teams.
Compliance has now become a regular agenda item
of leadership meetings across the company. To ensure
accountability of local country organizations, our manage-
ment includes integrity and compliance questions as part
of standard business reviews.
In addition, we continue to further embed our revised
Values and Behaviors launched last year in all aspects
of employees’ lives at Novartis – from recruitment and
development to promotions, performance assessments
and bonus awards.
Strengthening the Integrity & Compliance function
In May, we introduced a new Chief Ethics and Compli-
ance Officer who continues to report directly to the CEO.
The new Chief Ethics and Compliance Officer is also
Head of Litigation, reporting to the Group General Coun-
sel of Novartis. By bringing the compliance and legal
functions closer together, we can evaluate facts that are
uncovered and intended for use in litigation cases to
determine if additional compliance actions or policies
are warranted. This helps us constantly improve our com-
pliance activities.
Misconduct cases1 per category
A total of 1 707 cases of misconduct were reported to the BPO, of which 893
were substantiated, including 401 that resulted in dismissals or resignations.
FraUD
46%
proFessional praCtiCes
32%
eMployee relations
25%
ConFliCt oF interest
6%
QUality assUranCe
6%
inForMation proteCtion
3%
researCH anD DeVelopMent
2%
otHer
7%
787
540
431
98
102
56
34
112
1 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.
Corporate responsibility
Doing business responsibly
Novartis Annual Report 2016 | 69
We also continue to strengthen the Integrity & Compli-
ance (I&C) function, which now has approximately 375
full-time-equivalent employees who are dedicated to integ-
rity and compliance at the local, regional and global levels.
Of these employees, 175 were added in the past three
years. Additionally, we developed and launched an inter-
nal, web-based tool in January 2016 called the I&C Training
Academy, which is designed to help I&C professionals
further enhance their functional skills and competencies.
Furthermore, we took steps to strengthen integrity
and compliance monitoring by hiring regional monitoring
teams to perform in-country testing.
Changing how we interact with customers
Companies in the healthcare industry have an important
responsibility to educate doctors, nurses and other clini-
cians about how medicines and devices work. Practices
such as sponsoring doctors to attend conferences,
inviting clinicians to speak about products, and providing
promotional aids have long been used by pharmaceutical
companies to deliver information to the medical commu-
nity about medicines and services in their portfolio.
One of our goals in 2016 was to find better and more
inclusive ways to reach a broader cross-section of this
community. Moreover, social expectations are rapidly
changing, and educational and promotional practices
that have been widely used by the industry must be
re-evaluated.
We have 120 pilots for finding new and improved ways
of engaging with healthcare professionals that are ongo-
ing or completed. This includes employing technology
to supplement face-to-face meetings and bring the
experience of international congresses to the local level.
For the prominent American Society of Clinical Oncology
meeting in June, we used our new virtual conference
platform Vivinda TV to deliver meeting content on-
demand to more than 5 000 virtual delegates in 103
countries – a reach five times greater than in the past.
And at the European School for Advanced Studies in
Ophthalmology, we used Vivinda TV to provide almost
1 800 virtual delegates in 75 countries with online access
to meeting content. This significantly exceeded the 600
ophthalmologists who would normally attend the meet-
ing in person. Additionally, Novartis partnered with the
Ethics and people key performance indicators 1
Full-time equivalent positions / headcount 2
Turnover: % voluntary / % overall
Voluntary turnover of high3 performers (%)
Internal hires / external hires (%)
Women in management: % of management4 / % of Board of Directors
Associate nationalities / associate nationalities in management 4
Annual training hours per employee
Lost-time injury and illness rate (per 200 000 hours worked) 5
Total recordable case rate (per 200 000 hours worked) 5, 6
Novartis associates trained and certified on Code of Conduct 7
Misconduct cases reported / allegations substantiated 8
Dismissals and resignations related to misconduct 9
Regulatory inspections without major findings (%)
Suppliers posing an elevated risk under responsible procurement 10
Suppliers with active follow-up 10, 11
Suppliers audited 10
2016
2015
118 393 / 122 985
118 700 / 122 966
7.4 / 12.2
7.3 / 13.5
5.8
5.5
47.0 / 53.0
44.8 / 55.2
42 / 25
142 / 109
27.8
0.08
0.29
41 / 27
145 / 109
27.3
0.11
0.40
110 774
110 638
1 707 / 893
1 300 / 1 010
401
98.1
441
147
76
577
98.4
475
249
100
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 We have refined the high-performer definition methodology to reflect the focus on Values and Behaviors, and have restated 2015 data.
4 Management defined locally
5 Data include Novartis associates and third-party personnel managed by Novartis associates.
6 Includes all work-related injury and illness, whether leading to lost time or not
7 Active Novartis associates with email addresses, trained via e-learning
8 The number of misconduct cases reported may change as matters may be reassessed in the course of the case lifecycle. The number of substantiated allegations may change due
to the fact that investigation reports with assessments are received on an ongoing basis, which potentially leads to a difference in numbers at a later stage. In 2016, the Business
Practices Office (BPO) received a total of 3 595 complaints of alleged misconduct, of which 1 888 were deemed not to be related to misconduct and were delegated for review and
action outside the BPO investigative process. The BPO initiated investigations of 1 707 reported cases related to misconduct; 893 were substantiated, including 401 that resulted in
dismissals or resignations.
9 The number of dismissals and resignations related to misconduct may change due to the fact that investigation reports are received and then reviewed for remedial actions on an
ongoing basis, which potentially leads to a difference in numbers at a later stage.
10 Includes new suppliers and new products, services or sites from existing suppliers; potential risks include labor or human rights, HSE and animal welfare
11 Follow-up includes more information requested, audits or on-site assessments.
70 | Novartis Annual Report 2016
Corporate responsibility
continued
American Society of Hematology (ASH) to provide
3 000 healthcare professionals with virtual access to
their annual congress via the ASH web portal.
Beginning 2017, our company will offer doctors sup-
port to attend international medical conferences based
on their active participation in the event (i.e., only if they
are speakers or presenters of Novartis data, chairs of
Novartis-sponsored sessions or faculty for post-
congress education). Novartis will also only sponsor
speakers to represent the company in clearly defined
instances, such as when a new product becomes avail-
able, a new indication is added to an existing product, or
significant new clinical data is released.
We have 120 pilots for finding new and
improved ways of engaging with healthcare
professionals that are ongoing or completed
Driving environmental sustainability
In late 2015, Novartis launched its Vision 2030 on
Environmental Sustainability, which is underpinned by a
set of environmental sustainability targets in four areas:
energy and climate, water and micropollutants, materi-
als and waste, and environmental sustainability man-
agement. Throughout 2016, a cross-divisional team
began to select major facility and infrastructure projects
and measures necessary to achieve our 2020 goals,
based on the savings as determined by our internal
carbon price of USD 100/tCO2e. We are identifying
opportunities for contracting renewable wind and solar
electricity as priority actions.
At the same time, we found ways to improve our en-
vironmental footprint in our day-to-day operations, con-
tributing to a reduction in carbon emissions (Scope 1
and Scope 2) of 10 kilotons in 2016. For instance, at our
facility in Grimsby in the UK, we implemented a new
wastewater technology that uses microbubbles. This
technology was first introduced at our plant in Rin gas-
kiddy, Ireland, in 2015. There, it reduced electricity de-
mand by 160 kilowatts per year and carbon emissions
by 600 tons per year, without impacting the perfor-
mance of the plant.
Ghanaian scientist Edmund Ekuadzi gathers
plants used by traditional healers to analyze
their medicinal effects.
Increasing transparency around payments to
customers
As of 2016, companies belonging to the European
Federation of Pharmaceutical Industries and Associa-
tions (EFPIA), including Novartis, publicly disclose pay-
ments and other transfers of value to health profession-
als and healthcare organizations for prescription
phar maceuticals. Since June, we have made our dis-
closure reports available on our global website. We will
extend this disclosure to include all product segments
in EFPIA countries where we have activities – even parts
of our business that are not covered by the EFPIA code
– and publish them on our global website in 2017.
In addition to the EFPIA code, we comply with similar
transparency codes and regulations in the US, Japan and
Australia.
Combatting counterfeit medicines
Novartis is continuing to work to tackle the problem of
counterfeit drugs.
We established both an Anti-Counterfeiting Steering
Committee and an Anti-Counterfeiting Working Group.
The steering committee, made up of senior managers from
across the company, is tasked with driving the strategic
direction of our anti-counterfeiting approach worldwide.
The working group develops and delivers the specific
operational activities needed to implement the strategy.
Corporate responsibility
Doing business responsibly
Novartis Annual Report 2016 | 71
We found ways to improve our
environmental footprint in our day-to-day
operations, contributing to a reduction
in carbon emissions (Scope 1 and Scope 2)
of 10 kilotons in 2016
Maintaining a responsible supply chain
We engage with an extensive network of suppliers world-
wide, and their contributions are crucial to our success.
Responsible procurement (RP) helps ensure our goods
and services are ethically sourced by requiring the com-
panies with which we do business to meet the standards
of ethics, business integrity and environmental practice
that we expect. Our RP practice is designed to provide
a clear view of where potential issues exist or standards
may be compromised, with speed and accuracy. It quickly
filters out the approximately 95% of suppliers that pres-
ent little or no ethical risk, enabling us to concentrate our
efforts on the small number of suppliers where a signif-
icant risk exists or where we can influence change.
In 2016, we conducted a materiality assessment to
ensure that our current processes meet the recent
heightened external interest, additional scrutiny and new
regulations. One of the outcomes was the establishment
of a cross-functional steering committee. This commit-
tee has the accountability to expand our current RP
program into a comprehensive third-party risk frame-
work across Novartis.
In 2017, cross-functional workstreams formed under
the steering committee will carry out an action plan to
strengthen the policy, execution and monitoring aspects
of the program to address additional third-party risks.
Expanding our corporate volunteering program
Novartis has a number of initiatives to engage our asso-
ciates, helping us to attract and develop talented people,
strengthen our company’s culture, and support our ability
to execute our strategy.
In 2015, we put in place a corporate volunteering
platform through which Novartis associates can register
a potential corporate responsibility project idea or sign
up to become a corporate volunteer. In 2016, the pro-
gram expanded significantly, launching in several mar-
kets, including low- and middle-income countries. The
scope of projects in the platform is broad and includes
partnerships with global charitable organizations, remote
and on-the-ground capability building, one-time and
recurring pro bono services, and local efforts to support
smaller-scale foundations and institutions.
Environmental sustainability key performance indicators 1, 2
Energy use (million gigajoules), on site and purchased
Water discharge (million m3)
Contact water use, excluding cooling water (million m3)
Emissions
Greenhouse gas (GHG) emissions, total Scope 1 and Scope 2 (1 000 t)
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)
2016
16.6
16.2
14.8
1 352.7
396.6
134.7
821.4
50.7
480.8
60.2
17.9
2015
17.2
17.2
15.5
1 362.1
396.8
138.9
826.4
66.4
517.1
57.6
20.6
1 Continuing operations
2 2016 environmental sustainability data published in the Annual Report are actual data for the period from January through September, and best estimates for the period from
October through December. They will be updated with actual data in the first quarter of 2017. Significant deviations will be reported on our website and restated in next year’s
Annual Report.
72 | Novartis Annual Report 2016
independent assurance report on the
novartis 2016 corporate responsibility reporting
To the Board of Directors of
Novartis AG, Basel
Novartis responsibilities
We have been engaged to perform assurance proce-
dures to provide limited assurance on the following
aspects of the 2016 corporate responsibility (CR) report-
ing of Novartis AG and its consolidated subsidiaries
(Novartis Group) included in the Annual Report 2016.
Scope and subject matter
Our limited assurance engagement focused on the fol-
lowing data and information disclosed in the consoli-
dated CR reporting of Novartis Group for the year ended
December 31, 2016:
— The social key performance indicators on page 7, the
“Novartis access approaches: key performance
indicators 2016” on page 65, the “Misconduct cases
per category” on page 68, the “Ethics and people key
performance indicators” on page 69 and the “Envi-
ronmental sustainability key performance indicators”
on page 71 (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
Inherent limitations
The accuracy and completeness of CR indicators are
subject to inherent limitations given their nature and
methods for determining, calculating and estimating
such data. Our Assurance Report should therefore be
read in connection with Novartis Group guidelines,
definitions and procedures on CR reporting.
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 informa-
tion in accordance with the criteria. This responsibility
includes the design, implementation and maintenance of
related internal control relevant to this reporting process
that is free from material whether due to fraud and error.
Our responsibilities
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 indicators are not stated, in all material respects, in
accordance with the reporting criteria.
We planned and performed our procedures in accor-
dance with the International Standard on Assurance
Engagements (ISAE) 3000 (revised) “Assurance Engage-
ments Other Than Audits or Reviews of Historical Finan-
cial 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 procedures, 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 assur-
ance engagement than for a reasonable assurance
engagement.
Our independence and quality control
We have complied with the independence and other eth-
ical requirements of the Code of Ethics for Professional
Accountants issued by the International Ethics Stan-
dards Board for Accountants, which is founded on fun-
damental principles of integrity, objectivity, professional
competence and due care, confidentiality and profes-
sional behavior.
Corporate responsibility
independent assurance report on the novartis 2016 corporate responsibility reporting
Novartis Annual Report 2016 | 73
Our firm applies International Standard on Quality
Control 1 and accordingly maintains a comprehensive
system of quality control including documented policies
and procedures regarding compliance with ethical
requirements, professional standards, and applicable
legal and regulatory requirements.
We have not carried out any work on data other than out-
lined 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.
Summary of work performed
Our assurance procedures included the following:
— Reviewing the application of the Novartis Group inter-
nal CR reporting guidelines
— Interviewing associates responsible for internal
reporting and data collection
— Performing tests on a sample basis of evidence
supporting selected CR data concerning complete-
ness, 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
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 24, 2017
74 | Novartis Annual Report 2016
1
PHOTO ESSAY
Coping with eye disease
and fading vision late in life
Groups of people doing communal exercises to keep
fit are an everyday sight in Japan, but for one woman
they are a very public way to show she is fighting back
against a debilitating eye disease.
Yuko Yoshikawa feared she could no longer help
organize the popular sessions, known as radio
exercises, when she began suffering from age-
related macular degeneration (AMD), which causes
progressive loss of vision in the elderly. The disease
results in gradual blurring of the eye’s central vision,
making it harder to read and recognize faces, and
often triggering depression and feelings of isolation.
She gained information and support from other
patients, and is now working with them to spread the
word through a group called AMD Tomonokai, which
means “friends” in Japanese. Ms. Yoshikawa, now 65,
was encouraged to maintain her involvement with
the exercise classes, though she now wears dark
glasses to protect her eyes against bright sunlight.
Through its newsletters, meetings and website,
the group shares AMD patients’ experiences and
advises them on a range of practical matters, such
as how to get the most out of medical consultations,
find the best form of therapy, and manage the costs
of healthcare. It also offers practical tips, like using a
smartphone to read bus timetables by photographing
the small print and enlarging it on the screen.
Above all, the group stresses the importance of
social interaction and maintaining normal activities for
as much as possible to counteract the psychological
effects of the disease.
The challenges associated with AMD will likely
grow as the world’s population ages. In Japan, which
has the oldest average population of any country in
the world, an estimated 700 000 people suffer from
the disease. Worldwide, about 170 million people are
affected, and this number is expected to increase to
nearly 200 million by 2020.
PHOTO ESSAY
Novartis Annual Report 2016 | 75
1
2
3
Despite eyesight problems, Yuko Yoshikawa
(center foreground) throws herself into the
communal fitness sessions that are a feature
of Japanese life.
Hideo Takahashi, founder and head of the AMD
support group, with his wife Chizuko at their
vegetable plot in Saitama, near Tokyo, Japan
Ms. Yoshikawa visits a historic shrine near her
Tokyo home.
2
3
There is no cure for AMD, though therapies such
as Lucentis have been shown to improve symptoms
in the more serious form of the disease, called wet
AMD. And Novartis has ongoing work to develop
alternative treatments.
Members of AMD Tomonokai find different ways
to cope with the disease. Despite her deteriorating
vision, Hiroko Ayabe, a 71-year-old retired teacher,
continues to play an active role in family life by
looking after her grandchildren every day until her
daughter and son-in-law get home from work.
The group’s founder and head, Hideo Takahashi,
sets a good example by cycling to a small inner-
city farm where he and his wife, Chizuko, tend the
vegetables they grow – his eyes also protected by
dark glasses.
Mr. Takahashi, now 68 years old, discovered
he had AMD seven years ago and experienced
the same uncertainty and isolation as many
other patients. However, after a lifetime in the
pharmaceutical industry, he was more familiar with
the world of healthcare and determined to put his
knowledge to good use.
The group he established now has around
100 members and provides an important source
of advice, as well as support and encouragement
for patients. And like the plants he tends on his
vegetable plot, Mr. Takahashi is confident that now
that it has taken root, it will flourish and grow over
time.
For detail on eye care research k page 50
76 | Novartis Annual Report 2016
Corporate governance
Contents
Dear shareholder,
Letter from the Chairman
Summary of our corporate governance approach
Our shares and our shareholders
Our Board of Directors
Our management
Our independent external auditors
Our corporate governance framework
Further information
76
79
80
86
98
104
105
106
In 2016, we refreshed our Board with new
members, focused on the new operating model
of Novartis, and further strengthened our
corporate governance.
The mandate of our Board
Our Board is accountable for stewardship, governance
and oversight, and for setting the strategic direction to
deliver sustainable value. We achieve this by setting a
clear strategy for Novartis and through an effective
governance.
Our Board is also responsible for appointing our CEO
and the other Executive Committee members. We assert
independent judgment and work closely with our Exec-
utive Committee to ensure our strategy is properly imple-
mented, our ethical standards are applied, and our per-
formance is optimized.
Board composition
To be effective and independent, our Board must have
the right composition, structure and processes, and a
clear understanding of its role and responsibilities. Our
Board meets these requirements.
Our Board is comprised of 12 non-executive, inde-
pendent members with diverse education, experience,
nationalities and interpersonal skills. This diversity was
further strengthened when Ton Buechner and Liz
Doherty joined in February 2016, reinforcing our Board’s
expertise in finance and accounting, as well as in lead-
ership and management. With this, we achieved a sub-
stantial Board refreshment. Two-thirds of our Board
members have a tenure of less than six years, balancing
the benefits of continuity and experience with refresh-
ment, without applying a mandatory term limit.
Corporate governanCe
Letter from the Chairman
Novartis Annual Report 2016 | 77
In line with committee succession plans, Liz joined
our Audit and Compliance Committee (ACC), and was
designated as Financial Expert. Subject to their re-elec-
tion at the Annual General Meeting of Shareholders
(AGM) 2017, Liz will take over the chairmanship of the
ACC from Srikant Datar; Srikant will remain an ACC mem-
ber, designated as second Financial Expert; and he will
take over the chairmanship of the Risk Committee from
Andreas von Planta, who has already taken over the
chairmanship of the Governance, Nomination and Cor-
porate Responsibilities Committee (GNCRC) from Pierre
Landolt.
All Board members are non-executive and indepen-
dent, as defined by our own rules and those of the Swiss
Code of Best Practice for Corporate Governance. We
have established processes to ensure our Board func-
tions effectively, promoting efficient and balanced deci-
sion-making, and enabling our Board to effectively fulfill
its duties in the best interest of our shareholders, employ-
ees and other stakeholders.
We emphasize training, performance evaluation and
ongoing improvement of our Board and its members, as
well as succession planning. To get an outside view on
where we could improve further, we initiate a perfor-
mance and effectiveness evaluation by an independent
expert on a regular basis, with the most recent external
review being completed during 2014.
The focus of our Board in 2016
The key areas that our Board focused on in 2016 were
structural, cultural and leadership changes, as well as
the corporate responsibility programs, compliance and
the compensation system.
We re-evaluate the strategic direction of Novartis each
year and make necessary changes in line with our man-
date to create sustainable value.
Last year, a key strategic topic for our Board was the
continuing transformation of Novartis. This began in 2014
when we focused our company on our core businesses
and created a more integrated organization to facilitate
collaboration, drive efficiency, and support productivity
gains. In 2016, in close cooperation with our Executive
Committee, we implemented additional structural
changes aimed at positioning our company for future
growth. They included creating Global Drug Develop-
ment and manufacturing organizations to further enhance
efficiency and effectiveness. As a result of these actions,
in just over three years, Novartis has transformed from
a strongly divisionalized organization to a more inte-
grated, streamlined company focused on key segments
and able to take advantage of its global scale. For details
on our strategy and structure, please see pages 14 – 19.
We also strengthened our focus on the corporate cul-
ture of Novartis as defined by the Novartis Values and
Behaviors.
The GNCRC also reviewed progress on Novartis
Access, our portfolio of 15 on- and off-patent medicines
offered to governments and public-sector customers in
low- and lower-middle-income countries at a price of
USD 1 per treatment per month, which completed its first
year of implementation. The Novartis Malaria Initiative,
the Healthy Family social business, and our corporate
volunteering program were also reviewed. The GNCRC
also reviewed Novartis’ performance in key sustainabil-
ity ratings and discussed the potential for introducing
more robust reporting on the social impact of our activ-
ities. For further information on our corporate responsi-
bility efforts, please see the Corporate Responsibility
chapter, beginning on page 60, and our Corporate
Responsibility Performance Report on the Novartis web-
site: www.novartis.com/about-us/corporate-responsibility.
To meet the increasing expectations of patients and
society in a way that makes us proud, we also took fur-
ther steps in the compliance area. We enhanced our core
compliance processes and strengthened our Integrity &
Compliance function. Further, we evolved the way we
work to increase access to evidence-based information
about our products and services, with the aim of helping
doctors deliver the best possible care for patients. We
will continue to focus on further strengthening leaders’
accountability at all levels of the organization for com-
pliance.
And, finally, we continued to refine our compensation
system in line with best practice principles. For further
information, please see our Compensation Report,
beginning on page 110.
78 | Novartis Annual Report 2016
Role of the Chairman
Importance of shareholder engagement
As independent, non-executive Chairman, I am respon-
sible for the leadership of the Board, ensuring its effec-
tiveness in all aspects of its role. I also make sure we
effectively collaborate with our CEO and the Executive
Committee.
I ensure that our Board and its committees work
effectively, setting the agenda, style and tone of Board
discussions. I promote constructive challenge and
debate, as well as effective decision-making, while ensur-
ing that our performance is regularly evaluated and that
our members are provided with appropriate support,
education and advice.
In addition, I support, mentor and challenge our CEO,
without interfering in the operational management of
Novartis.
I am supported in my tasks by our Vice Chairman,
Enrico Vanni, who would lead the Board if I were inca-
pacitated.
Engagement with our shareholders is critical to our com-
pany’s long-term success. Our Board is committed to
continuous shareholder engagement. We strive to
exchange views with our shareholders in an atmosphere
of trust and respect that promotes a collaborative dia-
logue, with views and positions expressed openly to
enhance mutual understanding. As part of these efforts,
based on a structured annual program, our governance
specialists meet regularly with their peers from share-
holder groups, and I personally meet with many of our
shareholders, discussing strategy and governance. Our
shareholder engagement meaningfully contributes to the
continuing evolution of our governance framework.
Strengthened governance framework
Joerg reinhardt
Chairman of the Board of Directors
During the last two years, we took steps to further
strengthen our corporate governance, implementing the
rules of the Ordinance against Excessive Compensation
in Stock Exchange Listed Companies. We introduced
annual elections of the Chairman of the Board, of all
Board members, and of Compensation Committee mem-
bers. We also 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.
Last year we also addressed the question of auditor
rotation. We concluded that, at this stage, continuing with
the yearly assessment of PwC’s objectivity, effectiveness
and independence, and with the regular rotation of the
audit partner in charge, is in the best interest of Novartis,
its investors and other stakeholders.
Corporate governanCe
Summary of our corporate governance approach
Novartis Annual Report 2016 | 79
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,
Compensation Committee members, Independent Proxy and external auditors;
adopts Articles of Incorporation
audit and
Compliance
Committee
Compensation
Committee
Board of Directors
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
Responsible for operational management of Novartis
external auditor
Provides opinion on compliance
of Novartis Group consolidated
financial statements and
the financial statements of
Novartis AG
with applicable standards and
Swiss law, on compliance of
the Compensation Report with
applicable law, on effectiveness
of internal control over financial
reporting, and on the corporate
responsibility reporting of
Novartis
Leadership structure
Independent, non-executive Chairman and separate
CEO
Board governance
Structure
All Board members are non-executive and independent,
as defined by our rules. The Board has assigned respon-
sibilities to five committees:
— Audit and Compliance Committee
— Compensation Committee
— Governance, Nomination and Corporate Responsibil-
Processes
The Board’s processes significantly influence its effec-
tiveness. The Board has implemented best practices for
all such processes. Important elements include Board
meeting agendas (to address all important topics), infor-
mation submitted to the Board (to ensure the Board
receives sufficient information from management to per-
form its supervisory duty and to make decisions that are
reserved for it), and boardroom behavior (to promote an
efficient and balanced decision-making process).
Board and Executive Committee
compensation
ities Committee
— Research & Development Committee
— Risk Committee
Information on Board and Executive Committee com-
pensation is outlined in our Compensation Report, begin-
ning on page 110.
Composition
Board members have diverse education, experience,
nationalities and interpersonal skills. Their biographies
(beginning on page 94) describe their specific qualifica-
tions.
80 | Novartis Annual Report 2016
Our shares and our shareholders
Our shares
Share capital of Novartis AG
As of December 31, 2016, the share capital of Novartis
AG is CHF 1 313 557 410 fully paid-in and divided into
2 627 114 820 registered shares, each with a nominal
value of CHF 0.50 (Novartis share). Novartis AG has
neither authorized nor conditional capital. There are no
preferential voting shares; all Novartis shares have equal
voting rights. No participation certificates, non-voting
equity securities (Genussscheine), or profit-sharing
certificates have been issued.
Novartis shares are listed on the SIX Swiss Exchange
(ISIN CH0012005267, symbol: NOVN), and on the New
York Stock Exchange (NYSE) in the form of American
depositary receipts (ADRs) representing Novartis Amer-
ican depositary shares (ADSs) (ISIN US66987V1098,
symbol: NVS).
The holder of an ADR has the rights enumerated in
the deposit agreement (such as the right to give voting
instructions and to receive dividends). The ADS depos-
itary of Novartis AG – JPMorgan Chase Bank, New York
– holding the Novartis shares underlying the ADRs is reg-
istered as a shareholder in the Novartis Share Register.
An ADR is not a Novartis share and an ADR holder is not
a Novartis AG shareholder. ADR holders exercise their
voting rights by instructing the depositary to exercise
their voting rights. Each ADR represents one Novartis
share.
Changes in share capital
During the last three years, the following changes were
made to the share capital of Novartis AG:
In 2014, the share capital of Novartis AG did not
change. In 2015, Novartis AG reduced its share capital
by CHF 14.6 million (from CHF 1 353 096 500 to CHF
1 338 496 500) by canceling 29.2 million Novartis shares
repurchased on the second trading line during 2013 and
2014. In 2016, Novartis AG reduced its share capital by
CHF 24.9 million (from CHF 1 338 496 500 to CHF
1 313 557 410) by canceling 49.9 million Novartis shares
repurchased on the second trading line during 2015.
Capital changes
Number of shares
Year
As of Jan 1
Changes
in shares
As of Dec 31
Changes
in CHF
A table with additional information on changes in the
Novartis AG share capital can be found in Note 8 to the
financial statements of Novartis AG.
Convertible or exchangeable securities
Novartis AG has not issued convertible or exchangeable
bonds, warrants, options or other securities granting
rights to Novartis shares, other than options (and similar
instruments such as stock appreciation rights) granted
under or in connection with equity-based participation
plans of Novartis associates. Novartis AG does not grant
any new stock options under these plans.
Share repurchase programs
At the Annual General Meeting (AGM) in February 2008,
shareholders approved the sixth share repurchase pro-
gram authorizing the Board to repurchase Novartis
shares up to a maximum of CHF 10 billion via a second
trading line on the SIX Swiss Exchange. In 2008, a total
of 6 million Novartis shares were repurchased at an aver-
age price of CHF 49.42 per Novartis share, and canceled
in 2009. In April 2008, the share repurchases were sus-
pended in favor of debt repayment. In December 2010,
the Board announced the reactivation of the share repur-
chases. In 2011, 39 430 000 Novartis shares were repur-
chased at an average price of CHF 52.81 per Novartis
share, and canceled in 2012. In 2012, no Novartis shares
were repurchased. In 2013, 2 160 000 Novartis shares
were repurchased at an average price of CHF 70.58 per
Novartis share. In 2014, 27 040 000 Novartis shares
were repurchased at an average price of CHF 81.18 per
Novartis share. In 2015, 29 200 000 Novartis shares
repurchased in 2013 and 2014 were canceled. In the
same year, 49 878 180 Novartis shares were repur-
chased at an average price of CHF 93.24 per Novartis
share, and canceled in 2016. With those repurchases,
the sixth share repurchase program was completed.
At the AGM in February 2016, shareholders approved
the seventh share repurchase program authorizing the
Board to repurchase Novartis shares up to a maximum
of CHF 10 billion. In 2016, a total of 10 270 000 Novartis
shares were repurchased at an average price of CHF
74.67 per Novartis share.
Share developments
SHare DeveLopMentS In 2016
— Swiss-listed Novartis shares decreased 14.6% to
CHF 74.10
2014
2 706 193 000
2 706 193 000
— ADRs decreased 15.3% to USD 72.84
2015
2 706 193 000 – 29 200 000 2 676 993 000 – 14 600 000
2016
2 676 993 000 – 49 878 180 2 627 114 820 – 24 939 090
Corporate governanCe
our shares and our shareholders
Novartis Annual Report 2016 | 81
Novartis shares finished at CHF 74.10, a decrease of
14.6% from the 2015 year-end closing price of CHF 86.80.
Novartis ADRs decreased in 2016 by 15.3% to USD 72.84
from USD 86.04. The Swiss Market Index (SMI), in com-
parison, decreased by 6.8% in 2016, whereas the world
pharmaceutical index (MSCI) decreased by 12.0% during
the year. Total shareholder return for Novartis shares in
2016 was -11.4% in CHF and -13.8% in USD. The disap-
pointing Alcon performance, the slow uptake of Entresto
and the patent expiration of Gleevec in US weighed on
our share price in 2016. Over a longer-term period,
Novartis AG has consistently delivered a solid perfor-
mance, providing a 8.7% compounded annual total
shareholder return between January 1, 1996 and Decem-
ber 31, 2016, exceeding the 8.4% compounded returns
of its large pharmaceutical peers (see page 115; “bench-
mark companies”), or the returns of 8.3% of the MSCI.
The market capitalization of Novartis AG based on
the number of Novartis shares outstanding (excluding
Novartis treasury shares) amounted to USD 172 billion
as of December 31, 2016, compared to USD 208 billion
as of December 31, 2015.
ContInUoUSLY r ISIng DIvIDenD SInC e 1996
The Board proposes a 2% increase in the dividend pay-
ment for 2016 to CHF 2.75 per Novartis share (2015:
CHF 2.70) for approval at the AGM on February 28, 2017.
This represents the 20th consecutive increase in the div-
idend paid per share since the creation of Novartis AG
in December 1996, which reflects the successful execu-
tion of the Group’s strategy as well as the performance
of the Executive Committee and all Novartis associates.
If the 2016 dividend proposal is approved by sharehold-
ers, dividends to be paid out will total approximately
USD 6.4 billion (2015: USD 6.5 billion). This will result in
an expected payout ratio of 96% of net income from con-
tinuing operations (2015: 92% and 36% of net income
attributable to shareholders of Novartis AG). Based on
the 2016 year-end share price of CHF 74.10, the dividend
yield will be 3.7% (2015: 3.1%). The dividend payment
date has been set for March 6, 2017.
DIreCt SHare pUrCHaSe pLan
As of June 20, 2016, Novartis no longer provides a Direct
Share Purchase Plan. All participants were informed
about the termination through a letter, which also included
details about available options and the modalities of the
closure.
Key Novartis share data
Issued shares
Treasury shares 1
outstanding shares at December 31
Novartis 2016 share price movement
(based on USD amounts)
115
110
105
100
95
90
85
80
Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec
NOVARTIS
PEERS
MSCI WORLD MARKETS
MSCI WORLD PHARMA
Source: Datastream; data are converted into US dollars and re-based to 100 at
January 1, 2016. Currency fluctuations have an influence on the representation of the
relative performance of Novartis vs. indices and peers.
Novartis 1996–2016 total shareholder return
(based on USD amounts)
800
700
600
500
400
300
200
100
0
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
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.
2016
2015
2014
2 627 114 820
2 676 993 000
2 706 193 000
253 055 807
303 098 183
307 566 743
2 374 059 013
2 373 894 817
2 398 626 257
Weighted average number of shares outstanding
2 378 474 555
2 402 806 352
2 425 782 324
1 Approximately 135 million treasury shares (2015: 137 million; 2014: 153 million) are held in entities that restrict their availability for use.
82 | Novartis Annual Report 2016
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 2016: proposal to shareholders for approval at the Annual General Meeting on February 28, 2017
2016
2.82
2.82
2.80
2.80
4.82
2015
2.92
4.48
7.40
2.88
4.41
7.29
5.03
31.52
32.46
2.75
2.70
2014
4.39
– 0.18
4.21
4.31
– 0.18
4.13
5.73
29.50
2.60
Key ratios – December 31
Our shareholders
Price/earnings ratio 1
Price/earnings ratio from
continuing operations 1
Enterprise value/EBITDA
from continuing operations
Dividend yield (%) 1
2016
25.7
2015
11.9
2014
22.2
25.7
30.1
21.3
13
3.7
16
3.1
15
2.8
1 Based on the Novartis share price at December 31 of each year
Key data on ADRs issued in the US
Year-end ADR price (USD)
High 1
Low 1
Number of
ADRs outstanding 2
2016
72.84
86.21
67.59
2015
86.04
106.12
83.96
2014
92.66
96.65
78.20
315 349 314 299 578 398 307 623 364
Significant shareholders
According to the Novartis Share Register, as of Decem-
ber 31, 2016, the following registered shareholders
(including nominees and the ADS depositary) held more
than 2% of the total share capital of Novartis AG, with
the right to vote all these Novartis shares based on an
exemption granted by the Board (see page 84):1
— Shareholders: Novartis Foundation for Employee Par-
ticipation, with its registered office in Basel, holding
2.6%; Emasan AG, with its registered office in Basel,
holding 3.4%; and UBS Fund Management (Switzer-
land) AG, with its registered office in Basel, holding 2.1%
— Nominees: Chase Nominees Ltd., London, holding
8.5%; Nortrust Nominees, London, holding 3.9%; and
The Bank of New York Mellon, New York, holding 4.4%
through its nominees, The Bank of New York Mellon,
Everett, holding 1.8%, and The Bank of New York Mel-
lon, Brussels, holding 2.6%
— ADS depositary: JPMorgan Chase Bank, New York,
1 Based on the daily closing prices
2 The depositary, JPMorgan Chase Bank, holds one Novartis AG share for every ADR
holding 12.0%
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
2016
74.10
86.45
68.15
2015
86.80
102.30
82.20
2014
92.35
93.80
70.65
172.0
208.3
223.7
175.9
206.1
221.5
1 Based on the daily closing prices
2 Market capitalization is calculated based on the number of shares outstanding
(excluding treasury shares).
According to a disclosure filed with Novartis AG, Norges
Bank (Central Bank of Norway), Oslo, held 2.02% of the
share capital of Novartis AG as of December 31, 2016.
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, 2016:
— Capital Group Companies Inc., Los Angeles
— BlackRock Inc., New York
Disclosure notifications pertaining to shareholdings in
Novartis AG that were filed with Novartis AG and the SIX
Swiss Exchange are published on the latter’s electronic
publication platform, and can be accessed via:
www.six-exchange-regulation.com/en/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.
1 Excluding 4.5% of the share capital held as treasury shares by Novartis AG and its
entities that restrict their availability for use
Corporate governanCe
our shares and our shareholders
Novartis Annual Report 2016 | 83
Distribution of Novartis shares
The information in the following tables relates only to
registered shareholders and does not include holders of
unregistered shares. Also, the information provided in
the tables below cannot be assumed to represent the
entire Novartis AG investor base because nominees and
JPMorgan Chase Bank, as ADS depositary, are regis-
tered as shareholders for a large number of beneficial
owners.
As of December 31, 2016, Novartis AG had approxi-
mately 171 000 registered shareholders.
Number of shares held
As of December 31, 2016
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
Number of
registered
shareholders
25 153
103 217
38 138
3 427
481
71
35
Total registered shareholders/shares
170 522
Unregistered shares
total
% of registered
share capital
0.06
1.66
4.03
3.40
5.47
5.53
50.12
70.27
29.73
100.00
Shareholder rights
Shareholders have the right to receive dividends, to vote
and to execute all other rights as granted under Swiss
law and the Articles of Incorporation.
rIgHt to vote
Each Novartis share registered with the right to vote enti-
tles the holder to one vote at General Meetings of Share-
holders (General Meetings). Novartis shares can only be
voted if they are registered with voting rights in the
Novartis Share Register by the third business day before
the General Meeting (for shareholder registration and
voting restrictions, see page 84).
ADR holders may vote by instructing JPMorgan
Chase Bank, the ADS depositary, to exercise the voting
rights attached to the registered Novartis shares under-
lying the ADRs. JPMorgan Chase Bank exercises the
voting rights for registered Novartis shares underlying
ADRs for which no voting instructions have been given
by providing a discretionary proxy to an uninstructed
independent designee. Such designee has to be a
Novartis AG shareholder.
poWerS oF generaL MeetIngS oF SHareHoLDerS
The following powers are vested exclusively in the Gen-
eral Meeting:
— Adoption and amendment of the Articles of Incorpo-
1 Including significant registered shareholders as listed above
ration
Registered shareholders by type
— 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
As of December 31, 2016
Shareholders in %
Shares in %
of the consolidated financial statements
Individual shareholders
Legal entities 1
Nominees, fiduciaries
and ADS depositary
total
96.24
3.70
0.06
100.00
13.28
35.11
51.61
100.00
1 Excluding 4.5% of the share capital held as treasury shares by Novartis AG and its
entities that restrict their availability for use
Registered shareholders by country
As of December 31, 2016
Shareholders in %
Shares in %
Belgium
France
Germany
Japan
Switzerland 1
United Kingdom
United States
Other countries
total
0.14
2.37
5.27
0.16
88.60
0.47
0.31
2.68
4.08
0.49
2.00
0.73
42.53
23.43
23.93
2.81
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 4.5% of the share capital held as treasury shares by Novartis AG and its
entities that restrict their availability for use
— Approval of the financial statements of Novartis AG,
and decision on the appropriation of available earn-
ings shown on the balance sheet, including dividends
— Approval of the maximum aggregate amounts of com-
pensation 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 Commit-
tee members
— Decision of other matters that are reserved by law or
by the Articles of Incorporation to the General Meet-
ing of Shareholders
reSoLUtIonS anD eLeCtIonS at generaL MeetIngS
The General Meeting passes resolutions and elections
with the absolute majority of the votes represented at
the meeting. However, under the Articles of Incorpora-
tion (www.novartis.com/ corporate-governance), the
approval of two-thirds of the votes represented at the
meeting is required for:
— An alteration of the purpose of Novartis AG
— The creation of shares with increased voting powers
— An implementation of restrictions on the transfer of
registered shares, and the removal of such restric-
tions
84 | Novartis Annual Report 2016
— An authorized or conditional increase of the share
capital
— An increase of the share capital out of equity, by con-
tribution in kind, for the purpose of an acquisition of
property or the grant of special rights
— A restriction or suspension of rights or options to sub-
scribe
— A change of location of the registered office of
Novartis AG
— The dissolution of Novartis AG
In addition, the law provides for a qualified majority for
other resolutions, such as a merger or spin-off.
otHer SHareHoLDer rIgHtS
Shareholders representing at least 10% of the Novartis
share capital may request that an extraordinary General
Meeting be convened. Shareholders representing
Novartis shares with an aggregate nominal value of at
least CHF 1 million may request that an item be included
in a General Meeting agenda. Such requests must be
made in writing at least 45 days before the meeting,
specify the agenda item to be included, and contain the
proposal on which the shareholder requests a vote.
Shareholders can vote their Novartis shares by them-
selves or appoint another shareholder or the Indepen-
dent Proxy to vote on their behalf. All shareholders (who
are not yet registered on the online platform; see below)
receive a General Meeting invitation letter with a proxy
appointment form for the appointment of the Indepen-
dent Proxy. On this form, shareholders can instruct the
Independent Proxy to vote on alternative or additional
motions related to the agenda items either (i) according
to the motions of the Board for such alternative or addi-
tional motions, or (ii) against such alternative or addi-
tional motions. They can also abstain from voting.
Novartis AG offers shareholders the opportunity to
use an online platform (the Sherpany Platform) to receive
notices of future General Meetings exclusively by email
and to electronically give their instructions to the Inde-
pendent Proxy, grant powers of attorney to other share-
holders, and order their admission cards online. The
General Meeting registration form enables shareholders
who are not yet registered on the Sherpany Platform to
order detailed documents related to opening a Sherpany
account. They may also do so by contacting the Novartis
Share Registry. Shareholders can deactivate their online
account at any time and again receive invitations in paper
form.
Other rights associated with a registered Novartis
share may only be exercised by the shareholder, its legal
representative, another shareholder with the right to
vote, the Independent Proxy, an usufructuary (a person
who is not the owner of the share but who is entitled to
exercise shareholder rights), or a nominee who is regis-
tered in the Novartis Share Register.
Shareholder registration
Only shareholders, usufructuaries or nominees regis-
tered in the Novartis Share Register with voting rights
may exercise their voting rights. To be registered with
voting rights, a shareholder must declare that he or she
acquired the shares in his or her own name and for his
or her own account. According to the Articles of Incor-
poration, the Board may register nominees with the right
to vote. For restrictions on the registration of nominees,
please see below.
The Articles of Incorporation provide that no share-
holder shall be registered with the right to vote for more
than 2% of the registered share capital. The Board may,
upon request, grant an exemption from this restriction.
Considerations include whether the shareholder sup-
ports the Novartis goal of creating sustainable value and
has a long-term investment horizon. In 2016, the Board
approved an exemption requested by UBS Fund Man-
agement (Switzerland) AG based on the fulfilment of the
requirements as disclosed above. Further exemptions
are in force for the registered significant shareholders
listed on page 82 under Our Shareholders – Significant
Shareholders, and for Norges Bank (Central Bank of Nor-
way), Oslo, which as of December 31, 2016, was not reg-
istered in the share register but according to disclosure
notification filed with Novartis AG, held 2.02% of the
share capital of Novartis AG.
The same registration and voting restrictions indi-
rectly apply to holders of ADRs.
Given that shareholder representation at General
Meetings traditionally has been rather low in Switzerland,
Novartis AG considers registration restrictions neces-
sary to prevent a minority shareholder from dominating
a General Meeting.
The Articles of Incorporation provide that no nomi-
nee shall be regis tered with the right to vote for more
than 0.5% of the registered share capital. The Board may,
upon request, grant an exemption from this restriction if
the nominee discloses the names, addresses and num-
ber of shares of the individuals for whose account it holds
0.5% or more of the registered share capital. Exemptions
are in force for the nominees listed on page 82 under
Our Shareholders – Significant Shareholders, and for
the nominee Citi Bank, London, which in 2015 requested
an exemption, but as of December 31, 2016, was not reg-
istered in the Novartis Share Register.
The same restrictions indirectly apply to holders of
ADRs.
Registration restrictions in the Articles of Incorpora-
tion may only be removed through a resolution of the
General Meeting, with approval of at least two-thirds of
the votes represented at the meeting.
Shareholders, ADR holders, or nominees who are
linked to each other or who act in concert to circumvent
registration restrictions are treated as one person or
nominee for the purposes of the restrictions on registra-
tion.
Corporate governanCe
our shares and our shareholders
Novartis Annual Report 2016 | 85
No restrictions on trading of shares
No restrictions are imposed on the transferability of
Novartis shares. The registration of shareholders in the
Novartis Share Register or in the ADR register kept by
JPMorgan Chase Bank does not affect the tradability of
Novartis shares or ADRs. Registered Novartis sharehold-
ers or ADR holders may therefore purchase or sell their
Novartis shares or ADRs at any time, including before a
General Meeting, regardless of the record date. The
record date serves only to determine the right to vote at
a General Meeting.
Change-of-control provisions
no optIng Up, no optIng oU t
According to the Swiss Federal Act on Financial Infra-
structures, anyone who – directly, indirectly or acting in
concert with third parties – acquires equity securities
exceeding 33 1/3% of the voting rights of a company
(whether or not such rights are exercisable) is required
to make an offer to acquire all listed equity securities of
that company. A company may raise this threshold up to
49% of the voting rights (“opting up”) or may, under cer-
tain circumstances, waive the threshold (“opting out”).
Novartis AG has not adopted any such measures.
CHange-oF-ControL CLaUSeS
In accordance with good corporate governance and the
rules of the Ordinance against Excessive Compensation
in Listed Companies, there are no change-of-control
clauses and “golden parachute” agreements benefiting
Board members, Executive Committee members, or
other members of senior management. Furthermore,
employment contracts with Executive Committee mem-
bers do not contain notice periods or contract periods
exceeding 12 months, or commissions for the acquisition
or transfer of enterprises or severance payments.
General compensation provisions
non-eXeCUtIve MeMBerS oF t He BoarD oF DIre CtorS
Compensation of non-executive members of the Board
includes fixed compensation elements only. In particu-
lar, non-executive members of the Board shall receive
no company contributions to any pension plan, no per-
formance-related elements, and no financial instruments
(e.g., options).
MeMBerS oF tHe eXeCUtIve CoMMIttee
The members of the Executive Committee receive fixed
and variable, performance-related compensation. Fixed
compensation is comprised of the base salary and may
include other elements and benefits such as contribu-
tions to pension plans. Variable compensation may be
structured into short-term and long-term compensation
elements. Short-term variable compensation elements
shall be governed by performance metrics that take into
account the performance of Novartis and/or parts
thereof, and/or individual targets. Achievements are gen-
erally measured based on the one-year period to which
the short-term compensation relates. The long-term
compensation plans are based on performance metrics
that take into account strategic objectives of Novartis
(such as financial, innovation, shareholder return and/or
other metrics). Achievements are generally measured
based on a period of not less than three years.
aDDItIonaL aMoU nt
If the maximum aggregate amount of compensation
already approved by the General Meeting is not sufficient
to cover the compensation of newly appointed or pro-
moted Executive Committee members, Novartis may pay
out compensation, in a total amount up to 40% of the
total maximum aggregate amount last approved for the
Executive Committee per compensation period, to newly
appointed or promoted Executive Committee members.
For detailed information on the compensation of the
Board and the Executive Committee, see the Compen-
sation Report, beginning on page 110.
86 | Novartis Annual Report 2016
Our Board of Directors
Composition of the Board of Directors and its committees (as per December 31, 2016)
Chairman: J. Reinhardt
vice Chairman: E. Vanni
Board of Directors
N. Andrews
D. Azar
T. Buechner
S. Datar
E. Doherty
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. Doherty
A. von Planta
E. Vanni
E. Vanni (Chairman)
S. Datar
A. Fudge
W. Winters
A. von Planta (Chairman)
A. Fudge
P. Landolt
C. Sawyers
E. Vanni
J. Reinhardt (Chairman)
N. Andrews
D. Azar
C. Sawyers
A. von Planta (Chairman)
N. Andrews
S. Datar
A. Fudge
Election and term of office
Board members, the Chairman, and Compensation Com-
mittee members are elected annually and individually by
shareholders at the General Meeting. Board members
whose term of office has expired are immediately eligi-
ble for re-election.
The average tenure of Board members is seven years,
with two-thirds of Board members having a tenure of less
than six years. A Board member must retire after reach-
ing age 70. Under special circumstances, shareholders
may grant an exemption from this rule and re-elect a
Board member for additional terms of office. There is no
mandatory term limit for Board members so as to not
lose the value of the insight and knowledge of the com-
pany’s operations and practices that long-serving Board
members have developed.
Name
Joerg Reinhardt, Ph.D.
Enrico Vanni, Ph.D.
Nancy C. Andrews, M.D., Ph.D.
Dimitri Azar, M.D.
Ton Buechner
Srikant Datar, Ph.D.
Elizabeth Doherty
Ann Fudge
Pierre Landolt, Ph.D.
Andreas von Planta, Ph.D.
Charles L. Sawyers, M.D.
William T. Winters
Nationality
Year of birth
First election
at AGM
Last election
at AGM
End of
current term
D
CH
US
US
NLD
US
GB
US
CH
CH
US
GB/US
1956
1951
1958
1959
1965
1953
1957
1951
1947
1955
1959
1961
2013
2011
2015
2012
2016
2003
2016
2008
1996
2006
2013
2013
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
Corporate governanCe
our Board of Directors
Novartis Annual Report 2016 | 87
Board profile
Board composition
The composition of the Board must align with our status
as a listed company as well as our business portfolio,
geographic reach and culture. The Board must be diverse
in all aspects. Knowledge and experience in the follow-
ing fields must be represented on the Board: leadership
and management; healthcare, life sciences and medi-
cine; research and development; engineering and tech-
nology; marketing; banking, finance and accounting;
human resources; legal and public affairs; and risk man-
agement.
Individual Board member profile
Board members should have the following personal qual-
ities:
— Interact with other Board members to build an effec-
tive and complementary Board
— Establish trusting relationships
— Apply independence of thought and judgment
— Be challenging but supportive in the boardroom
— Influence without creating conflict by applying a con-
structive, non-confrontational style
— Listen well and offer advice based on sound judgment
— Be able and willing to commit adequate time to Board
and committee responsibilities
— Be open to personal feedback and seek to be respon-
sive
— Do not have existing board memberships or hold other
positions that could lead to a permanent conflict of
interest
— Understand and respect the boundaries of the role,
leaving the operational management of the company
to the CEO and his Executive Committee
Board members’ biographies (pages 94–97) highlight the
specific qualifications that led the Board to conclude
members are qualified to serve on the Board, which is
diverse in terms of background, credentials, interests and
skills.
Board diversity
The diversity of a board of directors is critical to its effec-
tiveness. When the Governance, Nomination and Cor-
porate Responsibilities Committee (GNCRC) of Novartis
identifies new Board member candidates to be proposed
to shareholders for election, the maintenance and
improvement of the Board’s diversity is an important cri-
terion. The Board’s aspiration is to have a diverse Board
in all aspects. This includes nationality, gender, back-
ground and experience, age, tenure, viewpoints, inter-
ests, and technical and interpersonal skills.
gender
MALE
75 %
FEMALE
25 %
Diversity
nationality
DUTCH
8 %
GERMAN
8 %
BRITISH
17 %
SWISS
25 %
AMERICAN
42 %
Background/experience
LEADERSHIP MANAGEMENT
26 %
MARKETING
5 %
LAW
11 %
ENGINEERING/TECHNOLOGY
11 %
FINANCE/ACCOUNTING
21 %
MEDICINE/HEALTHCARE/R&D
26 %
age
>66
8 %
<55
8 %
55–60
42 %
61–65
42 %
tenure
7–9 Y
8 %
<3 Y
25 %
>9 Y
25 %
3–6 Y
42 %
88 | Novartis Annual Report 2016
Role of the Board and its committees
The Board is responsible for the overall direction and
supervision of management, and holds the ultimate deci-
sion-making authority for Novartis AG, with the excep-
tion of decisions reserved for shareholders.
The Board has delegated certain responsibilities to
five committees, as set out below. Responsibilities
described with the terms “overseeing” or “reviewing” are
subject to final Board approval. The committees enable
the Board to work in an efficient and effective manner,
ensuring a thorough review and discussion of issues,
while giving the Board more time for deliberation and
decision-making. Moreover, committees ensure that only
Board members who are independent oversee audit and
compliance, governance and compensation – as only
independent Board members are delegated in the
respective committees.
Responsibilities
Board of Directors
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
— Approving major transactions and investments
— Determining the organizational structure and governance of the Group
— Determining and overseeing financial planning, accounting,
reporting and controlling
— Approving annual financial statements and corresponding
financial results releases
Members
Number of meetings held
in 2016/approximate
average duration (hrs) of Documents/
each meeting/attendance Link
11/7:00
Joerg reinhardt1
Enrico Vanni
Nancy C. Andrews
Dimitri Azar
Ton Buechner3
Srikant Datar
11
11
11
11
7
11
Elizabeth Doherty3 8
Ann Fudge
Pierre Landolt
11
11
Andreas von Planta 11
Charles L. Sawyers 9
William T. Winters
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
Charter of the Audit and
Compliance Committee
www.novartis.com/
corporate-governance
audit and Compliance Committee
7/3:00
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
7
7
Elizabeth Doherty2,3 5
Dimitri Azar
Andreas von Planta 7
Enrico Vanni
7
Compensation Committee
6/3:00
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 Board members
and the CEO
— Deciding on the compensation of Executive Committee members
— Preparing the Compensation Report and submitting it 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 2016
enrico vanni1
Srikant Datar
Ann Fudge
William T. Winters
6
6
6
6
Charter of the
Compensation
Committee
www.novartis.com/
corporate-governance
Corporate governanCe
our Board of Directors
Novartis Annual Report 2016 | 89
Number of meetings held
in 2016/approximate
average duration (hrs) of Documents/
each meeting/attendance Link
3/2:00
andreas von planta1 3
3
3
Pierre Landolt
Ann Fudge
Charles L. Sawyers 3
Enrico Vanni
3
Charter of the
Governance, Nomination
and Corporate
Responsibilities
Committee
www.novartis.com/
corporate-governance
Responsibilities
Members
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 onboarding 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
Joerg reinhardt1
4
Nancy C. Andrews 4
4
Dimitri Azar
Charles L. Sawyers 4
Charter of the
Research & Development
Committee
www.novartis.com/
corporate-governance
6/2:00
andreas von planta1 6
Nancy C. Andrews 5
6
Srikant Datar
Ann Fudge
6
Charter of the
Risk Committee
www.novartis.com/
corporate-governance
The primary responsibilities of this committee include:
— Monitoring research and development, and bringing recommendations
to the Board
— Assisting the Board with oversight and evaluation related to
research and development
— Informing the Board on a periodic basis about 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
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
90 | Novartis Annual Report 2016
The Novartis corporate culture and
role of the Board
The corporate culture of Novartis is becoming a key
focus of the Board. The Board works to ensure that the
Novartis strategy, operating model and compensation
system are aligned with Novartis’ Values and Behaviors,
as endorsed by the Board and that the Novartis com-
pensation system supports the desired corporate cul-
ture of Novartis. The Board will also review a regular eval-
uation of the corporate culture throughout Novartis.
Functioning of the Board
The Board takes decisions as a whole, supported by its
five committees. Each committee has a written charter
outlining its duties and responsibilities, and is led by a
Board-elected Chairman.
The Board and its committees meet regularly through-
out the year. The chairs set their meeting agendas. Any
Board member may request a Board or committee meet-
ing, and the inclusion of an agenda item. Before meet-
ings, Board members receive materials to help them pre-
pare the discussions and decision-making.
Chairman
Joerg Reinhardt has been the independent, non-execu-
tive Chairman since August 1, 2013. He has both indus-
try and Novartis experience, and meets the company’s
independence criteria. As independent Chairman, he can
lead the Board to represent the interests of all stake-
holders, being accountable to them and creating sus-
tainable value through effective governance, the right
strategy, and delivery of the expected level of perfor-
mance. The independent chairmanship also ensures an
appropriate balance of power between the Board and
the Executive Committee.
In this role, Mr. Reinhardt:
— Provides leadership to the Board
— Supports and mentors the CEO
— Supported by the GNCRC, ensures effective succes-
sion plans for the Board and the Executive Committee
— Ensures that the Board and its committees work
effectively
— Sets the agenda, style and tone of Board discussions,
promoting constructive dialogue and effective deci-
sion-making
— Supported by the GNCRC, ensures that all Board
committees are properly established, composed and
operated
— Ensures that the Board’s performance is annually
evaluated
— Ensures onboarding programs for new Board mem-
bers, and continuing education and specialization for
all Board members
— Ensures effective communication with the company’s
shareholders
— Promotes effective relationships and communication
between Board and Executive Committee members
Vice Chairman
Enrico Vanni has been the independent, non-executive
Vice Chairman since February 22, 2013.
In this role, Mr. Vanni:
— Leads the Board in case and as long as the Chairman
is incapacitated
— Chairs the sessions of independent Board members,
and leads independent Board members if and as long
as the Chairman is not independent
— Leads the yearly session of the Board members eval-
uating the performance of the Chairman, during which
the Chairman is not present
Board meetings
The Board has meetings with Executive Committee
members, as well as private meetings without them.
In 2016, there were 11 Board meetings. Because all
Board members are independent, no separate meetings
of the independent Board members were held in 2016.
Key activities of our Board and committees
in 2016
In 2016, the Board addressed in its meetings among oth-
ers the following key standard topics: strategy; Group
targets; mergers and acquisitions, business develop-
ment and licensing review; financial and business reviews;
major projects; investments and transactions; gover-
nance; and corporate culture. Topics addressed during
private meetings included Board self-evaluation and the
performance assessment of the Executive Committee
members, as well as CEO and Executive Committee suc-
cession planning.
In addition, in 2016 our Board and its committees focused
on a number of special topics, including:
Board of Directors:
Compliance; the Alcon turnaround; the creation of the
new Innovative Medicines Division with two separate
business units, Pharmaceuticals and Oncology; and the
new operating model of Novartis
Audit and Compliance Committee:
Specific accounting and compliance questions, compen-
sation disclosure; and the legal and regulatory environ-
ment concerning the rotation of external auditors
Corporate governanCe
our Board of Directors
Novartis Annual Report 2016 | 91
Compensation Committee:
Novartis peer groups; potential risks within the compen-
sation systems for executives and other associates,
including the sales force; clawback and malus; and
shareholder feedback from the corporate governance
roadshow
Governance, Nomination and Corporate
Responsibilities Committee:
Shareholder feedback from our corporate governance
roadshow; emerging corporate governance practices
and whether to adopt them; succession planning for the
Board, Board committees, and committee chairs; the
search profile for and discussion of potential new Board
members; and reviews of our corporate responsibility
activities
Research & Development Committee:
The Novartis portfolio of research and development proj-
ects in oncology and dermatology; efforts to discover
new drug discovery targets; high throughput screening
for target and drug discovery; the long term strategy for
NIBR after the appointment of new leadership; and
incentives and compensation-related topics for the R&D
organization
Risk Committee:
The Novartis Integrity & Compliance organization, key
business risks in the manufacturing organization; foreign
exchange risk management; IT security; and risks poten-
tially arising out of the compensation system
Honorary Chairmen
Dr. Alex Krauer and Dr. Daniel Vasella have been
appointed Honorary Chairmen in recognition of their sig-
nificant achievements on behalf of Novartis. They are not
provided with Board documents and do not attend Board
meetings.
Independence of Board members
The independence of Board members is a key corporate
governance issue. An independent Board member is one
who is independent of management and has no business
or relationship that could materially interfere with the
exercise of objective, unfettered and independent judg-
ment. Only with a majority of Board members being inde-
pendent can the Board fulfill its obligation to represent
the interests of shareholders, being accountable to them
and creating sustainable value through the effective gov-
ernance of Novartis. Accordingly, Novartis established
independence criteria based on international best prac-
tice standards as outlined on the Novartis website:
www.novartis.com/investors/governance-documents.shtml.
— The majority of Board members and any member of
the Audit and Compliance Committee, the Compen-
sation Committee, and the GNCRC must meet the
company’s independence criteria. These include,
inter alia, (i) a Board member not having received
direct compensation of more than USD 120 000 per
year from Novartis, except for dividends or Board
compensation, within the last three years; (ii) a Board
member not having been an employee of Novartis
within the last three years; (iii) a family member not
having been an executive officer of Novartis within
the last three years; (iv) a Board member or family
member not being employed by the external auditor
of Novartis; (v) a Board member or family member not
being a board member, employee or 10% shareholder
of an enterprise that has made payments to, or
received payments from, Novartis in excess of the
greater of USD 1 million or 2% of that enterprise’s
gross revenues. For members of the Audit and Com-
pliance Committee and the Compensation Commit-
tee, even stricter rules apply.
— In addition, Board members are bound by the Novartis
Conflict of Interest Policy, which prevents a Board
member’s potential personal interests from influenc-
ing the decision-making of the Board.
— The GNCRC annually submits to the Board a proposal
concerning the determination of the independence
of each Board member. For this assessment, the com-
mittee considers all relevant facts and circumstances
of which it is aware – not only the explicit formal inde-
pendence criteria. This includes an assessment of
whether a Board member is truly independent, in
character and judgment, from any member of senior
management and from any of his/her current or for-
mer colleagues.
— In its meeting on December 15, 2016, the Board deter-
mined that all of its members are independent.
Relationship of non-executive Board
members with Novartis
No Board member is or was a member of the manage-
ment of Novartis AG or of any other Novartis Group com-
pany in the last three financial years up to December 31,
2016. There are no significant business relationships of
any Board member with Novartis AG or with any other
Novartis Group company.
Mandates outside the Novartis Group
No Board member may hold more than 10 additional man-
dates in other companies, of which no more than four
shall be in other listed companies. Chairmanships of the
boards of directors of other listed companies count as
two mandates. Each of these mandates is subject to
Board approval.
92 | Novartis Annual Report 2016
The following mandates are not subject to these lim-
itations:
a) Mandates in companies that are controlled by
Novartis AG
b) Mandates that a Board member holds at the request
of Novartis AG or companies controlled by it. No
Board member shall hold more than five such man-
dates.
c) Mandates in associations, charitable organizations,
foundations, trusts and employee welfare founda-
tions. No Board member may hold more than 10 such
mandates.
“Mandates” means those in the supreme governing body
of a legal entity that is required to be registered in the
commercial register or a comparable foreign register.
Mandates in different legal entities that are under joint
control are deemed one mandate.
The Board may issue regulations that determine addi-
tional restrictions, taking into account the position of the
respective member.
Loans and credits
No loans or credits shall be granted to members of the
Board.
Board performance and effectiveness
evaluation
Process
The Board conducts an annual review to evaluate its per-
formance and that of individual committees and mem-
bers. As part of this process, each Board member com-
pletes a questionnaire on the performance and
effectiveness of the Board and the Chairman, and on his/
her committees, which lays the groundwork for a
qualitative review led by the Chairman. The Chairman
has discussions with each Board member, and then with
the entire Board. Also, the Board, without its Chairman,
discusses the performance of the Chairman. Further, the
committee evaluations are discussed by the respective
committees, and the results are debriefed to the Board.
Any suggestion for improvement is recorded and actions
are agreed upon.
Periodically, this process is conducted by an inde-
pendent consultant. In 2014, an independent perfor-
mance and effectiveness evaluation of the Board and its
committees, including an individual Board member
assessment, was conducted by the independent expert
company Russell Reynolds Associates. In 2015 and 2016,
the performance evaluation was conducted internally.
Content and results
The performance review examines the performance and
effectiveness, and strengths and weaknesses, of indi-
vidual Board members and of the full Board and each
Board committee.
This review covers topics including Board composi-
tion; purpose, scope and responsibilities; processes and
governance of the Board and its committees; meetings
and pre-reading material; team effectiveness; and lead-
ership and culture.
The review also evaluates the ability and willingness
of each Board member to commit adequate time and
effort to his/her responsibilities as provided for in the
charter of the GNCRC.
The results were discussed at the January 2017
meetings. It was concluded that the Board and its com-
mittees operate effectively.
Information and control systems of the
Board vis-à-vis management
Information on management
The Board ensures that it receives sufficient information
from the Executive Committee to perform its supervi-
sory duty and to make decisions that are reserved for it.
The Board obtains this information through several
means:
— The CEO informs the Board regularly about current
developments.
— Executive Committee meeting minutes are made
available to the Board.
— Meetings or teleconferences are held as required
between Board members and the CEO.
— The Board regularly meets with all Executive Com-
mittee members.
— The Board receives detailed, quarterly updates from
each Division Head.
— By invitation, other members of management attend
Board meetings to report on areas of the business
for which they are responsible.
— Board members are entitled to request information
from Executive Committee members or any other
Novartis associate, and they may visit any Novartis
site.
Board committees
Board committees regularly meet with management and,
at times, outside consultants, to review the business, bet-
ter understand applicable laws and policies affecting the
Group, and support the Board and management in meet-
ing the requirements and expectations of stakeholders
and shareholders.
In particular, the Chief Financial Officer (CFO), the
Group General Counsel, and representatives of the
external auditors are invited to Audit and Compliance
Corporate governanCe
our Board of Directors
Novartis Annual Report 2016 | 93
Committee meetings. Additionally, the heads of Internal
Audit, Financial Reporting & Accounting, Compliance
and Quality, as well as the Head of the Global Business
Practices Office, report on a regular basis to the Audit
and Compliance Committee. This committee reviews
financial reporting processes on behalf of the Board. For
each quarterly and annual release of financial informa-
tion, the Disclosure Review Committee is responsible for
ensuring the accuracy and completeness of disclosures.
The Disclosure Review Committee, which is a manage-
ment committee, is chaired by the CFO and includes the
CEO; the Group General Counsel; the heads of the divi-
sions, Novartis Operations, and the Novartis Institutes
for BioMedical Research (NIBR), as well as their finance
heads; and the heads of the following corporate func-
tions: Treasury, Tax, Financial Reporting & Accounting,
Internal Audit and Investor 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
system and processes, and also reviews the risk portfo-
lio of the Group to ensure appropriate and professional
risk management. For this purpose, the Group Risk
Office and the risk owners of the divisions report on a
regular basis to the Risk Committee. The Group General
Counsel, the Head of Group Risk, the Head of Internal
Audit, the Head of Ethics and Compliance, and other
senior executives are invited to these meetings on a reg-
ular basis.
Novartis management information system
Novartis produces comprehensive, consolidated (unau-
dited) financial statements on a monthly basis for the
total Group and its operating divisions. These are typi-
cally available within 10 days of the end of the month,
and include the following:
— Consolidated income statement of the month, quar-
ter-to-date and year-to-date in accordance with Inter-
national Financial Reporting Standards (IFRS), as well
as adjustments to arrive at core results, as defined by
Novartis. The IFRS and core figures are compared to
the prior-year period and targets in both USD and on
a constant currency basis.
— Consolidated balance sheet as of the month-end in
accordance with IFRS in USD
— Consolidated cash flow on a monthly, quarter-to-date
and year-to-date basis in accordance with IFRS in
USD
— Supplementary data on a monthly, quarterly and year-
to-date basis such as free cash flow, gross and net
debt, headcount, personnel costs, working capital,
and earnings per share on a USD basis where appli-
cable
Constant currencies, core results, free cash flow, net
debt and related target figures are non-IFRS measures.
An explanation of non-IFRS measures can be found on
pages 171 – 175 of the operating and financial review
2016.
This information is made available to Board members on
a monthly basis. An analysis of key deviations from the
prior year or target is also provided.
Two times per year, the Board also receives an out-
look of the full-year results in accordance with IFRS and
“core” (as defined by Novartis) along with related com-
mentary prior to the release of the results.
On an annual basis, in the fourth quarter of the year,
the 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.”
The Board does not have direct access to the com-
pany’s financial and management reporting systems but
can, at any time, request more detailed financial infor-
mation on any aspect that is presented to it.
Internal audit
The Internal Audit function carries out operational and
system audits in accordance with an audit plan approved
by the Audit and Compliance Committee. This function
helps organizational units accomplish objectives by pro-
viding an independent approach to the evaluation,
improvement and effectiveness of their internal control
framework. It prepares reports on the audits it has per-
formed, and reports actual or suspected irregularities to
the Audit and Compliance Committee and to the CEO.
The Audit and Compliance Committee regularly reviews
the internal audit scope, audit plans and results.
Risk management
The Group Risk Office is overseen by the Board’s inde-
pendent Risk Committee. The Compensation Commit-
tee works closely with the Risk Committee to ensure that
the compensation system does not lead to excessive
risk-taking by management (for details, see our Compen-
sation Report, beginning on page 110).
Organizational and process measures have been
designed to identify and mitigate risks at an early stage.
Organizationally, the responsibility for risk assessment
and management is allocated to the divisions, organiza-
tional units, and functions, with specialized Corporate
functions, such as Group Finance, Group Legal, Group
Quality Assurance, Corporate Health, Safety and Envi-
ronment, Business Continuity Management, Integrity and
Compliance and the Business Practices Office, provid-
ing support and controlling the effectiveness of the risk
management in these respective areas.
94 | Novartis Annual Report 2016
Board of Directors
Joerg reinhardt, ph.D.
Chairman of the Board of Directors
German, age 60
enrico vanni, ph.D.
Vice Chairman of the Board of Directors
Swiss, age 65
nancy C. andrews, M.D., ph.D.
Member of the Board of Directors
American, age 58
Joerg Reinhardt, Ph.D., has been Chairman
of the Board of Directors since 2013. He is
also Chairman of the Research & Develop-
ment Committee and Chairman of the Board
of Trustees of the Novartis Foundation.
Mr. Reinhardt previously was chairman of
the board of management and the executive
committee of Bayer HealthCare, Germany.
Prior to that, he was Chief Operating 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
Institute of the Novartis Research Founda-
tion in the United States from 2000 to 2010,
a member of the supervisory board of
MorphoSys AG in Germany from 2001 to
2004, and a member of the board of
directors of Lonza Group AG in Switzerland
from 2012 to 2013.
Mr. Reinhardt graduated with a doctorate
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.
Enrico Vanni, Ph.D., has been a member
of the Board of Directors since 2011 and
qualifies as an independent Non-Executive
Director. He is Vice Chairman of the Board
of Directors and Chairman of the Compen-
sation Committee. He is also a member of
the Audit and Compliance Committee and
the Governance, Nomination and Corporate
Responsibilities Committee.
Since his retirement as director of McKinsey
& Company in 2007, Mr. Vanni has been an
independent consultant. He is a board
member of several companies in industries
from healthcare to private banking – includ-
ing Advanced Oncotherapy PLC in the United
Kingdom, and non-listed companies such as
Lombard Odier SA, Banque Privée BCP
(Suisse) SA, Eclosion2, and Denzler &
Partners SA, all based in Switzerland.
Mr. Vanni holds an engineering degree in
chemistry from the Federal Polytechnic
School of Lausanne, Switzerland; a
doctorate in chemistry from the University
of Lausanne; and a Master of Business
Administration from INSEAD in Fontaineb-
leau, 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 companies 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 committee prior to
his retirement in 2007. As an independent
consultant, Mr. Vanni has continued to
support leaders of pharmaceutical and
biotechnology companies on core strategic
challenges facing the healthcare industry.
Nancy C. Andrews, M.D., Ph.D., has been
a member of the Board of Directors since
February 2015. She qualifies as an inde-
pendent Non-Executive Director and is a
member of the Research & Development
Committee and the Risk Committee.
Dr. Andrews is dean of the Duke University
School of Medicine and vice chancellor for
academic affairs at Duke University in the
United States. She is also a professor of
pediatrics, pharmacology and cancer biology
at Duke, and was elected as a fellow of the
American Association 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 Sciences. She is
former president of the American Society
for Clinical Investigation and serves on the
council of the National Academy of Medicine,
the board of directors of the American
Academy of Arts and Sciences, and the
Scientific Management Review Board of
the US National Institutes of Health.
Dr. Andrews holds a doctorate in biology
from the Massachusetts Institute of
Technology, and a doctor of medicine from
Harvard Medical School, both in the US. She
completed her residency and fellowship
trainings in pediatrics and hematology/
oncology at Boston Children’s Hospital and
the Dana-Farber Cancer Institute, also in the
US, and served as an attending physician at
Boston Children’s Hospital. Prior to joining
Duke, Dr. Andrews was director of the
Harvard/MIT M.D.-Ph.D. Program, and dean
of basic sciences and graduate studies as
well as professor of pediatrics at Harvard
Medical School. From 1993 to 2006, she was
a biomedical research investigator at the
Howard Hughes Medical Institute in the US.
Her research expertise is in iron homeostasis
and mouse models of human diseases.
Corporate governanCe
our Board of Directors
Novartis Annual Report 2016 | 95
Dimitri azar, M.D.
Member of the Board of Directors
American, age 57
ton Buechner
Member of the Board of Directors
Dutch, age 51
Srikant Datar, ph.D.
Member of the Board of Directors
American, age 63
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.
Dr. Azar is dean of the College of Medicine
and professor of ophthalmology, bioengi-
neering and pharmacology at the University
of Illinois at Chicago in the United States,
where he formerly was head of the Depart-
ment of Ophthalmology and Visual Sciences.
He is a member of the American Ophthalmo-
logical Society, former president of the
Chicago Ophthalmological Society, and pres-
ident-elect of the Chicago Medical Society.
Additionally, he is on the board of the Tear
Film and Ocular Surface Society, the board
of Verb Surgical, and the scientific advisory
board of Verily.
Dr. Azar began his career at the American
University of Beirut Medical Center in
Lebanon, and completed his fellowship and
residency training at the Massachusetts Eye
and Ear Infirmary at Harvard Medical School
in the US. His research on matrix metallopro-
teinases 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 ophthalmology with
tenure 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.
Ton Buechner has been a member of
the Board of Directors since February 23,
2016. He qualifies as an independent
Non-Executive Director.
Since 2012, Mr. Buechner has served as
chairman and CEO of the executive board
of Dutch multinational AkzoNobel. Prior to
joining AkzoNobel, he spent almost two
decades at the Sulzer Corporation in
Switzerland, where he was appointed
divisional president in 2001 and served as
president and CEO from 2007 to 2011. Mr.
Buechner’s early career was spent in the oil
and gas construction industry, and included
roles at Allseas Engineering in the Nether-
lands and at Aker Kvaerner in Singapore.
He is a member of the supervisory board
of Voith GmbH.
Mr. Buechner is an engineer by training.
He received his master’s degree in civil
engineering from Delft University of
Technology in the Netherlands in 1988,
specializing in offshore construction
technology and coastal engineering. Mr.
Buechner holds a Master of Business
Administration from IMD business school
in Lausanne, Switzerland.
Srikant Datar, Ph.D., has been a member
of the Board of Directors since 2003 and
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 Compensation
Committee. The Board of Directors has
appointed him as Audit Committee Financial
Expert.
Mr. Datar is the Arthur Lowes Dickinson
professor of business administration, faculty
chair of the Harvard Innovation Lab, and
senior associate dean for university affairs
at Harvard Business School 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.
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 industry, and as a professor at Carnegie
Mellon University, Stanford University and
Harvard University, all in the US. His research
interests are in the areas of cost manage-
ment, measurement of productivity, new
product development, 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, development and
training.
96 | Novartis Annual Report 2016
Board of Directors (continued)
elizabeth (Liz) Doherty
Member of the Board of Directors
British, age 59
ann Fudge
Member of the Board of Directors
American, age 65
pierre Landolt, ph.D.
Member of the Board of Directors
Swiss, age 69
Elizabeth (Liz) Doherty has been a member
of the Board of Directors since February 23,
2016. She qualifies as an independent
Non-Executive Director and is a member of
the Audit and Compliance Committee. The
Board of Directors has appointed her as
Audit Committee Financial Expert.
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 Committee; and the Gover-
nance, Nomination and Corporate Responsi-
bilities Committee.
Ms. Fudge is vice chairman and senior
independent director of Unilever NV, London
and Rotterdam. She is also chair of the
United States Program Advisory Panel of the
Bill & Melinda Gates Foundation, a director of
Northrop Grumman Corporation in the US,
and a trustee of Boston-based WGBH public
media.
Ms. Fudge received her bachelor’s degree
from Simmons College in the US and her
Master of Business Administration from
Harvard Business School, 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.
Ms. Doherty is a non-executive director and
chairman of the audit committee of Dunelm
Group PLC in the United Kingdom, and a
member of the supervisory board and audit
committee of Corbion NV in the Netherlands.
She is a fellow of the Chartered Institute of
Management Accountants, a non-executive
board member of the UK Ministry of Justice,
and a non-executive board member of Her
Majesty’s Courts and Tribunals Service
in the UK. She previously served as a
non- executive director and audit committee
member at Delhaize Group in Belgium
and Nokia Corp. in Finland, and as a
non-executive director at SABMiller PLC
in the UK.
Ms. Doherty received her bachelor’s degree
in liberal studies in science (physics) from
the University of Manchester in the UK. She
began her career as an auditor and has held
senior finance and accounting roles at
Unilever PLC and Tesco PLC. Additionally,
she was chief financial officer of both
Brambles Ltd. and Reckitt Benckiser Group
PLC.
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 a member of the Governance,
Nomination and Corporate Responsibilities
Committee.
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 chairman 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, Switzerland,
and the Eneas Fund, Cayman Islands. In
Brazil, Mr. Landolt is president of AxialPar
Ltda. and Moco Agropecuaria Ltda., the
Instituto Fazenda Tamanduá and the Instituto
Estrela de Fomento ao Microcrédito.
Mr. Landolt graduated 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 he
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 develop-
ment. In 2000, he co-founded Eco-Carbone
SAS, a company active in the design and
development of carbon sequestration
pro cesses. 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.
Corporate governanCe
our Board of Directors
Novartis Annual Report 2016 | 97
andreas von planta, ph.D.
Member of the Board of Directors
Swiss, age 61
Charles L. Sawyers, M.D.
Member of the Board of Directors
American, age 57
William t. Winters
Member of the Board of Directors
British/American, age 55
Andreas von Planta, Ph.D., has been a
member of the Board of Directors since
2006. He qualifies as an independent
Non-Executive Director and is Chairman of
the Risk Committee and the Governance,
Nomination and Corporate Responsibilities
Committee. He is also a member of the
Audit and Compliance Committee.
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 Burberry
(Suisse) SA, Lenz & Staehelin AG, A.P. Moller
Finance SA, HSBC Private Bank (Suisse) SA,
Socotab Frana SA and Raymond Weil SA.
Additionally, he is chairman of the regulatory
board of the SIX Swiss Exchange AG.
Mr. von Planta holds a doctorate in law from
the University of Basel in Switzerland, and a
Master of Laws from Columbia Law School
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.
Charles L. Sawyers, M.D., 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 Research & Development Committee
and the Governance, Nomination and
Corporate Responsibilities Committee.
In the United States, Dr. Sawyers is chair
of the Human Oncology and Pathogenesis
Program at Memorial Sloan Kettering Cancer
Center, professor of medicine and of cell and
developmental biology at the Weill Cornell
Graduate School of Medical Sciences, and
an investigator at the Howard Hughes
Medical Institute. He was appointed to 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 Investigation. He is also a member
of the US National Academy of Sciences,
the Institute of Medicine, and the scientific
advisory board of Agios Pharmaceuticals Inc.
in the US.
Dr. Sawyers received his doctor of medicine
from the Johns Hopkins University School
of Medicine in the US, and worked at the
Jonsson Comprehensive Cancer Center at
the University of California, Los Angeles for
nearly 18 years before joining Memorial
Sloan Kettering in 2006. An internationally
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.
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.
Mr. Winters is CEO and a board member
of Standard Chartered, based in London.
He also serves on the board of Colgate
University in the United States, and on the
boards of the International Rescue Commit-
tee, the Young Vic theater and the Print
Room theater in the United Kingdom.
Mr. Winters received his bachelor’s degree
from Colgate University and his Master of
Business Administration from the Wharton
School of the University of Pennsylvania in
the US. He previously ran Renshaw Bay, an
alternative asset management firm, and was
co-CEO of JPMorgan’s investment bank
from 2003 to 2010. He joined JPMorgan
in 1983 and has held management roles
across several market areas and in corporate
finance. Additionally, he was a commissioner
on the UK Independent Commission on
Banking in 2010 and 2011, and was awarded
the title of Commander of the Order of the
British Empire in 2013.
Honorary Chairmen
alex Krauer, ph.D.
Daniel vasella, M.D.
Corporate Secretary
Charlotte pamer-Wieser, ph.D.
98 | Novartis Annual Report 2016
Our management
Composition of the Executive Committee
Joseph Jimenez
Chief Executive Officer
Steven Baert
Human Resources
Felix r. ehrat
General Counsel
Harry Kirsch
Chief Financial Officer
andré Wyss
Novartis Operations
James Bradner
Biomedical Research
vasant narasimhan
Global Drug Development
paul Hudson
Innovative Medicines:
Pharmaceuticals
Bruno Strigini
Innovative Medicines:
Oncology
F. Michael Ball
Alcon
richard Francis
Sandoz
Executive Committee composition
CEO
The Executive Committee is headed by the CEO. Its
members are appointed by the Board.
There are no contracts between Novartis and third
parties whereby Novartis would delegate any business
management tasks to such third parties.
In addition to other Board-assigned duties, the CEO
leads the Executive Committee, building and maintain-
ing an effective executive team. With the support of the
Executive Committee, the CEO:
— Is responsible for the operational management of
Executive Committee role and functioning
The Board has delegated to the Executive Committee
overall responsibility for and oversight of the operational
management of Novartis. This includes:
— Developing policies and strategic plans for Board
approval, and implementing those approved
— Submitting to the Board and its committees proposed
changes in management positions of material signif-
icance, investments, financial measures, acquisitions
and divestments, contracts of material significance,
and targets – and implementing those approved
— Preparing and submitting quarterly and annual reports
to the Board and its committees
— Informing the Board of all matters of fundamental sig-
nificance to the businesses
— Recruiting, appointing and promoting senior
management
— Ensuring the efficient operation of the Group and the
achievement of optimal results
— Promoting an active
communications policy
internal and external
— Dealing with any other matters delegated by the Board
The Executive Committee is supported by a sub-com-
mittee: The Disclosure Committee (members are the
CEO, CFO and Group General Counsel) determines
whether an event constitutes information that is material
to the Group, determines the appropriate disclosure and
update of such information, and reviews media releases
concerning such information.
Novartis
— Develops strategy proposals to be recommended to
the Board, and ensures that approved strategies are
implemented
— Plans human resourcing to ensure that Novartis has
the capabilities and means to achieve its plans, and
that robust management succession and manage-
ment development plans are in place and presented
to the Board
— Develops an organizational structure, and establishes
processes and systems to ensure the efficient orga-
nization of resources
— Ensures that financial results, business strategies
and, when appropriate, targets and milestones are
communicated to the investment community – and
generally develops and promotes effective commu-
nication with shareholders and other stakeholders
— Ensures that the business performance is consistent
with business principles, as well as with high legal and
ethical standards, and that the culture of Novartis is
consistent with the Novartis Values and Behaviors
— Leads the Innovative Medicines Division
— Develops processes and structures to ensure that
capital investment proposals are reviewed thor-
oughly, that associated risks are identified, and that
appropriate steps are taken to manage these risks
— Develops and maintains an effective framework of
internal controls over risk in relation to all business
activities of the company
— Ensures that the flow of information to the Board is
accurate, timely and clear
Corporate governanCe
our management
Novartis Annual Report 2016 | 99
Mandates outside the Novartis Group
No Executive Committee member may hold more than
six additional mandates in other companies, of which no
more than two additional mandates shall be in other listed
companies. Each of these mandates is subject to Board
approval. Executive Committee members are not allowed
to hold chairmanships of the boards of directors of other
listed companies.
The following mandates are not subject to these lim-
itations:
a) Mandates in companies that are controlled by
Novartis AG
b) Mandates that an Executive Committee member
holds at the request of Novartis AG or companies
controlled by it. No Executive Committee member
shall hold more than five such mandates.
c) Mandates in associations, charitable organizations,
foundations, trusts and employee welfare founda-
tions. No Executive Committee member may hold
more than 10 such mandates.
“Mandates” means those in the supreme governing body
of a legal entity that is required to be registered in the
commercial register or a comparable foreign register.
Mandates in different legal entities that are under joint
control are deemed one mandate.
The Board may issue regulations that determine addi-
tional restrictions, taking into account the position of the
respective member.
Loans and credits
No loans or credits shall be granted to members of the
Executive Committee.
100 | Novartis Annual Report 2016
Executive Committee
Joseph Jimenez
Chief Executive Officer of Novartis
American, age 57
Steven Baert
Head of Human Resources of Novartis
Belgian, age 42
F. Michael (Mike) Ball
CEO, Alcon
American, age 61
Joseph Jimenez has been Chief Executive
Officer (CEO) of Novartis since 2010.
Mr. Jimenez previously held the position of
Division Head, Novartis Pharmaceuticals.
He joined Novartis in 2007 as Division Head,
Novartis Consumer Health. Before that, he
served as president and CEO of the North
American and European businesses for the
H.J. Heinz Company. He also 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
directors of General Motors Co. He
gradu ated in 1982 with a bachelor’s degree
from Stanford University and in 1984 with a
Master of Business Administration from the
University of California, Berkeley, both in the
United States.
Steven Baert has been Head of Human
Resources (CHRO) of Novartis since 2014.
He is a member of the Executive Committee
of Novartis.
Mr. Baert joined Novartis in 2006 as Head
of Human Resources Global Functions in
Switzerland. He has held several other
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, United States and
Canada, for Novartis Pharmaceuticals
Corporation. Prior to joining Novartis, he
held HR positions at Bristol-Myers Squibb
Co. and Unilever.
Mr. Baert represents Novartis on the board
of the GSK Consumer Healthcare joint
venture. He holds a Master of Business
Administration from the Vlerick Business
School in Belgium and a Master of Laws
from the Katholieke Universiteit Leuven,
also in Belgium. Additionally, he has a
Bachelor of Laws from the Katholieke
Universiteit Brussels.
F. Michael (Mike) Ball was appointed CEO
of Alcon on February 1, 2016. He is a member
of the Executive Committee of Novartis.
Mr. Ball previously served as CEO of Hospira
from 2011 to 2015. At Hospira, a world leader
in injectable pharmaceuticals and infusion
devices, he successfully turned the company
around and grew it by focusing on product
and quality improvements, and expanding its
global footprint. Prior to Hospira, Mr. Ball
held a number of senior leadership positions
at Allergan, beginning in 1995. He served
as president from 2006 to 2011 after having
led the strategy and execution of global
commercial activities for a wide range of
businesses, including eye care pharmaceuti-
cals, over-the-counter products and surgical
devices. Before joining Allergan, Mr. Ball held
roles of increasing responsibility in marketing
and sales at Syntex Corporation and Eli Lilly.
He began his career in the healthcare
industry in 1981.
Mr. Ball holds a Bachelor of Science and a
Master of Business Administration from
Queen’s University in Canada.
Corporate governanCe
our management
Novartis Annual Report 2016 | 101
James (Jay) Bradner, M.D.
President of the Novartis Institutes for
BioMedical Research (NIBR)
American, age 44
James (Jay) Bradner, M.D., joined Novartis on
January 1, 2016 and became President of the
Novartis Institutes for BioMedical Research
(NIBR) on March 1, 2016. He is a member of
the Executive Committee of Novartis.
Prior to joining Novartis, Dr. Bradner was on
the faculty of Harvard Medical School in the
Department of Medical Oncology at the
Dana-Farber Cancer Institute in the United
States. He was also associate director of the
Center for the Science of Therapeutics at
the Broad Institute of MIT and Harvard. Dr.
Bradner is a co-founder of five biotechnology
companies and has co-authored more than
150 scientific publications and 30 US patent
applications.
Dr. Bradner is a graduate of Harvard
University and the University of Chicago
Medical School in the US. He completed
his residency in medicine at Brigham and
Women’s Hospital and his fellowship in
medical oncology and hematology at the
Dana-Farber Cancer Institute. He has been
honored with many awards and was elected
into the American Society for Clinical
Investigation in 2011 and the Alpha Omega
Alpha Honor Medical Society in 2013.
Felix r. ehrat, ph.D.
Group General Counsel of Novartis
Swiss, age 59
richard Francis
CEO, Sandoz
British, age 48
Richard Francis has been CEO of Sandoz
since 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 United States
commercial organization. From 1998 to 2001,
he was at Sanofi in the United Kingdom, and
held various marketing roles across the
company’s urology, analgesics and cardio-
vascular products. He has also held sales
and marketing positions at Lorex Synthélabo
and Wyeth.
Mr. Francis received a Bachelor of Arts in
economics from Manchester Metropolitan
University in the UK.
Felix R. Ehrat, Ph.D., has been Group General
Counsel of Novartis since 2011. He is a
member 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 associate at Bär &
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). Mr. Ehrat is chairman
of Globalance Bank AG in Switzerland, and
chairman of SwissHoldings (the federation of
industrial and service groups in Switzerland).
He is a board member of Geberit AG and
Avenir Suisse (a think tank for economic and
social issues), and previously served as
chairman and board member of several listed
and non-listed companies.
Mr. Ehrat was admitted to the Zurich bar in
1985 and received his doctorate in law from
the University of Zurich in Switzerland in
1990. He received his Master of Laws from
McGeorge School of Law in the United
States in 1986. Some of his past member-
ships include the International Bar Associa-
tion, where he was co-chair of the Corporate
and M&A Law Committee from 2007 to
2008, and Association Internationale des
Jeunes Avocats, where he was president
from 1998 to 1999.
102 | Novartis Annual Report 2016
Executive Committee (continued)
paul Hudson
CEO, Novartis Pharmaceuticals
British, age 49
Harry Kirsch
Chief Financial Officer of Novartis
German, age 51
Paul Hudson has been CEO of Novartis
Pharmaceuticals since July 1, 2016. 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. Hudson joined Novartis from AstraZen-
eca, where he most recently was president,
AstraZeneca United States and executive
vice president, North America. He also
served as representative director and
president of AstraZeneca K.K. in Japan;
as president of AstraZeneca’s business in
Spain; and as vice president and primary
care director, United Kingdom. Before
AstraZeneca, Mr. Hudson held roles of
increasing responsibility at Schering-Plough,
including leading biologics global marketing.
He began his career in sales and marketing
roles at GlaxoSmithKline UK and Sanofi-
Synthélabo UK.
Mr. Hudson holds a degree in economics
from Manchester Metropolitan University in
the UK and a diploma in marketing from the
Chartered Institute of Marketing, also in the
UK.
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 pharma-
ceutical business. Prior to that, he held
finance positions in various categories of
P&G’s consumer goods business, technical
operations, and Global Business Services
organization.
Mr. Kirsch represents Novartis on the board
of the GSK Consumer Healthcare joint
venture. He holds a diploma degree in
industrial engineering and economics from
the University of Karlsruhe in Germany.
vasant (vas) narasimhan, M.D.
Global Head of Drug Development and
Chief Medical Officer for Novartis
American, age 40
Vasant (Vas) Narasimhan, M.D., has been
Global Head of Drug Development and Chief
Medical Officer for Novartis since February 1,
2016. He is a member of the Executive
Committee of Novartis.
Dr. Narasimhan joined Novartis in 2005 and
has held numerous leadership positions in
development and commercial functions.
His most recent role was Global Head of
Development for Novartis Pharmaceuticals,
overseeing the entire general medicines
pipeline. He previously served as Global
Head of the Sandoz Biopharmaceuticals
and Oncology Injectables business unit,
overseeing the division’s biosimilars pipeline,
and as Global Head of Development for
Novartis Vaccines. Dr. Narasimhan has also
held commercial and strategic roles at
Novartis, including North America Region
Head for Novartis Vaccines, and United
States Country President for Novartis
Vaccines and Diagnostics. Before joining
Novartis, he worked at McKinsey & Company.
Dr. Narasimhan received his medical degree
from Harvard Medical School in the US and
obtained a master’s degree in public policy
from Harvard’s John F. Kennedy School of
Government. He received his bachelor’s
degree in biological sciences from the
University of Chicago, also in the US. He
is an elected member of the US National
Academy of Medicine.
Corporate governanCe
our management
Novartis Annual Report 2016 | 103
Bruno Strigini
CEO, Novartis Oncology
French, age 55
andré Wyss
President of Novartis Operations and
Country President for Switzerland
Swiss, age 49
Secretary
Bruno Heynen
Bruno Strigini has been CEO of Novartis
Oncology since July 1, 2016. He is a member
of the Executive Committee of Novartis.
Mr. Strigini joined Novartis in 2014 as
President of Oncology. Prior to Novartis,
he was president of MSD for Europe and
Canada (Merck & Co. in the United States
and Canada). He previously worked at
Schering-Plough, UCB Celltech and
SmithKline Beecham, and his roles included
president of international operations,
president of Japan and Asia-Pacific, head of
global marketing and business development,
and managing director positions.
Mr. Strigini holds a Master of Business
Administration from IMD business school
in Switzerland, a doctorate in pharmacy
from the University of Montpellier in France,
and a master’s degree in microbiology
from Heriot-Watt University in the United
Kingdom. He is an elected member of the
French National Academy of Pharmacy, and
in 2014, he was awarded a doctor honoris
causa from Universidad Internacional
Menéndez Pelayo in Spain.
André Wyss has been President of Novartis
Operations since February 1, 2016, and is
responsible for manufacturing, shared
services and public affairs. He is also
Country President for Switzerland and a
member of the Executive Committee of
Novartis.
Mr. Wyss joined Novartis in 1984 as a
chemistry apprentice in manufacturing.
Before being appointed President of Novartis
Operations, he served as Head of Novartis
Business Services, building and implement-
ing a shared services organization across
Novartis. Prior to that, he held several other
leadership positions, including US Country
Head and President of Novartis Pharmaceu-
ticals Corporation; Head of the Pharmaceu-
ticals Division for the AMAC region (Asia-
Pacific, Middle East and African countries);
Group Emerging Markets Head; and Country
President and Head of Pharmaceuticals,
Greece.
Mr. Wyss received a graduate degree in
economics from the School of Economics
and Business Administration (HWV) in
Switzerland in 1995. He is a member of
the board of economiesuisse.
104 | Novartis Annual Report 2016
Our independent external auditors
Duration of the mandate and terms of office
of the auditors
Based on a recommendation by the Audit and Compli-
ance Committee, the Board nominates an independent
auditor for election at the AGM. Pricewaterhouse-
Coopers (PwC) assumed its existing auditing mandate
for Novartis in 1996. Bruno Rossi, auditor in charge,
began serving in his role in 2013, and Stephen Johnson,
global relationship partner, began serving in his role in
2014. PwC ensures that these partners are rotated at
least every five years.
Information to the Board and the
Audit and Compliance Committee
PwC is responsible for providing an opinion on whether
the consolidated financial statements comply with IFRS
and Swiss law, and whether the separate parent com-
pany financial statements of Novartis AG comply with
Swiss law. Additionally, PwC is responsible for opining
on the effectiveness of internal control over financial
reporting, on the Compensation Report and on the cor-
porate responsibility reporting of Novartis.
The Audit and Compliance Committee, acting on
behalf of the Board, is responsible for overseeing the
activities of PwC. In 2016, this committee held 7 meet-
ings. PwC was invited to 6 of these meetings to attend
during the discussion of agenda items that dealt with
accounting, financial reporting or auditing matters and
any other matters relevant to its audit.
On an annual basis, PwC provides the Audit and
Compliance Committee with written disclosures required
by the US Public Company Accounting Oversight Board,
and the committee and PwC discuss PwC’s indepen-
dence from Novartis.
The Audit and Compliance Committee recommended
to the Board to approve the audited consolidated finan-
cial statements and the separate parent company finan-
cial statements of Novartis AG for the year ended Decem-
ber 31, 2016. The Board proposed the acceptance of
these financial statements for approval by the sharehold-
ers at the next AGM.
The Audit and Compliance Committee regularly eval-
uates the performance of PwC, and once a year deter-
mines whether PwC should be proposed to the share-
holders for election. Also once a year, the auditor in
charge and the global relationship partner report to the
Board on PwC’s activities during the current year and on
the audit plan for the coming year. They also answer any
questions or concerns that Board members have about
the performance of PwC, or about the work it has con-
ducted or is planning to conduct.
To assess the performance of PwC, the Audit and
Compliance Committee holds private meetings with the
CFO and the Head of Internal Audit and, if necessary,
obtains an independent external assessment. Criteria
applied for the performance assessment of PwC include
an evaluation of its technical and operational compe-
tence; its independence and objectivity; the sufficiency
of the resources it has employed; its focus on areas of
significant risk to Novartis; its willingness to probe and
challenge; its ability to provide effective, practical rec-
ommendations; and the openness and effectiveness of
its communications and coordination with the Audit and
Compliance Committee, the Internal Audit function, and
management.
Approval of audit and non-audit services
The Audit and Compliance Committee approves a bud-
get for audit services, whether recurring or non-recur-
ring in nature, and for audit-related services not associ-
ated with internal control over financial reporting. PwC
reports quarterly to the Audit and Compliance Commit-
tee regarding the extent of services provided in accor-
dance with the applicable pre-approval, and the fees for
services performed to date. The Audit and Compliance
Committee individually approves all audit-related ser-
vices associated with internal control over financial
reporting, tax services and other services prior to the
start of work.
Audit and additional fees
PwC charged the following fees for professional services
rendered for the 12-month periods ended December 31,
2016 and December 31, 2015:
Audit services
Audit-related services
Tax services
Other services
total
2016
USD million
20151
USD million
26.7
2.9
0.7
1.3
31.6
25.9
1.1
0.0
0.7
27.7
1 Amounts for 2015 have been reclassified in line with the new 2016 classification
criteria to allow comparison with 2016 amounts.
Audit services include work performed to issue opinions
on consolidated financial statements and parent com-
pany financial statements of Novartis AG, to issue opin-
ions relating to the effectiveness of the Group’s internal
control over financial reporting, and to issue reports on
local statutory financial statements. Also included are
audit services that generally can only be provided by the
statutory auditor, such as the audit of the Compensation
Report, audits of non-recurring transactions, audits of
the adoption of new accounting policies, audits of infor-
mation systems and the related control environment,
reviews of quarterly financial results, as well as proce-
dures required to issue consents and comfort letters.
Corporate governanCe
our corporate governance framework
Novartis Annual Report 2016 | 105
Audit-related services include other assurance ser-
vices provided by the independent auditor but not
restricted to those that can only be provided by the stat-
utory auditor. They include services such as audits of
pension and other employee benefit plans, contract
audits of third-party arrangements, corporate responsi-
bility assurance, and other audit-related services.
Tax services represent tax compliance, assistance
with historical tax matters, and other tax-related ser-
vices.
Other services include procedures related to corpo-
rate integrity agreements, training in the finance area,
benchmarking studies, and license fees for use of
accounting and other reporting guidance databases.
Our corporate governance framework
Laws and regulations
Novartis AG is subject to the laws of Switzerland, in par-
ticular Swiss company and securities laws, and to the
securities laws of the US as applicable to foreign private
issuers of securities.
In addition, Novartis AG is subject to the rules of the
SIX Swiss Exchange, including the Directive on Informa-
tion Relating to Corporate Governance.
Novartis AG is also subject to the rules of the NYSE
as applicable to foreign private issuers of securities. The
NYSE requires Novartis AG to describe any material
ways in which its corporate governance differs from that
of domestic US companies listed on the exchange. These
differences are:
— Novartis AG shareholders do not receive written
reports directly from Board committees.
— External auditors are appointed by shareholders at
the AGM, as opposed to being appointed by the Audit
and Compliance Committee.
— While shareholders cannot vote on all equity compen-
sation plans, they are entitled to hold separate, yearly
binding shareholder votes on Board and Executive
Committee compensation.
— The Board has set up a separate Risk Committee that
is responsible for business risk oversight, as opposed
to delegating this responsibility to the Audit and Com-
pliance 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 evaluat-
ing his performance.
Swiss Code of Best Practice for
Corporate Governance
Novartis applies the Swiss Code of Best Practice for
Corporate Governance.
Novartis corporate governance standards
Novartis has incorporated the aforementioned corporate
governance standards described above into the Articles
of Incorporation and the Regulations of the Board of
Directors, its Committees and the Executive Committee
of Novartis AG (www.novartis.com/corporate-gover-
nance).
The GNCRC regularly reviews these standards and
principles, taking into account best practices, and rec-
ommends improvements to the corporate governance
framework for consideration by the full Board.
Additional corporate governance information can be
found on the Novartis website: www.novartis.com/cor-
porate-governance.
Printed copies of the Novartis Articles of Incorpora-
tion, regulations of the Board, and charters of Board
committees can be obtained by writing to: Novartis AG,
Attn: Corporate Secretary, Lichtstrasse 35, CH-4056
Basel, Switzerland.
106 | Novartis Annual Report 2016
Further information
Group structure of Novartis
Novartis AG and Group companies
Under Swiss company law, Novartis AG is organized as
a corporation that has issued shares of common stock
to investors. The registered office of Novartis AG is Licht-
strasse 35, CH-4056 Basel, Switzerland.
Business operations are conducted through Novartis
Group companies. Novartis AG, a holding company, owns
or controls directly or indirectly all entities worldwide
belonging to the Novartis Group. Except as described
below, the shares of these companies are not publicly
traded. The principal Novartis subsidiaries and associ-
ated companies are listed in Note 32 to the Group’s con-
solidated financial statements.
Divisions
The businesses of Novartis are divided on a worldwide
basis into three operating divisions: Innovative Medi-
cines, with the two business units Novartis Pharmaceu-
ticals and Novartis Oncology; Sandoz (generics); and
Alcon (eye care). These businesses are supported by a
number of global organizations including NIBR, which
focuses on discovering new drugs; the Global Drug
Development organization, which oversees the clinical
development of new medicines; and Novartis Operations,
which includes Novartis Technical Operations (the global
manufacturing organization) and Novartis Business Ser-
vices (which consolidates support services across
Novartis).
Majority holdings in publicly-traded
Group companies
The Novartis Group owns 73.4% of Novartis India Ltd.,
with its registered office in Mumbai, India, and listed on
the Bombay Stock Exchange (ISIN INE234A01025, sym-
bol: HCBA). The total market value of the 26.6% free float
of Novartis India Ltd. was USD 74.2 million at December
31, 2016, using the quoted market share price at year-
end. Applying this share price to all the shares of the
company, the market capitalization of the whole com-
pany was USD 279.0 million, and that of the shares
owned by Novartis was USD 204.8 million.
Significant minority shareholding owned by the
Novartis Group
The Novartis Group owns 33.3% of the bearer shares of
Roche Holding AG, with its registered office in Basel,
Switzerland, and listed on the SIX Swiss Exchange (ISIN
CH0012032113, symbol: RO). The market value of the
Group’s interest in Roche Holding AG, as of December
31, 2016, was USD 12.4 billion. The total market value of
Roche Holding AG was USD 197.1 billion. Novartis does
not exercise control over Roche Holding AG, which is
independently governed, managed and operated.
The Novartis Group owns a 36.5% share of a joint
venture created by GlaxoSmithKline PLC (GSK) and
Novartis, which combined the Novartis OTC and GSK
Consumer Healthcare businesses. Novartis holds four
of the 11 seats on the joint venture’s board. Furthermore,
Novartis has certain minority rights and exit rights, includ-
ing a put option that is exercisable as of March 2, 2018.
Political contributions
Novartis makes political contributions to support the
political dialogue on issues of relevance to the company.
Political contributions made by Novartis are not
intended to give rise to any obligations of the party
receiving it, or with the expectation of a direct or imme-
diate return for Novartis. Such contributions are fully
compliant with applicable laws, regulations and industry
codes. Novartis only makes political contributions in
countries where such contributions from corporations
are considered to reflect good corporate citizenship.
Moreover, Novartis only makes modest political contri-
butions so as to not create any dependency from the
political parties receiving these contributions.
In 2016 Novartis issued a guideline on Responsible
Lobbying, describing the overarching principles of trans-
parency in lobbying activities. For more information on
responsible lobbying see the public policy and advocacy
section of the Novartis website (https://www.novartis.com/
about-us/corporate-responsibility/doing-business-
responsibly/public-policy-advocacy).
In 2016, Novartis made political contributions total-
ing approximately USD 1.0 million, thereof approximately
USD 620 000 in Switzerland, USD 250 000 in the US,
USD 110 000 in Australia and USD 10 000 in the UK. In
addition, in the US, a political action committee estab-
lished by Novartis used funds received from Novartis
employees (but not from the company) to make political
contributions totaling approximately USD 240 000.
In Switzerland, Novartis supports political parties that
have a political agenda and hold positions that support
the strategic interests of Novartis, its shareholders and
other stakeholders. Swiss political parties are completely
privately financed, and the contributions of companies
are a crucial part thereof. This private financing of par-
ties is a deeply-rooted trait of the Swiss political culture,
and contributing to that system is an important element
of being a good corporate citizen.
Shareholder relations
The CEO, with the CFO and Investor Relations team, sup-
ported by the Chairman, are responsible for ensuring
effective communication with shareholders to keep them
informed of the company’s strategy, prospects, business
operations and governance. Through communication,
the Board also learns about and addresses sharehold-
ers’ expectations and concerns.
Corporate governanCe
Further information
Novartis Annual Report 2016 | 107
Novartis communicates with its shareholders through
the AGM, meetings with groups of shareholders and indi-
vidual shareholders, and written and electronic commu-
nications.
At the AGM, the Chairman, CEO and other Executive
Committee members, as well as representatives of the
external auditors, are present and can answer share-
holders’ questions. Other meetings with shareholders
may be attended by the Chairman, CEO, CFO, Executive
Committee members, and other members of senior man-
agement.
Topics discussed with shareholders may include
strategy, business performance and corporate gover-
nance, while fully respecting all applicable laws and stock
exchange rules.
Information for our stakeholders
Introduction
Novartis is committed to open and transparent
communication with shareholders, financial analysts,
customers, suppliers and other stakeholders. Novartis
aims to disseminate material developments in its busi-
nesses in a broad and timely manner that complies with
the rules of the SIX Swiss Exchange and the NYSE.
Communications
Novartis publishes this Annual Report to provide infor-
mation on the Group’s results and operations. In addi-
tion, Novartis prepares an annual report on Form 20-F
that is filed with the US Securities and Exchange Com-
mission (SEC). Novartis discloses quarterly financial
results in accordance with IFRS, and issues press
releases from time to time regarding business develop-
ments.
Novartis furnishes press releases relating to financial
results and material events to the SEC via Form 6-K. An
archive containing recent Annual Reports, annual reports
on Form 20-F, quarterly results releases, and all related
materials – including presentations and conference call
webcasts – is on the Novartis website at www.novartis.
com/investors.
Novartis also publishes a consolidated Corporate
Responsibility Performance Report, available on the
Novartis website at www.novartis.com/about-us/corpo-
rate-responsibility, which details progress and demon-
strates the company’s commitment to be a leader in cor-
porate responsibility. This report reflects the best-in-class
reporting standard, the Global Reporting Initiative’s G4
guidelines, and fulfills the company’s reporting require-
ment as a signatory of the UN Global Compact.
Information contained in reports and releases issued
by Novartis is only correct and accurate at the time of
release. Novartis does not update past releases to reflect
subsequent events, and advises against relying on them
for current information.
Investor Relations program
An Investor Relations team manages the Group’s inter-
actions with the international financial community. Sev-
eral events are held each year to provide institutional
investors and analysts with various opportunities to learn
more about Novartis.
Investor Relations is based at the Group’s headquar-
ters in Basel. Part of the team is located in the US to
coordinate interaction with US investors. Information is
available on the 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
108 | Novartis Annual Report 2016
1
1
2
3
4
Edmund Ekuadzi supervises an exam in pharmacognosy,
the study of medicines derived from plants.
Mr. Ekuadzi at Kwame Nkrumah University of Science
and Technology, where he teaches and does research
Discussing the search for medicinal plants with his colleagues
Back in the laboratory, Mr. Ekuadzi checks the equipment
used to analyze plant samples.
5 Visiting the rainforest with Clifford Osafo Asare, an herbalist
PHOTO ESSAY
A researcher
seeks the roots of plants’
healing power
Deep in a forest in the West African country of Ghana, two men
are searching for plants that they hope could ultimately provide
a cure for some of the world’s deadliest diseases.
2
One of these men is an expert on traditional healing,
drawing on centuries of inherited knowledge about
the medicinal qualities of certain roots and leaves.
The other, Edmund Ekuadzi, is a university researcher
who has dedicated his life to uncovering the science
behind this ancient wisdom.
Mr. Ekuadzi, who grew up in the Ghanaian capital
Accra, is an expert in the field of pharmacognosy,
or the study of medicines derived from plants and
other natural sources. Plants have yielded countless
medicines over the years. Examples include willows,
which were the original source of aspirin; poppies,
which provided the painkiller morphine; and cinchona
trees, which have long been used to make the anti
malarial drug quinine.
For Mr. Ekuadzi, the first challenge is to win
the trust of traditional herbalists – who sometimes
regard science as a threat to their livelihoods – and
persuade them to identify the plants they use to treat
a range of ailments. He then analyzes samples in his
laboratory at Kwame Nkrumah University of Science
and Technology in Kumasi, Ghana.
For example, he conducted the first scientific
investigation of a shrub in the buckthorn family known
as saawawa, widely used in West Africa as a cure all
for everything from cuts and burns to snake bites and
jaundice. The study isolated a number of compounds
that are responsible for the plant’s antibacterial and
antiinflammatory properties.
This research provides a benchmark to assess the
quality of herbal medicines that are extracted from
the plants. “These medicines are important for the
people of Ghana, where we are struggling to provide
healthcare for all,” he says.
PHOTO ESSAY
Novartis Annual Report 2016 | 109
3
4
5
But there is also the tantalizing prospect that
one day he may discover a compound that is new
to science and capable of transforming the practice
of medicine.
Such a breakthrough occurred in the 1970s, when
researchers studied a plant that for thousands of
years had been known to Chinese herbalists for its
antimalarial properties. Artemisinin now forms the
basis of combination therapies such as Coartem
from Novartis, which are the firstline treatment for
malaria worldwide.
Mr. Ekuadzi received support from Novartis
when he completed an internship in 2012 through
the company’s Next Generation Scientist Program.
It is designed to develop the scientific and medical
capabilities of postgraduate students and physicians
from emerging countries, providing skills that will
benefit them and their communities when they return
home.
Mr. Ekuadzi, now 31, is one of more than 100
scientists from 21 countries who have taken part
in the program, which helped him refine his use of
techniques such as mass spectrometry. This enables
him to analyze a plant’s molecular structure and
isolate the compounds that have therapeutic effects.
He now applies these skills at the university in
Ghana where he teaches pharmacognosy and works
as assistant laboratory manager, while continuing to
analyze the native plants that have been used to treat
people in Ghana for generations and that may one
day benefit patients much farther afield.
110 | Novartis Annual Report 2016
Compensation Report
Contents
Dear shareholder,
Compensation Committee Chairman’s letter
Compensation at a glance
Executive Committee compensation philosophy
and principles
110
112
114
2016 Executive Committee compensation system 116
Executive Committee performance
management process
2016 CEO compensation
CEO and other Executive Committee members’
2014–2016 Long Term Incentive plans vesting
CEO and other Executive Committee members’
compensation at grant value
121
123
127
129
2017 Executive Committee compensation system 136
2016 Board compensation system
2016 Board compensation
Compensation governance
Report of the statutory auditor
on the Compensation Report of Novartis AG
137
138
141
143
As Chairman of the Compensation Committee
of the Board of Directors, I am pleased to share
with you the 2016 Compensation Report of
Novartis AG.
Our strategy at Novartis is to use science-based innova-
tion to deliver better outcomes for patients in growing
areas of healthcare. Our executive compensation system
is aligned with our success in implementing that strategy,
as well as with the interests of our shareholders.
We introduced our new compensation system in 2014
with a combination of performance-related incentives,
including a short-term Annual Incentive and two new
Long-Term Incentive plans with three-year perfor-
mance-periods. For the first time in 2016, the three-year
performance-period for the two Long-Term Incentive
plans has concluded.
In the interests of shareholders and proxy advisors,
while remaining compliant with the Ordinance against
Excessive Compensation in Listed Companies, the Com-
pensation Committee has worked to further enhance, on
a voluntary basis, our compensation disclosures. Addi-
tional information has been provided on the process for
setting compensation targets for the Executive Commit-
tee, and the payout outcomes affecting realized com-
pensation of the CEO. We believe this is a meaningful
way to illustrate the alignment of the Compensation
Committee’s decisions on CEO pay for performance with
our shareholders’ interests.
Engagement with shareholders
The Compensation Committee would like to acknowl-
edge the strong shareholder support at the 2016 Annual
General Meeting (AGM) for all compensation-related
resolutions, and express appreciation for the opportu-
nity to meet many of our shareholders during 2016 to
discuss various compensation topics.
Based on their feedback, in 2016 the Compensation
Committee continued to evaluate the effectiveness of our
compensation programs and concluded that they are well
aligned with our strategic objectives and business prior-
ities. However, with the evolution of the healthcare indus-
try both in Europe and the US, as well as the emergence
of large US biotechnology companies, the Compensation
Committee has introduced a revised global healthcare
peer group for performance-periods starting in 2017. This
revised peer group will be used as the primary bench-
mark for determining the compensation opportunities of
the CEO and other key executives, and for evaluating rel-
ative Total Shareholder Return (TSR) performance and
ranking under the LTRPP. Further detail is provided on
page 136.
In 2016, to strengthen integrity and compliance
across the company and in line with the expectations of
our shareholders, the Compensation Committee held a
joint meeting with the Risk Committee focused on doing
Compensation RepoRt
Compensation Committee Chairman’s letter
Novartis Annual Report 2016 | 111
business responsibly. The Committees endorsed new
policies, systems and governance, including sales force
compensation, to support the highest ethical conduct at
all levels of the organization. While it will take time for the
organization to truly embed our Values and Behaviors,
the Board believes that these changes support our
culture of delivering high performance with integrity and
long-term sustainable value to shareholders.
2016 company performance
Novartis delivered in most of its key priority areas despite
a challenging year. The company achieved solid finan-
cials absorbing US Gleevec loss of exclusivity. Operation-
ally, in constant currencies, the company was slightly
below its sales target, met its free cash flow target, and
was below its net income target. Innovative Medicines
delivered strong performance, Sandoz’s was solid, out-
performed peers and gained market share, while Alcon
negatively impacted consolidated results.
Novartis achieved several breakthrough innovations
and drove the growth products including the successful
launch of Cosentyx and the steady growth of Entresto
following positive treatment guidelines in the US and
Europe. Significant changes to the company structure
were implemented effective from July 1, 2016 to improve
effectiveness by increasing the scale of the key func-
tions, while at the same time lowering costs. Important
progress has also been made in embedding a culture of
integrity. Compliance failures mainly related to legacy
issues.
2016 CEO realized compensation
The Compensation Committee focused on the CEO’s
performance compared to his financial and strategic
objectives, our Values and Behaviors, and the overall per-
formance of Novartis. The Compensation Committee
used its judgment and support from an independent
external compensation advisor to make decisions about
individual compensation elements, variable compensa-
tion payouts (which can vary between 0%–200% of the
target) and total compensation. Compensation Commit-
tee members also considered a variety of qualitative fac-
tors, including the business environment in which 2016
results were achieved.
— The CEO was awarded a 2016 Annual Incentive of
CHF 2 835 010, representing 90% of target, based
on a combination of our company’s performance and
his own performance. Half of the Annual Incentive is
delivered in cash, and the remainder in restricted
share units with a three-year vesting period.
— The three-year performance-period for the two
new Long-Term Incentive plans introduced in 2014
was completed in 2016. For the first – our Long-Term
Performance Plan (LTPP) – following the assessment
of performance against the three-year Novartis Cash
Value Added (NCVA) and Group innovation targets,
the Compensation Committee approved a payout of
112% of target for the CEO. For the second – our Long-
Term Relative Performance Plan (LTRPP) – following
the assessment of the Novartis three-year TSR
against the Novartis global healthcare peer group, the
Compensation Committee noted that Novartis ranked
10th out of 13 companies. Considering our TSR was
flat in USD, and was up +15% in CHF, over the three-
year performance-period 2014–2016, the Compen-
sation Committee approved a payout of 20% of target.
In light of the above, 2016 CEO realized total compen-
sation was CHF 10 556 685 including his fixed compen-
sation, his 2016 Annual Incentive, and the vesting of his
LTPP and LTRPP awards for the performance-period
2014–2016. The total LTPP and LTRPP payout was
CHF 5 392 347 including CHF 528 346 of dividend
equivalents accrued over the three-year performance-
period.
2017 AGM
We will continue to exchange views with our sharehold-
ers in an atmosphere of trust and respect that promotes
a collaborative dialogue. Shareholder engagement is
critical to our long-term success, and the Compensation
Committee is committed to continue meeting with our
shareholders. In line with our Articles of Incorporation,
shareholders will be asked to approve the total maximum
amount of Board compensation from the 2017 AGM to
the 2018 AGM, the Executive Committee compensation
for financial year 2018, and to endorse this Compensa-
tion Report in an advisory vote.
On behalf of Novartis and the Compensation Commit-
tee, I would like to thank you for your continued support
and feedback, which I consider extremely valuable in
driving improvements in our compensation systems and
practices. I invite you to send your comments to me at the
following email address: investor.relations@novartis.com.
Respectfully,
Enrico Vanni, Ph.D.
Chairman of the Compensation Committee
112 | Novartis Annual Report 2016
Compensation at a glance
executive Committee compensation
Executive Committee compensation system (pages 116–120)
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
Establishes a level of Rewards performance Rewards long-term
security for associates against key short-term shareholder value
and their dependents
tailored to local
market practices
and regulations
targets, and Values and creation and long-term
Behaviors
innovation
Rewards relative total
shareholder return
performance period
n/a
performance
measures
n/a
n/a
n/a
Cash
Country-specific
Delivery (at the end
of the performance
period for variable
compensation)
n/a
n/a
Ceo variable
opportunity3
other executive
Committee
members’ variable
opportunity3
n/a
n/a
1 year
3 years
3 years
Based on:
— 75% Novartis Cash
Value Added
Based on a payout
matrix made up of:
— Individual Balanced
Scorecard, including — 25% divisional
financial targets and
individual objectives
long-term
innovation
milestones
Based on Novartis’
relative total
shareholder return
vs. our peer
group of global
healthcare companies1
— 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)
total variable
compensation
Target: 150%
Target: 200%
Target: 125% 4
Target: 475%
Target: 90–120%
Target: 140–190%
Target: 30–80%
Target: 260%–390%
1 For the performance period 2016-2018, the companies in our global healthcare 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 equity instead of cash.
3 The shown information represents the variable compensation opportunity as a percentage of annual base compensation. The payout range for each element is 0–200% of target.
4 Effective from the performance-period 2016-18 (previously 100%).
2016 CEO realized compensation (pages 124–126)
The following table provides a summary of the 2016 CEO realized compensation in relation to the performance periods ended December 31, 2016.
We believe reporting realized compensation provides a meaningful way to transparently illustrate the alignment between the Compensation Com-
mittee’s decisions on CEO pay for performance and shareholders’ interests. In addition, this complements the disclosures required by the Ordi-
nance against Excessive Compensation in Listed Companies (pages 129–135).
The CEO realized compensation includes the payouts, based on actual performance assessed, from the two Long-Term Incentive plans newly
introduced in 2014 following the conclusion of their first three-year performance-period 2014–2016.
2016 fixed compensation and benefits
Variable compensation
annual base
compensation
pension and
other benefits
2016 annual
incentive
Long-term
performance plan
(Ltpp) 2014–20161
Long-term Relative
performance plan
(LtRpp) 2014–20161
total realized
compensation
Joseph Jimenez (CEO) 2 093 417
235 911 2
2 835 010
4 950 334
442 013
10 556 685
1 The shown amounts represent the underlying share value of the total number of shares vested (including dividend equivalents) to the CEO for the LTPP and LTRPP performance-
period 2014-2016.
2 Includes an amount of CHF 4 336 for mandatory employer contributions for the CEO paid by Novartis to Swiss governmental social security systems. This amount is out of total
employer contributions of CHF 1 144 673, and provides a right to the maximum future insured government pension benefit.
2017 Executive Committee compensation system (page 136)
The Executive Committee compensation system will remain unchanged in 2017 with the exception of a revised global healthcare peer group and
corresponding LTRPP payout matrix.
Compensation RepoRt
Compensation at a glance
Novartis Annual Report 2016 | 113
Board compensation
2016 Board compensation system (page 137)
Delivery: 50% cash/50% equity (up to 100% equity at the option of each Board member)
(CHF)
Chairman of the Board
Board membership
Vice Chairman
Chairman of the Audit and Compliance Committee
Chairman of the following committees:
— Compensation Committee
— Governance, Nomination and Corporate Responsibilities Committee
— Research & Development Committee
— Risk Committee
Membership of the 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
300 000
50 000
120 000
60 000
60 000
30 000
2016 Board compensation (pages 138–140)
amounts earned for financial year 2016
(CHF)
Chairman
Dr. Joerg Reinhardt 2
Other Board members
active on December 31, 2016
Other Board members
who stepped down at the 2016 AGM
Cash
Equity
1
Other benefits
total
1 900 000
1 900 000
4 336
3 804 336
1 625 000
2 540 000
12 147
4 177 147
27 500
27 500
579
55 579
total
3 552 500
4 467 500
17 062
3
8 037 062
1 Includes an amount of CHF 17 062 for mandatory employer contributions for all Board members paid by Novartis to Swiss governmental social security systems. This amount is
out of total employer contributions of CHF 387 308, and provides a right to the maximum future insured government pension benefit for the Board member.
2 The Chairman of the Board also received payment for the loss of other entitlements at his previous employer totaling EUR 2 665 051, staggered in three installments from 2014 to
2016. In January 2016, the Chairman of the Board received the third and final installment. No additional committee fees for chairing the Research & Development Committee were
delivered to the Chairman of the Board.
3 Please see page 139 for a reconciliation between the amount reported in this table and the amount approved by shareholders at the 2016 AGM to be used to compensate Board
members for the period from the 2016 AGM to the 2017 AGM. The amount paid is within the maximum amount approved by shareholders.
2017 Board compensation system
The Board compensation system will remain unchanged in 2017.
Compensation governance
Governance and risk management (pages 141–142)
Decision on
Compensation of Chairman and other Board members
Compensation of CEO
Compensation of other Executive Committee members
executive Committee compensation risk management principles
Decision making authority
Board of Directors
Board of Directors
Compensation Committee
— Rigorous performance management process
— Balanced mix of short-term and long-term
— Performance-based 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% of
— Clawback principles apply to all elements of
— Matrix approach to performance evaluation
under the Annual Incentive, including an
individual Balanced Scorecard and assessed
Values and Behaviors
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
114 | Novartis Annual Report 2016
Executive Committee
compensation philosophy and principles
Novartis compensation philosophy
Our compensation philosophy aims to ensure that the
Executive Committee is rewarded according to its suc-
cess in implementing the company strategy and to its
contribution to company performance. The Executive
Committee compensation system is designed in line with
the following key elements:
Board of Directors determines specific, measurable and
time-bound performance metrics for both the short-term
Annual Incentive and the Long-Term Incentive plans. The
targets include financial metrics such as sales, profit and
cash flow, as well as non-financial metrics in areas such
as quality, talent, integrity and reputation, which are rein-
forced by our Values and Behaviors. The CEO and the
other Executive Committee members are compensated
according to the extent to which the targets are achieved.
pay for
performance
Variable compensation is tied directly
to the achievement of strategic
company targets.
Executive Committee compensation
benchmarking
shareholder
alignment
A significant part of our incentives
are equity-based. Also, the LTRPP rewards
on the basis of relative total shareholder
return.
Balanced
rewards to create
sustainable value
Mix of targets are 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.
Alignment with company strategy
The Novartis strategy is to use science-based innova-
tion to deliver better patient outcomes. We aim to lead
in growing areas of healthcare focusing on innovative
pharmaceuticals and oncology medicines, generics and
biosimilars, and eye care. To align the compensation sys-
tem with this strategy, and to ensure that Novartis is a
high-performing organization over the long term, the
To attract and retain key talent, it is important for us to
offer competitive compensation opportunities.
The Compensation Committee reviews the compet-
itiveness of the compensation of the CEO and Executive
Committee members on a regular basis. For this pur-
pose, the Compensation Committee uses benchmark
data from publicly available sources, as well as reputa-
ble market data providers where appropriate. All data is
reviewed and evaluated by the Compensation Commit-
tee’s independent advisor, who also provides indepen-
dent research and advice regarding the compensation
of the CEO and the other Executive Committee mem-
bers.
While benchmarking information regarding executive
pay is considered by the Compensation Committee, any
decisions on compensation are ultimately based on the
specific business needs of Novartis and on the execu-
tive’s experience, skill sets and performance.
Executives meeting their objectives are generally
awarded target compensation in line with the market
median benchmark for comparable roles within a peer
group of global competitors in the healthcare industry.
Our peer group is made up of companies that are simi-
lar in size to Novartis and that also have similar business
models and needs for talent and skills. In the event of
under- or over-performance by an executive, the actual
compensation may be lower or higher than the bench-
mark median.
Compensation RepoRt
executive Committee compensation philosophy and principles
Novartis Annual Report 2016 | 115
The Compensation Committee considers the global
healthcare peer group the most relevant benchmark
given the fierce competition within the pharmaceutical
and biotechnology industries for top executive talent with
deep expertise and competences. The composition of
the peer group accurately reflects the competitive land-
scape of Novartis. Although Novartis is headquartered
in Switzerland, more than a third of sales come from the
US market and the US will remain a significant recruit-
ment talent pool for the company (e.g., all current Exec-
utive Committee members have extensive experience
with the US). In addition to providing a benchmark for
compensation, the global healthcare peer group is used
to evaluate relative total shareholder return (TSR) per-
formance and ranking under the Long-Term Relative Per-
formance Plan (LTRPP), as a reference point for pay and
performance alignment as well as for compensation plan
design and practices.
Global healthcare peer group for 20161
Abbott
AbbVie
Amgen
AstraZeneca
Bristol-Myers Squibb
Eli Lilly & Co.
GlaxoSmithKline
Johnson & Johnson
Merck & Co.
Pfizer
Roche
Sanofi
The Compensation Committee also uses a cross-in-
dustry peer group of European-headquartered multi
national companies as an additional reference point to
assess regional pay practices and trends. These com-
panies were selected on the basis of comparability in
size, scale, global scope of operations, and economic
influences to Novartis. This European cross-industry
peer group is comprised of five global companies focus-
ing exclusively on healthcare – AstraZeneca, GlaxoSmith-
Kline, Novo Nordisk, Roche and Sanofi – and 10 compa-
nies selected from the STOXX® All Europe 100 Index
representing all sectors (excluding financial services,
energy and utilities, apparel, media, and real estate
investment trusts): Anheuser-Busch, Bayer, BMW, Daim-
ler, Danone, Heineken, L’Oréal, Merck KgaA, Nestlé and
Unilever.
Novartis comparison to peer group median
Against the global healthcare peer group, Novartis is
among the largest in key dimensions including market
capitalization, sales and operating income. The table
below compares our market capitalization, sales and
operating income to the median market capitalization,
sales and operating income for our global healthcare
peer group.
1 This global healthcare peer group is used as the basis for the TSR comparator group
Market capitalization 1
(USD billions)
featured in the LTRPP for the performance periods 2014-2016, 2015-2017 and
2016-2018.
Net sales 2
Operating income 2
Median of
global healthcare
Novartis peer group for 2016 3
172.0
48.5
8.3
103.0
30.8
7.0
The Compensation Committee reviews the companies
in our global healthcare peer group annually and consid-
ers adjustments over time in line with the evolution of the
competitive environment in the healthcare industry.
Following the latest review, the Compensation Com-
mittee approved changes to the global healthcare peer
group for 2017 onwards, which are reflected on page 136.
1 Market capitalization at December 31, 2016 is calculated based on the number of
shares outstanding (excluding treasury shares).
2 Continuing operations
3 Data source: Bloomberg database; most recently disclosed (as of January 18, 2017)
trailing 12-month net sales and operating income.
116 | Novartis Annual Report 2016
2016 Executive Committee
compensation system
The 2016 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
Variable compensation
Annual base compensation
The level of annual base compensation reflects each
associate’s key responsibilities, job characteristics,
experience and skill sets. It is paid in cash, typically
monthly.
Annual base compensation is reviewed regularly, and
any increase reflects merit based on performance, as
well as market movements.
Pension and other benefits
The primary purpose of pension and insurance plans is
to establish a level of security for associates and their
dependents with respect to age, health, disability and
death. The level and scope of pension and insurance
benefits provided are country- specific, influenced by
local market practices and regulations.
Company policy is to change from defined benefit
pension plans to defined contribution pension plans. All
major pension plans have now been aligned with this pol-
icy as far as reasonably practicable. Please also see Note
25 to the Group’s audited consolidated financial state-
ments (page 226).
Novartis may provide other benefits in a specific
country – such as a company car, and tax and financial
planning services – according to local market practices
and regulations. Executive Committee members who
have been transferred on an international assignment
also receive benefits (such as tax equalization) in line
with the company’s international assignment policies.
Annual Incentive
For the Annual Incentive of the CEO and other Execu-
tive Committee members, a target incentive is defined
as a percentage of annual base compensation at the
beginning of each performance year. The target incen-
tive is 150% of annual base compensation for the CEO,
and ranges from 90% to 120% for the other Executive
Committee members. It is delivered half in cash and half
in equity deferred for three years.
The formula for the target Annual Incentive is out-
lined below.
Annual Incentive formula
Annual base
compensation
x
Target
incentive %
=
target annual
incentive value
peRFoRmanCe measURes
The Annual Incentive payout is based on a matrix made
up of two elements: a balanced scorecard and our Val-
ues and Behaviors, which are described in more detail
below.
BALANCED SCORECARD
The first element used to determine the payout of the
Annual Incentive is a balanced scorecard within which
Group, divisional or unit targets are weighted 60%, and
individual objectives are weighted 40%. For more details
on the target-setting and performance management pro-
cess, please refer to pages 121–122.
Compensation RepoRt
2016 executive Committee compensation system
Novartis Annual Report 2016 | 117
GROUP, DIVISIONAL AND UNIT TARGETS
Within the Group, divisional and unit targets, each mea-
sure is weighted individually. The CEO and corporate
function heads share the same Group financial targets
(further described below). In place of the Group targets,
division and business unit heads have targets that include
divisional or business unit sales, operating income, free
cash flow as a percentage of sales, and market share of
peers. Organizational unit heads have financial and
non-financial targets specific to their organization. The
Board of Directors sets the Group, divisional and unit tar-
gets at the start of each performance year in constant
currencies, where applicable, and evaluates achieve-
ment against these targets at the end of that year.
INDIVIDUAL OBJECTIVES
Individual objectives differ for each Executive Commit-
tee member depending on their responsibilities, and may
include additional financial and non-financial targets.
Examples of additional financial targets are implemen-
tation of growth, productivity and development initiatives.
Non-financial targets may include leadership as well as
people and talent management, workforce diversity,
quality, social initiatives such as access to medicines,
and ethical business practices.
By way of illustration, the balanced scorecard mea-
sures used for the CEO in 2016 are set out in the table
below.
2016 balanced scorecard measures used for
the CEO
performance
measures
Weight Breakdown of performance measures
Group financial 60%
targets
Group net sales
Corporate net result
Group net income
Group free cash flow as % of sales
CEO
individual
objectives
40%
Additional financial targets (e.g., EPS)
Innovation and growth
Cross-divisional synergies
High-performing organization
overall total
100%
members, is achieved in line with our Values and Behav-
iors. Associates are held accountable to demonstrate
innovation, quality, collaboration, performance, courage
and integrity. All Novartis associates are expected to live
up to these on a daily basis, and to align and energize
other associates to do the same. Detailed descriptors
are used to assess performance against our Values and
Behaviors.
peRFoRmanCe eVaLUation anD paYoUt DeteRmination
Following a thorough review of the two elements that
compose the Annual Incentive – performance against
the balanced scorecard objectives and an assessment
against our Values and Behaviors – a rating from 1 to 3
is assigned to each.
The following payout matrix shows how the Annual
Incentive performance factor is derived using a combina-
tion of performance against the balanced scorecard and
demonstration of our Values and Behaviors. The Board of
Directors for the CEO, and the Compensation Committee
for the other Executive Committee members, determine
the final payout factor, taking into account the ranges
shown. Payouts are capped at 200% of target.
2016 Annual Incentive payout matrix
performance
vs. Balanced
scorecard
exceeding
expectations
meeting
expectations
3
2
partially meeting
1
expectations
% payout
60 – 90%
130 – 160%
170 – 200%
0 – 70%
90 – 120%
130 – 160%
0%
0 – 70%
60 – 90%
1
2
3
partially
meeting
expectations
meeting
expectations
exceeding
expectations
Values and Behaviors
assessment
OUR VALUES AND BEHAVIORS
The second element used to determine the payout of the
Annual Incentive ensures that the performance of all
Novartis associates, including Executive Committee
The payout matrix for the Annual Incentive equally rec-
ognizes performance against the objectives in the bal-
anced scorecard and demonstration of our Values and
Behaviors.
118 | Novartis Annual Report 2016
FoRm anD DeLiVeRY oF tHe aWaRD
The Annual Incentive is paid 50% in cash in the first quar-
ter of the year following the performance-period, and
50% in Novartis restricted shares or restricted share
units (RSUs) that are deferred and vest after three years.
Each restricted share is entitled to voting rights and pay-
ment of dividends during the vesting period. Each RSU
is equivalent in value to one Novartis share but does not
carry any dividend, dividend equivalent or voting rights.
Following the vesting period, settlement of RSUs is made
in unrestricted Novartis shares or American Depositary
Receipts (ADRs).
If a participant leaves Novartis due to voluntary res-
ignation or misconduct, unvested restricted shares and
RSUs are forfeited. The Board of Directors and the Com-
pensation Committee retain accountability for ensuring
that the plan rules are applied correctly, and for deter-
mining whether a different treatment should apply in
exceptional circumstances. This is necessary to ensure
that the treatment of any award in the event of cessation
of employment is appropriate.
Executives may choose to receive all or part of the
cash portion of their Annual Incentive in Novartis shares
or ADRs (US only) that will not be subject to forfeiture
conditions. In the US, awards may also be delivered in
cash under the US-deferred compensation plan.
Long-Term Incentive plans
Novartis operates two Long-Term Incentive plans (the
Long-Term Performance Plan and the Long-Term Rela-
tive Performance Plan) for the Executive Committee
members, which are granted under the same plan rules,
differing only with respect to the performance conditions
applied.
GRant oF LonG-teRm inCentiVe pLans
At the beginning of every performance-period, Execu-
tive Committee members are granted a target number
of performance share units (PSUs) under each of the
Long-Term Incentive plans according to the following
formula:
step 1
Annual base
compensation
x
Target
incentive %
=
Grant value
step 2
Grant value
/
Share price
=
target number
of psUs
VestinG oF LonG-teRm inC entiVe pLans
At the end of the three-year performance-period, the
Compensation Committee adjusts the number of PSUs
realized based on actual performance.
Long-Term Incentive plans payout formula
Target number
of PSUs
x
Performance
factor
=
Realized
psUs
+
dividend
equivalents
The performance factor can range from 0% to 200% of
target. Each realized PSU is converted into one Novartis
share at the vesting date. PSUs do not carry voting rights,
but do accrue dividend equivalents that are reinvested
in additional PSUs and delivered at vesting to the extent
that performance conditions have been met. In the US,
awards may also be delivered in cash under the US-de-
ferred compensation plan.
If a participant leaves Novartis due to voluntary res-
ignation or termination by the company for misconduct,
none of the awards vest. When a member is terminated
by the company for reasons other than performance or
conduct, the award vests on a pro-rata basis for time
spent with the company during the performance-period.
In such a case, the award will vest on the regular vesting
date (no acceleration), will be subject to performance
should an evaluation be possible, and will also be sub-
ject to other conditions such as observing the conditions
of a non-compete agreement. Executives leaving
Novartis due to approved retirement, including approved
early retirement, death or disability, will receive full vest-
ing of their award on the normal vesting date (accelera-
tion will only apply in the case of death). The award will
be subject to performance, should an evaluation be pos-
sible, and will also be subject to other conditions such
as observing the conditions of a non-compete agree-
ment. Further details can be found in Note 26 to the
Group’s audited consolidated financial statements (page
229).
The Board of Directors and the Compensation Com-
mittee retain accountability for ensuring that the plan
rules are applied correctly, and for determining whether
different treatment should apply in exceptional circum-
stances. This is necessary to ensure that the treatment
of any award in the event of cessation of employment is
appropriate.
Compensation RepoRt
2016 executive Committee compensation system
Novartis Annual Report 2016 | 119
The NCVA targets are determined considering expected
growth rates in sales, operating income, and return from
invested capital (under foreseen economic circum-
stances).
At the end of the performance-period, the NCVA per-
formance factor is calculated using results in constant
currencies. The NCVA performance factor is based on
a 1:3 payout curve, where a 1% deviation in realization
versus target leads to a 3% change in payout (for exam-
ple, a realization of 105% leads to a payout factor of 115%).
Accordingly, if performance over the three-year vesting
period falls below 67% of target, no payout is made for
this portion of the LTPP. If performance over the three-
year vesting period is above 133% of target, payout for
this portion of the LTPP is capped at 200% of target.
The calculated performance realization is adjusted
for unplanned major events during the performance-pe-
riod (e.g., significant merger and acquisition transac-
tions).
INNOVATION MEASURE: 25% OF LTPP
Innovation is a key element of the Novartis strategy. Divi-
sional and unit innovation targets are set at the begin-
ning of the performance-period, comprised of up to 10
target milestones that represent the most important
research and development project milestones for each
division and unit. 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 tar-
get milestones. A 150–200% payout may be awarded for
extraordinary additional achievement. The CEO and cor-
porate function heads receive the weighted average of
divisional and unit innovation payouts.
The Research & Development Committee assists the
Board of Directors and the Compensation Committee in
setting the innovation targets and reviewing achieve-
ments at the end of the performance-period.
LonG-teRm peRFoRmanCe pLan (Ltpp)
This is the first of the two Long-Term Incentive plans.
OVERVIEW
The LTPP, as described below, was granted for the first
time to the CEO and other Executive Committee mem-
bers in 2014, and the first payout under this plan for per-
formance-period 2014–2016 is disclosed on page 127.
The LTPP target incentive is 200% of annual base com-
pensation for the CEO, and ranges from 140% to 190%
for the other Executive Committee members.
PERFORMANCE MEASURES
Awards under the LTPP are based on three-year
performance objectives and split as follows:
75% financial
25% innovation
measure
Novartis Cash Value
Added
Up to 10 key innovation
milestones
Ceo, corporate
function and certain
organizational unit
heads
Commercial
division and unit
heads, and head
of research unit
100% Group
Weighted average
of divisional/unit
performance
100% divisional/unit
performance
FINANCIAL MEASURE (NOVARTIS CASH VALUE ADDED):
75% OF LTPP
The Novartis Cash Value Added (NCVA) is a metric that
incentivizes sales growth and margin improvement as
well as asset efficiency. A summary of the calculation is
below.
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
120 | Novartis Annual Report 2016
LonG-teRm ReLatiVe peRFoRmanCe pLan (LtRpp)
This is the second of the two Long-Term Incentive plans.
OVERVIEW
The LTRPP was granted for the first time to the CEO and
other Executive Committee members in 2014, and the
first payout under this plan for performance-period
2014–2016 is disclosed on page 128. As of 2016, the tar-
get incentive is 125% of annual base compensation for
the CEO (a 25 percentage-point increase from 2015),
and ranges from 30% to 80% for the other Executive
Committee members.
PERFORMANCE MEASURE
The LTRPP is based on the achievement of long-term
relative TSR versus the global healthcare peer group
over rolling three-year performance-periods. TSR is cal-
culated in USD as share price growth plus dividends over
the three-year performance-period. The calculation is
based on Bloomberg standard published TSR data,
which is publicly available.
The peer group for the 2016–2018 performance-pe-
riod is the same as for benchmarking the compensation
of the CEO and other Executive Committee members
and is comprised of: Abbott, AbbVie, Amgen, AstraZen-
eca, Bristol-Myers Squibb, Eli Lilly & Co., GlaxoSmith-
Kline, Johnson & Johnson, Merck & Co., Pfizer, Roche
and Sanofi.
At the end of the performance-period, all companies
are ranked in order of highest to lowest TSR, and the
position in the peer group determines the payout range
as follows:
The Compensation Committee uses its discretion to
determine the payout factor within the ranges shown,
and takes into consideration factors such as absolute
TSR, overall economic conditions, currency fluctuations
and other unforeseeable situations. The Compensation
Committee believes that the LTRPP payout matrix is
aligned with the company’s pay-for-performance princi-
ple, 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. The LTRPP payout
matrix is aligned with practices at the companies in our
global healthcare peer group.
Target disclosure
To allow shareholders to assess the link between com-
pany performance and compensation, Novartis is com-
mitted to disclosing in the Compensation Report the tar-
gets of our compensation programs at the end of each
performance-period – including judgment used in
assessing actual performance versus targets. In line with
this principle, the targets and achievements of the CEO
for the 2016 Annual Incentive, the LTPP and the LTRPP
for the performance-period 2014–2016 can be found on
pages 124–126.
This approach is proposed to our shareholders given
that disclosing our short- and long-term targets under
our compensation programs before the end of the rele-
vant performance-period would give substantial insight
into the company’s confidential, forward-looking strate-
gies, and could therefore place the company and its
shareholders at a competitive disadvantage.
LTRPP payout matrix
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%
Compensation RepoRt
executive Committee performance management process
Novartis Annual Report 2016 | 121
Executive Committee
performance management process
To foster a high-performance culture, the company
applies a uniform performance management process
worldwide based on quantitative and qualitative criteria,
including our Values and Behaviors. Novartis associates,
including the CEO and other Executive Committee mem-
bers, are subject to a formal three-step process.
objective setting
performance
evaluation
Compensation
determination
CEO objective setting
This section describes the objective-setting process to
determine the stretch targets of our Annual Incentive
plan and the LTPP. No objective setting is required for
the LTRPP.
INDIVIDUAL TARGETS OF THE CEO ANNUAL INCENTIVE
The CEO discusses his individual objectives for the com-
ing year directly with the Chairman of the Board of Direc-
tors prior to the start of the performance-period. The
Chairman reviews the CEO’s individual objectives before
they are discussed and approved by the Board of Direc-
tors. The agreed individual objectives are also part of the
CEO’s balanced scorecard and laid out as Novartis pri-
orities for the coming year.
GROUP FINANCIAL TARGETS OF THE CEO ANNUAL INCENTIVE
AND LTPP
The Board of Directors and the Compensation Commit-
tee use a rigorous process to establish Group financial
targets for the Annual Incentive and the LTPP. The objec-
tive-setting process for Group financial targets begins
with bottom-up input from our commercial and organi-
zational divisions and units by country and brands. The
bottom-up input process takes into account both inter-
nal and external market and regulatory factors, such as
new product launches, patent expiries, pricing pressures,
changes in the healthcare environment, investments in
capital expenditure, and resource allocation decisions.
The Group financial targets support our ambition to be
a leader in the healthcare industry without encouraging
unnecessary or excessive risk taking, while being fully
in line with Group compliance, conduct and accounting
standards.
The financial targets are reviewed and challenged at
the country, regional and Group levels as well as by the
Executive Committee before they are proposed in
December – prior to the start of the performance-period
– to the Board of Directors.
The Board of Directors reviews and assesses the
proposed financial targets in detail to ensure that they
are set at levels that are sufficiently and appropriately
challenging. This review takes into account a variety of
relevant information including internal business plans,
external market consensus, strategic choices to be made
by the company, and industry expectations for the com-
panies of our global healthcare peer group. Following
this thorough review by the Board of Directors, the final
objectives are approved early in the year and incorpo-
rated into the CEO Annual Incentive balanced scorecard
and the LTPP.
INNOVATION TARGETS OF LTPP
Each year, the divisions and units evaluate their long-
term strategic plans to develop recommendations for
innovation targets that are focused on challenging mile-
stones of critical importance to the long-term success
of the business, and that should be the best- or first-in-
class development projects that can significantly
advance treatment outcomes for patients worldwide.
These targets are presented by the Global Head of Drug
Development and Chief Medical Officer for Novartis as
well as the President of the Novartis Institutes for Bio-
Medical Research (NIBR) at a joint meeting of the
Research & Development Committee and the Compen-
sation Committee. Both Committees review, discuss and
challenge the targets before they are finalized and
approved by the Board of Directors. The innovation tar-
gets of the LTPP are largely aligned with the major devel-
opment projects outlined in the pipeline schedule of the
Annual Report (see page 52).
CEO performance evaluation
The Board of Directors periodically assesses Group
business performance, as well as the CEO’s progress
against his objectives and incentive plan targets. At the
mid-year performance review, the performance of the
CEO is reviewed by the Chairman of the Board of Direc-
tors.
For the year-end review, the CEO prepares and pres-
ents 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 financial results as well as an assessment
against our Values and Behaviors. At the year-end review,
the Board of Directors discusses the performance of the
CEO without him being present. The Board of Directors
evaluates the degree to which the set objectives have
been achieved and – to the extent possible – compares
these results with peer industry companies, taking into
account general economic and financial criteria as well
as industry developments. The Board of Directors later
shares its assessment with the CEO.
122 | Novartis Annual Report 2016
CEO compensation determination
What we value
observed behaviors
As part of the review of CEO compensation, the Com-
pensation Committee considers a competitive analysis
of CEO target compensation prepared by its indepen-
dent advisor and, based on competitive factors as well
as individual and company performance, determines any
recommendations for changes to target compensation
for the coming year.
At its January meeting, following a recommendation
from the Compensation Committee, the Board of Direc-
tors approves the CEO’s variable compensation for the
prior performance-periods and the target compensation
for the coming year. This meeting takes place without
the CEO being present. The Board of Directors later
shares its decisions with the CEO.
Performance management process for the
other Executive Committee members
(excluding the CEO)
The other Executive Committee members propose the
financial and non-financial targets for their division or
unit for review, challenge and approval by the CEO and,
subsequently (as previously described), by the Board of
Directors and Compensation Committee. In addition,
each Executive Committee member agrees on individ-
ual objectives with the CEO, who also reviews each mem-
ber’s performance at mid-year and year-end.
Following the year-end evaluation, the CEO meets
with the Chairman of the Board of Directors, who reviews
the performance of each Executive Committee member.
Subsequently, the CEO presents and discusses at the
Board of Directors meeting the recommended perfor-
mance rating for each Executive Committee member.
Shortly after year-end, the CEO proposes a payout
for the Annual Incentive for each Executive Committee
member based on the performance ratings and corre-
sponding to the payout matrix. The Compensation Com-
mittee discusses each member’s performance with the
CEO and approves the Annual Incentive payouts for the
prior year as well as any changes to target compensa-
tion for the coming year. The Compensation Committee
informs the Board of Directors of its final decisions, and
the CEO later shares these decisions with each Execu-
tive Committee member.
Assessment of Values and Behaviors
at Novartis
Values and Behaviors have been an integral part of the
company’s compensation system since its foundation.
In 2015, to reinforce the culture of the company, Novartis
rolled out six new Values and Behaviors – which are inno-
vation, quality, collaboration, performance, courage and
integrity.
innovation
Experiment
and deliver
solutions
Quality
— Experiment and encourage others to do so
— Take smart risks that benefit patients
and customers
— Deliver new solutions with speed and simplicity
— Look for better ways to do things
Take pride
in doing ordinary — Do not compromise on quality and safety;
strive for excellence
things extra-
— Always work on your strengths and weaknesses
ordinarily well
Collaboration
Champion
high-performing
teams with
diversity
and inclusion
performance
Prioritize
and make
things happen
with urgency
Courage
— Champion working together
in high-performing teams
— Know yourself and your impact on others
— Welcome diversity and inclusion of styles,
ideas and perspectives
— Show passion to achieve goals; go the extra mile
— Put team results before your own success;
acknowledge the contributions of others
— Prioritize, make decisions,
and make things happen with urgency
Speak up, and
give and
receive feedback — Give and accept constructive feedback
— Speak up and challenge the norm
— Acknowledge when things do not work; learn
integrity
Advocate
and apply
high ethical
standards
every day
— Operate with high ethical standards
— Be humble and caring, and show trust,
respect and empathy to others
— Live by the Code of Conduct
even when facing resistance or difficulties
These values are embedded in all aspects of employees’
lives at Novartis, including recruitment, development and
promotions; performance assessments
through
360-degree evaluations and organizational employee
surveys; and Annual Incentive awards; to measure indi-
vidual and organizational performance against our val-
ues. As part of the Annual Incentive award process, train-
ing 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.
In 2015 and again in 2016, we further improved the
framework for measuring individual performance against
our values, ensuring that fair, objective assessments can
be made in a uniform way across all levels of the organi-
zation. The assessment is part of a rigorous manage-
ment process review in which observed Values and
Behaviors are evaluated based on globally-defined prin-
ciples. 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 evaluation. During the calibration sessions,
line managers share the proposed ratings of their direct
reports with management peers to ensure all apply a
common framework, and they seek input and feedback
on observed behaviors.
The Values and Behaviors assessments for the CEO
and other Executive Committee members are made and
calibrated by the Board of Directors.
Compensation RepoRt
2016 Ceo compensation
Novartis Annual Report 2016 | 123
2016 CEO compensation
This section provides information on the CEO target compensation followed by the 2016 CEO realized compensa-
tion on a voluntary basis.
1. 2016 CEO target compensation
Following a competitive analysis of the CEO’s compen-
sation and an evaluation of the CEO’s performance in
2015, the Compensation Committee approved an
increase in the CEO’s target compensation effective for
2016. The target compensation is the amount that the
CEO is eligible to receive if there is 100% achievement
of all short-term and long-term targets for the respec-
tive performance-periods, excluding any dividend equiv-
alents and share price movement.
Among other things, the Compensation Committee
considered that the CEO’s target compensation had not
been increased in three years and that his compensa-
tion was falling further below the median level of our
global healthcare peer group. In recognition of this, the
Compensation Committee approved:
— An increase in annual base compensation from
CHF 2 060 500 to CHF 2 100 000 with effect from
March 1, 2016
— A 25 percentage-point increase in CEO LTRPP target
from 100% to 125% of annual base compensation as
from the 2016–2018 performance-period to increase
the competitiveness of the CEO’s target total com-
pensation versus peers through the incentive vehicle
most aligned to shareholders’ interests
In 2016, at target value, the CEO’s compensation included
Annual Incentive at 150%, LTPP at 200% and LTRPP at
125% of annual base compensation. The payout range
for all of these plans can vary between 0%–200% of the
target. Therefore the total target compensation for the
CEO is CHF 12 075 000 and can range from a minimum
of CHF 2 100 000 to a maximum of CHF 22 050 000
(excluding pension and other benefits, any share price
movements and any accrued dividend equivalents),
based on the extent to which financial and strategic
objectives for payout of short-term Annual Incentive and
Long-Term Incentive plans are achieved. As a result, the
2016 CEO’s compensation at target was comprised of
19% fixed compensation (i.e. annual base compensation,
pension and other benefits), 26% Annual Incentive, and
55% Long-Term Incentives.
124 | Novartis Annual Report 2016
2. 2016 CEO realized compensation
This section provides a detailed summary and break-
down by component of the total realized compensation
of the CEO in relation to the performance-periods ended
December 31, 2016. This includes, for the first time,
reporting of CEO realized total compensation in a single
table.
To give context to the 2016 CEO realized compen-
sation, within this section, we include details of the CEO’s
achievements against his balanced scorecard targets
along with the achievements under the LTPP (NCVA and
Group Innovation) and LTRPP for the performance-pe-
riod 2014–2016.
Reporting compensation at realized value in this way
provides enhanced transparency to shareholders of the
CEO’s compensation. We also consider that this
approach is an important method of demonstrating the
alignment between the Compensation Committee’s
decisions on CEO pay for performance and sharehold-
ers’ interests.
2016 CEO realized total compensation breakdown
The Compensation Committee believes it is critical to
assess performance against a mix of targets (both short-
term and long-term) for compensation-related purposes
to reflect the full operational performance of the orga-
nization and to ensure that results are delivered with high
integrity and long-term financial sustainability. The Com-
pensation Committee uses its judgment when determin-
ing final compensation outcomes and any discretionary
adjustments, positive or negative.
The CEO’s 2016 realized total compensation was
CHF 10 556 685. This amount is comprised of 2016
annual base compensation, pension and other benefits,
Annual Incentive and, for the 2014–2016 perfor-
mance-period, the vesting of his LTPP and LTRPP awards
including accrued dividend equivalents.
A detailed breakdown by component of the 2016 CEO
realized compensation is set out below.
annUaL Base Compensation
The CEO annual base compensation paid in 2016 was
CHF 2 093 417 (representing a 1.6% increase from 2015).
pension anD otHeR BeneFits
The CEO received pension benefits of CHF 160 283 and
other benefits of CHF 75 628 during 2016.
annUaL inCentiVe
Given the 2016 CEO balanced scorecard and assessed
Values and Behaviors, the Annual Incentive award was
CHF 2 835 010.
Following the performance evaluation of the CEO by
the Board of Directors, the Compensation Committee
thoroughly reviewed the assessment against the previ-
ously agreed objectives as set out in the 2016 CEO bal-
anced scorecard (see following page).
In reaching its recommendation to the Board of Direc-
tors on the CEO’s 2016 Annual Incentive payout factor
of 90% (which was subsequently approved by the Board
of Directors), the Compensation Committee recognized
that overall he met expectations, was successful in
achieving significant milestones in innovation, and that
Novartis met its free cash flow target while it was slightly
below its sales target in a year of absorbing Gleevec US
LOE. Group net income was below target mainly due to
Alcon performance.
Among the major achievements in 2016 were Cosen-
tyx reaching blockbuster status, Gilenya delivering dou-
ble digit growth, Sandoz biopharmaceuticals reaching
USD 1 billion of sales, and Entresto receiving positive
treatment guidelines in the US and Europe.
Compensation RepoRt
2016 Ceo compensation
Novartis Annual Report 2016 | 125
2016 Ceo BaLanCeD sCoReCaRD
The Annual Incentive performance is measured in constant currencies to reflect the operational performance that
can be influenced.
performance metrics for continuing operations
(weight)
target1
achievement vs. target
(in constant currencies)
Group
financial
targets
(60%)
Group net sales (30%)
Corporate net result2 (20%)
Group net income (30%)
Group free cash flow as % of sales (20%)
achievement of Group financial targets
| USD 49 540 m
| USD –1 675 m
| USD 7 203 m
| 18.8%
| Slightly below
| Slightly above
| Below
| At target
slightly below
additional financial targets for continuing operations
In constant currencies, core operating income and EPS were below target. Core EPS was slightly
below. Divisional share of peers (Innovative Medicines and Sandoz) were ahead of target while
Alcon was behind.
Below
innovation and growth
The company continued to strengthen its pipeline, with the NIBR unit producing 13 new Proof of
Concepts (above target). In total, Novartis secured 14 approvals in Innovative Medicines, as well
as 15 major submissions. Progress was made with the biosimilars pipeline at Sandoz, with the FDA
approval of Etanercept and filing of Rituximab with the EMA. LEE011 (ribociclib) achieved FDA
breakthrough therapy designation. Growth Products contributed USD 17.1 billion or 35% of net
sales, up 20% (USD) over the prior year. Cosentyx was ahead of target, and reached blockbuster
status. Entresto continued to grow steadily following positive treatment guidelines in the US and
Europe.
| Exceeded
Cross-divisional synergies
In January 2016, Novartis announced plans to further focus its divisions to better leverage our
development and marketing capabilities. Novartis Business Services (NBS) continued to leverage
the global scale of Novartis to streamline and consolidate operations. Novartis Technical Opera-
tions completed the organizational integration including a more efficient utilization of functional
capabilities and resources. Novartis completed the creation of its new Global Drug Development
(GDD) organization to further streamline drug development. A total of 38 000 associates rea-
ligned to new business organizations with effect from July 1, 2016 with minimal business dis-
ruption. All these actions will increase the productivity of the company and provide a solid foun-
dation for the future growth and profitability of Novartis.
| At target
| At target
High-performing organization (e.g., quality, talent)
Novartis continues to proactively drive compliance, reliable product quality and sustainable effi-
ciency as part of the quality strategy. Compliance issues which were uncovered and remediated
mainly related to legacy failures. A total of 206 global health authority inspections were com-
pleted in 2016, 26 of which were conducted by the FDA. All but 4 out of 206 inspections were
deemed good or acceptable. Corrective and preventative actions to address all observations
have been defined and are being implemented. In 2016, Novartis combined several innovative
Access programs into a single portfolio under unified leadership. The Group was successful in
filing approximately three quarters of its Novartis Top Leader roles (the company’s 360 most
senior executives) internally. Women in management increased to 42% and Novartis continues
to be recognized in the market for its efforts in diversity and inclusion. Our Values and Behaviors
continued to progress in employee pulse surveys and have been embedded in all aspects of
associates’ lives at Novartis and significant progress has been made in embedding a culture of
integrity in a sustainable way.
individual
objectives
(40%)
achievement of individual objectives
at target
1 The target was set using July 2015 forward currency exchange rates.
2 Includes corporate cost, income from associated companies, net financial income and income taxes.
As a result of the CEO’s achievements as described above, a payout factor of 90% was approved for the CEO and
the value of his 2016 Annual Incentive award was determined as follows:
Annual base
compensation1
CHF thousands
x Target incentive
% of annual
base compensation
x Performance factor
% of target
= Final award
CHF thousands
2016 Annual Incentive
2 100
x
150%
x 90%
= 2 835 2
1 As per plan rules, the Annual Incentive is calculated based on the annual base compensation effective March 1, 2016
2 50% of the Annual Incentive is paid in cash and the other 50% as 19 867 RSUs, which have a three-year vesting period.
126 | Novartis Annual Report 2016
oUtCome oF tHe Ltpp peRFoRmanCe-peRioD 2014–2016
The LTPP payout for the CEO for performance-period 2014–2016 is CHF 4 950 334, including CHF 485 037 of
dividend equivalents. The LTPP payout factor for the CEO was 112% based on the outcome of the performance
objectives below.
measure
Weight targets and achievements
75%
novartis
Cash Value
added
(nCVa)
Group
innovation
25%
Over the three-year performance period, 2014 to 2016, Novartis performed 4.4% ahead of the USD 10.1 billion NCVA
target in constant currencies. This was mainly due to over achievements in the beginning of the performance-period
driven by stronger than anticipated performance of Gleevec and the successful launch of Cosentyx. NCVA was
negatively impacted by Alcon underperformance at the end of the cycle. Overall this corresponded to a payout of
113% following the application of the 1:3 payout curve. In arriving at the NCVA performance score, the Compensation
Committee excluded, as a major item, the favorable impact from lower cost of capital.
Novartis delivered strong innovation performance over the period 2014–2016 despite usual attrition rates inherent to
pharmaceutical drug development. The majority of innovation targets were achieved by our divisions and units many
of which will have a significant positive impact for both the company and patient outcomes. The company successfully
achieved major innovation milestones, including Entresto (approved in the US and the EU), Cosentyx (approved for AS
and PsA in EU and in the US) and submissions of biosimilar etanercept and pegfilgrastim. Zarxio (filgrastim) was the first
biosimilar approved in the US under the BPCIA pathway. Based on the evaluation performed by the R&D Committee,
the Board of Directors approved, in line with a recommendation from the Compensation Committee, a payout factor
for group innovation of 107% applicable to the CEO. This corresponds to the weighted average of divisional and unit
innovation payouts.
oUtCome oF tHe LtRpp peRFoRmanCe-peRioD 2014–2016
The LTRPP payout for the CEO for performance-period 2014–2016 is CHF 442 013, including CHF 43 309 of div-
idend equivalents. The LTRPP payout factor applicable to the CEO was 20% based on Novartis TSR rank position,
in USD, being 10th in the comparator group of 13 healthcare companies (Novartis and 12 other companies).
In USD our TSR was flat for the three-year period 2014–2016 while in CHF TSR was up +15%. In reaching its
decision on the payout factor, the Compensation Committee exercised its discretion within the boundaries of the
LTRPP payout matrix (see page 120) and decided that the minimum of the payout range should apply.
2016 CEO realized total compensation table
The following table is newly introduced to aid shareholders’ understanding of 2016 realized total compensation of
the CEO. It reports, the aggregate fixed and variable compensation in the year, including the LTPP and the LTRPP
payouts for performance-period 2014–2016 following their respective completed performance assessments.
Equity relating to the 2016 Annual Incentive is disclosed using the underlying value of Novartis shares on the
date of grant, while the realized value for the LTPP and LTRPP payouts (including dividend equivalents) is calcu-
lated using the share price on the date of vest. In both cases the applicable date is January 17, 2017 and the share
price was CHF 71.35 per Novartis share.
2016 base
compensation
2016 pension
benefits
2016 Annual Incentive
Realized LTPP
Realized LTRPP
2014–2016 period 2014–2016 period
Other 2016
compensation
Total realized
compensation
Currency
Cash
(amount)
1
Amount
Cash
(amount)
Equity
(value at
2
grant date)
Shares
(value at
3
vesting date)
Shares
(value at
3
vesting date)
Amount
4
5
Amount
Joseph Jimenez (CEO)
CHF
2 093 417
160 283
1 417 500
1 417 510
4 950 334
442 013
75 628
10 556 685
1 Includes service costs of pension and post-retirement healthcare benefits accumulated in 2016, in accordance with IAS19. It also includes an amount of CHF 4 336 for mandatory
employer contributions for the CEO paid by Novartis to Swiss governmental social security systems. This amount is out of total employer contributions of CHF 1 144 673, and
provides a right to the maximum future insured government pension benefit.
2 The portion of the Annual Incentive delivered in RSUs is rounded up to the nearest share.
3 For the performance-period 2014-2016, the accrued dividend equivalent amounts were CHF 485 037 and CHF 43 309 respectively for the LTPP and the LTRPP.
4 Includes any other perquisites and benefits in kind.
5 All amounts are before deduction of the employee’s social security contribution and income tax due by the CEO.
2015 CEO realized compensation
It should be noted that a direct year over year comparison to the 2016 realized compensation is not possible given
the changes made in 2014 to our Long-Term Incentive plans from the Old LTPP (OLTPP) to the LTPP and LTRPP,
and the fact that OLTPP awards did not accrue dividend equivalents.
However, using the 2016 methodology for reporting realized compensation, the CEO’s 2015 realized total com-
pensation is calculated as CHF 10 911 330 (with no dividend equivalents accrued, per the OLTPP rules), including
CHF 5 496 351 OLTPP payout for the performance-period 2013–2015.
Compensation RepoRt
Ceo and other executive Committee members’ 2014–2016 Long-term incentive plans vesting
Novartis Annual Report 2016 | 127
CEO and other Executive Committee
members’ 2014–2016 Long-Term Incentive
plans vesting
Overview
In this section, the tables reconcile the target values at
grant date with the total value of shares delivered to the
CEO and other Executive Committee members (includ-
ing dividend equivalents) following the vesting of the first
performance-period 2014–2016 for the LTPP and the
LTRPP respectively. Details of the LTPP and the LTRPP
can be found on pages 118–120.
We recognize the importance to our shareholders of
being able to easily reconcile the payout of our Long-
Term Incentive plans against the original amounts
granted. It allows an assessment of pay for performance
decisions by the Compensation Committee.
The Long-Term Incentive plans’ payout outcomes for
the other Executive Compensation members is deter-
mined using an approach closely aligned to the method-
ology used for the CEO described on page 126. For the
LTPP, the NCVA measure applies to the other Executive
Committee members as it does for the CEO. However,
the innovation measure is specific to the performance
of the respective division or unit. To determine the LTRPP
payout, the same principles apply as for the CEO.
Payout schedule for the LTPP performance-period 2014–20161
PSUs at grant
Shares delivered at vesting
PSUs
(target number)
PSUs
(target value
at grant date)
(CHF)2
Performance shares
Payout factor Performance shares delivered at vesting
equivalent shares delivered at vesting
for LTPP delivered at vesting (value at vesting date) delivered at vesting (value at vesting date)
(CHF)
(CHF)3
(number)4
(number)
(% of target)
Dividend
Dividend
Total shares
equivalent shares delivered at vesting
(value at
vesting date)
(CHF)
Joseph Jimenez (CEO)
55 878
4 121 003
112%
62 583
4 465 297
6 798
485 037
4 950 334
Other 7 members of the Executive
Committee who were active members
on December 31, 2016 5
75 962
5 602 506
107%–114%
84 539
6 030 352
9 080
647 739
6 678 091
subtotal
131 840
9 723 509
147 122
10 495 649
15 878
1 132 776
11 628 425
Other 3 members of the Executive
Committee members who stepped
down during 2016
72 699
5 366 905
106%–115%
81 651
5 799 375
9 150
649 864
6 449 239
total
204 539
15 090 414
228 773
16 295 024
25 028
1 782 640
18 077 664
1 For those who joined the Executive Committee in the course of the performance-period 2014-2016, the information disclosed reflects the pro-rata LTPP 2014-2016 payout
attributable to the period they were a member of the Executive Committee. Includes 3 039 target PSUs granted to Vasant Narasimhan under the OLTPP for the performance-period
2014-2016. The payout factor for the OLTPP 2014-2016 is 113% of target.
2 The shown amounts represent the underlying share value of the target number of PSUs granted to each Executive Committee member for the performance-period 2014-2016
based on the closing share price on the grant date (January 22, 2014) of CHF 73.75 per Novartis share and USD 80.79 per ADR.
3 The shown amounts represent the underlying share value of the target number of PSUs vested for the performance-period 2014-2016 based on the closing share price on the
vesting date (January 17, 2017) of CHF 71.35 per Novartis share and USD 71.99 per ADR.
4 Dividend equivalent shares are calculated on the dividend each member of the Executive Committee would have received based on the actual number of shares delivered at the end
of the performance-period 2014-2016. At vesting, the dividend equivalents are credited in shares or ADRs.
5 Excludes F. Michael Ball, James Bradner and Paul Hudson, who joined the Executive Committee in 2016 and have not participated in the LTPP for the performance-period
2014-2016
For the CEO and other Executive Committee members, including those who stepped down during the year, the
combined impact of the performance factor and share price movements over the performance-period to deter-
mine the value of performance shares delivered at vesting, compared to the target value at grant date, was CHF 1.2
million excluding dividend equivalents. Of that amount, the impact of the share price movement over the perfor-
mance-period was CHF –583 548.
128 | Novartis Annual Report 2016
Payout schedule for the LTRPP performance-period 2014–20161
PSUs at grant
Shares delivered at vesting
PSUs
(target number)
PSUs
(target value
at grant date)
(CHF)2
Payout factor Performance shares
for LTRPP delivered at vesting
(number)
(% of target)
equivalent shares delivered at vesting
vesting date) delivered at vesting (value at vesting date)
(CHF)
(number)4
(CHF)3
Performance shares
delivered at vesting
(value at
Dividend
Dividend
Total shares
equivalent shares delivered at vesting
(value at
vesting date)
(CHF)
Joseph Jimenez (CEO)
27 939
2 060 501
20%
5 588
398 704
607
43 309
442 013
Other 6 members of the Executive
Committee who were active members
on December 31, 2016 5
20 043
1 478 226
20%
subtotal
47 982
3 538 727
4 008
9 596
285 926
684 630
435
1 042
31 033
316 959
74 342
758 972
Other 3 members of the Executive
Committee members who stepped
down during 2016
30 042
2 218 214
20%
6 008
426 414
total
78 024
5 756 941
15 604
1 111 044
677
1 719
48 048
474 462
122 390
1 233 434
1 For those who joined the Executive Committee in the course of the performance-period 2014-2016, the information disclosed reflects the pro-rata LTRPP 2014-2016 payout
attributable to the period they were a member of the Executive Committee.
2 The shown amounts represent the underlying share value of the target number of PSUs granted to each Executive Committee member for the performance-period 2014-2016
based on the closing share price on the grant date (January 22, 2014) of CHF 73.75 per Novartis share and USD 80.79 per ADR.
3 The shown amounts represent the underlying share value of the target number of PSUs vested for the performance-period 2014-2016 based on the closing share price on the
vesting date (January 17, 2017) of CHF 71.35 per Novartis share and USD 71.99 per ADR.
4 Dividend equivalent shares are calculated on the dividend each member of the Executive Committee would have received based on the actual number of shares delivered at the end
of the performance-period 2014-2016. At vesting, the dividend equivalents are credited in shares or ADRs.
5 Excludes F. Michael Ball, James Bradner, Paul Hudson and Vasant Narasimhan, who joined the Executive Committee in 2016 and have not participated in the LTRPP for the
performance-period 2014-2016
For the CEO and other Executive Committee members, including those who stepped down during the year, the
combined impact of the performance factor and share price movements over the performance-period to deter-
mine the value of performance shares delivered at vesting, compared to the target value at grant date, was
CHF –4.6 million excluding dividend equivalents. Of that amount, the impact of the share price movement over the
performance-period was CHF –40 285.
Compensation RepoRt
Ceo and other executive Committee members’ compensation at grant value
Novartis Annual Report 2016 | 129
CEO and other Executive Committee
members’ compensation at grant value
In accordance with the Ordinance against Excessive
Compensation in Listed Companies in Switzerland we
continue to disclose, in this section, total compensation
at grant value for the CEO and other Executive Commit-
tee members.
In 2016, Novartis
implemented organizational
changes to pursue its growth and innovation strategy
with the following appointments to the Executive Com-
mittee:
— Effective February 1, 2016, F. Michael Ball was appointed
CEO of Alcon following the departure of Jeff George.
In line with the company’s priorities for 2016, Mr. Ball
received a one-off performance- based Long-Term
Incentive award linked to Alcon-specific growth tar-
gets over a three-year period to further incentivize
him to return the division to growth, accelerate inno-
vation and sales, strengthen customer relationships,
and improve basic operations.
— Also effective February 1, 2016, Dr. Vasant Narasim-
han was appointed Global Head of Drug Development
and Chief Medical Officer to lead our drive to improve
resource allocation and standards in drug develop-
ment across divisions and business units.
— On March 1, 2016, as previously announced in the 2015
Compensation Report, Dr. James Bradner became
President of NIBR when Dr. Mark Fishman retired.
Prior to joining Novartis, Dr. Bradner was on the fac-
ulty of Harvard Medical School in the Department of
Medical Oncology at the Dana-Farber Cancer Insti-
tute in the US. Dr. Bradner also advised and served on
the boards of several scientific companies he founded,
and served on the supervisory board of another com-
pany. As previously disclosed, in reaching the terms
of the offer for Dr. Bradner, the Board of Directors rec-
ognized the need to make up compensation that he
forfeited by joining Novartis.
— On July 1, 2016, Novartis created two separate busi-
ness units, Novartis Pharmaceuticals and Novartis
Oncology, which together form the Innovative Medi-
cines Division. As part of this reorganization, Bruno
Strigini was appointed CEO of Novartis Oncology, and
Paul Hudson was appointed CEO of Novartis Phar-
maceuticals. Prior to joining Novartis, Mr. Hudson
served as an executive at another company. In reach-
ing the terms of the offer for Mr. Hudson, the Board
of Directors recognized the need to make up com-
pensation that he forfeited by joining Novartis. With
these changes, David Epstein, former Division Head
of Novartis Pharmaceuticals, stepped down from the
Executive Committee on June 30, 2016. In accor-
dance with the terms of his retirement agreement as
well as his employment contract, Mr. Epstein will leave
the company in July 2017 after the expiry of his con-
tractual 12-month notice period.
The tables below disclose for the CEO and the other
Executive Compensation members the fixed compen-
sation (e.g., base compensation and pension benefits),
variable compensation (e.g., the cash portion of the 2016
Annual Incentive and the granted share based compen-
sation of the 2016 Annual Incentive, and the LTPP and
LTRPP for the performance-period 2016–2018), plus
other compensation. Other 2016 compensation includes
the full amount of compensation for lost entitlements
from former employers either paid in cash or granted in
equity in the year.
PSUs awarded under the Long-Term Incentive plans
are reported at target value on the respective grant dates
(i.e. assuming the PSUs will vest at 100% achievement
and excluding any dividend equivalents that may be
accrued during the performance-period). The actual pay-
out outcomes for the PSUs will be assessed after the
relevant performance-periods complete, with a payout
range of 0–200% of the target value.
130 | Novartis Annual Report 2016
CEO and other Executive Committee members’ compensation at grant value for financial year 2016
Fixed compensation and
pension benefits
Variable compensation
Actual compensation paid or granted for 2016
Long-Term Incentive
2016 grants at target
2016 base
compensation
2016 pension
benefits
2016 Annual Incentive
LTRPP
2016–2018 period 2016–2018 period
LTPP
Other 2016
compensation
Total
compensation
Currency
Cash
(amount)
1
Amount
Cash
(amount)
Equity
(value at
2
grant date)
PSUs
(target value
3
at grant date)
PSUs
(target value
3
at grant date)
Amount
4
5
Amount
executive Committee members active on December 31, 2016 6
Joseph Jimenez
(CEO)
CHF
CHF
2 093 417
721 667
160 283
147 442
1 417 500
554 730
1 417 510
554 746
4 200 031
1 050 048
2 625 079
350 042
75 628
139 159
11 989 448
3 517 834
USD
1 012 308
60 574
553 574
553 603
1 742 284
762 269
4 040 748
8 725 360
USD
CHF
CHF
CHF
CHF
888 462
915 833
786 667
475 000
1 025 000
58 859
148 122
188 738
108 818
141 510
579 393
202 400
520 000
579 448
809 680
520 070
1 687 473
1 564 033
1 280 062
794 195
552 002
480 033
1 155 169
14 852
1 116 054
5 742 999
4 206 922
4 891 624
288 945
736 450
288 968
736 475
0
1 751 009
0
824 018
3 090 313
51 361
4 252 044
5 265 823
CHF
764 993
157 348
537 531
537 551
1 093 245
364 468
102 868
3 558 004
Steven Baert
F. Michael Ball
(from February 1, 2016) 7
James Bradner
(from March 1, 2016) 8
Felix R. Ehrat
Richard Francis
Paul Hudson
(from July 1, 2016) 9
Harry Kirsch
Vasant Narasimhan
(from February 1, 2016)
Bruno Strigini
(from July 1, 2016)
CHF
CHF
CHF
445 000
830 834
9 931 091
André Wyss
subtotal 10
executive Committee members who stepped down during 2016 11
David Epstein
(until June 30, 2016) 12
699 767
USD
109 057
146 289
1 425 275
290 385
211 863
0
5 585 643
211 910
1 275 025
7 468 241
1 074 442
1 360 001
16 751 942
268 670
425 040
7 422 814
45 696
95 595
2 366 638
4 132 784
9 850 656 58 435 662
428 400
428 412
1 285 264
642 632
4 529 809
8 304 669
Mark C. Fishman
(until February 29, 2016) 13
Jeff George
(until January 31, 2016) 14
subtotal 10
total 10
USD
175 154
107 706
195 000
0
0
0
126 454
604 314
USD
CHF
CHF
80 000
940 809
10 871 900
18 558
410 492
1 835 767
44 000
657 537
6 243 180
43 986
465 417
7 933 658
0
1 266 270
18 018 212
0
633 135
8 055 949
2 996 905
7 540 067
17 390 723
3 183 449
11 913 726
70 349 389
See page 131 for 2015 compensation figures
1 Includes service costs of pension and post-retirement healthcare benefits accumulated in 2016, in accordance with IAS19. It also includes an amount of CHF 75 216 for mandatory employer contributions for all
Executive Committee members paid by Novartis to governmental social security systems. This amount is out of total employer contributions of CHF 3 263 989, and provides a right to the maximum future
insured government pension benefit for the Executive Committee member.
2 The portion of the Annual Incentive delivered in equity is rounded up to the nearest share based on the closing share price on the grant date (January 17, 2017) of CHF 71.35 per Novartis share and USD 71.99 per
ADR.
3 The shown amounts represent the underlying share value of the target number of PSUs granted to Executive Committee members for the performance-period 2016-2018 based on the closing share price on
the grant date (January 20, 2016) of CHF 79.70 per Novartis share and USD 80.49 per ADR. For F. Michael Ball, who joined Novartis on February 1, 2016, the target PSUs were granted on February 1, 2016, at the
closing share price of the same date (USD 77.27 per ADR).
4 Includes any other perquisites, benefits in kind, and international assignment benefits as per the global mobility policy (e.g., housing, international health insurance, children’s school fees, tax equalization). Tax
equalization benefits included for David Epstein, Richard Francis and Jeff George are USD 478 904, CHF 862 101 and USD 961 519, respectively.
5 All amounts are before deduction of the social security contribution and income tax due by the Executive Committee member.
6 For those members who joined the Executive Committee in 2016, 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, 2016. The information under “LTPP” and “LTRPP” reflects their pro-rata compensation at target for the period to December 31, 2018.
7 F. Michael Ball received 50 000 target PSUs, mainly subject to the achievement of Alcon’s sales and core operating income growth targets, as well as successful launches of new products and solving critical
supply issues. The total target value at grant date was USD 3.9 million. The 50 000 target PSUs are subject to performance conditions assessed annually in three tranches of 16 667, 16 667 and 16 666 for the
calendar years 2016, 2017 and 2018, respectively. The PSUs vest on February 1, 2019, provided the relevant performance conditions are met and he remains employed with Novartis on that date. Subject to the
extent to which the performance conditions are fulfilled, between 0% and 200% of the target PSUs may vest. The full value of the target PSUs is included under the column “Other 2016 compensation.”
8 James Bradner received 3 607 RSUs for lost entitlements in connection with his former supervisory board mandate, with a total value at grant date of USD 309 300. The vesting of the RSUs will be staggered
based on the original vesting period of the lost entitlements, in January 2018 and January 2020, provided that he remains employed with Novartis on the respective vesting dates. In addition, Dr. Bradner
received as compensation for lost entitlements at one of his former scientific companies a cash payment of USD 844 250. Both awards, made in 2016, are included in full under the column “Other 2016
compensation” and were previously disclosed in the 2015 Annual Report.
9 Paul Hudson received a cash payment of CHF 191 300 in July 2016. In addition, he received 2 992 RSUs and 31 510 target PSUs, with total target value at grant date of CHF 2.8 million. These amounts are for lost
entitlements at his former employer. The vesting of the RSUs will be staggered based on the original vesting period of the lost entitlements, between March 2017 and March 2019. The vesting of the target PSUs
will be subject to the achievement of performance conditions under the Novartis LTPP, and staggered based on the original vesting period of the lost entitlements, between March 2017 and December 2023.
Both awards will vest provided he remains employed with Novartis on the respective vesting dates. The full value of the cash payment and the awards is included under the column “Other 2016 compensation.”
10 Amounts in USD for Mr. Ball, Dr. Bradner, Mr. Epstein, Mark C. Fishman and Mr. George were converted at a rate of CHF 1.00 = USD 1.015, which is the same average exchange rate used in the Group’s 2016
consolidated financial statements.
11 For those members who left the Executive Committee in 2016, the information under the columns “Base compensation,” “Pension benefits,” “Annual Incentive,” “LTPP” and “LTRPP” reflects the pro-rata
compensation during 2016 for the period they were an Executive Committee member. The information under the column “Other 2016 compensation” includes, inter alia, their pro-rata compensation from the
date they stepped down from the Executive Committee to December 31, 2016.
12 Mr. Epstein stepped down from the Executive Committee on June 30, 2016. In accordance with the contractual notice period of his employment agreement, he will leave the company in July 2017. Until the end
of the notice period, he will receive further contractual compensation that includes the base salary, pension and other benefits, and the vesting of his incentive awards under the approved early retirement
conditions of the Novartis plan rules.
13 Dr. Fishman stepped down from the Executive Committee on February 29, 2016 and retired from Novartis. Until the retirement date, he received further contractual compensation that included base salary,
pension and other benefits, and the vesting of his incentive awards in accordance with the terms of the Novartis plan rules. As of March 1, 2016, Dr. Fishman provided certain consulting services to Novartis for
which he is 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 for other scientists who provide
consultancy services to the NIBR organization. In 2016, no payments were made in relation to such services.
14 Mr. George stepped down from the Executive Committee on January 31, 2016. In accordance with the contractual notice period of his employment agreement, he will leave the company in January 2017. Until the
end of the notice period, he will receive further contractual compensation that includes the base salary, pension and other benefits, and the vesting of his incentive awards in accordance with the terms of the
Novartis plan rules. Mr. George was not granted LTPP and LTRPP awards for the performance-period 2016-2018. In accordance with the applicable plan rules, the LTPP and LTRPP awards for the
performance-period 2015-2017 will be eligible to vest on the normal vesting date pro-rata based on the number of months of Novartis employment during the performance-period. The vesting of these awards is
subject to performance conditions assessed at the end of the period.
Compensation RepoRt
Ceo and other executive Committee members’ compensation at grant value
Novartis Annual Report 2016 | 131
CEO and other Executive Committee members’ compensation at grant value for financial year 20151
(comparative information)
Fixed compensation and
pension benefits
Variable compensation
Actual compensation paid or granted for 2015
Long-Term Incentive
2015 grants at target
2015 base
compensation
2015 pension
benefits
2015 Annual Incentive
LTRPP
2015–2017 period 2015–2017 period
LTPP
Other 2015
compensation
Total
compensation
Currency
Cash
(amount)
Amount
2
Cash
(amount)
Equity
(value at
3
grant date)
PSUs
(target value
4
at grant date)
PSUs
(target value
4
at grant date)
Amount
5
6
Amount
executive Committee members active on December 31, 2015
Joseph Jimenez
(CEO)
Steven Baert
Felix R. Ehrat
David Epstein
Mark C. Fishman 7
Richard Francis
Jeff George
Harry Kirsch
André Wyss
subtotal 8
CHF
CHF
CHF
USD
USD
CHF
USD
CHF
CHF
CHF
2 060 500
175 289
1 545 375
1 545 383
4 121 054
2 060 527
88 432
11 596 560
653 333
892 500
158 099
153 054
543 900
648 875
543 953
960 048
648 917
1 521 517
256 030
447 565
94 716
3 210 079
12 669
4 325 097
1 400 000
362 819
1 428 000
1 428 054
2 520 001
1 260 050
569 737
8 968 661
990 000
716 667
248 910
193 635
956 539
200 946
950 000
735 000
160 431
127 237
861 300
599 400
158 400
757 625
861 323
1 881 089
599 424
1 080 054
891 021
360 018
129 825
5 863 468
954 170
4 503 368
158 404
1 536 056
576 009
1 260 286
4 846 640
757 628
1 480 074
647 575
51 476
4 804 809
0
1 176 053
1 102 513
294 083
83 688
3 518 574
9 225 826
1 749 163
6 448 733
7 624 994
15 974 055
6 687 990
3 169 620
50 880 381
executive Committee members who stepped down during 2015
Brian McNamara
(until March 1, 2015) 9
Andrin Oswald
(until March 1, 2015) 9
subtotal 8
total 8
USD
131 154
69 008
115 100
138 333
27 634
136 500
264 443
93 988
247 173
CHF
CHF
CHF
0
0
0
58 361
11 751
40 670
426 044
64 580
13 899
283 236
664 182
120 696
25 198
322 342
1 073 840
9 490 269
1 843 151
6 695 906
7 624 994
16 094 751
6 713 188
3 491 962
51 954 221
As published in the 2015 Compensation Report, with the exception of the tabular format
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 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 shown amounts 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 social security contribution and income tax due by the Executive Committee member.
7 Mark C. Fishman, President of 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, Dr. 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 Amounts in USD for Mr. Epstein, Dr. Fishman, Mr. George and Mr. 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 2015 consolidated
financial statements.
9 Brian McNamara (Division Head of Novartis OTC) and Andrin Oswald (Division Head of 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 the performance-period 2015-2017 (as well as for those granted for the performance-period 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 performance-period.
132 | Novartis Annual Report 2016
Number of equity instruments awarded at grant value to the CEO and other Executive Committee members for
financial year 20161
The table below provides the number of equity instruments awarded to the CEO and other Executive Committee
members for financial year 2016, and the awards for 2015 are on the next page for comparison purposes.
executive Committee members active on December 31, 2016
Joseph Jimenez (CEO)
Steven Baert
F. Michael Ball (from February 1, 2016)
James Bradner (from March 1, 2016)
Felix R. Ehrat
Richard Francis
Paul Hudson (from July 1, 2016) 4
Harry Kirsch
Vasant Narasimhan (from February 1, 2016)
Bruno Strigini (from July 1, 2016)
André Wyss
subtotal
executive Committee members who stepped down during 2016
David Epstein (until June 30, 2016)
Mark C. Fishman (until February 29, 2016) 4
Jeff George (until January 31, 2016) 4
subtotal
total
Variable compensation
2016 Annual
Incentive
LTPP
2016–2018 period
LTRPP
2016–2018 period
Other
Equity
(number) 2
PSUs
(target number) 3
PSUs
(target number) 3
Equity/PSUs
(number)
19 867
7 775
7 690
8 049
11 348
7 289
4 050
10 322
7 534
2 970
17 870
104 764
5 951
0
611
6 562
111 326
52 698
13 175
22 548
20 965
19 624
16 061
0
21 970
13 717
13 549
17 064
211 371
32 937
4 392
9 865
9 867
6 926
6 023
0
10 339
4 573
3 388
5 333
93 643
15 968
7 984
0
0
15 968
227 339
0
0
7 984
101 627
0
0
50 000
3 607
0
0
34 502
0
0
0
0
88 109
29 902
0
6 724
36 626
124 735
See next page for 2015 compensation figures
1 The values of the awards are reported in the table “CEO and other Executive Committee member’s compensation at grant value for financial year 2016” on page 130.
2 Vested shares, restricted shares and/or RSUs granted under the Annual Incentive for performance-period 2016
3 Target number of PSUs granted under the LTPP and LTRPP as applicable for the performance-period 2016-2018
4 Paul Hudson, Mark C. Fishman and Jeff George were not granted LTPP and LTRPP awards for the performance-period 2016-2018.
Compensation RepoRt
Ceo and other executive Committee members’ compensation at grant value
Novartis Annual Report 2016 | 133
Number of equity instruments awarded at grant value to the CEO and other Executive Committee members for
financial year 20151 (comparative information)
executive Committee members active on December 31, 2015
Joseph Jimenez (CEO)
Steven Baert
Felix R. Ehrat
David Epstein
Mark C. Fishman
Richard Francis
Jeff George
Harry Kirsch
André Wyss
subtotal
executive Committee members who stepped down during 2015
Brian McNamara (until March 1, 2015) 4
Andrin Oswald (until March 1, 2015) 4
subtotal
total
Variable compensation
2015 Annual
Incentive
LTPP
2015–2017 period
LTRPP
2015–2017 period
Equity
(number) 2
PSUs
(target number) 3
PSUs
(target number) 3
19 390
6 825
8 142
17 742
10 701
7 521
1 968
9 506
14 756
96 551
0
0
0
48 626
11 328
17 953
25 519
19 049
12 744
15 555
17 464
13 009
24 313
3 021
5 281
12 760
9 023
4 248
5 833
7 641
3 470
181 247
75 590
591
762
1 353
119
164
283
96 551
182 600
75 873
As published in the 2015 Compensation Report, with the exception of the tabular format
1 The values of the awards included in this table are reported in the table “CEO and other Executive Committee members’ compensation at grant value for financial year 2015.”
2 Vested shares, restricted shares and/or RSUs granted under the Annual Incentive for performance-period 2015
3 Target number of PSUs granted under the LTPP and LTRPP as applicable for the performance-period 2015-2017
4 Target number of PSUs granted under the LTPP and LTRPP is reported on a pro-rata basis. See footnote 9 of the table “CEO and other Executive Committee members’
compensation at grant value for financial year 2015.”
CEO and other Executive Committee members’
base compensation and variable compensation mix
for financial year 20161
Base
Variable
compensation compensation 2
Joseph Jimenez (CEO)
Steven Baert
F. Michael Ball
James Bradner
Felix R. Ehrat
Richard Francis
Paul Hudson
Harry Kirsch
Vasant Narasimhan
Bruno Strigini
André Wyss
total
17.8%
22.3%
21.9%
19.6%
22.6%
21.9%
45.1%
20.2%
23.2%
20.1%
21.4%
21.1%
82.2%
77.7%
78.1%
80.4%
77.4%
78.1%
54.9%
79.8%
76.8%
79.9%
78.6%
78.9%
1 Excludes pension and other benefits. Also excludes David Epstein, Mark C. Fishman
and Jeff George, who stepped down from the Executive Committee during 2016
2 See the table “CEO and other Executive Committee members’ compensation at
grant value for financial year 2016” on page 130 with regard to the disclosure
principles of variable compensation.
134 | Novartis Annual Report 2016
Additional information
This part provides additional disclosures, including information about the shareholdings of the CEO and the other
Executive Committee members, collectively referred to in this section as Executive Committee members.
Share ownership requirements for Executive
Committee members
Executive Committee members are required to own at
least a minimum multiple of their annual base compen-
sation in Novartis shares, RSUs or share options within
five years of hire or promotion, as set out in the table
below.
In the event of a substantial rise or drop in the share
price, the Board of Directors may, at its discretion, amend
that time period accordingly.
Function
CEO
ownership level
5 x base compensation
Other Executive Committee members
3 x base compensation
The determination of equity amounts against the share
ownership requirements is defined to include vested and
unvested Novartis shares or ADRs, as well as RSUs
acquired under our compensation plans. However,
unvested matching shares granted under the Leveraged
Share Savings Plan (LSSP), the Employee Share Own-
ership Plan (ESOP), and any unvested PSUs are excluded.
The determination also includes other shares as well as
vested options of Novartis shares or ADRs that are
owned directly or indirectly by “persons closely linked”
to an Executive Committee member. The Compensation
Committee reviews compliance with the share owner-
ship guideline on an annual basis.
As at December 31, 2016, all members who have
served at least five years on the Executive Committee
have met or exceeded their personal Novartis share own-
ership requirements.
Shares, ADRs, equity rights and share options
owned by Executive Committee members
The following table shows the total number of shares,
ADRs, and other equity rights owned by Executive Com-
mittee members and “persons closely linked” to them as
at December 31, 2016.
As at December 31, 2016, no members of the Exec-
utive Committee together with “persons closely linked”
to them owned 1% or more of the outstanding shares (or
ADRs) of Novartis. As at the same date, no members of
the Executive Committee held any share options to pur-
chase Novartis shares, with the exception of André Wyss
who held 373 000.
Shares, ADRs and other equity rights owned by Executive Committee members1
Joseph Jimenez (CEO)
Steven Baert
F. Michael Ball
James Bradner
Felix R. Ehrat
Richard Francis
Paul Hudson
Harry Kirsch
Vas Narasimhan
Bruno Strigini
André Wyss
total 3
Vested shares
Unvested shares
and ADRs and other equity rights 2
total at
December 31, 2016
347 278
11 111
0
0
137 290
22 424
0
47 437
7 271
4 310
61 475
273 930
50 827
49 081
14 479
122 196
49 550
24 027
108 686
79 703
92 383
92 875
621 208
61 938
49 081
14 479
259 486
71 974
24 027
156 123
86 974
96 693
154 350
638 596
957 737
1 596 333
1 Includes holdings of “persons closely linked” to Executive Committee members (see definition on page 135)
2 Includes restricted shares, RSUs and target number of PSUs. Matching shares under the ESOP and 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 David Epstein, Mark C. Fishman and Jeff George stepped down from the Executive Committee in 2016. At the time they stepped down from the Executive Committee, Mr. Epstein
owned 116 027 vested shares, and 250 225 unvested shares and other equity rights; Dr. Fishman owned 117 792 vested shares, and 83 311 unvested shares and other equity rights;
and Mr. George owned 144 368 vested shares, 141 396 vested share options, and 74 189 unvested shares and other equity rights.
Compensation RepoRt
Ceo and other executive Committee members’ compensation at grant value
Novartis Annual Report 2016 | 135
Other payments to Executive Committee members
During 2016, no other payments or waivers of claims
other than those set out in the tables (including their foot-
notes) contained in this Compensation Report were
made to Executive Committee members or to “persons
closely linked” to them.
Payments to former Executive Committee members
Under the former Executive Committee members’ con-
tracts and in line with the company’s Long-Term Incen-
tive plan rules, payments were made to five former mem-
bers of the Executive Committee totaling CHF 5 243 670.
The payments related to the vesting of Long-Term Incen-
tives for the 2014–2016 performance-period based on
actual performance outcomes plus any dividend equiv-
alents. In addition, in line with the company’s policies, a
total amount of CHF 87 780 was paid by the company
for tax, financial services and tax equalization provided
to two former Executive Committee members. With the
exception of the above amounts, during 2016, no other
payments (or waivers of claims) were made to former
Executive Committee members or to “persons closely
linked” to them.
Loans to Executive Committee members
No loans were granted to current or former Executive
Committee members or to “persons closely linked” to
them in 2016. In addition, no such loans were outstand-
ing as of December 31, 2016.
Persons closely linked
“Persons closely linked” are (i) their spouse, (ii) their chil-
dren 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.
Note 27 to the Group’s audited consolidated
financial statements
The total expense for the year for the compensation
awarded to Executive Committee and Board members
using International Financial Reporting Standards (IFRS)
measurement rules is presented in the Financial Report
in Note 27 on page 233 to the Group’s audited consoli-
dated financial statements.
Award and delivery of equity to Novartis associates
During 2016, 13.1 million unvested restricted shares (or
ADRs), RSUs and target PSUs were granted, and 10.4
million Novartis vested shares (or ADRs) were delivered
to Novartis associates under various equity-based par-
ticipation plans. Current unvested equity instruments
(restricted shares, RSUs and target PSUs) – as well as
outstanding equity options held by associates – repre-
sent 2.2% of issued shares. Novartis delivers treasury
shares to associates to fulfill these obligations, and aims
to offset the dilutive impact from its equity-based partic-
ipation plans.
136 | Novartis Annual Report 2016
2017 Executive Committee
compensation system
In accordance with the above global healthcare peer
group, a new LTRPP payout matrix for performance-pe-
riods 2017–2019 has been developed, which can be
found below.
LTRPP payout matrix for performance-period
2017–2019
position in peer group
Positions 1–4
Positions 5–8
Positions 9–12
Positions 13–16
payout range
160–200%
100–150%
20–80%
0%
The Compensation Committee has evaluated the Exec-
utive Committee compensation system and has decided
that it will remain largely unchanged in 2017, with the
exception of the revised LTRPP payout matrix to reflect
the new global healthcare peer group effective from per-
formance-periods starting in 2017, as described below.
The Compensation Committee believes that the compen-
sation system is operating as intended, supports the com-
pany’s strategy, and is aligned with market and best prac-
tices.
Global healthcare peer group for 2017
With effect from performance-periods starting in 2017,
our global healthcare peer group will consist of 15 global
pharmaceutical and biotechnology companies, factoring
the following changes:
— Removed Abbott Laboratories, as this company’s
core business is primarily in medical devices and
nutrition
— Added Celgene, Biogen, Gilead and Novo Nordisk,
reflecting the evolution of the healthcare industry and
the emergence of large and global biotechnology
companies with which we directly compete for exec-
utive talent
Global healthcare peer group for 2017
AbbVie
Amgen
AstraZeneca
Biogen
Bristol-Myers Squibb
Celgene
Eli Lilly & Co.
Gilead Sciences
GlaxoSmithKline
Johnson & Johnson
Merck & Co.
Novo Nordisk
Pfizer
Roche
Sanofi
Compensation RepoRt
2016 Board compensation system
Novartis Annual Report 2016 | 137
2016 Board compensation system
Board compensation philosophy and
benchmarking
The Board of Directors sets compensation for its mem-
bers at a level that allows for the attraction and retention
of high-caliber individuals with global experience, includ-
ing a mix of Swiss and international members. Board
members do not receive variable compensation, under-
scoring their focus on corporate strategy, supervision
and governance.
The Board of Directors sets the level of compensa-
tion for its Chairman and the other members to be in line
with relevant benchmark companies, which include other
large Swiss-headquartered multinational companies:
ABB, Credit Suisse, LafargeHolcim, Nestlé, Roche, Syn-
genta and UBS. This peer group has been chosen for
Board compensation due to the comparability of Swiss
legal requirements, including broad personal and indi-
vidual liabilities under Swiss law (and new criminal liabil-
ity under the Swiss rules regarding compensation of
Board and Executive Committee members related to the
Ordinance against Excessive Compensation in 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 proposal by the Compensation Committee and on
advice from its independent advisor, including relevant
benchmarking information.
Compensation of the Chairman of the
Board of Directors
As Chairman, Dr. Joerg Reinhardt receives total annual
compensation valued at CHF 3.8 million. The total com-
pensation 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
Dr. Reinhardt also received compensation for lost enti-
tlements at his former employer, with a total value of
EUR 2.6 million, as reported in previous Compensation
Reports. Payments were staggered based on the vesting
period at his former employer during the period
2014–2016, provided that he remained in office as
Chairman at the respective due dates. On January 31,
2016, he received the final installment of EUR 1 045 800
in cash.
For 2016, the Chairman voluntarily waived the
increase in compensation to which he is contractually
entitled, which is an amount not lower than the average
annual compensation increase awarded to associates
based in Switzerland (1% for 2016). For the year 2017,
the Chairman will also voluntarily waive this increase.
Compensation of the other Board members
The annual fee rates for Board membership and addi-
tional functions are included in the table below. These
were approved by the Board of Directors with effect from
the 2014 AGM, and align our aggregate Board compen-
sation with the current levels of other large Swiss com-
panies.
2016 Board member annual fee rates
Chairman of the Board
Board membership
Vice Chairman
Chairman of the Audit and Compliance Committee
Chairman of the following committees:
— Compensation Committee
— Governance, Nomination and
Corporate Responsibilities Committee
— Research & Development Committee
— Risk Committee
Membership of the Audit and Compliance Committee
Membership of the following committees:
— Compensation Committee
— Governance, Nomination and
Corporate Responsibilities Committee
— Research & Development Committee
— Risk Committee
Annual fee (CHF)
3 800 000
300 000
50 000
120 000
60 000
60 000
30 000
In addition, the following policies apply regarding Board
compensation:
— 50% of compensation is delivered in cash, paid on a
quarterly basis in arrears. Board members may
choose to receive more of their compensation in
shares instead of cash.
— At least 50% of compensation is delivered in shares
in two installments: one six months after the AGM and
one 12 months after the AGM.
— Board members bear the full cost of their employee
social security contributions, if any, and do not receive
share options or pension benefits.
The Board compensation system will remain unchanged
in 2017.
138 | Novartis Annual Report 2016
2016 Board compensation
Board member compensation tables
The following tables disclose the 2016 Board member compensation and prior-year comparative information.
Board compensation is reported as the amount earned in the financial year.
Board member compensation earned for financial year 2016
Governance,
Nomination
Audit and
and Corporate Research &
Compliance Compensation Responsibilities Development
Committee Committee
Committee
Committee Committee
Risk
Shares
1
(number)
Cash
(CHF)
(A)
Shares
(CHF)
(B)
Other
(CHF)
2
(C)
Total
(CHF)
3
(A)+(B)+(C)
Board
Vice
membership Chairman
Board members active on December 31, 2016
Joerg Reinhardt 4
Chair
Enrico Vanni
Nancy Andrews
Dimitri Azar
Ton Buechner
(from February 24, 2016)
Srikant Datar
Elizabeth Doherty
(from February 24, 2016)
Ann Fudge
Pierre Landolt 7
Andreas von Planta
Charles L. Sawyers
William T. Winters
subtotal
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Chair
•
•
Board members who stepped down at the 2016 aGm
Verena A. Briner
(until February 23, 2016)
•
subtotal
total
Chair
• 5
Chair
25 020 1 900 000 1 900 000 4 336 3 804 336
• 6
•
•
3 291
250 000
250 000 4 336
504 336
• 5
2 265
177 500
177 500
2 567
195 000
195 000
–
–
355 000
390 000
•
•
•
•
•
1 864
–
250 000
–
250 000
3 159
240 000
240 000
– 480 000
1 118
150 000
150 000
– 300 000
2 567
195 000
195 000
–
390 000
4 553
–
335 000 3 475
338 475
•
• 8
Chair 5
Chair
3 055
237 500
237 500 4 336
479 336
•
•
2 369
180 000
180 000
4 344
–
330 000
–
–
360 000
330 000
56 172 3 525 000 4 440 000 16 483 7 981 483
•
1 147
27 500
27 500
579
55 579
1 147
27 500
27 500
579
55 579
57 319 3 552 500 4 467 500 17 062 8 037 062
See next page for 2015 compensation figures
1 The shown amounts represent the gross number of shares delivered to each Board member in 2016 for the respective Board member’s service period. The number of shares
reported in this column represent: (i) the second and final equity installment delivered in February 2016 for the services from the 2015 AGM to the 2016 AGM, and (ii) the first of two
equity installments delivered in August 2016 for the services from the 2016 AGM to the 2017 AGM. The second and final equity installment for the services from the 2016 AGM to the
2017 AGM will take place in February 2017.
2 Includes an amount of CHF 17 062 for mandatory employer contributions for all Board members paid by Novartis to Swiss governmental social security systems. This amount is out of
total employer contributions of CHF 387 308, and provides a right to the maximum future insured government pension benefit for the Board member.
3 All amounts are before deduction of the social security contribution and income tax due by the Board member.
4 Does not include EUR 1 045 800 paid to Joerg Reinhardt on January 31, 2016 for lost entitlements at his former employer. This amount is the third and final of three installments
totaling EUR 2 665 051, which compensates him for lost entitlements at his former employer. The lost entitlements of EUR 2 665 051 were included in full on page 124 of the 2014
Compensation Report. No additional committee fees for chairing the Research & Development Committee were delivered to Dr. Reinhardt.
5 From February 24, 2016
6 Until February 23, 2016
7 According to Pierre Landolt, the Sandoz Family Foundation is the economic beneficiary of the compensation.
8 Until February 23, 2016, Chair of the Governance, Nomination and Corporate Responsibilities Committee
Compensation RepoRt
2016 Board compensation
Novartis Annual Report 2016 | 139
Board member compensation earned for financial year 20151 (comparative information)
Governance,
Nomination
Audit and
and Corporate Research &
Compliance Compensation Responsibilities Development
Committee Committee
Committee
Committee Committee
Risk
Shares
2
(number)
Cash
(CHF)
(A)
Shares
(CHF)
(B)
Other
(CHF)
3
(C)
Total
(CHF)
4
(A)+(B)+(C)
Board
Vice
membership Chairman
Board members active on December 31, 2015
Joerg Reinhardt 5
Chair
Enrico Vanni
Nancy Andrews
(from February 27, 2015)
Dimitri Azar
Verena A. Briner
Srikant Datar
Ann Fudge
Pierre Landolt 6
Andreas von Planta
Charles L. Sawyers
William T. Winters
subtotal
•
•
•
•
•
•
•
•
•
•
•
•
•
Chair
•
Chair
•
•
• 7
•
Chair
•
• 7
Board members who stepped down at the 2015 aGm
Chair
19 397 1 900 000 1 900 000 29 197 3 829 197
•
•
•
•
2 552
250 000
250 000 4 357
504 357
812
137 500
137 500
2 712
172 250
217 750
–
–
275 000
390 000
1 684
165 000
165 000 4 357
334 357
2 450
240 000
240 000
– 480 000
1 990
195 000
195 000
–
390 000
3 674
–
360 000 3 492
363 492
•
•
•
Chair
2 296
225 000
225 000 4 357
454 357
1 757
177 500
177 500
3 210
–
325 000
–
–
355 000
325 000
42 534 3 462 250 4 192 750 45 760 7 700 760
Ulrich Lehner
(until February 26, 2015)
subtotal
total
•
•
•
•
•
1 242
39 167
39 167
582
78 916
1 242
39 167
39 167
582
78 916
43 776 3 501 417 4 231 917 46 342 7 779 676
As published in the 2015 Compensation Report, with the exception of the tabular format
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 The shown amounts represent the gross number of shares delivered to each Board member in 2015 for the respective Board member’s service period. The number of shares
reported in this column represent: (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 installments 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 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 the deduction of the 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 totaling EUR
2 665 051, which compensates him for lost entitlements at his previous employer that were 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 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
Reconciliation between the reported Board compensation and the amount approved by shareholders
at the AGM
Compensation
Compensation earned for the period
earned for the from January 1 to the
respective AGM (2 months) of
the financial year
(B)
financial year
(A) 1
Compensation
to be earned for
the period from
January 1 to the
AGM (2 months) in
the year following
the financial year
(C)
Total
compensation
Amount within the
earned from Amount approved by amount approved by
shareholders at the
AGM to AGM
respective AGM
(A)-(B)+(C)
shareholders at the
respective AGM
January 1, 2016
to 2016 aGm
January 1, 2017
to 2017 aGm 2
2016 aGm
to 2017 aGm
2016 aGm
2016 aGm
633 334
653 334
633 334
3 804 336
3 805 000
713 334
4 292 726
4 355 000
(CHF)
Joerg Reinhardt
Other Board members
2016
3 804 336
4 232 726
total
8 037 062
1 286 668
1 346 668
8 097 062
8 160 000
Joerg Reinhardt
Other Board members
2015
3 829 197
3 950 479
January 1, 2015
to 2015 AGM
January 1, 2016
to 2016 AGM
2015 AGM
to 2016 AGM
2015 AGM
2015 AGM
658 174
667 250
633 334
653 334
3 804 357
3 805 000
3 936 563
3 940 000
total
7 779 676
1 325 424
1 286 668
7 740 920
7 745 000
1 See previous page for 2016 Board member compensation.
2 To be confirmed and reported in the 2017 Compensation Report
Yes
Yes
Yes
Yes
Yes
Yes
140 | Novartis Annual Report 2016
Loans to Board members
No loans were granted to current or former members of
the Board of Directors or to “persons closely linked” to
them during 2016. In addition, no such loans were out-
standing as of December 31, 2016.
Other payments to Board members
During 2016, no payments (or waivers of claims) other
than those set out in the Board member compensation
table (including its footnotes) on page 138 were made to
current members of the Board of Directors or to “per-
sons closely linked” to them.
Shares, ADRs and share options owned by
Board members
The total number of vested Novartis shares and ADRs
owned by members of the Board of Directors and “per-
sons closely linked” to them as of December 31, 2016 is
shown in the table below.
As of December 31, 2016, no members of the Board
of Directors together with “persons closely linked” to
them owned 1% or more of the outstanding shares (or
ADRs) of Novartis. As of the same date, no members of
the Board of Directors held any share options to purchase
Novartis shares.
Shares and ADRs owned by Board members1
Joerg Reinhardt
Enrico Vanni
Nancy Andrews
Dimitri Azar
Ton Buechner
Srikant Datar
Elizabeth Doherty
Ann Fudge
Pierre Landolt 3
Andreas von Planta
Charles L. Sawyers
William T. Winters
total 4
Number of shares 2
at
December 31,
2016
497 762
17 853
2 308
11 217
1 398
34 998
839
17 530
58 061
127 740
6 029
9 257
784 992
1 Includes holdings of “persons closely linked” to Board members (see definition on
page 135)
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 Verena A. Briner stepped down from the Board of Directors on February 23, 2016.
On February 23, 2016, Dr. Briner owned 7 507 shares.
Payments to former Board members
During 2016, no payments (or waivers of claims) were
made to former Board members or to “persons closely
linked” to them, except for the following amounts:
— Dr. William R. Brody and Dr. Rolf M. Zinkernagel, who
stepped down from the Board of Directors at the 2014
AGM, received delegated Board membership fees for
their work on the Boards of the Novartis Institute for
Tropical Diseases (Dr. Zinkernagel) and the Genom-
ics Institute of the Novartis Research Foundation (Dr.
Brody and Dr. Zinkernagel). During 2016, an amount
of CHF 25 000 and CHF 50 000 was paid to Dr. Brody
and Dr. Zinkernagel, respectively, for their work on
these Boards. No further payments related to these
Board memberships will be made to Dr. Brody and Dr.
Zinkernagel, as their respective mandates have
ended.
— The payments reported in Note 27 to the Group’s
audited consolidated financial statements (page 233)
Share ownership requirements for Board members
The Chairman is required to own a minimum of 30 000
Novartis 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 Direc-
tors, to ensure their interests are aligned with sharehold-
ers’. 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 at Decem-
ber 31, 2016, all members of the Board of Directors who
have served at least three years on the Board, as well as
former members who stepped down from the Board at
the 2016 AGM, have complied with the share ownership
requirements.
Compensation RepoRt
Compensation governance
Novartis Annual Report 2016 | 141
Compensation governance
Legal framework
Committee member independence
The Swiss Code of Obligations and the Corporate Gov-
ernance Guidelines of the SIX Swiss Exchange require
listed companies to disclose certain information about
the compensation of Board and Executive Committee
members, their equity participation in the Group, and
loans made to them. This Annual Report fulfills that
requirement. In addition, the Annual Report is in line with
the principles of the Swiss Code of Best Practice for
Corporate Governance of the Swiss Business Federa-
tion (economiesuisse).
Compensation decision-making authorities
Authority for decisions related to compensation is gov-
erned by the Articles of Incorporation, Board regulations
and the Compensation Committee Charter, which are all
published on the company website: www.novartis.com/
corporate-governance.
The Compensation Committee serves as the super-
visory and governing body for compensation policies and
plans within Novartis, and has overall responsibility for
determining, reviewing and proposing compensation pol-
icies and plans for approval by the Board of Directors in
line with the Compensation Committee Charter. A sum-
mary of discussions and conclusions of each committee
meeting is delivered to the full Board of Directors. A sum-
mary of the compensation decision-making authorities
is set out below.
Compensation authorization levels within
the parameters set by the shareholders’ meeting
Decision on
Decision making authority
Compensation of Chairman and
other Board members
Board of Directors
Compensation of CEO
Board of Directors
Compensation of other Executive Compensation Committee
Committee members
The Compensation Committee is composed exclusively
of members of the Board of Directors who meet the inde-
pendence criteria set forth in the Board regulations. From
the 2016 AGM, the Compensation Committee had the
following four members: Ann Fudge, Srikant Datar, Enrico
Vanni and William Winters. Mr. Vanni has served as mem-
ber since 2011 and as Chair since 2012.
Role of the Compensation Committee’s
independent advisor
The Compensation Committee retained Frederic W.
Cook & Co. Inc. as its independent external compensa-
tion advisor for 2016. The advisor was hired directly by
the Compensation Committee in 2011, and the Compen-
sation Committee has been fully satisfied with the per-
formance and independence of the advisor since its
engagement. Frederic W. Cook & Co. Inc. is independent
of management and does not perform any other consult-
ing work for Novartis. In determining whether or not to
renew the engagement with the advisor, the Compensa-
tion Committee evaluates, at least annually, the quality
of the consulting service, the independence of the advi-
sor, and the benefits of rotating advisors.
Compensation Committee meetings held
in 2016
In 2016, the Compensation Committee held six formal
meetings, and two additional joint meetings with the
Research & Development Committee to review and
endorse for approval by the Board of Directors the inno-
vation targets and achievements of our LTPP. It also held
one additional joint meeting with the Risk Committee to
review risk within the compensation systems for execu-
tives and other associates, including the sales force. The
Compensation Committee conducted a performance
self-evaluation and a review of its charter in 2016, as it
does every year.
142 | Novartis Annual Report 2016
Compensation governance and
risk management
The Compensation Committee, with support from its
independent advisor, reviews market trends in compen-
sation and changes in corporate governance rules.
Together with the Risk Committee, it also reviews the
Novartis compensation systems to ensure that they do
not encourage inappropriate or excessive risk taking,
and instead encourage behaviors that support sustain-
able value creation.
A summary of the risk management principles is out-
lined 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
Executive Committee employment contracts provide for
a notice period of up to 12 months and contain no change-
of-control clauses or severance provisions (e.g., agree-
ments concerning special notice periods, longer-term
contracts, “golden parachutes,” waiver of lock-up peri-
ods for equities and bonds, shorter vesting periods, and
additional contributions to occupational pension
schemes).
Malus and clawback
Any incentive compensation paid to Executive Commit-
tee members is subject to malus and clawback rules.
This means that the Board of Directors for the CEO, or
the Compensation Committee for the other Executive
Committee members, may decide – subject to applica-
ble law – to not pay any unpaid or unvested incentive
compensation (malus), or to seek to recover incentive
compensation that has been paid in the past (clawback),
where the payout has been proven to conflict with inter-
nal management standards, including company and
accounting policies, or violate laws. This principle applies
to both the short-term Annual Incentive and the Long-
Term Incentive plans. In 2016, the Compensation Com-
mittee did not exercise malus or clawback for current or
former Executive Committee members.
Compensation RepoRt
Report of the statutory auditor on the Compensation Report of novartis aG
Novartis Annual Report 2016 | 143
Report of the statutory auditor
on the Compensation Report of Novartis AG
To the General Meeting of Novartis AG, Basel
We have audited the 2016 CEO target compensation on
page 123, the 2016 CEO realized compensation on page
124, the outcome of the LTRPP performance-period
2014–2016, 2016 CEO realized total compensation table
and 2015 CEO realized compensation on page 126, the
CEO and other Executive Committee members’ 2014–
2016 Long Term Incentive plans vesting on pages 127–
128, the CEO and other Executive Committee members’
compensation at grant value on pages 129–135 and the
2016 Board Compensation on pages 138–140 of the
accompanying Compensation Report of Novartis AG for
the year ended December 31, 2016.
Board of Directors’ responsibility
The Board of Directors is responsible for the prepara-
tion and overall fair presentation of the Compensation
Report in accordance with Swiss law and the Ordinance
against Excessive Compensation in Listed Companies
(Ordinance). The Board of Directors is also responsible
for designing the compensation system and defining indi-
vidual compensation packages.
Auditor’s responsibility
Our responsibility is to express an opinion on the accom-
panying Compensation Report. We conducted our audit
in accordance with Swiss Auditing Standards. These
standards require that we comply with ethical require-
ments, and plan and perform the audit to obtain reason-
able assurance about whether the Compensation Report
complies with Swiss law and articles 14–16 of the Ordi-
nance.
Report with regard to compensation, loans and credits
in accordance with articles 14–16 of the Ordinance. The
procedures selected depend on the auditor’s judgment,
including the assessment of the risks of material mis-
statements in the Compensation Report, whether due to
fraud or error. This audit also includes evaluating the rea-
sonableness of the methods applied to value compo-
nents of compensation, as well as assessing the overall
presentation of the Compensation Report. We believe
that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our opinion.
Opinion
In our opinion, the Compensation Report of Novartis AG
for the year ended December 31, 2016 complies with
Swiss law and articles 14–16 of the Ordinance.
PricewaterhouseCoopers AG
Bruno Rossi
Audit expert
Auditor in charge
stephen Johnson
Global relationship
partner
An audit involves performing procedures to obtain audit
evidence on the disclosures made in the Compensation
Basel, January 24, 2017
144 | Novartis Annual Report 2016
1
1
2
3
4
His work as a stadium groundskeeper in
Brisbane, Australia, exposed Malcolm Caddies
to heavy doses of sunlight.
Mr. Caddies spends the morning with his family.
Mr. Caddies is an evangelist for Australia’s
SunSmart campaign, which promotes using
sunscreen, wearing a hat, and staying under
cover when the sun is strongest.
Australia still has high rates of skin cancer, but the
SunSmart campaign may be having an impact.
2
Photo Essay
Novartis Annual Report 2016 | 145
3
4
Photo Essay
A groundskeeper tackles cancer
in several ways
Malcolm Caddies’ medical odyssey began like so many others’ around the
world: with the discovery of a lump. It was under his left arm, and it was
sizeable – about three centimeters. He hurried to the doctor in his hometown
of Brisbane, Australia. She did some tests and came back with grim news.
He had melanoma, a cancer of skin pigment. “She told me to get my affairs
in order,” Mr. Caddies recalls, “that I was probably going to die.”
Australia and New Zealand have the highest rates
of skin cancer in the world. And for 47-year-old Mr.
Caddies, the head groundskeeper at Brisbane’s
SunCorp Stadium, it has always been an occupational
hazard. He works in Brisbane’s abundant sunshine,
with its exceptionally high rates of ultraviolet (UV)
light, and has long understood the risks, wearing
sunscreen and a hat, avoiding the midday sun, and
routinely going to doctors for skin checks. “You’re
always having things cut out,” he says.
But his big malignant tumor signaled something
much more dire. Mr. Caddies’ oldest son, then 17,
searched “metastatic melanoma” on Google, and
came away shaken. Meanwhile, Mr. Caddies and his
wife shielded their two younger boys from the news.
Yet when Mr. Caddies went to the Melanoma
Center in Brisbane, the first thing the doctor told him
was to “forget everything” he’d been told about the
disease. While the tumor was large, it was not a death
sentence. Indeed, tests showed that the cancer had
not spread far. Doctors removed the tumor and two
lymph nodes, and found that only one of them was
affected. That was a promising sign.
When doctors later inspected Mr. Caddies’ history,
they found another report of melanoma six years
earlier. The fact that Mr. Caddies’ case was a re-
currence qualified him to participate in a clinical trial.
Since completing the treatment, he has had hospital
checks every month as well as CT scans every three
months. So far, he has no further symptoms. He says
he now monitors the UV index as he tries to avoid
unnecessary exposure. When he does venture out into
the sun, he wears a wide-brim hat and the strongest
sunscreen.
His mission now is to spread the word about mela-
noma and to encourage fellow citizens, colleagues,
and especially his children to lower their risk. The
goal, part of a national drive in Australia, is to be
“sunsmart.” That means adopting a “no hat, no play”
philosophy, applying plenty of sunscreen, and staying
inside or in the shade, when possible, during the
high-UV hours around noon.
While melanoma rates in Australia remain stub-
bornly high with 13 300 new cases diagnosed every
year, there’s a ray of good news: Rates for Australians
under 40 appear to be dropping. That in dicates that
sunsmart lessons from Mr. Caddies and thousands
of other survivors may be sinking in.
For detail on cancer research k page 42
146 | Novartis Annual Report 2016
Financial Report
Contents
FINANCIAL REPORT
Operating and financial review 2016
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
Summary of quarterly and Group
financial data
Novartis Group
consolidated financial statements
Notes to the Novartis
Group consolidated financial statements
Report of Novartis management
on internal control over financial reporting
146
147
153
155
156
158
158
160
162
167
171
176
178
183
248
Report of the statutory auditor on the
consolidated financial statements of Novartis AG 249
Financial statements of Novartis AG
255
Notes to the financial statements of Novartis AG 257
Appropriation of available earnings of Novartis AG
as per balance sheet and declaration of dividend 265
Report of the statutory auditor
on the financial statements of Novartis AG
266
Operating and
financial review 2016
This operating and financial review should be read
together with the Group’s consolidated financial state-
ments in this Annual Report, which have been prepared
in accordance with International Financial Reporting
Standards (IFRS) as published by the International
Accounting Standards Board, and with the sections on
performance and innovation on pages 22 to 57 of this
Annual Report.
On January 27, 2016, Novartis announced plans to
further focus our divisions, integrating businesses that
share therapeutic areas to better leverage our develop-
ment and marketing capabilities. These plans included
the transfer of the Ophthalmic Pharmaceuticals fran-
chise from the Alcon Division to the Innovative Medicines
Division (formerly named the Pharmaceuticals Division),
and the transfer of selected mature products from the
Innovative Medicines Division to the Sandoz Division.
Operationally, these transfers were completed as of April
1, 2016. The centralization of manufacturing and the inte-
gration of some drug development functions, also
announced on January 27, 2016, were operationally com-
pleted as of July 1, 2016.
In compliance with IFRS, Novartis updated its current
and prior years segment financials to reflect these trans-
fers, to aid comparability of year-on-year results. As a
result, all comparisons of divisional results from 2016 to
2015 reflect the new divisional structure.
In 2015, Novartis completed a series of portfolio
transformation transactions, including the acquisition of
oncology assets from GlaxoSmithKline plc (GSK) and a
36.5% interest in GSK Consumer Healthcare Holdings
Ltd., and the divestment of its Vaccines and Animal
Health businesses. To reflect these transactions,
Novartis reported the Group’s financial results for all
years presented as “continuing operations” and “discon-
tinued operations.”
Unless otherwise noted, the comments in this oper-
ating and financial review refer to continuing operations,
which include the businesses of the Innovative Medi-
cines, Sandoz and Alcon Divisions; Corporate activities;
and, starting March 2, 2015, the results from the new
oncology assets acquired from GSK and the 36.5% inter-
est in the GSK Consumer Healthcare joint venture (the
latter reported as investment in associated companies).
We also provide information on discontinued operations
and total Group performance. For further details on con-
tinuing and discontinued operations see pages 152 and
154 and Note 30 to the Group consolidated financial
statements.
FINANCIAL REPORT
Operating and financial review 2016
Novartis Annual Report 2016 | 147
Risk overview
Group overview
Novartis delivered solid financial performance in 2016,
driven by our continued success with growth products
including Cosentyx and Gilenya, which helped offset the
effects of generic competition of approximately USD 2.4
billion, mainly driven by the loss of patent protection in
the US for the pioneering leukemia drug, Gleevec. As a
result, our net sales to third parties from continuing oper-
ations of USD 48.5 billion (–2%, 0% cc) were broadly in
line with the prior year. Currencies negatively impacted
the results driven by the strengthening of the US dollar
on average versus the British pound and major emerg-
ing market currencies, which was partially offset by the
strengthening of the Japanese yen.
Operating income was USD 8.3 billion (–8%, –3% cc),
a decrease from USD 9.0 billion in 2015 mainly due to
the loss of exclusivity on Gleevec, as investments related
to new product launches and the Alcon growth plan were
partially offset by resource allocation and productivity
programs. Operating income margin was 17.0% of net
sales.
Net income from continuing operations was USD 6.7
billion (–5%, +1% cc) with the increase of 1% in constant
currencies compared to the decline in operating income
due to higher income from associated companies, mainly
from the investment in GSK Consumer Healthcare Hold-
ings Ltd. The current year includes USD 0.3 billion (2015:
USD 0.4 billion) exceptional charges related to Venezu-
ela. For more information see page 159.
Basic earnings per share from continuing operations
increased 2% in constant currencies (–3%, +2% cc) to
USD 2.82, up more than net income in constant curren-
cies due to a reduction in the average number of shares
outstanding.
Free cash flow from continuing operations increased
2% to USD 9.5 billion, mainly driven by lower net invest-
ments in property, plant and equipment.
For the total Group, net income amounted to USD 6.7
billion in 2016 compared to USD 17.8 billion in 2015. The
prior year benefitted from the USD 10.8 billion net income
from discontinued operations, which included USD 12.7
billion of exceptional pre-tax divestment gains and the
operational results of the divested businesses until the
respective dates of completion of the transactions. For
more information on discontinued operations please see
pages 152 and 154 and Note 30 to the Novartis Group
consolidated financial statements.
Basic earnings per share decreased to USD 2.82
from USD 7.40 in the prior year.
Free cash flow for the total Group amounted to
USD 9.5 billion in 2016 compared to USD 9.0 billion in
2015. The prior year included a negative free cash flow
of approximately USD 0.3 billion from discontinued oper-
ations.
Our financial results are affected to varying degrees by
external factors. Loss of market exclusivity and the intro-
duction of branded and generic competitors could sig-
nificantly erode sales of our innovative products. Our
ability to grow depends on the success of our research
and development efforts to replenish our pipeline, as well
as on the commercial acceptance of our products in mar-
ket. Increased pricing pressure could impact our ability
to generate returns and invest for the future.
We have a significant global compliance program in
place, but any failure to comply with local laws could lead
to substantial liabilities. There are strict regulatory
requirements surrounding our manufacturing processes,
which introduce a greater chance for disruptions and lia-
bilities. With products sold in approximately 155 coun-
tries, our ability to hedge against foreign exchange fluc-
tuations could have a significant effect on our reported
results. We also depend on critical information technol-
ogy systems to support our business processes.
For more detail on these trends and how they could
impact our results, see details starting on page 167.
Results of operations
In evaluating the Group’s performance, we consider not
only the IFRS results, but also certain non-IFRS mea-
sures, including core results and constant currency
results. These measures assist us in evaluating our ongo-
ing performance from year to year and we believe this
additional information is useful to investors in under-
standing the performance of our business.
The Group’s core results – including core operating
income, core net income and core earnings per share –
exclude fully the amortization and impairment charges
of intangible assets, excluding software, and certain
acquisition related items. The following items that exceed
a threshold of USD 25 million are also excluded: integra-
tion and divestment related income and expenses,
divestment gains and losses, restructuring charges/
releases, legal related items, impairments of property,
plant and equipment and financial assets, as well as
income and expense items that management deems
exceptional and that are or are expected to accumulate
within the year to be over a USD 25 million threshold. A
reconciliation between IFRS results and core results is
shown on pages 173-175.
We present information about our net sales and other
key figures relating to operating and net income in con-
stant currencies (cc). We calculate constant currency
net sales and operating income by applying the prior-year
average exchange rates to current financial data
expressed in local currencies in order to estimate an elim-
ination of the impact of foreign exchange rate movements.
The core results, constant currencies and other non-
IFRS measures are explained in more detail starting on
page 171 and are not intended to be substitutes for the
equivalent measures of financial performance prepared
in accordance with IFRS. These measures may differ
from similarly titled non-IFRS measures of other compa-
nies.
148 | Novartis Annual Report 2016
Key figures
(USD millions unless indicated otherwise)
Net sales to third parties from continuing operations
Sales to discontinued operations
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
Return on net sales (%)
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 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
Free cash flow
nm = not meaningful
Year ended
Year ended
Dec 31, 2016 Dec 31, 2015
48 518
49 414
26
48 518
49 440
918
947
– 17 520
– 17 404
31 916
32 983
– 11 998
– 11 772
– 9 039
– 8 935
– 2 194
– 2 475
1 927
2 049
– 2 344
– 2 873
8 268
8 977
17.0
703
– 707
– 447
7 817
18.2
266
– 655
– 454
8 134
– 1 119
– 1 106
6 698
7 028
10 766
Change
in USD
%
Change in
constant
currencies
%
– 2
nm
– 2
– 3
– 1
– 3
– 2
– 1
11
– 6
18
– 8
164
– 8
2
– 4
– 1
– 5
nm
0
nm
0
– 3
– 2
– 1
– 4
– 2
8
– 5
17
– 3
164
– 10
58
2
– 13
1
nm
– 59
6 698
17 794
– 62
6 712
17 783
– 62
– 59
– 14
2.82
2.82
9 455
9 455
11
2.92
4.48
7.40
9 259
9 029
nm
– 3
nm
nm
2
nm
– 62
– 59
2
5
Net sales by segment
The following table provides an overview of net sales to third parties by segment:
(USD millions)
Innovative Medicines1, 2
Sandoz2
Alcon2
Net sales to third parties from continuing operations
Year ended
Year ended
Dec 31, 2016 Dec 31, 2015
32 562
33 345
10 144
10 070
5 812
5 999
48 518
49 414
Change
in USD
%
Change in
constant
currencies
%
– 2
1
– 3
– 2
0
2
– 2
0
1 Formerly named the Pharmaceuticals Division
2 Restated to reflect the new divisional structures and product transfers between divisions, announced on January 27, 2016
Additional comments on the changes in the net sales by division can be found starting on page 22.
FINANCIAL REPORT
Operating and financial review 2016
Novartis Annual Report 2016 | 149
Operating income from continuing operations
The following table provides an overview of operating income by segment:
(USD millions)
Innovative Medicines1, 2
Sandoz2
Alcon2
Corporate
Operating income from continuing operations
Year ended
Dec 31, 2016
% of
Year ended
net sales Dec 31, 2015
% of
net sales
7 426
1 445
– 132
– 471
8 268
22.8
14.2
– 2.3
17.0
7 815
1 300
281
– 419
8 977
23.4
12.9
4.7
18.2
Change
in USD
%
– 5
11
nm
– 12
– 8
Change in
constant
currencies
%
0
14
nm
– 25
– 3
nm = not meaningful
1 Formerly named the Pharmaceuticals Division
2 Restated to reflect the new divisional structures and product transfers between divisions, announced on January 27, 2016
Operating income was USD 8.3 billion (–8%, –3% cc), a
decrease from USD 9.0 billion in 2015 mainly due to the
loss of exclusivity on Gleevec, as investments related to
new product launches and the Alcon growth plan were
partially offset by resource allocation and productivity
programs. The negative currency impact of 5% was due
to the strong USD on average versus the British pound
and major emerging market currencies, partially offset
by the strengthening of the Japanese yen. Operating
income margin in constant currencies decreased 0.7 per-
centage points; currency had a negative impact of 0.5
percentage points resulting in a decrease of 1.2 percent-
age points to 17.0% of net sales.
Additional comments on the changes in operating
income by division can be found starting on page 22.
Corporate income and expense, which includes the
cost of Group management and central services,
amounted to a net expense of USD 471 million (–12%,
–25% cc) in 2016 compared to a net expense of USD 419
million in the prior year. The increase was mainly due to
lower royalty and other income as well as costs related
to the execution of the initiatives announced on January
27, 2016, to further focus the divisions, centralize man-
ufacturing and integrate drug development functions.
These factors more than offset the reduction in General
& Administration expenses in 2016.
Core operating income key figures1
(USD millions unless indicated otherwise)
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 171.
Year ended
Year ended
Dec 31, 2016 Dec 31, 2015
35 806
36 900
– 11 991
– 11 729
– 8 402
– 8 738
– 2 120
– 2 389
753
823
– 1 059
– 1 077
12 987
13 790
26.8
27.9
Change
in USD
%
Change in
constant
currencies
%
– 3
– 2
4
11
– 9
2
– 6
– 1
– 4
3
8
– 7
– 1
– 2
The adjustments made to operating income to arrive at
core operating income from continuing operations
amounted to USD 4.7 billion (2015: USD 4.8 billion)
broadly in line with the prior year.
Excluding these items, core operating income from
continuing operations decreased 6% (–2% cc) to
USD 13.0 billion. Core operating income margin in con-
stant currencies decreased 0.7 percentage points mainly
due to the loss of exclusivity on Gleevec, as investments
related to new product launches and the Alcon growth
plan were partially offset by resource allocation and pro-
ductivity programs. Currency had a negative impact of
0.4 percentage points, resulting in a margin of 26.8% of
net sales, compared to 27.9% in 2015. Additional com-
ments on the changes in the core operating income by
division can be found starting on page 22.
150 | Novartis Annual Report 2016
The following table provides an overview of core operating income by segment:
(USD millions)
Innovative Medicines1, 2
Sandoz2
Alcon2
Corporate
Year ended
Dec 31, 2016
% of
Year ended
net sales Dec 31, 2015
% of
net sales
10 354
2 071
850
– 288
31.8
20.4
14.6
10 862
2 045
1 235
– 352
32.6
20.3
20.6
Core operating income from continuing operations
12 987
26.8
13 790
27.9
1 Formerly named the Pharmaceuticals Division
2 Restated to reflect the new divisional structures and product transfers between divisions, announced on January 27, 2016
Change
in USD
%
– 5
1
– 31
18
– 6
Change in
constant
currencies
%
– 1
4
– 27
4
– 2
Research and development of Innovative Medicines Division
The following table provides an overview of the reported and core research and development expense of the Inno-
vative Medicines Division:
(USD millions unless indicated otherwise)
Research and Exploratory Development
Confirmatory Development
Total Innovative Medicines Division Research and Development expense
As % of Innovative Medicines net sales to third parties
Core Research and Exploratory Development2
Core Confirmatory Development2
Year ended
Year ended
Dec 31, 2016 Dec 31, 2015 1
– 2 645
– 2 739
– 5 064
– 4 946
– 7 709
– 7 685
23.7
23.0
– 2 543
– 2 663
– 4 569
– 4 839
Total Core Innovative Medicines Division Research and Development expense
– 7 112
– 7 502
As % of Innovative Medicines net sales to third parties
21.8
22.5
1 Restated to reflect the new divisional structures and product transfers between divisions, announced on January 27, 2016
2 Core excludes impairments, amortization and certain other items.
Change
in USD
%
Change in
constant
currencies
%
3
– 2
0
5
6
5
2
– 4
– 2
3
4
4
Innovative Medicines Division Research and Exploratory
Development expense amounted to USD 2.6 billion in
2016, a decrease of 3% (+2% cc) compared to 2015 as
a result of continued productivity efforts. Confirmatory
Develop ment expense increased by 2% (–4% cc) to
USD 5.1 billion compared to USD 4.9 billion in 2015, mainly
driven by the impairment of intangible assets.
Core Research and Exploratory Development
expense in the Innovative Medicines Division as percent
of sales decreased by 0.8 percentage points in constant
currencies as a result of continued productivity efforts
and synergies from acquired Oncology assets. This
decrease was partially offset by negative currency move-
ments of 0.1 percentage points, resulting in a net decrease
of 0.7 percentage points to 21.8% of net sales.
FINANCIAL REPORT
Operating and financial review 2016
Novartis Annual Report 2016 | 151
Non-operating income and expense
The following table provides an overview of non-operating income and expense:
(USD millions unless indicated otherwise)
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 from discontinued operations
Net income
Basic EPS (USD) from continuing operations
Basic EPS (USD) from discontinued operations
Total basic EPS (USD)
nm = not meaningful
Year ended
Year ended
Dec 31, 2016 Dec 31, 2015
8 268
8 977
703
– 707
– 447
7 817
266
– 655
– 454
8 134
– 1 119
– 1 106
6 698
7 028
10 766
6 698
17 794
2.82
2.82
2.92
4.48
7.40
Change
in USD
%
– 8
164
– 8
2
– 4
– 1
– 5
nm
– 62
– 3
nm
– 62
Change in
constant
currencies
%
– 3
164
– 10
58
2
– 13
1
nm
– 59
2
nm
– 59
Income from associated companies increased to
USD 703 million, compared to USD 266 million in the
prior year.
The increase was mainly due to income recognized
from our investment in GSK Consumer Healthcare Hold-
ings Ltd. of USD 234 million compared to a loss of USD 79
million recognized in the prior year, in which the income
from operations was more than offset by integration
charges and an additional expense from the final pur-
chase price allocation for the investment in GSK. The
2016 income contribution from GSK Consumer Health-
care Holdings Ltd. includes a negative adjustment
recorded in the second quarter upon the issuance of
2015 actual results.
In addition, in 2016, we recognized an income of
USD 464 million from our investment in Roche, which
reflected our estimated share of income for 2016 of
USD 532 million partly offset by the adjustment for 2015
actual results. The higher contribution from Roche in
2016 was mainly due to a smaller adjustment recognized
upon publication of 2015 actual results by Roche com-
pared to the adjustment recorded in the prior year upon
publication of the 2014 actual results.
Interest expense from continuing operations
increased to USD 707 million from USD 655 million in the
prior year due to higher outstanding debt.
Other financial income and expense amounted to an
expense of USD 447 million compared to USD 454 mil-
lion in the prior-year, mainly on account of an exceptional
charge of USD 305 million (2015: USD 410 million) related
to Venezuela due to foreign exchange losses on intra-
group payables as well as higher currency losses recog-
nized in 2016.
The tax rate from continuing operations increased to
14.3% from 13.6% in the prior year, mainly as a result of
a change in profit mix to jurisdictions with higher tax
rates.
Net income from continuing operations was USD 6.7
billion (–5%, +1% cc) with the increase of 1% in constant
currencies compared to the decline in operating income
due to higher income from associated companies, mainly
from the investment in GSK Consumer Healthcare Hold-
ings Ltd. The current year includes USD 0.3 billion (2015:
USD 0.4 billion) exceptional charges related to Venezu-
ela. For more information see page 159.
Basic earnings per share from continuing operations
was USD 2.82 per share (–3%, +2% cc), up more than
net income due to a reduction in the average number of
shares outstanding.
152 | Novartis Annual Report 2016
Core non-operating income and expense
The following table provides an overview of core non-operating income and expense:
(USD millions unless indicated otherwise)
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 loss from discontinued operations
Core net income
Core basic EPS (USD) from continuing operations
Core basic EPS (USD) from discontinued operations
Core basic EPS (USD)
nm = not meaningful
Year ended
Year ended
Dec 31, 2016 Dec 31, 2015
12 987
13 790
1 134
– 707
– 99
981
– 655
– 24
13 315
14 092
– 2 001
– 2 051
11 314
12 041
– 256
11 314
11 785
4.75
4.75
5.01
– 0.11
4.90
Change
in USD
%
Change in
constant
currencies
%
– 6
16
– 8
nm
– 6
2
– 6
nm
– 4
– 5
nm
– 3
– 2
16
– 10
nm
– 2
– 2
– 3
nm
– 1
– 2
nm
0
Core income from associated companies increased to
USD 1.1 billion from USD 981 million in the prior-year
period. The increase was due to a higher contribution
from GSK Consumer Healthcare Holdings Ltd., which
accounted for USD 369 million in 2016 compared to
USD 213 million in prior-year period.
Core other financial income and expense, which
excludes the exceptional charges of USD 0.3 billion
(2015: USD 0.4 billion) related to Venezuela amounted
to a net expense of USD 99 million, compared to USD 24
million in 2015.
The core tax rate from continuing operations (core
tax as a percentage of core pre-tax income) increased
to 15.0% from 14.6% in the prior year. This increase is
mainly a result of a change in core profit mix to jurisdic-
tions with higher tax rates.
Core net income from continuing operations was
USD 11.3 billion (–6%, –3% cc) and decreased 3% in con-
stant currencies, broadly in line with core operating
income.
Core basic EPS from continuing operations was
USD 4.75 (–5%, –2% cc), down less than core net income
due to a reduction in the number of shares outstanding.
Discontinued operations
(USD millions unless indicated otherwise)
Net sales to third parties from discontinued operations
Operating income from discontinued operations
Net income from discontinued operations
Attributable to:
Shareholders of Novartis AG
Non-controlling interests
Basic earnings per share (USD) from discontinued operations
Free cash flow from discontinued operations
Year ended
Dec 31, 2015
601
12 477
10 766
10 758
8
4.48
– 230
As all transactions of the portfolio transformation were
completed during 2015, there are no results from discon-
tinued operations reported in the 2016 consolidated
income statement. In 2015, results for discontinued oper-
ations include the operational results from the Vaccines
influenza business, prior to its divestment to CSL Lim-
ited on July 31, 2015, as well as results from the Vaccines
non-influenza business and OTC until March 2, 2015.
Operational results from the Animal Health business,
which was divested on January 1, 2015 include only the
divestment gain.
Discontinued operations in 2015 also include the
exceptional pre-tax gains of USD 12.7 billion from the
divestment of Animal Health (USD 4.6 billion), and the
transactions with GSK (USD 2.8 billion for the Vaccines
non-influenza business and USD 5.9 billion arising from
FINANCIAL REPORT
Operating and financial review 2016
Novartis Annual Report 2016 | 153
the contribution of Novartis OTC into the GSK Consumer
Healthcare joint venture). In addition, the GSK transac-
tions resulted in USD 0.6 billion of additional transac-
tion-related costs that were expensed.
Net income from discontinued operations in the prior
year amounted to USD 10.8 billion. For more information
on discontinued operations please see pages 152 and
154, and Note 30 to the Novartis Group consolidated
financial statements.
Total Group
For the total Group, net income amounted to USD 6.7
billion compared to USD 17.8 billion in 2015. The decrease
was mainly due to the exceptional divestment gains
included in the net income from the discontinued oper-
ations of the prior year.
Basic earnings per share decreased to USD 2.82
from USD 7.40.
Factors affecting comparability of year-on-year results
of operations
The comparability of the year-on-year results of our
operations for the total Group can be significantly
affected by acquisitions and divestments. The transac-
tions of significance during 2016 and 2015 are mentioned
below.
TRANSACTIONS WITH GLAXOSMITHKLINE PLC
On March 2, 2015, Novartis closed its transactions with
GlaxoSmithKline plc, Great Britain (GSK) announced in
April 2014, with the following consequences:
Significant transactions in 2016
ALCON – ACQUISITION OF TRANSCEND MEDICAL, INC.
On February 17, 2016, Alcon entered into an agreement
to acquire Transcend Medical, Inc. (Transcend), a pri-
vately-held, US-based company focused on developing
minimally-invasive surgical devices to treat glaucoma.
The transaction closed on March 23, 2016, and the fair
value of the total purchase consideration was USD 332
million. Results of operations since the date of acquisi-
tion were not material.
INNOVATIVE MEDICINES – ACQUISITION OF SELEXYS
PHARMACEUTICALS CORPORATION
On November 18, 2016, Novartis acquired Selexys Phar-
maceuticals Corporation (Selexys), a privately-held,
US-based company specializing in development of ther-
apeutics in certain hematologic and inflammatory disor-
ders, following receipt of results of the SUSTAIN study.
The fair value of the total purchase consideration for
acquiring the 81% stake Novartis did not already own
amounted to USD 268 million. Results of operations
since the date of acquisition were not material.
Significant transactions in 2015
Portfolio transformation transactions
In 2015, Novartis completed a series of portfolio trans-
formation transactions as follows:
TRANSACTION WITH ELI LILLY AND COMPANY
On January 1, 2015, Novartis closed its transaction with
Eli Lilly and Company, USA (Lilly) announced in April
2014, to 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 dis-
continued operations.
INNOVATIVE MEDICINES – ACQUISITION OF GSK ONCOLOGY
PRODUCTS
Novartis acquired GSK’s oncology products and certain
related assets for an aggregate cash consideration of
USD 16.0 billion. In 2015, from the date of acquisition the
business generated net sales of USD 1.8 billion. Manage-
ment estimates that sales for the entire year 2015 would
have amounted to USD 2.1 billion had the oncology prod-
ucts been acquired at the beginning of the 2015 report-
ing period. The 2015 net results from operations on a
reported basis since the acquisition date were not mate-
rial, mainly due to amortization of intangible assets.
VACCINES – DIVESTMENT
Novartis divested its Vaccines business (excluding its
Vaccines influenza business) to GSK for up to USD 7.1
billion plus royalties. The USD 7.1 billion consists of
USD 5.25 billion paid at closing and up to USD 1.8 billion
in future milestone payments. The fair value of the con-
tingent future milestones and royalties as at the acqui-
sition date is USD 1.0 billion, resulting in a fair value of
consideration received of USD 6.25 billion. Included in
this amount is a USD 450 million milestone payment
received in late March 2015. The sale of this business
resulted in a pre-tax gain of USD 2.8 billion, which is
recorded in operating income from discontinued opera-
tions.
CONSUMER HEALTH – COMBINATION OF NOVARTIS OTC WITH
GSK CONSUMER HEALTHCARE
Novartis and GSK agreed to create a combined con-
sumer healthcare business through the combination of
Novartis OTC and GSK Consumer Healthcare busi-
nesses. On March 2, 2015, a new entity, GlaxoSmithKline
Consumer Healthcare Holdings Ltd. (GSK Consumer
Healthcare) was formed via the contribution of business
from both Novartis and GSK. Novartis has a 36.5% inter-
est in the newly created entity. Based on estimates of
fair value exchanged, an investment in associated com-
pany of USD 7.6 billion was recorded. The resulting pre-
tax gain, net of transaction related costs, of USD 5.9 bil-
lion is recorded in operating income from discontinued
154 | Novartis Annual Report 2016
operations. The investment is accounted for using the
equity method of accounting using estimated results for
the last quarter of the year.
ADDITIONAL GSK RELATED COSTS
The GSK transaction resulted in USD 0.6 billion of addi-
tional transaction-related costs that were expensed,
thereof USD 0.3 billion paid in 2015.
TRANSACTION WITH CSL
On October 26, 2014, Novartis entered into an agree-
ment with CSL to sell its Vaccines influenza business to
CSL for USD 275 million. The transaction with CSL was
completed on July 31, 2015, resulting in a partial reversal
of the impairment recorded in 2014 in the amount of
USD 0.1 billion, which is included in operating income
from discontinued operations.
Other significant transactions in 2015
INNOVATIVE MEDICINES – ACQUISITION OF SPINIFEX
PHARMACEUTICALS, INC.
On June 29, 2015, the Innovative Medicines Division
acquired Spinifex Pharmaceuticals, Inc. (Spinifex), a US
and Australia based, privately held development stage
company, focused on developing a peripheral approach
to treat neuropathic pain. The transaction closed on July
24, 2015, and the fair value of the total purchase consid-
eration was USD 312 million. The 2015 results of opera-
tions since the date of acquisition were not material.
INNOVATIVE MEDICINES – ACQUISITION OF ADMUNE
THERAPEUTICS LLC
On October 16, 2015, the Innovative Medicines Division
acquired Admune Therapeutics LLC (Admune), a
US-based, privately held company, broadening the
Novartis pipeline of cancer immunotherapies. The fair
value of the total purchase consideration amounted to
USD 258 million. The 2015 results of operations since
the date of acquisition were not material.
For further details on significant transactions in 2016 and
2015, see Note 2 to the Group consolidated financial
statements.
Classification as continuing operations and
discontinued operations
Following the April 22, 2014 announcement of the port-
folio transformation transactions with Lilly and GSK, as
described above, Novartis reported the Group’s finan-
cial statements for the current and prior years as “con-
tinuing operations” and “discontinued operations”.
Continuing operations comprise the businesses of
the Innovative Medicines, Sandoz and Alcon Divisions as
well as the continuing Corporate activities. Continuing
operations also include the results from oncology assets
acquired from GSK and the estimated results from the
36.5% interest in GSK Consumer Healthcare Holdings
Ltd. for the period from March 2, 2015 (the latter reported
as part of income from associated companies).
Discontinued operations included in 2015 the oper-
ational results from the Vaccines influenza business,
prior to its divestment to CSL Limited on July 31, 2015,
as well as results from the Vaccines non-influenza busi-
ness and OTC business until March 2, 2015. Operational
results from the Animal Health business, which was
divested on January 1, 2015, include only the divestment
gain.
Discontinued operations in 2015 also included the
exceptional pre-tax gain of USD 12.7 billion from the
divestment of Animal Health (USD 4.6 billion) and from
the transactions with GSK (USD 2.8 billion from the Vac-
cines non-influenza business and USD 5.9 billion arising
from the contribution of Novartis OTC into GSK Con-
sumer Healthcare Holdings Ltd.). In addition the GSK
transactions resulted in USD 0.6 billion of additional
transaction-related costs, which were expensed and
reported in Corporate discontinued operations.
Excluded from discontinued operations are certain
intellectual property rights and related other revenues
of the Vaccines Division, which are retained by Novartis
and are now reported under Corporate activities.
As required by IFRS, results of the discontinued oper-
ations excluded any further depreciation and amortiza-
tion related to discontinued operations from the date of
the portfolio transformation announcement of April 22,
2014.
FINANCIAL REPORT
Operating and financial review 2016
Novartis Annual Report 2016 | 155
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, excluding marketable
securities. Cash flows in connection with the acquisition 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 172. The following is a summary of the free cash
flow:
(USD millions)
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
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
Free cash flow from continuing operations
Free cash flow from discontinued operations
Free cash flow
2016
2015
Change
8 268
8 977
– 709
6 175
956
– 264
5 575
1 642
– 96
15 135
16 098
942
– 878
1 180
– 669
– 2 111
– 2 454
– 1 536
– 1 207
– 1 051
974
– 617
– 246
11 475
12 085
– 1 862
– 2 367
161
237
– 1 017
– 1 138
847
621
– 247
– 264
247
– 149
9 455
9 455
166
– 82
1
9 259
– 230
9 029
600
– 686
– 168
– 963
– 238
– 209
343
– 329
– 434
1 220
– 610
505
– 76
121
226
17
81
– 67
– 1
196
230
426
In 2016, free cash flow from continuing operations
amounted to USD 9.5 billion (+2 % USD) compared to
USD 9.3 billion in 2015. The increase of USD 0.2 billion
was mainly driven by lower net investments in property,
plant and equipment.
Free cash flow for the total Group amounted to
USD 9.5 billion in 2016 compared to USD 9.0 billion in
2015. The prior year included a negative free cash flow
of approximately USD 0.3 billion from discontinued oper-
ations.
156 | Novartis Annual Report 2016
Liquidity, cash flow and capital resources
The following table summarizes the Group’s cash flow:
(USD millions)
Cash flows from operating activities from continuing operations
Cash flows used in investing activities from continuing operations
2016
2015
Change
11 475
12 085
– 610
– 2 693
– 19 666
16 973
Cash flows used in/from operating and investing activities from discontinued operations
– 748
8 694
– 9 442
Cash flows used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Net change in cash and cash equivalents
– 5 314
– 9 176
– 387
– 286
3 862
– 101
2 333
– 8 349
10 682
Change in marketable securities, commodities, time deposits and derivative financial instruments
– 3
– 66
63
Change in current and non-current financial debts and derivative financial instruments
– 1 871
– 1 520
– 351
Change in net debt
Net debt at January 1
Net debt at December 31
459
– 9 935
10 394
– 16 484
– 6 549
– 9 935
– 16 025
– 16 484
459
Cash flows from operating activities from continuing
operations amounted to USD 11.5 billion, compared to
USD 12.1 billion in 2015. The decrease of USD 0.6 billion
was driven by lower operating income adjusted for non-
cash items, lower hedging results and higher payments
out of provisions, partially offset by dividends received
from GSK Consumer Healthcare Holdings Ltd., lower
cash outflows for taxes paid and net current assets and
other operating cash flow items.
Cash flows used in investing activities from continu-
ing operations amounted to USD 2.7 billion in 2016. This
amount includes cash outflows of USD 1.9 billion for the
purchase of property, plant and equipment, USD 1.4 bil-
lion for intangible, financial and other non-current assets,
and USD 0.8 billion for acquisitions and divestments of
businesses, net (including the Transcend Medical, Inc.
and Selexys Pharmaceuticals Corporation acquisitions).
This was offset by cash inflows of USD 1.3 billion of pro-
ceeds from the sale of non-current assets and USD 0.1
billion net proceeds from sales of marketable securities
and commodities. In 2015, cash flows used in investing
activities from continuing operations amounted to
USD 19.7 billion, primarily due to the acquisition of the
GSK oncology assets for USD 16.0 billion.
Cash flows used in investing activities from discon-
tinued operations amounted to USD 0.7 billion in 2016
due to portfolio transformation transactions payments,
including capital gains taxes. In 2015, the cash flows from
investing activities from discontinued operations of
USD 8.9 billion were mainly driven by net proceeds from
the portfolio transformation divestments.
The cash flows used in financing activities amounted
to USD 5.3 billion, compared to USD 9.2 billion in 2015.
The 2016 amount includes cash outflows of USD 6.5 bil-
lion for the dividend payment and USD 0.9 billion for trea-
sury share transactions, net. The net inflow from current
and non-current financial debts of USD 2.1 billion was
due to the increase in short-term borrowings of USD 1.8
billion and the issuance of two euro denominated bonds
for total proceeds of USD 1.9 billion, partially offset by
the repayment at maturity of a euro denominated bond
of USD 1.7 billion.
The 2015 amount included mainly a cash outflow of
USD 6.6 billion for the dividend payment and USD 4.5
billion for treasury share transactions, net, partially off-
set by a net inflow from financial debts of USD 2.0 bil-
lion.
Group net debt
Group net debt consists of:
(USD millions)
2016
2015
Change
Current financial debts
and derivative financial
instruments
– 5 905
– 5 604
– 301
Non-current financial debts
– 17 897
– 16 327
– 1 570
Total financial debt
– 23 802
– 21 931
– 1 871
Less liquidity
Cash and cash equivalents
7 007
4 674
2 333
Marketable securities,
commodities, time deposits
and derivative financial
instruments
770
773
– 3
Total liquidity
7 777
5 447
2 330
Net debt at December 31
– 16 025
– 16 484
459
Total non-current and current financial debt, including
derivatives, amounted to USD 23.8 billion at December
31, 2016, compared to USD 21.9 billion at December 31,
2015.
Non-current financial debt increased by USD 1.6 bil-
lion to USD 17.9 billion at December 31, 2016, mainly due
to the issuance of two euro denominated bonds for a
total amount of USD 2.0 billion.
Current financial debt increased by USD 0.3 billion
to USD 5.9 billion at December 31, 2016, from USD 5.6
billion at December 31, 2015, mainly due to higher short-
term borrowings partially offset by a repayment at matu-
rity of a euro denominated bond of USD 1.7 billion. Over-
all current financial debt consists of the current portion
of non-current debt of USD 0.2 billion and other short-
term borrowings (including derivatives and commercial
FINANCIAL REPORT
Operating and financial review 2016
Novartis Annual Report 2016 | 157
paper) of USD 5.7 billion. Group net debt decreased to
USD 16.0 billion at the end of 2016 from USD 16.5 billion
at the end of 2015.
for the US commercial paper programs. It matures in
September 2020 and was undrawn as per December 31,
2016.
Novartis has two US commercial paper programs
under which it can issue up to USD 9.0 billion in the
aggregate of unsecured commercial paper notes.
Novartis also has a Japanese commercial paper program
under which it can issue up to JPY 150 billion (approxi-
mately USD 1.3 billion) of unsecured commercial paper
notes. Commercial paper notes totaling USD 3.2 billion
under these three programs were outstanding as per
December 31, 2016. Novartis further has a committed
credit facility of USD 6.0 billion, entered into on Septem-
ber 23, 2015. This credit facility is provided by a syndi-
cate of banks and is intended to be used as a backstop
The long-term credit rating for the company contin-
ues to be double-A (Moody’s Aa3; Standard & Poor’s
AA–; Fitch AA).
We are not aware of significant demands to change
our level of liquidity needed to support our normal busi-
ness activities. We make use of various borrowing facil-
ities provided by several financial institutions. We also
successfully issued various bonds in previous years
(including 2015 and 2016) and raised funds through our
commercial paper programs. In addition, reverse repur-
chasing agreements are contracted and Novartis has
entered into credit support agreements with various
banks for derivative transactions.
An overview of our current financial debt and related interest rates is set forth below:
2016
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
2015
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
na = not applicable or available
Interest bearing accounts of associates payable on
demand relate to employee deposits in CHF from the com-
pensation of associates employed by Swiss entities
(December 31, 2016 interest rate: 0.5%). Other bank and
financial debt refer to usual lending and overdraft facilities.
The maturity schedule of our net debt can be found
in Note 29 to the consolidated financial statements on
page 242.
December 31
USD millions
1 601
836
3 174
178
116
5 905
1 645
1 185
1 085
1 659
30
5 604
Maximum
Average
interest rate
balance
at year end during the year during the year during the year
% USD millions
Average
interest rate
Average
balance
% USD millions
0.50
8.56
0.68
na
na
0.62
5.98
0.62
na
na
1 694
1 066
4 788
881
93
8 522
1 720
1 280
3 545
1 916
79
8 540
0.50
6.71
0.45
na
na
0.59
5.54
0.19
na
na
1 763
1 369
6 989
1 719
192
12 032
1 803
2 785
5 686
3 044
188
13 506
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 % 2016 1
Liquidity
in % 2015 1
Financial
debt in %
2016 2
Financial
debt in %
2015 2
77
9
5
9
100
50
16
13
1
20
66
13
13
5
3
64
14
14
5
3
100
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.
158 | Novartis Annual Report 2016
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:
(USD millions)
Non-current financial debt, including current portion
Operating leases
Unfunded pensions and other post-employment benefit plans
Research & Development
Potential milestone commitments
Purchase commitments
Property, plant & equipment
Total contractual cash obligations
Payments due by period
Total
18 075
2 897
2 242
Less than
1 year
178
262
117
2–3 years
4–5 years
After
5 years
3 513
1 628
12 756
324
244
186
256
2 125
1 625
4 175
385
854
2 283
653
223
200
23
27 612
1 142
4 958
4 353
17 159
The Group intends to fund the R&D and purchase commitments with internally generated resources.
On December 16, 2016 Novartis entered into an
agreement to acquire Ziarco Goup Limited, a privately
held company focused on the development of novel
treatments in dermatology. The transaction closed on
January 20, 2017. The total consideration of USD 420
million consists of an initial cash payment of USD 325
million before purchase price adjustments and prelimi-
nary present value of contingent consideration of USD 95
million.
On December 20, 2016 Novartis entered into a defin-
itive agreement for the acquisition of Encore Vision, Inc, a
privately held company focused on the development of a
novel treatment in presbyopia. The transaction closed on
January 20, 2017. The total consideration of USD 465 mil-
lion consists of an initial cash payment of USD 375 million
before purchase price adjustments and preliminary pres-
ent value of contingent consideration of USD 90 million.
For further details on the above two transactions see
Note 2 to the Group consolidated financial statements.
Effects of currency fluctuations
We transact our business in many currencies other than
the US dollar, our reporting currency.
The following provides an overview of net sales and
operating expenses for our continuing operations based
on IFRS values for 2016 and 2015 for currencies most
important to the Group:
2016
2015
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
Operating
Operating
Net sales expenses Net sales expenses
%
%
%
%
38
26
2
7
4
3
3
2
2
1
12
43
23
15
5
3
2
1
1
1
1
5
40
24
2
6
4
3
3
2
2
1
13
42
23
13
4
3
3
1
2
1
1
7
Operating expenses in the above table include cost of
goods sold, Marketing & Sales, Research & Development,
General & Administration, Other income and Other expense.
We prepare our consolidated financial statements in
US dollars. As a result, fluctuations in the exchange rates
between the US dollar and other currencies can have a
significant effect on both the Group’s results of operations
as well as on the reported value of our assets, liabilities
and cash flows. This in turn may significantly affect
reported earnings (both positively and negatively) and the
comparability of period-to-period results of operations.
For purposes of our consolidated balance sheets, we
translate assets and liabilities denominated in other cur-
rencies into US dollars at the prevailing market exchange
rates as of the relevant balance sheet date. For purposes
of the Group’s consolidated income and cash flow state-
ments, revenue, expense and cash flow items in local
currencies are translated into US dollars at average
exchange rates prevailing during the relevant period. As
a result, even if the amounts or values of these items
remain unchanged in the respective local currency,
changes in exchange rates have an impact on the
amounts or values of these items in our consolidated
financial statements.
Because our expenditures in Swiss francs are sig-
nificantly higher than our revenues in Swiss francs, vol-
atility in the value of the Swiss franc can have a signifi-
cant impact on the reported value of our earnings, assets
and liabilities, and the timing and extent of such volatility
can be difficult to predict. In addition, there is a risk that
certain countries could take steps that could significantly
impact the value of their currencies.
There is also a risk that certain countries could devalue
their currency. If this occurs, then it could impact the effec-
tive prices we would be able to charge for our products
and also have an adverse impact on both our consolidated
FINANCIAL REPORT
Operating and financial review 2016
Novartis Annual Report 2016 | 159
income statement and balance sheet. The Group is
exposed to a potential adverse devaluation risk on its inter-
company funding and total investment in certain subsid-
iaries operating in countries with exchange controls.
The most significant country in this respect is Vene-
zuela, where the Group has incurred significant foreign
exchange losses in 2016 and 2015.
Subsidiaries whose functional currencies have expe-
rienced a cumulative inflation rate of more than 100%
over the past three years apply the rules of IAS 29 “Finan-
cial 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 Group’s subsidiaries in Venezuela are experienc-
ing a significant reduction in approvals for remittance of
US dollars outside the country at the exchange rate avail-
able for imports of specific goods and services of
national priority, including medicines and medical sup-
plies. As a result, in November 2016, the Group changed
the exchange rate applied to translate the financial state-
ments of its Venezuelan subsidiaries from VEF 11 per
USD to the floating rate of DICOM (Sistema de Divisa
Complementaria) which was VEF 658 per USD as of
November 1, 2016. A corresponding USD 0.3 billion reval-
uation loss on the outstanding intercompany balances
was recognized in the fourth quarter of 2016. Due to
reserves against the intercompany balances, the net out-
standing intercompany payable balance of Venezuela
subsidiaries was reduced to an insignificant amount as
at December 31, 2016.
The Group has an equivalent of approximately USD 2
million of cash in Venezuela in local currency (VEF), which
is subject to loss of purchase power due to high inflation
in the country.
The Group manages its global currency exposure by
engaging in hedging transactions where management
deems appropriate, after taking into account the natural
hedging afforded by our global business activity. For
2016, we entered into various contracts that change in
value with movements in foreign exchange rates to pre-
serve the value of assets, commitments and expected
transactions. We use forward contracts and foreign cur-
rency options to hedge. For more information on how
these transactions affect our consolidated financial
statements and on how foreign exchange rate exposure
is managed, see Notes 1, 5, 16 and 29 to the Group’s con-
solidated financial statements.
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
2016
0.744
0.288
0.755
1.015
0.151
1.107
1.355
0.922
1.498
2015 Change in %
0.753
0.305
0.784
1.040
0.159
1.110
1.529
0.826
1.649
– 1
– 6
– 4
– 2
– 5
0
– 11
12
– 9
2016
0.722
0.307
0.741
0.978
0.144
1.051
1.227
0.854
1.648
2015 Change in %
0.731
0.253
0.721
1.011
0.154
1.093
1.483
0.831
1.362
– 1
21
3
– 3
– 6
– 4
– 17
3
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 cur-
rency (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 %
2016
0
– 3
1
– 2
– 3
USD %
2016
– 2
– 8
– 5
– 6
– 6
Percentage
Change in point currency
Change in
constant
impact currencies %
2015
2016
Percentage
Change in point currency
impact
2015
USD %
2015
– 2
– 5
– 6
– 4
– 3
5
– 2
– 18
10
9
– 5
– 19
– 34
– 5
– 5
– 10
– 17
– 16
– 15
– 14
For additional information on the effects of currency fluctuations, see Note 29 to the Group’s consolidated finan-
cial statements.
160 | Novartis Annual Report 2016
Condensed consolidated balance sheets
(USD millions)
Assets
Property, plant & equipment
Goodwill
Intangible assets other than goodwill
Financial and other non-current assets
Total non-current assets
Inventories
Trade receivables
Other current assets
Cash, marketable securities, commodities, time deposits
and derivative financial instruments
Total current assets
Total assets
Equity and liabilities
Total equity
Financial debts
Other non-current liabilities
Total non-current liabilities
Trade payables
Financial debts and derivatives
Other current liabilities
Total current liabilities
Total liabilities
Total equity and liabilities
Dec 31, 2016 Dec 31, 2015
Change
15 641
15 982
30 980
31 174
– 341
– 194
31 340
34 217
– 2 877
27 232
27 338
– 106
105 193
108 711
– 3 518
6 255
8 202
2 697
6 226
8 180
2 992
7 777
5 447
24 931
22 845
29
22
– 295
2 330
2 086
130 124
131 556
– 1 432
74 891
77 122
– 2 231
17 897
16 327
1 570
15 127
14 399
33 024
30 726
4 873
5 905
5 668
5 604
728
2 298
– 795
301
11 431
12 436
– 1 005
22 209
23 708
– 1 499
55 233
54 434
799
130 124
131 556
– 1 432
Total non-current assets of USD 105.2 billion at Decem-
ber 31, 2016 decreased by USD 3.5 billion compared to
December 31, 2015.
Intangible assets other than goodwill decreased by
USD 2.9 billion, mainly due to amortization and impair-
ment charges totaling USD 4.5 billion, and unfavorable
currency translation adjustments of USD 0.5 billion, par-
tially offset by the impact of business combinations and
additions totaling USD 2.1 billion. Property, plant and
equipment decreased by 0.3 billion, mainly due to depre-
ciation of USD 1.5 billion and unfavorable currency trans-
lation adjustments of USD 0.5 billion, partially offset by
additions of USD 1.8 billion.
Goodwill decreased by USD 0.2 billion to USD 31.0
billion, mainly on account of currency translation adjust-
ments.
Financial and other non-current assets decreased by
USD 0.1 billion to USD 27.2 billion. This includes: invest-
ments in associated companies, which decreased by
USD 1.0 billion to USD 14.3 billion, mainly on account of
currency translation adjustments; deferred tax assets,
which increased by USD 1.1 billion to USD 10.0 billion,
mainly on intangible assets, inventories and pension obli-
gations, and financial assets and other non-current
assets which decreased by USD 0.2 billion to USD 2.9
billion.
rities, commodities and derivatives of USD 2.3 billion, par-
tially offset by a decrease in other current assets of
USD 0.3 billon. Inventories and trade receivables were
broadly in line with 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 moni-
tor the level of trade receivables in Greece, Italy, Portu-
gal, Spain, Brazil, Russia and Saudi Arabia. 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 provi-
sioning approach or may change the terms of trade on
which we operate.
The majority of the outstanding trade receivables
from these closely monitored countries are due directly
from local governments or from government-funded enti-
ties except for Russia, which are due from private enti-
ties. The gross trade receivables from these countries
at December 31, 2016 amount to USD 1.5 billion (2015:
USD 1.6 billion), of which USD 82 million are past due for
more than one year (2015: USD 80 million) and for which
provisions of USD 62 million have been recorded (2015:
USD 56 million). At December 31, 2016, amounts past
due for more than one year are not significant in any of
these countries.
Total current assets increased by USD 2.1 billion to
USD 24.9 billion at December 31, 2016, mainly due to an
increase in cash and cash equivalents, marketable secu-
The following table provides an overview of our aging
analysis of our trade receivables as of December 31,
2016 and 2015:
FINANCIAL REPORT
Operating and financial review 2016
Novartis Annual Report 2016 | 161
(USD millions)
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
Provisions for doubtful trade receivables
Total trade receivables, net
2016
7 386
262
2015
7 318
265
223
255
185
145
163
– 162
8 202
193
156
135
– 142
8 180
There is also a risk that certain countries could devalue
their currency. Currency exposures are described in
more detail in paragraph “Effects of currency fluctuation”
on page 158.
Trade payables and other current liabilities decreased
by USD 1.8 billion to USD 16.3 billion, compared to
USD 18.1 billion at December 31, 2015, due to a decrease
in other current liabilities of USD 1.0 billion and a decrease
in trade payables of USD 0.8 billion.
Current income tax liabilities decreased by USD 0.1
billion to USD 1.6 billion. While there is some uncertainty
about the final taxes to be assessed in our major coun-
tries, we believe that our estimated amounts for current
income tax liabilities, including any amounts related to
any uncertain tax positions, are appropriate based on
currently known facts and circumstances.
In our key countries, Switzerland and the US, assess-
ments have been agreed by the tax authorities up to 2014
in Switzerland and in the US up to 2012, with the excep-
tion of one open US position related to the 2007 and one
for the 2010 tax filings.
Other non-current liabilities amounted to USD 15.1 bil-
lion at December 31, 2016, compared to USD 14.4 billion
at December 31, 2015. The increase of USD 0.7 billion
was primarily due to an increase in the pension liability
of USD 0.5 billion, mainly resulting from a decrease in
the actuarial discount rates used to calculate the pres-
ent value of the benefit obligation and an increase in
deferred tax liability of USD 0.3 billion.
Other non-current liabilities include deferred tax lia-
bilities of USD 6.7 billion, provisions and other non-cur-
rent liabilities of USD 8.5 billion.
Novartis believes that its total provisions are ade-
quate based upon currently available information. How-
ever, given the inherent difficulties in estimating liabilities
in this area, Novartis may incur additional costs beyond
the amounts provided. Management believes that such
additional amounts, if any, would not be material to the
Group’s financial condition but could be material to the
results of operations or cash flows in a given period.
The Group’s equity decreased by USD 2.2 billion to
USD 74.9 billion at December 31, 2016, compared to
USD 77.1 billion at December 31, 2015. The decrease was
mainly on account of unfavorable currency translation
differences of USD 2.4 billion and net actuarial losses
from defined benefit plans of USD 0.5 billion, partially
offset by the Novartis share of other comprehensive
income recognized by associated companies of USD 0.7
billion . The USD 6.5 billion dividend payment was offset
by the net income of USD 6.7 billion.
The Group’s liquidity amounted to USD 7.8 billion at
December 31, 2016 compared to USD 5.4 billion at
December 31, 2015, and net debt decreased to USD 16.0
billion at December 31, 2016 compared to USD 16.5 bil-
lion at December 31, 2015. The debt/equity ratio
increased to 0.32:1 at December 31, 2016 compared to
0.28:1 at December 31, 2015.
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
2016
2015
Change
Change USD millions USD millions USD millions
2015
2016
Balance at beginning of year
2 373.9
2 398.6
– 24.7
77 046
70 766
6 280
Shares acquired to be held in Group Treasury
Shares acquired to be canceled
Other share purchases
Exercise of options and employee transactions
Equity-based compensation
Decrease of treasury share repurchase
obligation under a share buyback trading plan
Dividends
Net income of the year attributable to shareholders
of Novartis AG
Impact of change in ownership of consolidated entities
Other comprehensive income attributable to shareholders
of Novartis AG
– 9.6
– 10.3
– 49.9
– 2.6
4.1
9.0
– 4.1
27.0
11.9
9.6
39.6
1.5
– 22.9
– 2.9
– 897
897
– 784
– 4 805
4 021
– 208
– 417
209
214
664
1 592
– 1 378
815
– 151
658
– 6 475
– 6 643
– 658
168
6 712
17 783
– 11 071
– 7
– 7
– 2 330
– 1 806
– 524
Balance at end of year
2 374.1
2 373.9
0.2
74 832
77 046
– 2 214
162 | Novartis Annual Report 2016
During 2016, 13.1 million treasury shares were delivered
as a result of options being exercised and physical share
deliveries related to equity-based participation plans
(2015: 38.9 million shares). Novartis repurchased 10.3
million shares on the SIX Swiss Exchange second trad-
ing line under the CHF 10 billion share buyback approved
at the Annual General Meeting (AGM) in 2016, to offset
the dilutive impact from equity-based participation plans
(2015: 49.9 million shares under the USD 5 billion share
buyback announced in November 2013, which was com-
pleted in November 2015). In addition, 2.6 million shares
were acquired from employees, which were previously
granted to them under the respective programs (2015:
4.1 million). No shares were repurchased on the SIX Swiss
Exchange first trading line in 2016 (2015: 9.6 million). With
these transactions, the total number of shares outstand-
ing was increased by 0.2 million shares in 2016 (2015:
reduction of 24.7 million shares).
Critical accounting policies and estimates
Our significant accounting policies are set out in Note 1
to the Group’s consolidated financial statements, which
are prepared in accordance with International Financial
Reporting Standards (IFRS) as issued by the Interna-
tional Accounting Standards Board (IASB).
Given the uncertainties inherent in our business activ-
ities, we must make certain estimates and assumptions
that require difficult, subjective and complex judgments.
Because of uncertainties inherent in such judgments,
actual outcomes and results may differ from our assump-
tions and estimates, which could materially affect the
Group’s consolidated financial statements. Application
of the following accounting policies requires certain
assumptions and estimates that have the potential for
the most significant impact on our consolidated financial
statements.
Deductions from revenues
As is typical in the pharmaceutical industry, our gross
sales are subject to various deductions which are pri-
marily composed of rebates and discounts to retail cus-
tomers, government agencies, wholesalers, health insur-
ance companies and managed healthcare organizations.
These deductions represent estimates of the related
obligations, requiring the use of judgement when esti-
mating the effect of these sales deductions on gross
sales for a reporting period. These adjustments are
deducted from gross sales to arrive at net sales.
The following summarizes the nature of some of
these deductions and how the deduction is estimated.
After recording these, net sales represent our best esti-
mate of the cash that we expect to ultimately collect. The
US market has the most complex arrangements related
to revenue deductions.
United States specific healthcare plans and
program rebates
The United States Medicaid Drug Rebate Program is
administered by State governments using State and Fed-
eral funds to provide assistance to certain vulnerable
and needy individuals and families. Calculating the
rebates to be paid related to this program involves inter-
preting relevant regulations, which are subject to chal-
lenge or change in interpretative guidance by govern-
ment authorities. Provisions for estimating Medicaid
rebates are calculated using a combination of historical
experience, product and population growth, product
pricing and the mix of contracts and specific terms in the
individual State agreements.
The United States Federal Medicare Program, which
funds healthcare benefits to individuals age 65 or older
and certain disabilities, provides prescription drug ben-
efits under Part D section of the program. This benefit
is provided and administrated through private prescrip-
tion drug plans. Provisions for estimating Medicare
Part D rebates are calculated based on the terms of indi-
vidual plan agreements, product sales and population
growth, product pricing and the mix of contracts.
We offer rebates to key managed healthcare and pri-
vate plans in an effort to sustain and increase sales of
our products. These programs provide a rebate after the
plans have demonstrated they have met all terms and
conditions set forth in their contract with us. These
rebates are estimated based on the terms of individual
agreements, historical experience, product pricing, and
projected product growth rates.
These provisions are adjusted based on established
processes and experiences from filing data with individ-
ual states and plans. There is often a time lag of several
months between us recording the revenue deductions
and our final accounting for them.
Non-United States specific healthcare plans and
program rebates
In certain countries other than the US, we provide rebates
to governments and other entities. These rebates are
often mandated by laws or government regulations.
In several countries, especially in Europe and Austra-
lia, we enter into innovative pay-for- performance arrange-
ments with certain healthcare providers. Under these
agreements, we may be required to make refunds to the
healthcare providers or to provide additional medicines
free of charge if anticipated treatment outcomes do not
meet predefined targets. Potential refunds and the deliv-
ery of additional medicines at no cost are estimated and
recorded as a deduction of revenue at the time the
related revenues are recorded. Estimates are based on
historical experience and clinical data. In cases where
historical experience and clinical data are not sufficient
for a reliable estimation of the outcome, revenue recog-
nition would be deferred until such history would be avail-
able. In addition, we offer global patient assistance pro-
grams.
There is often a time lag of several months between
us recording the revenue deductions and our final
accounting for them.
FINANCIAL REPORT
Operating and financial review 2016
Novartis Annual Report 2016 | 163
Non-healthcare plans and program rebates, returns
and other deductions
We offer rebates to purchasing organizations and other
direct and indirect customers to sustain and increase
market share for our products. Since rebates are con-
tractually agreed upon, the related provisions are esti-
mated based on the terms of the individual agreements,
historical experience, and projected product growth
rates.
Charge-backs occur where our subsidiaries have
arrangements with indirect customers to sell products
at prices that are lower than the price charged to whole-
salers. A charge-back represents the difference between
the invoice price to the wholesaler and the indirect cus-
tomer’s contract price. We account for vendor charge-
backs by reducing revenue for the estimate of charge-
backs attributable to a sale transaction. Provisions for
estimated charge-backs are calculated using a combi-
nation of factors such as historical experience, product
growth rates, payments, product pricing, level of inven-
tory in the distribution channel, the terms of individual
agreements and our estimate of the claims processing
time lag.
When we sell a product providing a customer the right
to return it, we record a provision for estimated sales
returns based on our sales return policy and historical
return rates. Other factors considered include actual
product recalls, expected marketplace changes, the
remaining shelf life of the product, and the expected
entry of generic products. In 2016, sales returns amounted
to approximately 1% of gross product sales. If sufficient
experience is not available, sales are only recorded
based on evidence of product consumption or when the
right of return has expired.
We enter into distribution service agreements with
major wholesalers, which provide a financial disincentive
for the wholesalers to purchase product quantities in
excess of current customer demand. Where possible,
we adjust shipping patterns for our products to maintain
wholesalers’ inventory levels consistent with underlying
patient demand.
We offer cash discounts to customers to encourage
prompt payment. Cash discounts are estimated and
accrued at the time of invoicing and are deducted from
revenue.
Following a decrease in the price of a product, we
generally grant customers a “shelf stock adjustment” for
their existing inventory for the relevant product. Provi-
sions for shelf stock adjustments, which are primarily
relevant within the Sandoz Division, are determined at
the time of the price decline or at the point of sale, if the
impact of a price decline on the products sold can be
reasonably estimated based on the customer’s inventory
levels of the relevant product.
Other sales discounts, such as consumer coupons
and co-pay discount cards, are offered in some markets.
The estimated amounts of these discounts are recorded
at the time of sale, or when the coupons are issued, and
are estimated utilizing historical experience and the spe-
cific terms for each program. If a discount for a proba-
ble future transaction is offered as part of a sales trans-
action then an appropriate portion of revenue is deferred
to cover this estimated obligation.
We adjust provisions for revenue deductions period-
ically to reflect actual experience. To evaluate the ade-
quacy of provision balances, we use internal and exter-
nal estimates of the inventory in transit, the level of
inventory in the distribution and retail channels actual
claims data received and the time lag for processing
rebate claims. External data sources include reports
from wholesalers and third-party market data purchased
by Novartis.
The following table shows the worldwide extent of our revenue deductions provisions and related payment expe-
riences for the Innovative Medicines, Sandoz and Alcon Divisions:
Provisions for deductions from revenue
Income statement charge
(USD millions)
2016
Effect of
currency
translation
Revenue
deductions
Revenue
offset against deductions
gross trade provisions at
January 1 combinations utilizations of prior years Current year receivables December 31
provisions at and business Payments/ Adjustments
Change in
provisions
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 continuing operations 2016
1 165
1 024
1 601
3 790
– 3 203
7
3 492
1 461
– 31
– 1 844
– 26
1 883
14
1 020
– 19 – 11 142
– 117
11 383
– 50 – 16 189
– 136
16 758
– 4
10
1 702
4 183
2015
US-specific healthcare plans and program rebates
1 097
– 2 823
– 90
2 981
1 165
Non-US-specific healthcare plans and program rebates
1 015
– 109
– 1 716
– 3
1 846
– 9
1 024
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
1 601
3 790
164 | Novartis Annual Report 2016
The table below shows the gross to net sales reconciliation for our Innovative Medicines 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
2016
Innovative Medicines 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 Innovative Medicines gross to net sales adjustments
Innovative Medicines net sales 2016
20151
Innovative Medicines 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 Innovative Medicines gross to net sales adjustments
Innovative Medicines net sales 2015
USD millions
– 3 051
– 1 352
– 2 736
– 7 139
– 2 533
– 1 238
– 2 831
– 6 602
1 Restated to reflect the new divisional structures and product transfers between divisions, announced on January 27, 2016.
42 630
100.0
– 3 051
– 885
– 2 237
– 2 044
– 4 780
– 2 929
– 10 068
32 562
– 7.2
– 5.2
– 11.2
– 23.6
76.4
42 460
100.0
– 2 533
– 762
– 2 000
– 1 751
– 4 582
– 2 513
– 9 115
33 345
– 6.0
– 4.7
– 10.8
– 21.5
78.5
Surgical equipment revenue
Surgical equipment is often sold together with other
products and services under a single contract. The total
consideration is allocated to the separate elements
based on their relative fair values. Revenue is recognized
once the recognition criteria have been met for each ele-
ment of the contract.
For surgical equipment, in addition to cash and instal-
ment sales, revenue is recognized under finance and
operating lease arrangements. Arrangements in which
Novartis transfers substantially all the risks and rewards
incidental to ownership to the customer are treated as
finance lease arrangements. Revenue from finance lease
arrangements is recognized at amounts equal to the fair
values of the equipment, which approximate the present
values of the minimum lease payments under the arrange-
ments. As interest rates embedded in lease arrange-
ments are approximately market rates, revenue under
finance lease arrangements is comparable to revenue
for outright sales. Finance income for arrangements in
excess of twelve months is deferred and subsequently
recognized based on a pattern that approximates the
use of the effective interest method and recorded in
“Other income”. Operating lease revenue for equipment
rentals is recognized on a straight-line basis over the
lease term.
Impairment of goodwill, intangible assets
and property, plant and equipment
We review long-lived intangible assets and property,
plant and equipment for impairment whenever events or
changes in circumstance indicate that the asset’s bal-
ance sheet carrying amount may not be recoverable.
Goodwill, the Alcon brand-name and other currently not
amortized intangible assets are reviewed for impairment
at least annually.
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. Usu-
ally, 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 mea-
sure the fair value less costs of disposal. Therefore, an
estimate of fair value less costs of disposal is derived
indirectly and is based on net present value techniques
utilizing post-tax cash flows and discount rates. In the
limited cases where the value in use method is applied,
net present value techniques are utilized using pre-tax
cash flows and discount rates.
Fair value reflects estimates of assumptions that mar-
ket participants would be expected to use when pricing
the asset and for this purpose management considers
the range of economic conditions that are expected to
FINANCIAL REPORT
Operating and financial review 2016
Novartis Annual Report 2016 | 165
exist over the remaining useful life of the asset. The esti-
mates used in calculating net present values are highly
sensitive, and depend on assumptions specific to the
nature of the Group’s activities with regard to:
— amount and timing of projected future cash flows;
— future tax rates;
— behavior of competitors (launch of competing products,
marketing initiatives, etc.); and
— appropriate discount rate.
Due to the above factors and those further described in
Note 1, actual cash flows and values could vary signifi-
cantly from forecasted future cash flows and related val-
ues derived using discounting techniques.
The recoverable amount of the grouping of cash gen-
erating units to which goodwill and indefinite life intan-
gible assets are allocated is based on fair value less costs
of disposal. The valuations are derived from applying dis-
counted future cash flows based on key assumptions,
including the terminal growth rate and discount rate. For
additional information see Note 11 starting on page 207.
In 2016, intangible asset impairment charges for con-
tinuing operations of USD 591 million were recognized,
of which USD 522 million were recorded in the Innova-
tive Medicines Division and USD 65 million in the Sandoz
Division and USD 4 million in the Alcon Division.
In 2015, intangible asset impairment charges of con-
tinuing operations amounted to USD 206 million (USD 178
million in the Innovative Medicines Division and USD 27
million in the Sandoz Division and USD 1 million in the
Alcon Division).
In 2016, there was no reversal of prior year impair-
ment charges (2015: USD 40 million).
Goodwill and other intangible assets represent a sig-
nificant part of our consolidated balance sheet, primar-
ily due to acquisitions. Although no significant additional
impairments are currently anticipated, impairment eval-
uation could lead to material impairment charges in the
future. For more information, see Note 11 to the Group’s
consolidated financial statements.
Additionally, net impairment charges for property,
plant and equipment from continuing operations during
2016 amounted to USD 102 million (2015: USD 80 mil-
lion).
Trade receivables
Trade receivables are initially recognized at their invoiced
amounts including any related sales taxes less adjust-
ments for estimated revenue deductions such as rebates,
charge backs and cash discounts.
Provisions for doubtful trade receivables are estab-
lished once there is an indication that it is likely that a
loss will be incurred. These provisions represent the dif-
ference between the trade receivable’s carrying amount
in the consolidated balance sheet and the estimated net
collectible amount. Significant financial difficulties of a
customer, such as probability of bankruptcy, financial
reorganization, default or delinquency in payments are
considered indicators that recovery of the trade receiv-
able is doubtful. Trade receivable balances include sales
to drug wholesalers, retailers, private health systems,
government agencies, managed care providers, phar-
macy benefit managers and government-supported
healthcare systems. Novartis continues to monitor sov-
ereign debt issues and economic conditions in Greece,
Italy, Portugal, Spain and other countries, and evaluates
trade receivables in these countries for potential collec-
tion risks. Substantially all of the trade receivables over-
due from such countries are due directly from local gov-
ernments or
from government-funded entities.
Deteriorating credit and economic conditions and other
factors in these countries have resulted in, and may con-
tinue to result in an increase in the average length of time
that it takes to collect these trade receivables and may
require Novartis to re-evaluate the collectability of these
trade receivables in future periods.
Contingent consideration
In a business combination or divestment of a business,
it is necessary to recognize contingent future payments
to previous or from new owners representing contrac-
tually defined potential amounts as a liability or asset.
Usually for Novartis these are linked to milestone or roy-
alty payments related to certain assets and are recog-
nized as a financial liability or asset at their fair value
which is then re-measured at each subsequent report-
ing date. These estimations typically depend on factors
such as technical milestones or market performance and
are adjusted for the probability of their likelihood of
payment and if material, appropriately discounted to
reflect the impact of time. Changes in the fair value of
contingent consideration liabilities are recognized in the
consolidated income statement in “Cost of goods sold”
for currently marketed products and in “Research &
Development” for In-Process Research and Develop-
ment (IPR&D). Changes in contingent consideration
assets are recognized in “”Other revenue”, Other income”
or “Other expense”, depending on its nature. The effect
of unwinding the discount over time is recognized in
“Interest expense” in the consolidated income statement.
Novartis does not recognize contingent consideration
associated with asset purchases outside of a business
combination that are conditional upon future events
which are within its control until such time as there is an
unconditional obligation. If the contingent consideration
is outside the control of Novartis, a liability is recognized
once it becomes probable that the contingent consider-
ation will become due. In both cases, if appropriate, a
corresponding asset is recorded.
Impairment of associated companies
accounted for at equity
Novartis considers investments in associated compa-
nies for impairment evaluation whenever indicators are
noted for example when there is a quoted share price
indicating a fair value less than the per-share balance
sheet carrying value for the investment.
166 | Novartis Annual Report 2016
“Marketable securities” are financial assets recorded
in Corporate and consisting principally of quoted equity
and quoted debt securities as well as fund investments
which are principally traded in liquid markets. Marketable
securities that are held for long-term strategic purposes
and typically recorded in the Divisions are classified as
non-current financial assets. They include equity secu-
rities and fund investments.
Retirement and other post-employment
benefit plans
We sponsor pension and other post-employment bene-
fit plans in various forms that cover a significant portion
of our current and former associates. For post-employ-
ment plans with defined benefit obligations, we are
required to make significant assumptions and estimates
about future events in calculating the expense and the
present value of the liability related to these plans. These
include assumptions about the interest rates we apply
to estimate future defined benefit obligations and net
periodic pension expense as well as rates of future pen-
sion increases. In addition, our actuarial consultants pro-
vide our management with historical statistical informa-
tion such as withdrawal and mortality rates in connection
with these estimates.
Assumptions and estimates used by the Group may
differ materially from the actual results we experience
due to changing market and economic conditions, higher
or lower withdrawal rates, and longer or shorter life spans
of participants among other factors. For example, in
2016, a decrease in the interest rate we apply in deter-
mining the present value of the defined benefit obliga-
tions of one quarter of one percent would have increased
our year-end defined benefit pension obligation for plans
in Switzerland, US, UK, Germany and Japan, which rep-
resent 95% of the Group total defined benefit pension
obligation, by approximately USD 0.8 billion. Similarly, if
the 2016 interest rate had been one quarter of one per-
centage point lower than actually assumed, net periodic
pension cost for pension plans in these countries, which
represent about 92% of the Group’s total net periodic
pension cost for pension plans, would have increased by
approximately USD 27 million. Depending on events,
such differences could have a material effect on our total
equity. For more information on obligations under retire-
ment and other post-employment benefit plans and
underlying actuarial assumptions, see Note 25 to the
Group’s consolidated financial statements.
Provisions and Contingencies
A number of Group companies are involved in various
government investigations and legal proceedings (intel-
lectual property, sales and marketing practices, product
liability, commercial, employment and wrongful dis-
charge, environmental claims, etc.) arising out of the nor-
mal conduct of their businesses. For more information,
see Note 20 and Note 28 in the Group’s consolidated
financial statements.
We record provisions for legal proceedings when it
is probable that a liability has been incurred and the
amount can be reliably estimated. These provisions are
adjusted periodically as assessments change or addi-
tional information becomes available. For significant
product liability cases the provision is actuarially deter-
mined based on factors such as past experience, amount
and number of claims reported, and estimates of claims
incurred but not yet reported.
Provisions are recorded for environmental remedia-
tion costs when expenditure on remedial work is proba-
ble and the cost can be reliably estimated. Remediation
costs are provided for under “Non-current liabilities” in
the Group’s consolidated balance sheet.
Provisions relating to estimated future expenditure
for liabilities do not usually reflect any insurance or other
claims or recoveries, since these are only recognized as
assets when the amount is reasonably estimable and
collection is virtually certain.
Research & Development
Internal Research & Development costs are fully charged
to the consolidated income statement in the period in
which they are incurred. We consider that regulatory and
other uncertainties inherent in the development of new
products preclude the capitalization of internal develop-
ment expenses as an intangible asset usually until mar-
keting approval from the regulatory authority is obtained
in a relevant major market, such as for the US, the EU,
Switzerland or Japan.
Healthcare contributions
In many countries our subsidiaries are required to make
contributions to the countries’ healthcare costs as part
of programs other than the ones mentioned above under
deductions from revenues. The amounts to be paid
depend on various criteria such as the subsidiary’s mar-
ket share or sales volume compared to certain targets.
Considerable judgment is required in estimating these
contributions as not all data is available when the
estimates need to be made.
The largest of these healthcare contributions relates
to the US Healthcare Reform fee, which was introduced
in 2011. This fee is an annual levy to be paid by US phar-
maceutical companies, including various Novartis sub-
sidiaries, based on each company’s qualifying sales as
a percentage of the prior year’s government-funded pro-
gram sales. This pharmaceutical fee levy is recognized
in “Other expense”.
On July 25, 2014, the US Department of the Treasury
and the US Internal Revenue Service issued final guid-
ance on this pharmaceutical fee levy which stipulated
that instead of a liability being estimated and recognized
immediately with the first qualifying sale in the following
fee year, as had been industry practice, the levy is owed
in the year in which the sales occur.
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Operating and financial review 2016
Novartis Annual Report 2016 | 167
As a result of this final guidance, in 2014, “Other
expense” includes the recurring non-tax deductible
annual expense of approximately USD 200 million for
the 2014 pharmaceutical fee levy, as well as the non-tax
deductible expense of USD 204 million for the 2013 phar-
maceutical fee levy. USD 204 million of this charge has
been considered as an additional exceptional charge in
2014 since it results from the change in timing of recog-
nition of the pharmaceutical fee levy as required by the
final guidance.
In addition, effective 2013, the US government also
implemented a medical device sales tax which is levied
on the Alcon Division’s US sales of products which are
considered surgical devices under the law. This medical
device tax is initially included in the cost of inventory as,
for Alcon, the tax is usually levied on intercompany sales.
It is expensed as cost of goods sold when the inventory
is sold to third parties.
property globally to deliver goods and services, the
transfer prices within the Group as well as arrangements
between subsidiaries to finance research & development
and other activities may be challenged by the national
tax authorities in any of the jurisdictions in which Novartis
operates. Therefore, inherent uncertainties exist in our
estimates of our tax positions, but we believe that our
estimated amounts for current and deferred tax assets
or liabilities, including any amounts related to any uncer-
tain tax positions, are appropriate based on currently
known facts and circumstances.
New accounting pronouncements
See Note 1 to the Group’s consolidated financial state-
ments.
Taxes
We prepare and file our tax returns based on an inter-
pretation of tax laws and regulations, and record esti-
mates based on these judgments and interpretations.
Our tax returns are subject to examination by the com-
petent taxing authorities, which may result in an assess-
ment being made requiring payments of additional tax,
interest or penalties. Since Novartis uses its intellectual
Internal control over financial reporting
The Group’s management has assessed the effective-
ness of internal control over financial reporting. The
Group’s independent statutory auditor also issued an
opinion on the effectiveness of internal control over
financial reporting. Both the Group’s management and
its external auditors concluded that the Group main-
tained, in all material respects, effective internal control
over financial reporting as of December 31, 2016.
Factors affecting results of operations
We believe that our strategy, which is anchored in our
company’s tradition of leadership in innovation, positions
us well to take advantage of trends shaping the future of
the industry. These trends range from advances in sci-
ence and technology that are opening new frontiers for
research and development (R&D), to the growing and
graying of populations that are boosting demand for
chronic disease treatments (see page 15).
At the same time, these trends contribute to certain
risks and uncertainties in our operations. Some of them
are inherent to the industry, and others are specific to
Novartis. Anticipating and managing these risks can influ-
ence our ability to deliver strong financial performance
and meet the needs of patients, healthcare providers,
payors, regulators and shareholders.
Approach to risk management
The Risk Committee of the Board ensures the Group has
implemented an appropriate and effective risk manage-
ment system and process. It reviews with management
and internal audit the identification, prioritization and
management of the risks, the accountabilities and roles
of the functions involved with risk management, the risk
portfolio and the related actions implemented by man-
agement. The Risk Committee informs the Board of
Directors on a periodic basis.
The Group Risk Office coordinates and aligns the risk
management processes, and reports to the Risk Com-
mittee on a regular basis on risk assessment and risk
management. Organizational and process measures
have been designed to identify and mitigate risks at an
early stage. Organizationally, the responsibility for risk
assessment and management is allocated to the divi-
sions, organizational units, and functions, with special-
ized Corporate functions, such as Group Finance, Group
Legal, Group Quality Assurance, Corporate Health,
Safety and Environment, Business Continuity Manage-
ment, Integrity and Compliance and the Business Prac-
tices Office, providing support and controlling the effec-
tiveness of the risk management in these respective
areas.
Financial risk management is described in more detail
in Note 29 to the Group consolidated financial state-
ments.
Risk factors
Loss of exclusivity for patented products
Pharmaceutical companies routinely face generic com-
petition when their products lose patent or other intel-
lectual property protection, and Novartis is no exception.
Major products of our Innovative Medicines and Alcon
Divisions, as well as certain products of our Sandoz Divi-
sion, are protected by patent or other intellectual prop-
168 | Novartis Annual Report 2016
erty rights – allowing us to exclusively market those prod-
ucts. The loss of exclusivity has had, and will continue to
have, an adverse effect on our results. In 2016, the impact
of generic competition on our net sales amounted to
USD 2.4 billion.
Some of our best-selling products have started to, or
are expected to, face considerable competition due to
the expiration of patent or other intellectual property pro-
tection. For example, we faced generic competition for
Gleevec/Glivec in the US, Japan and certain EU coun-
tries for most of 2016. In the remaining EU countries, cer-
tain of our Glivec intellectual property rights expired in
December 2016, and generic competition there has
begun. Looking forward, certain intellectual property
protecting Afinitor and Gilenya will expire in 2018, 2019
and 2020. In addition, some of the patents protecting
these products are being challenged in the US, raising
the possibility of an earlier entry of generic competition.
To counter the impact of patent expirations, we con-
tinuously invest in R&D to rejuvenate our portfolio. For
example, in 2016, we invested 18.6% of total net sales in
R&D. One measure of the output of our efforts is the per-
formance of our growth products – products launched
in a key market (EU, US, Japan) in 2011 or later, or prod-
ucts with exclusivity in key markets until at least 2020
(except Sandoz, which includes only products launched
in the last 24 months). These products accounted for
35% of total net sales in 2016, up 20% (USD) from the
previous year.
Ability to deliver new products
Our ability to maintain and grow our business – and to
replace revenue and income lost to generic and other
competition – depends in part on the success of our R&D
activities in identifying and developing new treatments
that address unmet medical needs, are accepted by
patients and physicians, and are reimbursed by payors.
Developing new healthcare products and bringing
them to market is a costly, lengthy and uncertain pro-
cess. R&D for a new product in our Innovative Medicines
Division can take 15 years or more, from discovery to
commercial launch. With time limits on intellectual prop-
erty protections, the longer it takes to develop a prod-
uct, the less time we may have to recoup our costs.
During each stage of development, there is a significant
risk that we will encounter obstacles. They may cause a
delay or add substantial expense, limit the potential for
commercial success, or force us to abandon a product
in which we have invested substantial amounts of time
and money.
In addition, as healthcare costs continue to rise, gov-
ernments and payors around the world are increasingly
focused on health outcomes, rewarding new products
that represent truly breakthrough innovation versus
those that offer an incremental benefit over other prod-
ucts in the same therapeutic class. This has led to
requests for more clinical trial data, for the inclusion of
more patients in clinical trials, and for more detailed anal-
yses of the trials. As a result, the already lengthy and
expensive process of obtaining regulatory approvals and
reimbursement for pharmaceutical products has become
even more challenging.
Our Sandoz Division faces similar challenges, partic-
ularly in the development of biosimilars. While Sandoz
was a pioneer in introducing biosimilars to the European
market in 2006, and was the first company to win
approval for a biosimilar under the new regulatory path-
way in the US in 2015, many countries still lack fully devel-
oped regulatory frameworks for the development and
approval of biosimilars. Further delays in establishing
regulatory frameworks, or any other difficulties that may
arise in the development or marketing of biosimilars,
could put at risk the significant investments that Sandoz
has made, and will continue to make, in this area.
Our Alcon Division faces medical device develop-
ment and approval processes that are often similarly dif-
ficult. As part of its growth plan, Alcon is taking steps to
accelerate innovation. It has started to see the results of
its efforts, with the approval and launch in 2016 of two
new intraocular lenses, PanOptix and UltraSert, as well
as a multifocal version of Dailies Total1. But there is no
certainty that Alcon will continue to be successful in
these efforts, and if it is not, there could be a material
adverse effect on the success of the Alcon Division, and
on the Group as a whole.
In spite of our significant investments, there can be
no guarantee that our R&D activities will produce com-
mercially viable new products that will enable us to grow
our business and replace revenue and income lost to
competition.
Commercial success of key growth products
Our ability to grow depends not only on our pipeline deliv-
ery, but also on our commercial success, particularly with
respect to our growth products, which we consider to
be an indicator of our ability to renew our portfolio. The
commercial success of these products could be impacted
at any time by a number of factors, including new com-
petitors, changes in doctors’ prescribing habits, pricing
pressure, manufacturing issues, or loss of intellectual
property protection. In addition, our revenue could be
significantly impacted by the timing and rate of commer-
cial acceptance of key new products.
All of our businesses face intense competition from
new products and scientific advances from competitors.
Physicians, patients and payors may choose competitor
products instead of ours if they perceive them to be bet-
ter in terms of efficacy, safety, cost or convenience. In
our Oncology business, for example, Afinitor saw sales
decline in 2016 due to new treatment options in advanced
breast cancer and renal cell carcinoma in the US. Sales
increases for Afinitor in other indications, such as neu-
roendocrine tumors of gastrointestinal or lung origin,
were unable to compensate.
Our Alcon Division also faced significant competitive
pressure in 2016. Alcon is implementing a growth plan
to counteract this pressure, including steps such as
accelerating innovation and increasing investments in
new product launches. While we are starting to see signs
of progress, such as contact lens market share gains in
certain European countries where we started investing
in direct-to-consumer advertising, there is no certainty
that our actions and investments will be sufficient to off-
set competition and return the division to growth. Should
FINANCIAL REPORT
Operating and financial review 2016
Novartis Annual Report 2016 | 169
our efforts fail to accomplish their goals, or fail to do so
in a timely manner, it could have a material adverse
impact on our business, financial condition, or results of
operations beyond the near term, as well.
Pricing and reimbursement
Around the world, governments and payors continue to
struggle with rising healthcare costs as aging popula-
tions contribute to increased prevalence of chronic dis-
eases. There have also been examples, particularly in
the US, of significant controversies about prices for phar-
maceuticals that some members of the public have con-
sidered excessive. These factors have intensified the
pressures we face regarding the prices we charge for
our drugs, and on our ability to establish satisfactory
rates of reimbursement for our products by govern-
ments, insurers and other payors.
We expect scrutiny to continue in 2017 and following
years as governments and insurers around the world
strive to reduce healthcare costs through steps such as
restricting access to higher priced new medicines,
increasing coinsurance or copays owed by patients for
medicines, increasing the use of generics, and imposing
price cuts. In this environment, we believe it is more
important than ever to demonstrate the value that true
innovation brings to the healthcare system.
To manage these pressures, we are investing in real-
world data and analytics to provide additional evidence
of the health benefits of our products, exploring new
technologies and patient management services, and
partnering with payors to develop and scale out-
comes-based commercial models. For example, we are
working with customers on flexible pricing approaches
where we are fully compensated only if a drug succeeds
in meeting certain performance targets.
Business practices
In recent years, there has been a trend of increasing gov-
ernment investigations and litigation against companies
operating in our industry, including in the US and other
countries. We are obligated to comply with the laws of
all countries in which we operate, as well as any new
requirements that may be imposed upon us. But beyond
legal requirements, we strive to meet evolving public
expectations for ethical behavior. We have a significant
global compliance program in place, and devote substan-
tial time and resources to ensure that our business is
conducted in a legal and publicly acceptable manner.
Despite our efforts, any failure to comply with the law
could lead to substantial liabilities that may not be cov-
ered by insurance and could affect our business and rep-
utation.
Governments and regulatory authorities worldwide
are also increasingly challenging practices previously
considered to be legal and compliant. For example, spon-
soring doctors to attend medical conferences has long
been used by pharmaceutical companies to help raise
awareness of the latest advances in medicine. One of
our goals in 2016 was to find better and more inclusive
ways to reach a broader cross-section of this commu-
nity. We have therefore started to employ technology to
supplement face-to-face meetings and bring the expe-
rience of international congresses to the local level.
Responding to these challenges and new regulations
is costly. Investigations and litigation may affect our rep-
utation, create a risk of potential exclusion from govern-
ment reimbursement programs in the US and other coun-
tries, potentially large damage payments and agreements
intended to regulate company behavior. This is why we
continued to strengthen the Integrity & Compliance (I&C)
function in 2016. The function now has 375 employees,
175 of whom were added in the last three years.
We also introduced a new Chief Ethics and Compli-
ance Officer, reporting directly to the CEO, in 2016. The
new Chief Ethics and Compliance Officer is also Head
of Litigation, reporting to the Group General Counsel of
Novartis. By bringing the I&C and Legal functions closer
together, we can evaluate facts that are at issue in law-
suits to determine if additional compliance actions or
policies are warranted. We expect this will help us con-
stantly improve our compliance activities.
Supply continuity
The production of pharmaceutical products and medi-
cal devices can be highly complex, and any manufactur-
ing issue compromising supply or quality could have seri-
ous consequences for the health of patients. For this
reason, there are strict regulatory requirements sur-
rounding our manufacturing processes, which introduce
a greater chance for disruptions and liabilities. For exam-
ple, government authorities monitor our manufacturing
facilities, and if they fail to meet requirements, there is a
risk that they could be shut down. Disturbances in our
supply chain could lead to product shortages, lost reve-
nue and litigation.
Beyond regulatory requirements, many of our prod-
ucts involve technically sophisticated manufacturing pro-
cesses or require specialized raw materials. For exam-
ple, biologic products – produced from living plant or
animal micro-organisms – comprise a significant portion
of our product portfolio. For biologic products, slight
deviations in the production process could lead to pro-
duction failures or recalls. Our portfolio also includes a
number of sterile products, such as oncology treatments,
which are technically complex to manufacture and
require strict environmental controls. There is a greater
chance of production failures and supply interruptions
for such products.
Given the complexity of our manufacturing pro-
cesses, we have worked for several years to adopt a sin-
gle high-quality standard across the company. We
believe these efforts are having an impact. The results
of inspections by regulatory agencies in 2016 were con-
sistent with the year before. Out of a total of 206 inspec-
tions, all but four (98%) were without major findings.
Novartis took a further step in 2016 in our ongoing com-
mitment to improvement, realigning our quality organi-
zation into a single, enterprise-wide group under one
leader.
Foreign exchange fluctuations
Changes in exchange rates between the US dollar, our
reporting currency, and other currencies can have a sig-
nificant effect on our reported sales, costs and earnings,
as well as on the reported value of our assets, liabilities
and cash flows.
170 | Novartis Annual Report 2016
For example, because our expenditures in Swiss
francs are significantly higher than our revenue in Swiss
francs, volatility in the value of the Swiss franc can have
a significant impact on our reported results, and the tim-
ing and extent of such volatility can be difficult to predict.
There is also a risk that certain countries could take
steps that could significantly impact the value of their
currencies, such as withdrawing from trade agreements
or common currencies. In addition, countries may expe-
rience periods of high inflation. This could lead them to
devalue their currencies or set exchange controls, as
Venezuela has done. Ongoing conditions in Venezuela
and other such countries could lead to further devalua-
tions, which could result in significant additional finan-
cial losses to the Group in the future.
To mitigate the risk posed by foreign exchange fluc-
tuations, we engage in hedging transactions where man-
agement deems appropriate, after taking into account
the natural hedging afforded by our global business activ-
ity.
Intangible assets and goodwill
We carry a significant amount of goodwill and other
intangible assets on our consolidated balance sheet, pri-
marily due to acquisitions. As a result, we may incur sig-
nificant impairment charges if the fair value of intangible
assets and groupings of cash generating units contain-
ing goodwill would be less than their carrying value on
the Group’s consolidated balance sheet at any point in
time.
We regularly review our long-lived intangible and tan-
gible assets for impairment. In 2016, for example, we
recorded intangible asset impairment charges of
USD 591 million. Impairment testing may lead to addi-
tional impairment charges in the future. Any significant
impairment charges could have a material adverse effect
on our results of operations and financial condition.
Tax
Our worldwide operations are taxed under laws in the
jurisdictions in which we operate. However, the inte-
grated nature of our worldwide operations can produce
conflicting claims from revenue authorities as to the
determination of profits to be taxed in individual coun-
tries. The majority of the jurisdictions in which we oper-
ate have double tax treaties with other foreign jurisdic-
tions, which provide a framework for mitigating the
incidence of double taxation on our revenues and capi-
tal gains.
But in recent years, tax authorities around the world
have become more rigid in exercising any discretion they
may have. As part of this, the Organization for Economic
Co-operation and Development (OECD) has proposed
a number of tax law changes under its Base Erosion and
Profit Shifting (BEPS) Action Plans to address issues of
transparency, coherence and substance.
At the same time, the European Commission is final-
izing the Anti Tax Avoidance Directive and continues to
expand the application of the fiscal state aid policy and
the respective investigation on tax ruling practices.
These tax reform initiatives on the OECD and European
levels also need local country implementation, including
in our home country of Switzerland, which may result in
significant changes to established tax principles and
could lead to an increased risk of international tax dis-
putes.
Although we have taken steps to be in compliance
with the evolving OECD and European tax initiatives, and
will continue to do so, significant uncertainties remain as
to the outcome of the Swiss and other countries’ tax
reform efforts. Such efforts, including with respect to
tax base or rate, transfer pricing, intercompany divi-
dends, cross border transactions, controlled corpora-
tions, and limitations on tax relief allowed on the interest
on intercompany debt, could require us to adapt our tax
structure, increase our effective tax rate and adversely
affect our financial results.
IT security, data integrity & data privacy
Our business is heavily dependent on critical, complex
and interdependent information technology (IT) systems,
including Internet-based systems, to support business
processes.
The size and complexity of our IT systems, and – in
some instances – their age, make them potentially vul-
nerable to external and internal security breaches, break-
downs, malicious intrusions, malware, misplaced and lost
data, programming and human errors, and other similar
events. Although we have devoted and continue to devote
significant resources and management attention to the
protection of our data and information technology, like
many companies, we have experienced such events and
expect to continue to experience them in the future. We
believe that the data security breaches we have experi-
enced to date have not resulted in significant disruptions
to our operations, and will not have a significant adverse
effect on our current or future results of operations. How-
ever, we may not be able to prevent breakdowns or
breaches in our systems that could have a material
adverse effect on our business, financial condition,
results of operation, or reputation.
In addition, our use of information technologies,
including the Internet, social media, mobile technologies,
and technology-based medical devices – as well as other
routine business operations – sometimes involves gath-
ering personal information (including sensitive personal
information) regarding our patients, vendors, customers,
employees, collaborators and others. Breaches of our
systems or other failures to protect such information
could expose the personal information of third parties to
unauthorized persons. Such information breaches could
result in significant potential liability and reputational
harm.
FINANCIAL REPORT
Operating and financial review 2016
Novartis Annual Report 2016 | 171
Non-IFRS measures as defined by Novartis
A limitation of the core measures is that they provide a
view of the Group’s operations without including all
events during a period, such as the effects of an acqui-
sition, divestments, or amortization/impairment of pur-
chased intangible assets and restructurings.
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 to investors, including changes in sales
volume, we present information about our net sales and
various values relating to operating and net income that
are adjusted for such foreign currency effects.
Constant currency calculations have the goal of elim-
inating two 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:
— The impact of translating the income statements of
consolidated entities from their non-USD functional
currencies to USD
— The impact of exchange rate movements on the major
transactions of consolidated entities performed in
currencies other than their functional currency.
We calculate constant currency measures by translating
the current year’s foreign currency values for sales and
other income statement items into USD, using the aver-
age exchange rates from the prior year and comparing
them to the prior year values in USD.
We use these constant currency measures in evalu-
ating the Group’s performance, as they may assist us in
evaluating our ongoing performance from year to year.
However, in performing our evaluation, we also consider
equivalent measures of performance that are not affected
by changes in the relative value of currencies.
Growth rate calculation
For ease of understanding, Novartis uses a sign conven-
tion for its growth rates such that a reduction in operat-
ing expenses or losses compared to the prior year is
shown as a positive growth.
Novartis uses certain non-IFRS metrics when measur-
ing performance, especially when measuring current
year results against prior periods, including core results,
constant currencies, free cash flow and net debt.
Despite the use of these measures by management
in setting goals and measuring the Group’s performance,
these are non-IFRS measures that have no standardized
meaning prescribed by IFRS. As a result, such measures
have limits in their usefulness to investors.
Because of their non-standardized definitions, the
non-IFRS measures (unlike IFRS measures) may not be
comparable to the calculation of similar measures of
other companies. These non-IFRS measures are pre-
sented solely to permit investors to more fully understand
how the Group’s management assesses underlying per-
formance. These non-IFRS measures are not, and should
not be viewed as, a substitute for IFRS measures.
As an internal measure of Group performance, these
non-IFRS measures have limitations, and the Group’s
performance management process is not solely
restricted to these metrics.
Core results
The Group’s core results – including core operating
income, core net income and core earnings per share –
exclude fully the amortization and impairment charges
of intangible assets, excluding software, and certain
acquisition related items. The following items that exceed
a threshold of USD 25 million are also excluded: integra-
tion and divestment related income and expenses,
divestment gains and losses, restructuring charges/
releases, legal related items, impairments of property,
plant and equipment and financial assets, as well as
income and expense items that management deems
exceptional and that are or are expected to accumulate
within the year to be over a USD 25 million threshold.
Novartis believes that investor understanding of the
Group’s performance is enhanced by disclosing core
measures of performance because, as they exclude
items that can vary significantly from year to year, the
core measures enable better comparison of business
performance across years. For this same reason,
Novartis uses these core measures in addition to IFRS
and other measures as important factors in assessing
the Group’s performance.
The following are examples of how these core mea-
sures are utilized:
— In addition to monthly reports containing financial
information prepared under IFRS, senior manage-
ment receives a monthly analysis incorporating these
core measures.
— Annual budgets are prepared for both IFRS and core
measures.
172 | Novartis Annual Report 2016
Free cash flow
Additional information
Novartis defines free cash flow as cash flow from oper-
ating activities and cash flow associated with the pur-
chase or sale of property, plant and equipment, and
intangible, other non-current and financial assets,
excluding marketable securities. Cash flows in connec-
tion with the acquisition or divestment of subsidiaries,
associated companies and non-controlling interests in
subsidiaries are not taken into account to determine free
cash flow.
Free cash flow is presented as additional information
because Novartis considers it to be a useful indicator of
the Group’s ability to operate without reliance on addi-
tional borrowing or use of existing cash. Free cash flow
is a measure of the net cash generated that is available
for debt repayment, investment in strategic opportuni-
ties and for returning to shareholders. Free cash flow is
not intended to be a substitute measure for cash flow
from operating activities as determined under IFRS.
EBITDA
Novartis defines earnings before interest, tax, depreci-
ation and amortization (EBITDA) as operating income
from continuing operations excluding depreciation of
property, plant and equipment (including any related
impairment charges) and amortization of intangible
assets (including any related impairment charges).
(USD millions)
2016
2015
Change
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
8 268
8 977
– 709
1 489
1 470
19
3 861
3 755
106
693
246
447
14 311
14 448
– 137
Net debt
Novartis defines net debt as current and non-current
financial debt less cash and cash equivalents, current
investments and derivative financial instruments. Net
debt is presented as additional information because
management believes it is a useful supplemental indica-
tor of the Group’s ability to pay dividends, to meet finan-
cial commitments and to invest in new strategic oppor-
tunities, including strengthening its balance sheet.
Novartis Cash Value Added
The Novartis Cash Value Added (NCVA) is a metric that
is based on what the company assesses to be its cash
flow return less a capital charge on gross operating
assets. NCVA is used as the primary internal financial
measure for determining payouts under the new Long-
Term Performance Plan (LTPP) introduced in 2014. More
information on NCVA is presented as part of the Com-
pensation Report on page 119.
Enterprise value
Enterprise value represents the total amount that share-
holders and debt holders have invested in Novartis, less
the Group’s liquidity.
(USD millions
unless indicated otherwise)
Dec 31, 2016 Dec 31, 2015
Change
Market capitalization
172 048
208 321
– 36 273
Non-controlling interests
59
76
– 17
Financial debts and
derivatives
23 802
21 931
1 871
Liquidity
– 7 777
– 5 447
– 2 330
Enterprise value
188 132
224 881
– 36 749
Enterprise value/EBITDA
13
16
FINANCIAL REPORT
Operating and financial review 2016
Novartis Annual Report 2016 | 173
2016 and 2015 reconciliation from IFRS results to core results
(USD millions unless indicated otherwise)
IFRS operating income
from continuing operations
Innovative Medicines1
Sandoz
Alcon
Corporate
Total Group
2016
2015 2
restated
2016
2015 2
restated
2016
2015 2
restated
2016
2015
2016
2015
7 426
7 815
1 445
1 300
– 132
281
– 471
– 419
8 268
8 977
Amortization of intangible assets
2 440
2 367
460
447
901
895
3 801
3 709
522
138
65
27
4
1
591
166
Impairments
Intangible assets
Property, plant & equipment
related to the Group-wide
rationalization of manufacturing sites
Other property, plant & equipment
Financial assets
1
76
18
6
– 45
32
– 7
8
83
14
Total impairment charges
617
131
66
124
4
Acquisition or divestment related items
- Income
- Expense
Total acquisition or divestment
related items, net
– 68
41
– 22
214
– 27
192
– 1
1
0
1
2
21
91
112
99
99
– 6
84
117
786
89
– 9
123
369
– 229
– 260
– 297
– 283
223
250
264
465
– 6
– 10
– 33
182
Other items
Divestment gains
Restructuring items
- Income
- Expense
Legal-related items
- Income
- Expense
Additional income
Additional expense
Total other items
Total adjustments
– 608
– 626
– 6
– 48
– 54
– 662
– 680
– 41
418
– 30
422
– 23
123
121
– 4
33
– 4
29
– 5
65
– 5
57
– 73
639
– 39
629
– 99
205
578
– 61
– 119
84
– 102
132
357
2 928
3 047
40
– 2
15
174
745
6
100
626
– 13
61
77
4
– 5
33
57
– 30
– 68
65
– 22
100
90
– 35
– 99
205
592
– 96
– 194
251
165
245
553
982
954
183
67
4 719
4 813
Core operating income
from continuing operations
10 354 10 862
2 071
2 045
850
1 235
– 288
– 352 12 987 13 790
As % of net sales
31.8
32.6
20.4
20.3
14.6
20.6
26.8
6
2
697
264
703
27.9
266
Income from associated companies
Core adjustments to income
from associated companies, net of tax
Interest expense
Other financial income and expense 3
Taxes (adjusted for above items)
Core net income
from continuing operations
Core net loss
from discontinued operations 4
Core net income
Core net income
attributable to shareholders
Core basic EPS from
continuing operations (USD) 5
Core basic EPS from
discontinued operations (USD) 5
Total core basic EPS (USD) 5
1 Formerly named the Pharmaceuticals Division
2 Restated to reflect the new divisional structures and product transfers between divisions, announced on January 27, 2016.
3 Adjusted for charges of USD 0.3 billion related mainly to Venezuela subsidiaries (2015: USD 0.4 billion)
4 For details on 2015 discontinued operations reconciliation from IFRS to core net income, please refer to page 175.
5 Earnings per share (EPS) is calculated on the amount of net income attributable to shareholders of Novartis AG.
431
715
431
715
– 707
– 655
– 99
– 24
– 2 001 – 2 051
11 314 12 041
– 256
11 314 11 785
11 307 11 774
4.75
5.01
– 0.11
4.75
4.90
174 | Novartis Annual Report 2016
2016 and 2015 reconciliation from Group IFRS results to Group core results
2016 (USD millions unless indicated otherwise)
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
Net income
Basic EPS from continuing operations (USD) 6
Total basic EPS (USD) 6
Acquisition or
divestment
related items,
including
restructuring
and integration
charges 3
Impairments 2
Amortization
of intangible
assets 1
IFRS results
3 758
3 801
4 097
96
786
786
31 916
8 268
7 817
– 1 119
6 698
6 698
2.82
2.82
Other
items 4 Core results
36
35 806
– 33
– 33
165
648
12 987
13 315
– 2 001
11 314
11 314
4.75
4.75
The following are adjustments to arrive at core gross profit from continuing operations
Other revenues
Cost of goods sold
918
– 17 520
3 758
96
– 50
868
86
– 13 580
The following are adjustments to arrive at core operating income from continuing operations
Marketing & Sales
Research & Development
General & Administration
Other income
Other expense
– 11 998
– 9 039
– 2 194
1 927
– 2 344
43
495
7
– 11 991
99
74
– 8 402
– 2 120
– 10
205
– 297
– 867
753
264
816
– 1 059
The following are adjustments to arrive at core income before taxes from continuing operations
Income from associated companies
Other financial income and expense
703
– 447
296
135
348
1 134
– 99
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 296 million for the
Novartis share of the estimated Roche core items.
2 Impairments: Cost of goods sold and Research & Development include impairment charges related to intangible assets; Other income includes impairment reversals of property,
plant and equipment; Other expense includes impairment charges related to property, plant and equipment, and financial assets.
3 Acquisition or divestment related items, including restructuring and integration charges: Other income and Other expense include transitional service-fee income and expenses,
and other items related to the portfolio transformation; Other income also includes a gain from the revaluation of a previously held financial investment in a newly acquired
company.
4 Other items: Other revenues include an early release of deferred income associated with a collaboration agreement; Cost of goods sold, Other income and Other expense include
net restructuring and other charges related to the Group-wide rationalization of manufacturing sites; Research & Development, Marketing & Sales, Other income and Other
expense include other restructuring income and charges; Cost of goods sold and Research & Development include adjustments of contingent considerations; General &
Administration, Other income and Other expense include items related to setup costs for Novartis Business Services; Other income and Other expense also include legal
settlements and changes in provisions; Other income also includes gains from product divestments, other income related to the portfolio transformation and a gain related to the
sale of real estate; Other expense also includes a charge as a result of a pension plan amendment, a charge for an indirect tax settlement and other costs; Income from associated
companies includes USD 135 million for the Novartis share of the estimated GSK Consumer Healthcare Holdings Ltd. core items; Other financial income and expense relates mainly
to devaluation losses in Venezuela.
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 other 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 5.5 billion to arrive at the core results before tax amounts to USD 882 million.
The average tax rate on the adjustments for continuing operations is 16.0% since the estimated full-year tax charge has been applied to the pre-tax income of the period.
6 Earnings per share (EPS) is calculated on the amount of net income attributable to shareholders of Novartis AG.
FINANCIAL REPORT
Operating and financial review 2016
Novartis Annual Report 2016 | 175
2015 (USD millions unless indicated otherwise)
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
32 983
8 977
8 134
– 1 106
7 028
12 479
– 1 713
10 766
17 794
2.92
4.48
7.40
Acquisition or
divestment
related items,
including
restructuring
and integration
charges 3
Impairments 2
Amortization
of intangible
assets 1
IFRS results
3 666
3 709
4 132
126
369
369
182
182
Other
items 4 Core results
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 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 relates mainly to devaluation losses in Venezuela.
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 other 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.
176 | Novartis Annual Report 2016
Summary of quarterly
and Group financial data
Summary of quarterly financial data for 2016 and 2015
(USD millions unless indicated otherwise)
Q1
Q2
Q3
Q4
2016
Q1
Q2
Q3
Q4
2015
Net sales to third parties
from continuing operations
Sales to discontinued operations
11 600 12 470 12 126 12 322 48 518 11 935 12 694 12 265 12 520 49 414
26
26
Net sales from continuing operations
11 600 12 470 12 126 12 322 48 518 11 961 12 694 12 265 12 520 49 440
Other revenues
Cost of goods sold
Gross profit
Marketing & Sales
Research & Development
General & Administration
Other income
Other expense
Operating income
from continuing operations
210
209
215
284
918
241
202
220
284
947
– 4 212 – 4 451 – 4 368 – 4 489 – 17 520 – 3 980 – 4 487 – 4 388 – 4 549 – 17 404
7 598
8 228
7 973
8 117 31 916
8 222
8 409
8 097
8 255 32 983
– 2 741 – 3 067 – 2 944 – 3 246 – 11 998 – 2 691 – 3 016 – 2 890 – 3 175 – 11 772
– 2 041 – 2 190 – 2 224 – 2 584 – 9 039 – 2 067 – 2 206 – 2 190 – 2 472 – 8 935
– 564
– 582
– 456
– 592 – 2 194
– 591
– 601
– 573
– 710 – 2 475
777
239
530
381
1 927
414
357
682
596
2 049
– 578
– 535
– 610
– 621 – 2 344
– 502
– 662
– 892
– 817 – 2 873
2 451
2 093
2 269
1 455
8 268
2 785
2 281
2 234
1 677
8 977
Income from associated companies
127
203
217
156
703
15
121
120
10
266
Interest expense
– 185
– 180
– 174
– 168
– 707
– 179
– 164
– 154
– 158
– 655
Other financial income and expense
– 41
– 3
– 38
– 365
– 447
57
– 82
– 31
– 398
– 454
Income before taxes
from continuing operations
2 352
2 113
2 274
1 078
7 817
2 678
2 156
2 169
1 131
8 134
Taxes
– 341
– 307
– 329
– 142 – 1 119
– 372
– 300
– 357
– 77 – 1 106
Net income
from continuing operations
Net income/loss
from discontinued operations
Net income
Attributable to:
2 011
1 806
1 945
936
6 698
2 306
1 856
1 812
1 054
7 028
2 011
1 806
1 945
936
6 698 13 005
1 838
1 895
1 056 17 794
10 699
– 18
83
2 10 766
Shareholders of Novartis AG
2 011
1 804
1 940
957
6 712 13 005
1 836
1 888
1 054 17 783
2
5
– 21
– 14
–
2
7
2
11
0.85
0.76
0.81
0.40
2.82
0.96
0.77
0.75
0.44
2.92
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)
0.85
0.76
0.81
0.40
2.82
5.40
0.76
4.44
– 0.01
0.04
0.79
0.00
0.44
4.48
7.40
Net sales to third parties by segment
Innovative Medicines1, 2
7 729
8 387
8 173
8 273 32 562
7 960
8 633
8 254
8 498 33 345
Sandoz2
Alcon2
Net sales to third parties
from continuing operations
Operating income by segment
2 445
2 577
2 517
2 605 10 144
2 444
2 530
2 542
2 554 10 070
1 426
1 506
1 436
1 444
5 812
1 531
1 531
1 469
1 468
5 999
11 600 12 470 12 126 12 322 48 518 11 935 12 694 12 265 12 520 49 414
Innovative Medicines1, 2
2 180
1 866
2 020
1 360
7 426
2 450
1 994
1 872
1 499
7 815
Sandoz2
Alcon2
Corporate
Operating income
from continuing operations
Core operating income
from continuing operations
Core net income
from continuing operations
Core basic earnings per share (USD)
from continuing operations
346
31
380
354
365
1 445
7
– 50
– 120
– 132
340
141
281
54
388
57
291
1 300
29
281
– 106
– 160
– 55
– 150
– 471
– 146
– 48
– 83
– 142
– 419
2 451
2 093
2 269
1 455
8 268
2 785
2 281
2 234
1 677
8 977
3 261
3 332
3 381
3 013 12 987
3 651
3 593
3 489
3 057 13 790
2 788
2 930
2 938
2 658 11 314
3 199
3 074
3 061
2 707 12 041
1.17
1.23
1.23
1.12
4.75
1.33
1.27
1.27
1.14
5.01
1 Formerly named the Pharmaceuticals Division
2 Restated to reflect the new divisional structures and product transfers between divisions, announced on January 27, 2016
FINANCIAL REPORT
Summary of quarterly and Group financial data
Novartis Annual Report 2016 | 177
Summary of Group financial data 2012–2016
(USD millions unless indicated otherwise)
2016
2015
2014
2013
2012
Net sales to third parties from continuing operations
48 518
49 414
52 180
51 869
51 080
Change relative to preceding year
Innovative Medicines net sales1, 2
Change relative to preceding year
Sandoz net sales2
Change relative to preceding year
Alcon net sales2
Change relative to preceding year
Operating income from continuing operations
Change relative to preceding year
As % of net sales
As % of average equity
As % of average net operating assets
Net income from continuing operations
Change relative to preceding year
As % of net sales
As % of average equity
Net income/loss from discontinued operations
Net income
As % of average equity
Dividends of Novartis AG3
As % of net income from continuing operations4
As % of net income4
Cash flows from operating activities from continuing operations
Change relative to preceding year
As % of net sales
Cash flows from operating activities
Free cash flow from continuing operations
Change relative to preceding year
As % of net sales
Free cash flow
Purchase of property, plant & equipment5
Change relative to preceding year
As % of net sales
Depreciation of property, plant & equipment5
As % of net sales
Core Research & Development5
As % of net sales
%
– 1.8
– 5.3
0.6
1.5
– 1.7
32 562
33 345
34 828
34 953
34 466
%
– 2.3
– 4.3
– 0.4
1.4
– 0.5
10 144
10 070
10 736
10 528
10 408
0.7
– 6.2
2.0
1.2
5 999
6 616
6 388
– 9.3
3.6
2.9
– 7.8
6 206
3.3
5 812
– 3.1
8 268
– 7.9
17.0
10.9
9.0
8 977
11 089
10 983
11 507
– 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
6 698
7 028
10 727
9 309
9 530
– 4.7
13.8
8.8
– 34.5
14.2
9.5
15.2
20.6
14.8
10 766
– 447
– 2.3
17.9
13.0
– 17
6 698
17 794
10 280
9 292
8.8
24.1
14.1
12.9
6 445
6 475
6 643
6 810
96
96
92
36
62
65
74
74
9.7
18.7
14.1
– 147
9 383
13.9
6 100
65
66
11 475
12 085
13 898
12 617
13 810
– 5.0
23.7
– 13.0
24.5
10.2
26.6
– 8.6
24.3
1.4
27.0
11 475
11 879
13 897
13 174
14 194
9 455
9 259
10 934
9 521
11 251
2.1
19.5
9 455
1 862
– 21.3
3.8
– 15.3
18.7
14.8
21.0
– 15.4
18.4
– 6.3
22.0
9 029
10 762
9 945
11 383
2 367
2 624
2 903
2 458
– 9.8
4.8
– 9.6
5.0
18.1
5.6
28.5
4.8
1 489
1 470
1 586
1 554
1 517
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
3.1
3.0
3.0
3.0
8 402
8 738
8 723
8 885
%
17.3
17.7
16.7
17.1
3.0
8 396
16.4
7 156
20.8
Core Innovative Medicines Division Research & Development1, 2
7 112
7 502
7 432
7 611
As % of Innovative Medicines Division net sales
%
21.8
22.5
21.3
21.8
Total assets
Liquidity
Equity
Debt/equity ratio
Current ratio
Net operating assets
Change relative to preceding year
As % of net sales
Personnel costs5, 6
As % of net sales
130 124
131 556
125 387
126 254
124 191
7 777
5 447
13 862
9 222
8 119
74 891
77 122
70 844
74 472
69 263
0.32:1
1.12:1
0.28:1
0.29:1
0.24:1
0.96:1
1.39:1
1.16:1
0.28:1
1.16:1
90 916
93 606
77 393
83 268
80 870
%
%
– 2.9
187.4
20.9
– 7.1
3.0
189.4
148.3
160.5
– 0.3
158.3
13 681
13 540
14 569
13 760
13 127
%
28.2
27.4
27.9
26.5
25.7
Full-time equivalent associates at year-end5, 6
118 393
118 700
117 809
119 362
112 461
Net sales per full-time equivalent associate (average)3
USD
409 274
417 861
440 020
447 488
460 867
1 Formerly named the Pharmaceuticals Division
2 Restated to reflect the new divisional structures and product transfers between divisions, announced on January 27, 2016
3 2016 dividend proposal for shareholder approval at the Annual General Meeting on February 28, 2017.
In all years, this figure reflects only amounts paid to third-party shareholders of Novartis AG.
4 Based on net income attributable to the shareholders of Novartis AG
5 Continuing operations
6 Own employees
nm = not meaningful
178 | Novartis Annual Report 2016
Novartis Group
consolidated financial statements
Consolidated income statements
(For the years ended December 31, 2016, 2015 and 2014)
(USD millions unless indicated otherwise)
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.
Note
2016
2015
2014
3
48 518
49 414
52 180
3
48 518
49 440
52 419
26
239
918
947
1 215
– 17 520
– 17 404
– 17 345
31 916
32 983
36 289
– 11 998
– 11 772
– 12 377
– 9 039
– 8 935
– 9 086
– 2 194
– 2 475
– 2 616
1 927
2 049
1 391
– 2 344
– 2 873
– 2 512
8 268
8 977
11 089
703
– 707
– 447
266
– 655
– 454
1 918
– 704
– 31
7 817
8 134
12 272
3
4
5
5
6
– 1 119
– 1 106
– 1 545
6 698
7 028
10 727
30
10 766
– 447
6 698
17 794
10 280
6 712
17 783
10 210
– 14
11
70
2.82
7
2.82
2.80
7
2.80
2.92
4.48
7.40
2.88
4.41
7.29
4.39
– 0.18
4.21
4.31
– 0.18
4.13
FINaNcI al RepORT
Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 179
Consolidated statements of comprehensive income
(For the years ended December 31, 2016, 2015 and 2014)
(USD millions)
Net income
Note
2016
2015
2014
6 698
17 794
10 280
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 comprehensive income
recognized by associated companies, net of taxes
Currency translation effects
Total of items to eventually recycle
Other comprehensive income never to be recycled into the consolidated income statement:
Actuarial losses from defined benefit plans, net of taxes
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.
8.1
8.1
8.1
– 113
15
– 98
28
20
48
671
– 48
89
21
110
– 5
8.2
– 2 391
– 1 662
– 2 220
– 1 818
– 1 662
– 2 115
8.3
– 515
– 147
4 365
15 985
4 382
15 977
4 382
5 238
10 739
– 17
8
– 822
7 343
7 274
7 820
– 546
69
180 | Novartis Annual Report 2016
Consolidated statements of changes in equity
(For the years ended December 31, 2016, 2015 and 2014)
(USD millions)
Note
Share
capital
Treasury
shares
Issued share
capital and
reserves
attributable
Retained Total value
to Novartis
earnings adjustments shareholders
Non-
controlling
interests
Total
equity
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
Exercise of options and employee transactions
Equity-based compensation
Increase of treasury share repurchase
obligation under a share buyback trading plan
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
Exercise of options and employee transactions
Equity-based compensation
Decrease of treasury share repurchase
obligation under a share buyback trading plan
Changes in non-controlling interests
Fair value adjustments related to divestments
Total of other equity movements
Total equity at December 31, 2015
Net income
Other comprehensive income
Total comprehensive income
Dividends
Purchase of treasury shares
Reduction of share capital
Exercise of options and employee transactions
Equity-based compensation
8
9.1
9.2
9.4
9.5
9.7
9.8
8
9.1
9.2
9.3
9.4
9.5
9.7
9.8
8
8
9.1
9.2
9.3
9.4
9.5
Impact of change in ownership of consolidated entities 9.6
Fair value adjustments related to divestments
8
Total of other equity movements
Total equity at December 31, 2016
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
23
6
2 377
1 137
– 6 810
– 6 926
2 400
1 143
– 658
– 658
– 120
– 6 810
– 6 926
2 400
1 143
– 658
– 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
– 10
– 6 643
– 33
– 6 086
15
14
6
– 5
1 578
809
658
– 6 643
– 6 119
1 592
815
658
– 100
100
– 10
– 6 643
– 6 119
1 592
815
658
– 10
– 10
991
2
– 9 789
100
– 9 697
– 10
– 9 707
– 101
80 379
– 4 223
77 046
76
77 122
6 712
6 712
– 14
6 698
671
– 3 001
– 2 330
– 3
– 2 333
7 383
– 3 001
4 382
– 17
4 365
– 7
25
2
5
– 6 475
– 985
– 6
212
659
– 7
– 12
– 6 475
– 992
214
664
– 7
12
– 6 475
– 992
214
664
– 7
25
– 6 614
12
– 6 596
– 6 596
– 76
81 148
– 7 212
74 832
59
74 891
– 19
– 19
972
The accompanying Notes form an integral part of the consolidated financial statements.
FINaNcI al RepORT
Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 181
Consolidated balance sheets
(At December 31, 2016 and 2015)
(USD millions)
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
current assets
Inventories
Trade receivables
Marketable securities, commodities, time deposits and derivative financial instruments
Cash and cash equivalents
Other current assets
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
current liabilities
Trade payables
Financial debts and derivative financial instruments
Current income tax liabilities
Provisions and other current liabilities
Total current liabilities
Total liabilities
Total equity and liabilities
The accompanying Notes form an integral part of the consolidated financial statements.
Note
2016
2015
10
11
11
4
12
13
13
14
15
16
16
17
15 641
15 982
30 980
31 174
31 340
34 217
14 304
15 314
10 034
2 196
698
8 957
2 466
601
105 193
108 711
6 255
8 202
770
7 007
2 697
6 226
8 180
773
4 674
2 992
24 931
22 845
130 124
131 556
18
18
972
– 76
991
– 101
73 936
76 156
74 832
77 046
59
76
74 891
77 122
19
12
20
21
17 897
16 327
6 657
8 470
6 355
8 044
33 024
30 726
4 873
5 905
1 603
5 668
5 604
1 717
22
9 828
10 719
22 209
23 708
55 233
54 434
130 124
131 556
182 | Novartis Annual Report 2016
Consolidated cash flow statements
(For the years ended December 31, 2016, 2015 and 2014)
(USD millions)
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
Note
23.1
2016
6 698
8 437
899
43
2015
2014
7 028
10 727
9 070
6 725
432
34
479
35
– 723
– 646
– 668
– 155
714
– 23
553
– 24
– 2 111
– 2 454
– 2 179
cash flows before working capital and provision changes from continuing operations
13 088
14 155
15 648
Payments out of provisions and other net cash movements in non-current liabilities
– 1 536
– 1 207
– 1 125
Change in net current assets and other operating cash flow items
23.2
– 77
– 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 of interests in associated companies
Acquisitions and divestments of businesses, net
Purchase of marketable securities and commodities
Proceeds from sales of marketable securities and commodities
cash flows used in investing activities from continuing operations
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
Impact of change in ownership of consolidated entities
Dividends paid to non-controlling interests and other financing cash flows
cash flows used in financing activities
Effect of exchange rate changes 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.
11 475
12 085
13 898
– 188
– 1
11 475
11 897
13 897
– 1 862
– 2 367
– 2 624
161
237
– 1 017
– 1 138
847
621
– 247
– 264
247
– 149
166
– 82
1
23.3
– 765
– 16 507
– 530
– 595
622
262
– 2 693
– 19 666
60
– 780
246
– 239
431
– 60
2
1 370
– 331
– 169
2 086
– 8
889
881
– 3 441
– 10 784
– 6 475
– 6 643
– 6 810
– 1 109
– 6 071
– 6 915
214
1 935
1 581
4 596
2 400
6 024
– 1 696
– 3 086
– 2 599
1 816
451
– 107
– 6
7
– 4
– 140
– 5 314
– 9 176
– 8 147
– 387
– 286
2 333
– 8 349
4 674
13 023
– 295
6 336
6 687
7 007
4 674
13 023
Cash flows used in/from investing activities from discontinued operations 1
23.4
– 748
8 882
1 In 2016, the total net tax payment amounted to USD 2 299 million, of which USD 188 million was included in the cash flows used in investing activities from discontinued operations.
In 2015, the total net tax payment amounted to USD 3 325 million, of which a refund of USD 94 million was included in the cash flows used in operating activities from discontinued
operations, and a USD 965 million payment in the cash flows from investing activities of discontinued operations.
In 2014, the total net tax payment amounted to USD 2 645 million, of which USD 7 million was included in the cash flows used in operating activities from discontinued operations,
and a USD 459 million payment in the cash flows from investing activities from discontinued operations.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 183
Notes to the Novartis
Group consolidated financial statements
1. Significant accounting policies
The Novartis Group (Novartis or Group) is a multinational
group of companies specializing in the research, devel-
opment, manufacturing and marketing of a broad range
of healthcare products led by innovative pharmaceuti-
cals and also including eye care products and cost sav-
ing generic pharmaceuticals. It is head quartered in Basel,
Switzerland.
The consolidated financial statements of the Group
are prepared in accordance with International Financial
Reporting Standards (IFRS) as issued by the Interna-
tional Accounting Standards Board (IASB). They are pre-
pared in accordance with the historical cost convention
except for items that are required to be accounted for
at fair value.
The Group’s financial year-end is December 31 which
is also the annual closing date of the individual entities’
financial statements incorporated into the Group’s con-
solidated financial statements.
The preparation of financial statements requires
management to make certain estimates and assump-
tions, either at the balance sheet date or during the year
that affect the reported amounts of assets and liabilities,
including any contingent amounts, as well as of revenues
and expenses. Actual outcomes and results could differ
from those estimates and assumptions.
Listed below are accounting policies of significance
to Novartis or, in cases where IFRS provides alternatives,
the option adopted by Novartis.
Scope of consolidation
The consolidated financial statements include all enti-
ties, including structured entities, over which Novartis
AG, Basel, Switzerland, directly or indirectly has control
(generally as a result of owning more than 50% of the
entity’s voting interest). Consolidated entities are also
referred to as “subsidiaries”.
In cases where Novartis does not fully own a subsid-
iary it has elected to value any remaining outstanding
non-controlling interest at the time of acquiring control
of the subsidiary at its proportionate share of the fair
value of the net identified assets.
The contribution of a business to an associate or joint
venture is accounted for by applying the option under
IFRS that permits the accounting for the retained inter-
est of the business contributed at its net book value at
the time of the contribution.
Investments in associated companies (generally
defined as investments in entities in which Novartis holds
between 20% and 50% of voting shares or over which it
otherwise has significant influence) and joint ventures
are accounted for using the equity method except for
selected venture fund investments for which the Group
has elected to apply the method of fair value through the
consolidated income statement.
Foreign currencies
The consolidated financial statements of Novartis are
presented in US dollars (USD). The functional currency
of subsidiaries is generally the local currency of the
respective entity. The functional currency used for the
reporting of certain Swiss and foreign finance entities is
USD instead of their respective local currencies. This
reflects the fact that the cash flows and transactions of
these entities are primarily denominated in these curren-
cies.
For subsidiaries not operating in hyperinflationary
economies, the subsidiary’s results, financial position
and cash flows that do not have USD as their functional
currency are translated into USD using the following
exchange rates:
— income, expense and cash flows using for each month
the average exchange rate with the US dollar values
for each month being aggregated during the year.
— balance sheets using year-end exchange rates.
— resulting exchange rate differences are recognized
in other comprehensive income.
The only hyperinflationary economy applicable to
Novartis is Venezuela. The financial statements of the
major subsidiaries in this country are first adjusted for
the effect of inflation with any gain or loss on the net
monetary position recorded in the related functional lines
in the consolidated income statement and then trans-
lated into USD.
Acquisition of assets
Acquired assets are initially recognized on the balance
sheet at cost if they meet the criteria for capitalization.
If acquired as part of a business combination, the fair
value of identified assets represents the cost for these
assets. If separately acquired, the cost of the asset
includes the purchase price and any directly attributable
costs for bringing the asset into the condition to operate
as intended. Expected costs for obligations to disman-
tle and remove property, plant and equipment when it is
no longer used are included in their cost.
184 | Novartis Annual Report 2016
Property, plant and equipment
Property, plant and equipment are depreciated on a
straight-line basis in the consolidated income statement
over their estimated useful lives. Leasehold land is depre-
ciated over the period of its lease whereas freehold land
is not depreciated. The related depreciation expense is
included in the costs of the functions using the asset.
Property, plant and equipment are assessed for
impairment whenever there is an indication that the bal-
ance sheet carrying amount may not be recoverable
using cash flow projections for the useful life.
The following table shows the respective useful lives
for property, plant and equipment:
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,
including any related equipment, are deducted from the
gross acquisition cost to arrive at the balance sheet car-
rying value of the related assets.
Goodwill and intangible assets
Goodwill
Goodwill arises in a business combination and is the
excess of the consideration transferred to acquire a busi-
ness over the underlying fair value of the net identified
assets acquired. It is allocated to groups of cash gener-
ating units (CGUs) which are usually represented by the
reported segments. Goodwill is tested for impairment
annually at the CGU level and any impairment charges
are recorded under “Other Expense” in the consolidated
income statement.
Intangible assets available-for-use
Novartis has the following classes of available-for-use
intangible assets: Currently marketed products; Market-
ing know-how; Technologies; Other intangible assets
(including computer software) and the Alcon brand
name.
Currently marketed products represent the compos-
ite value of acquired intellectual property, patents, and
distribution rights and product trade names.
Marketing know-how represents the value attribut-
able to the expertise acquired for marketing and distrib-
uting Alcon surgical equipment.
Technologies represent identified and separable
acquired know-how used in the research, development
and production processes.
Significant investments in internally developed and
acquired computer software are capitalized and included
in the “Other” category and amortized once available for
use.
The Alcon brand name is shown separately as it is
the only Novartis intangible asset that is available for use
with an indefinite useful life. Novartis considers that it is
appropriate that the Alcon brand name has an indefinite
life since Alcon-branded products have a history of
strong revenue and cash flow performance, and Novartis
has the intent and ability to support the brand with spend-
ing to maintain its value for the foreseeable future.
Except for the Alcon brand name, intangible assets
available for use are amortized over their estimated use-
ful lives on a straight-line basis and evaluated for poten-
tial impairment whenever facts and circumstances indi-
cate that their carrying value may not be recoverable.
The Alcon brand name is not amortized, but evaluated
for potential impairment annually.
The following table shows the respective useful lives
for available-for-use intangible assets and the location
in the consolidated income statement in which the
respective amortization 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 20 years
Other (including
computer software)
Alcon brand name
3 to 7 years
Not amortized,
indefinite useful life
“Cost of goods sold”
or “Research
and Development”
In the respective
functional expense
Not applicable
Intangible assets not yet available-for-use
Acquired research and development intangible assets,
which are still under development and have accordingly
not yet obtained marketing approval, are recognized as
In-Process Research & Development (IPR&D).
IPR&D is not amortized, but evaluated for potential
impairment on an annual basis or when facts and circum-
stances warrant. Any impairment charge is recorded in
the consolidated income statement under “Research &
Development”. Once a project included in IPR&D has
been successfully developed it is transferred to the “Cur-
rently marketed product” category.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 185
Impairment of goodwill and intangible
assets
Impairment of associated companies
accounted for at equity
An asset is 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 applies the fair value less costs of disposal
method for its impairment assessment. In most cases no
directly observable market inputs are available to mea-
sure the fair value less costs of disposal. Therefore, an
estimate is derived indirectly and is based on net pres-
ent value techniques utilizing post-tax cash flows and
discount rates. In the limited cases where the value in
use method would be applied, net present value tech-
niques would be applied using pre-tax cash flows and
discount rates.
Fair value less costs of disposal reflects estimates of
assumptions that market participants would be expected
to use when pricing the asset or CGUs, and for this pur-
pose management considers the range of economic
conditions that are expected to exist over the remaining
useful life of the asset.
The estimates used in calculating the net present val-
ues are highly sensitive and depend on assumptions spe-
cific to the nature of the Group’s activities with regard
to:
— amount and timing of projected future cash flows;
— outcome of R&D activities (compound efficacy, results
of clinical trials, etc.);
— amount and timing of projected costs to develop
IPR&D into commercially viable products;
— probability of obtaining regulatory approval;
— long-term sales forecasts for periods of up to 20 years;
— sales erosion rates after the end of patent or other
intellectual property rights protection and timing of
the entry of generic competition;
— selected tax rate;
— behavior of competitors (launch of competing prod-
ucts, marketing initiatives, etc.); and
— selected discount rate.
Generally, for intangible assets with a definite useful life
Novartis uses cash flow projections for the whole useful
life of these assets. For goodwill and the Alcon brand
name, Novartis generally utilizes cash flow projections
for a five-year period based on management forecasts,
with a terminal value based on cash flow projections usu-
ally in line with inflation rates for later periods. Probabil-
ity-weighted scenarios are typically used.
Discount rates used consider the Group’s estimated
weighted average cost of capital adjusted for specific
country and currency risks associated with cash flow
projections to approximate the weighted average cost
of capital of a comparable market participant.
Due to the above factors, actual cash flows and val-
ues could vary significantly from forecasted future cash
flows and related values derived using discounting tech-
niques.
Novartis considers investments in associated compa-
nies for impairment evaluation whenever objective evi-
dence indicates the net investment may be impaired,
including when a quoted share price indicates a fair value
less than the per-share balance sheet carrying value for
the investment.
If the recoverable amount of the investment is esti-
mated to be lower than the balance sheet carrying
amount an impairment charge is recognized for the dif-
ference in the consolidated income statement under
“Income from associated companies”.
Cash and cash equivalents, marketable
securities, commodities, derivative
financial instruments and non-current
financial assets
Cash and cash equivalents include highly liquid invest-
ments with original maturities of three months or less
which are readily convertible to known amounts of cash.
Bank overdrafts are usually presented within current
financial debts on the consolidated balance sheet except
in cases where a right of offset has been agreed with a
bank which then allows for presentation on a net basis.
Marketable securities are financial assets consisting
principally of equity and debt securities as well as fund
investments. Marketable securities held for short-term
non-strategic purposes are principally traded in liquid
markets and are classified as marketable securities on
the consolidated balance sheet. Marketable securities
held for long-term strategic purposes are classified as
non-current financial assets on the consolidated balance
sheet.
Marketable securities are initially recorded at fair
value on their trade date which is different from the set-
tlement date when the transaction is ultimately effected.
Quoted securities are re-measured at each reporting
date to fair value based on current market prices. If the
market for a financial asset is not active or no market is
available, fair values are established using valuation tech-
niques. Apart from discounted cash flow analysis and
other pricing models, for the majority of investments in
what is known as the “Level 3” hierarchy, the valuation
is based on the acquisition cost as the best approxima-
tion of the fair value of the investee. This is adjusted for
a higher or lower valuation in connection with a partial
disposal, a new round of financing and for the investee’s
performance below or above expectations. The fair value
of investments in “Level 3” is reviewed regularly for a
possible diminution in value.
The Group has classified all its equity and quoted
debt securities as well as fund investments as available-
for-sale, as they are not acquired to generate profit from
short-term fluctuations in price. Unrealized gains, except
exchange gains related to quoted debt instruments, are
recorded as a fair value adjustment in the consolidated
statement of comprehensive income. They are recog-
nized in the consolidated income statement when the
186 | Novartis Annual Report 2016
financial asset is sold, at which time the gain is trans-
ferred either to “Other financial income and expense”,
for the marketable securities held for short-term non-stra-
tegic purposes, or to “Other income”, for all other equity
securities and fund investments. Exchange gains related
to quoted debt instruments are immediately recognized
in the consolidated income statement under “Other
financial income and expense”.
A security is assessed for impairment when its mar-
ket value at the balance sheet date is less than initial cost
reduced by any previously recognized impairment.
Impairments on equity securities, quoted debt securities
and fund investments, and exchange rate losses on
quoted debt securities in a foreign currency which are
held for short-term non-strategic purposes are recorded
in “Other financial income and expense”. Impairments
are recorded for all other equity securities and other fund
investments in “Other expense” in the consolidated
income statement.
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”.
Other non-current financial assets including loans
are carried at amortized cost, which reflects the time
value of money, less any allowances for uncollectable
amounts. Impairments and exchange rate gains and
losses on other non-current financial assets, including
loans, as well as interest income using the effective inter-
est rate method, are immediately recorded in “Other
income” or “Other expense” in the consolidated income
statement.
Derivative financial instruments are initially recog-
nized in the balance sheet at fair value and are re-mea-
sured to their current fair value at the end of each sub-
sequent reporting period. The valuation of a forward
exchange rate contract is based on the discounted cash
flow model, using interest curves and spot rates at the
reporting date as observable inputs.
Options are valued based on a modified Black-
Scholes model using volatility and exercise prices as
major observable inputs.
The Group utilizes derivative financial instruments for
the purpose of hedging to reduce the volatility in the
Group’s performance due to the exposure to various
types of business risks. The Group, therefore, enters into
certain derivative financial instruments which provide
effective economic hedges. The risk reduction is obtained
because the derivative’s value or cash flows are expected,
wholly or partly, to move inversely to the hedged item
and, therefore, offset changes in the value or cash flows
of the hedged item. The overall hedging strategy is aim-
ing to mitigate the currency and interest exposure risk
of positions which are contractually agreed and to par-
tially hedge the exposure risk of selected anticipated
transactions. However, the Group generally does not
hedge the translation risk related to its foreign invest-
ments.
Not all of the financial impact of derivative financial
instruments can be matched with the financial impact of
the economically hedged item. A prerequisite for obtain-
ing this accounting-hedge relationship is extensive doc-
umentation on inception and proving on a regular basis
that the economic hedge is effective for accounting pur-
poses. Changes in the fair value of any derivative instru-
ments that do not qualify for cash flow hedge account-
ing are recognized immediately in “Other financial income
and expense” in the consolidated income statement.
Inventories
Inventory is valued at acquisition or production cost
determined on a first-in first-out basis. This value is used
for the “Cost of goods sold” in the consolidated income
statement. Unsalable inventory is fully written off in the
consolidated income statement under “Cost of goods
sold”.
Trade receivables
Trade receivables are initially recognized at their invoiced
amounts including any related sales taxes less adjust-
ments for estimated revenue deductions such as rebates,
chargebacks and cash discounts.
Provisions for doubtful trade receivables are estab-
lished once there is an indication that it is likely that a
loss will be incurred. These provisions represent the dif-
ference between the trade receivable’s carrying amount
in the consolidated balance sheet and the estimated net
collectible amount. Significant financial difficulties of a
customer, such as probability of bankruptcy, financial
reorganization, default or delinquency in payments are
considered indicators that recovery of the trade receiv-
able is doubtful. Charges for doubtful trade receivables
are recognized in the consolidated income statement
within “Marketing & Sales” expenses.
Legal and environmental liabilities
Novartis and its subsidiaries are subject to contingen-
cies arising in the ordinary course of business such as
patent litigation, environmental remediation liabilities and
other product-related litigation, commercial litigation,
and governmental investigations and proceedings. Pro-
visions are recorded where a reliable estimate can be
made of the probable outcome of legal or other disputes
against the subsidiary.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 187
Contingent consideration
In a business combination or divestment of a business,
it is necessary to recognize contingent future payments
to previous or from new owners representing contrac-
tually defined potential amounts as a liability or asset.
Usually for Novartis, these are linked to milestone or roy-
alty payments related to certain assets and are recog-
nized as a financial liability or asset at their fair value
which is then re-measured at each subsequent report-
ing date. These estimations typically depend on factors
such as technical milestones or market performance and
are adjusted for the probability of their likelihood of
payment and if material, appropriately discounted to
reflect the impact of time.
Changes in the fair value of contingent consideration
liabilities in subsequent periods are recognized in the
consolidated income statement in “Cost of goods sold”
for currently marketed products and in “Research &
Development” for IPR&D. Changes in contingent consid-
eration assets are recognized in “Other revenue”, “Other
income” or “Other expense”, depending on its nature.
The effect of unwinding the discount over time is recog-
nized in “Interest expense” in the consolidated income
statement.
Novartis does not recognize contingent consider-
ation associated with asset purchases outside of a busi-
ness combination that are conditional upon future events
which are within its control until such time as there is an
unconditional obligation. If the contingent consideration
is outside the control of Novartis, a liability is recognized
once it becomes probable that the contingent consider-
ation will become due. In both cases, if appropriate, a
corresponding asset is recorded.
Defined benefit pension plans and other
post-employment benefits
The liability in respect of defined benefit pension plans
and other post-employment benefits is the defined ben-
efit obligation calculated annually by independent actu-
aries using the projected unit credit method. The current
service cost for such post- employment benefit plans is
included in the personnel expenses of the various func-
tions where the associates are employed, while the net
interest on the net defined benefit liability or asset is
recognized as “Other expense” or “Other income”.
Treasury shares
Treasury shares are initially recorded at fair value on their
trade date which is different from the settlement date
when the transaction is ultimately effected. Treasury
shares are deducted from consolidated equity at their
nominal value of CHF 0.50 per share. Differences
between the nominal amount and the transaction price
on purchases or sales of treasury shares with third par-
ties, or the value of services received for the shares allo-
cated to associates as part of share-based compensa-
tion arrangements, are recorded in “Retained earnings”
in the consolidated statement of changes in equity.
Revenue recognition
Revenue
Revenue is recognized on the sale of Novartis Group
products and services and recorded as “Net sales” in
the consolidated income statement when there is per-
suasive evidence that a sales arrangement exists, title
and risks and rewards for the products are transferred
to the customer, the price is determinable and collect-
ability is reasonably assured. When contracts contain
customer acceptance provisions, sales are recognized
upon the satisfaction of acceptance criteria. If products
are stockpiled at the request of the customer, revenue
is only recognized once the products have been inspected
and accepted by the customer and there is no right of
return or replenishment on product expiry.
Surgical equipment may be sold together with other
products and services under a single contract. The total
consideration is allocated to the separate elements
based on their relative fair values. Revenue is recognized
once the recognition criteria have been met for each ele-
ment of the contract.
For surgical equipment, in addition to cash and instal-
ment sales, revenue is recognized under finance and
operating lease arrangements. Arrangements in which
Novartis transfers substantially all the risks and rewards
incidental to ownership to the customer are treated as
finance lease arrangements. Revenue from finance lease
arrangements is recognized at amounts equal to the fair
values of the equipment, which approximate the present
values of the minimum lease payments under the arrange-
ments. As interest rates embedded in lease arrange-
ments are approximately market rates, revenue under
finance lease arrangements is comparable to revenue
for outright sales. Finance income for arrangements in
excess of twelve months is deferred and subsequently
recognized based on a pattern that approximates the
use of the effective interest method and recorded in
“Other income”. Operating lease revenue for equipment
rentals is recognized on a straight-line basis over the
lease term.
Provisions for rebates and discounts granted to gov-
ernment agencies, wholesalers, retail pharmacies, man-
aged healthcare organizations and other customers are
recorded as a deduction from revenue at the time the
related revenues are recorded or when the incentives
are offered. They are calculated on the basis of histori-
cal experience and the specific terms in the individual
agreements. Provisions for refunds granted to health-
care providers under innovative pay-for-performance
agreements are recorded as a revenue deduction at the
time the related sales are recorded. They are calculated
on the basis of historical experience and clinical data
available for the product as well as the specific terms in
the individual agreements. In cases where historical
188 | Novartis Annual Report 2016
experience and clinical data are not sufficient for a reli-
able estimation of the outcome, revenue recognition is
deferred until such history is available.
intangible asset, usually when marketing approval has
been achieved from a regulatory authority in a major mar-
ket.
Cash discounts are offered to customers to encour-
age prompt payment and are recorded as revenue
deductions. Following a decrease in the price of a prod-
uct, we generally grant customers a “shelf stock adjust-
ment” for a customer’s existing inventory for the involved
product. Provisions for shelf stock adjustments, which
are primarily relevant within the Sandoz Division, are
determined at the time of the price decline or at the point
of sale, if the impact of a price decline on the products
sold can be reasonably estimated based on the custom-
er’s inventory levels of the relevant product. When there
is historical experience of Novartis agreeing to customer
returns and Novartis can reasonably estimate expected
future returns, a provision is recorded for estimated sales
returns. In doing so the estimated rate of return is applied,
determined based on historical experience of customer
returns and considering any other relevant factors. This
is applied to the amounts invoiced also considering the
amount of returned products to be destroyed versus
products that can be placed back in inventory for resale.
Where shipments are made on a re-sale or return basis,
without sufficient historical experience for estimating
sales returns, revenue is only recorded when there is
evidence of consumption or when the right of return has
expired.
Provisions for revenue deductions are adjusted to
actual amounts as rebates, discounts and returns are
processed. The provision represents estimates of the
related obligations, requiring the use of judgment when
estimating the effect of these sales deductions.
Other revenue
“Other revenue” includes royalty income and revenue
from activities such as manufacturing services or other
services rendered to the extent such revenue is not
recorded under net sales.
Payments made to third parties in order to in-license
or acquire intellectual property rights, compounds and
products, including initial upfront and subsequent mile-
stone payments, are capitalized as are payments for
other assets, such as technologies to be used in R&D
activities. If additional payments are made to the origi-
nator company to continue to perform R&D activities, an
evaluation is made as to the nature of the payments. Such
additional payments will be expensed if they are deemed
to be compensation for subcontracted R&D services not
resulting in an additional transfer of intellectual property
rights to Novartis. Such additional payments will be cap-
italized if they are deemed to be compensation for the
transfer to Novartis of additional intellectual property
developed at the risk of the originator company. Subse-
quent internal R&D costs in relation to IPR&D and other
assets are expensed since the technical feasibility of the
internal R&D activity can only be demonstrated by the
receipt of marketing approval for a related product from
a regulatory authority in a major market.
Costs for post-approval studies performed to sup-
port the continued registration of a marketed product
are recognized as marketing expenses. Costs for activ-
ities that are required by regulatory authorities as a con-
dition for obtaining marketing approval are capitalized
and recognized as currently marketed product.
Inventory produced ahead of regulatory approval is
provisioned against and the charge is included in “Other
expense” in the consolidated income statement, as its
ultimate use cannot be assured. If this inventory can be
subsequently sold, the provision is released to “Other
income” in the consolidated income statement either on
approval by the appropriate regulatory authority or,
exceptionally in Europe, on recommendation by the
Committee for Medicinal Products for Human Use
(CHMP), if approval is virtually certain.
Research & Development
Share-based compensation
Internal Research & Development (R&D) costs are fully
charged to “Research & Development” in the consoli-
dated income statement in the period in which they are
incurred. The Group considers that regulatory and other
uncertainties inherent in the development of new prod-
ucts preclude the capitalization of internal development
expenses as an intangible asset until marketing approval
from a regulatory authority is obtained in a major market
such as the United States, the European Union, Switzer-
land or Japan.
Payments made to third parties in compensation for
subcontracted R&D, such as contract research and
development organizations, that is deemed not to trans-
fer intellectual property to Novartis are expensed as
internal R&D expenses in the period in which they are
incurred. Such payments are only capitalized if they meet
the criteria for recognition of an internally generated
Vested Novartis shares and American Depositary
Receipts (ADRs) which are granted as compensation are
valued at their market value on the grant date and are
immediately expensed in the consolidated income state-
ment.
The fair values of unvested restricted shares,
restricted share units (RSUs) and performance share
units (PSUs) in Novartis shares and ADRs granted to
associates as compensation are recognized as an
expense over the related vesting period. The expense
recorded in the consolidated income statement is
included in the personnel expenses of the various func-
tions where the associates are employed.
Unvested restricted shares, restricted ADRs and
RSUs are only conditional on the provision of services
by the plan participant during the vesting period. They
are valued using their fair value on the grant date. As
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 189
RSUs do not entitle the holder to dividends the fair value
is based on the Novartis share price at the grant date
adjusted for the net present value of the dividends
expected to be paid during the holding period. The fair
value of these grants, after making adjustment for
assumptions related to their forfeiture during the vest-
ing period, are expensed on a straight-line basis over the
respective vesting period.
PSUs require the plan participant to not only provide
services during the vesting period but they are also sub-
ject to certain performance criteria being achieved
during the vesting period. PSUs granted under plans
defined as “Long-Term Performance Plans” are subject
to performance criteria based on Novartis internal per-
formance metrics. The expense is determined taking into
account assumptions concerning performance during
the period against targets and expected forfeitures due
to plan participants not meeting their service conditions.
These assumptions are periodically adjusted. Any
change in estimates for past services are recorded
immediately as an expense or income in the consolidated
income statement and amounts for future periods are
expensed over the remaining vesting period. As a result,
at the end of the vesting period, the total charge during
the whole vesting period represents the amount which
will finally vest. The number of equity instruments that
finally vest is determined at the vesting date.
PSUs granted under the Long-Term Relative Perfor-
mance Plan (LTRPP) are not only conditional on the pro-
vision of services by the plan participant during the vest-
ing period but are also conditional on the Total
Shareholder Return (TSR) performance of Novartis rel-
ative to a specific peer group of companies over the vest-
ing period. These performance conditions are based on
variables which can be observed in the market. IFRS
requires that these observations are taken into account
in determining the fair value of these PSUs at the date
of grant. Novartis has determined the fair value of these
PSUs at the date of grant using a “Monte Carlo” simula-
tion model. The total fair value of this grant is expensed
on a straight-line basis over the vesting period. Adjust-
ments to the number of equity instruments granted are
only made if a plan participant does not fulfill the service
conditions.
If a plan participant leaves Novartis, for reasons other
than retirement, disability or death, then unvested
restricted shares, restricted ADRs, RSUs and related
share options and PSUs are forfeited, unless determined
otherwise by the provision of the plan rules or by the
Compensation Committee, for example, in connection
with a reorganization or divestment.
Measuring the fair values of PSUs granted under the
LTRPP, requires an estimation of the probability of uncer-
tain future events and various other factors used in the
valuation models. The Monte Carlo simulation used for
determining the fair value of the PSUs related to the
LTRPP requires as input parameters the 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
underlying equity instruments with those of the peer
group of companies and the risk free interest rate.
Government grants
Grants from governments or similar organizations are
recognized at their fair value when there is a reasonable
assurance that the grant will be received and the Group
will comply with all attached conditions.
Government grants related to income are deferred
and recognized in the consolidated income statement
over the period necessary to match them with the related
costs which they are intended to compensate.
The accounting policy for property, plant and equip-
ment describes the treatment of any related grants.
Restructuring charges
Restructuring provisions are recognized for the direct
expenditures arising from the restructuring, where the
plans are sufficiently detailed and where appropriate
communication to those affected has been made.
Charges to increase restructuring provisions are
included in “Other expense” in the consolidated income
statements. Corresponding releases are recorded in
“Other income” in the consolidated income statement.
Taxes
Taxes on income are provided in the same periods as
the revenues and expenses to which they relate and
include any interest and penalties incurred during the
period. Deferred taxes are determined using the com-
prehensive liability method and are calculated on the
temporary differences that arise between the tax base
of an asset or liability and its carrying value in the bal-
ance sheet prepared for consolidation purposes, except
for those temporary differences related to investments
in subsidiaries and associated companies, where the tim-
ing of their reversal can be controlled and it is probable
that the difference will not reverse in the foreseeable
future. Since generally the retained earnings are rein-
vested, withholding or other taxes on eventual distribu-
tion of a subsidiary’s retained earnings are only taken
into account when a dividend has been planned.
The estimated amounts for current and deferred tax
assets or liabilities, including any amounts related to any
uncertain tax positions, are based on currently known
facts and circumstances. Tax returns are based on an
interpretation of tax laws and regulations and reflect esti-
mates based on these judgments and interpretations.
The tax returns are subject to examination by the com-
petent taxing authorities which may result in an assess-
ment being made requiring payments of additional tax,
interest or penalties. Inherent uncertainties exist in the
estimates of the tax positions.
Non-current assets held for sale
Non-current assets are classified as assets held for sale
when their carrying amount is to be recovered principally
through a sale transaction and a sale is considered highly
190 | Novartis Annual Report 2016
probable. They are stated at the lower of carrying amount
and fair value less costs of disposal. Assets held for sale,
included within a disposal group or included within dis-
continued operations are not depreciated or amortized.
Status of adoption of significant new or
amended IFRS standards or interpretations
The adoption of new or amended standards and inter-
pretations which are effective for the financial year
beginning on January 1, 2016 did not have a material
impact on the Group’s consolidated financial statements.
The following new IFRS standards will, based on a
Novartis analysis, be of significance to the Group, but
have not yet been early adopted:
— IFRS 9 Financial Instruments will substantially change
the classification and measurement of financial instru-
ments; will require impairments to be based on a for-
ward-looking model; will change the approach to
hedging financial exposures and related documenta-
tion and also the recognition of certain fair value
changes. However, the Group does not expect IFRS
9 to have a significant impact on its consolidated
financial statements and will implement the new stan-
dard on January 1, 2018.
— IFRS 15 Revenue from contracts with customers
amends revenue recognition requirements and estab-
lishes principles for reporting information about the
nature, amount, timing and uncertainty of revenue and
cash flows arising from contracts with customers. The
standard replaces IAS 18 Revenue and IAS 11 Con-
struction contracts and related interpretations. How-
ever, the Group does not expect IFRS 15 to have a
significant impact on its consolidated financial state-
ments and will implement the new standard on Jan-
uary 1, 2018.
— IFRS 16 Leases substantially changes the financial
statements as the majority of leases will become
on-balance sheet liabilities with corresponding right
of use assets on the balance sheet. The standard
replaces IAS 17 Leases and is effective January 1,
2019. The current operating lease commitments of
USD 2.9 billion as of December 31, 2016 and disclosed
in Note 28 provide, subject to the provision of the
standard, an indicator of the impact of the implemen-
tation of IFRS 16 on the Group’s consolidated balance
sheet.
There are no other IFRS standards or interpretations
which are not yet effective which would be expected to
have a material impact on the Group.
2. Significant transactions
Significant transactions in 2016
alcON – acQUISITION OF TRaNSceND MeDIcal, INc.
On February 17, 2016, Alcon entered into an agreement
to acquire Transcend Medical, Inc. (Transcend), a pri-
vately-held, US-based company focused on developing
minimally-invasive surgical devices to treat glaucoma.
The transaction closed on March 23, 2016, and the fair
value of the total purchase consideration was USD 332
million. The amount consisted of an initial cash payment
of USD 240 million and the net present value of the con-
tingent consideration of USD 92 million due to the Tran-
scend shareholders, which they are eligible to receive
upon achievement of specified development and com-
mercialization milestones. The purchase price allocation
resulted in net identifiable assets of USD 294 million and
goodwill of USD 38 million. Results of operations since
the date of acquisition were not material.
INNOVaTIVe MeDIcINeS – acQUISITION OF SeleXYS
pHaRMaceUTIcalS cORpORaTION
On November 18, 2016, Novartis acquired Selexys Phar-
maceuticals Corporation (Selexys), a privately held,
US-based company specializing in development of ther-
apeutics in certain hematologic and inflammatory disor-
ders following receipt of results of the SUSTAIN study.
The previously held interest of 19% is adjusted to its fair
value of USD 64 million through the consolidated income
statement at acquisition date. This re-measurement
resulted in a gain of USD 53 million.
The fair value of the total purchase consideration for
acquiring the 81% stake Novartis did not already own
amounted to USD 268 million. The amount consisted of
an initial cash payment of USD 194 million and the net
present value of the contingent consideration of USD 74
million due to the Selexys shareholders, which they are
eligible to receive upon achievement of specified devel-
opment and commercialization milestones. The pur-
chase price allocation resulted in net identifiable assets
of USD 332 million. No goodwill was recognized. Results
of operations since the date of acquisition were not mate-
rial.
Significant transactions entered into in 2016 and
closed in January 2017
INNOVaTIVe MeDIcINeS – acQUISITION OF ZIaRcO GROUp
lIMITeD
On December 16, 2016, Novartis entered into an agree-
ment to acquire Ziarco Group Limited, a privately held
company focused on the development of novel treat-
ments in dermatology. This acquisition will add a once
daily oral H4 receptor antagonist in development for
atopic dermatitis (AD), commonly known as eczema, to
complement the Novartis dermatology portfolio and
pipeline. The transaction closed on January 20, 2017,
and the preliminary fair value of the total purchase con-
sideration was USD 420 million before ordinary purchase
price adjustments. The amount consisted of an initial
cash payment of USD 325 million before ordinary pur-
chase price adjustments and the preliminary net pres-
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 191
ent value of the contingent consideration of USD 95 mil-
lion, due to the Ziarco shareholders, which they are
eligible to receive upon achievement of specified devel-
opment milestones. The preliminary purchase price allo-
cation resulted in net identifiable assets of USD 382 mil-
lion and goodwill of USD 38 million.
INNOVaTIVe MeDIcINeS – acQUISITION OF eNcORe VISION,
INc.
On December 20, 2016, Novartis entered into a defini-
tive agreement for the acquisition of Encore Vision, Inc.,
a privately-held company in Fort Worth, Texas, USA,
focused on the development of a novel treatment in pres-
byopia. The transaction closed on January 20, 2017, and
the preliminary fair value of the total purchase consider-
ation was USD 465 million before ordinary purchase
price adjustments. The amount consisted of an initial
cash payment of USD 375 million before ordinary pur-
chase price adjustments and the preliminary net pres-
ent value of the contingent consideration of USD 90 mil-
lion, due to the Encore shareholders, which they are
eligible to receive upon achievement of specified devel-
opment and commercialization milestones. The prelimi-
nary purchase price allocation resulted in net identifiable
assets of USD 374 million and goodwill of USD 91 million.
Significant transactions in 2015
Portfolio transformation transactions
TRaNSacTION WITH elI lIllY aND cOMpaNY
On January 1, 2015, Novartis closed its transaction with
Eli Lilly and Company, USA (Lilly) announced in April 2014
to 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 discontin-
ued operations.
TRaNSacTIONS WITH GlaXOSMITHKlINe plc
On March 2, 2015, Novartis closed its transactions with
GlaxoSmithKline plc, Great Britain (GSK) announced in
April 2014, with the following consequences:
INNOVATIVE MEDICINES – ACQUISITION OF GSK ONCOLOGY
PRODUCTS
Novartis acquired GSK’s oncology products and certain
related assets for an aggregate cash consideration of
USD 16.0 billion. Up to USD 1.5 billion of this cash con-
sideration at the acquisition date is contingent on cer-
tain development milestones. The fair value of this poten-
tially refundable consideration as at the acquisition date
is USD 0.1 billion. In addition, under the terms of the
agreement, Novartis is granted a right of first negotiation
over the co-development or commercialization of GSK’s
current and future oncology R&D pipeline, excluding
oncology vaccines. The right of first negotiation is for a
period of 12.5 years from the acquisition closing date.
The purchase price allocation of the fair value of the con-
sideration of USD 15.9 billion resulted in net identified
assets of USD 13.5 billion and goodwill of USD 2.4 bil-
lion. In 2015, from the date of the acquisition the busi-
ness generated net sales of USD 1.8 billion. Management
estimates net sales for the entire year 2015 would have
amounted to USD 2.1 billion had the oncology products
been acquired at the beginning of the 2015 reporting
period. The 2015 net results from operations on a
reported basis since the acquisition date were not mate-
rial.
VACCINES – DIVESTMENT
Novartis divested its Vaccines business (excluding its
Vaccines influenza business) to GSK for up to USD 7.1
billion plus royalties. The USD 7.1 billion consists of
USD 5.25 billion paid at closing and up to USD 1.8 billion
in future milestone payments. The fair value of the con-
tingent future milestones and royalties as at the acqui-
sition date is USD 1.0 billion, resulting in a fair value of
consideration received of USD 6.25 billion. Included in
this amount is a USD 450 million milestone payment
received in late March 2015. The sale of this business
resulted in a pre-tax gain of USD 2.8 billion, which is
recorded in operating income from discontinued opera-
tions.
Novartis’s Vaccines influenza business was excluded
from the GSK Vaccines business acquisition. However,
GSK entered into a future option arrangement with
Novartis in relation to the Vaccines influenza business,
pursuant to which Novartis could have unilaterally
required GSK to acquire the entire or certain parts of its
Vaccines influenza business for consideration of up to
USD 250 million (the Influenza Put Option) if the divest-
ment to CSL Limited, Australia (CSL), discussed below,
had not been completed. The option period was 18
months from the closing date of the GSK transaction,
but terminated with the sale of the Vaccines influenza
business to CSL on July 31, 2015. Novartis paid GSK a
fee of USD 5 million in consideration for the grant of the
Influenza Put Option.
CONSUMER HEALTH – COMBINATION OF NOVARTIS OTC WITH
GSK CONSUMER HEALTHCARE
Novartis and GSK agreed to create a combined con-
sumer healthcare business through the combination
between Novartis OTC and GSK Consumer Healthcare
businesses. On March 2, 2015, a new entity, GlaxoSmith-
Kline Consumer Healthcare Holdings Ltd. (GSK Con-
sumer Healthcare) was formed via contribution of busi-
nesses from both Novartis and GSK. Novartis has a
36.5% interest in the newly 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 fair val-
ues exchanged, an investment in an associated company
of USD 7.6 billion was recorded. The resulting pre-tax
gain, net of transaction related costs, of USD 5.9 billion
is recorded in operating income from discontinued oper-
ations.
Novartis has four of eleven seats on the GSK Con-
sumer Healthcare Board of Directors. Furthermore,
Novartis has customary minority rights and also exit
rights at a pre-defined, market based pricing mechanism.
The investment is accounted for using the equity
method of accounting using estimated results for the last
quarter of the year. Any differences between this esti-
mate and actual results, when available, will be adjusted
in the Group’s consolidated financial statements in the
following year.
192 | Novartis Annual Report 2016
ADDITIONAL GSK RELATED COSTS
The GSK transaction resulted in USD 0.6 billion of addi-
tional transaction-related costs that were expensed,
thereof USD 0.3 billion paid in 2015.
TRaNSacTION WITH cSl
On October 26, 2014, Novartis entered into an agree-
ment with CSL to sell its Vaccines influenza business to
CSL for USD 275 million. Entering into the separate
divestment agreement with CSL resulted in the Vaccines
influenza business being classified as a separate dis-
posal group consisting of a group of cash generating
units within the Vaccines Division, requiring the perfor-
mance of a separate valuation of the Vaccines influenza
business net assets. This triggered the recognition of an
exceptional impairment charge in 2014 of USD 1.1 billion
as the estimated net book value of the Vaccines influ-
enza business net assets was above the USD 275 mil-
lion consideration. The transaction with CSL was com-
pleted on July 31, 2015, resulting in a partial reversal of
the impairment recorded in 2014 in the amount of USD 0.1
billion, which is included in operating income from dis-
continued operations.
Other significant transactions in 2015
INNOVaTIVe MeDIcINeS – acQUISITION OF SpINIFeX
pHaRMaceUTIcalS, INc.
On June 29, 2015, Novartis entered into an agreement
to acquire Spinifex Pharmaceuticals, Inc. (Spinifex), a US
and Australia based, privately held development stage
company, focused on developing a peripheral approach
to treat neuropathic pain. The transaction closed on July
24, 2015, and the fair value of the total purchase consid-
eration was USD 312 million. The amount 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 they
are eligible to receive upon achievement of specified
development and commercialization milestones. The
purchase price allocation resulted in net identifiable
assets of USD 263 million and goodwill of USD 49 mil-
lion. The 2015 results of operations since the date of
acquisition were not material.
INNOVaTIVe MeDIcINeS – acQUISITION OF aDMUNe
THeRapeUTIcS llc
On October 16, 2015, Novartis entered into an agreement
to acquire Admune Therapeutics LLC (Admune), a
US-based, privately held company, broadening Novartis’
pipeline of cancer immunotherapies. The fair value of the
total purchase consideration amounted to USD 258 mil-
lion. This amount consists of an initial cash payment of
USD 140 million and the net present value of the contin-
gent consideration of USD 118 million due to Admune’s
previous owners, which they are eligible to receive upon
the achievement of specified development and commer-
cialization milestones. The purchase price allocation
resulted in net identifiable assets of USD 258 million. No
goodwill was recognized. The 2015 results of operations
since the date of acquisition were not material.
Significant transactions in 2014
VaccINeS – DIVeSTMeNT OF BlOOD TRaNSFUSION
DIaGNOSTIcS UNIT
On January 9, 2014, Novartis completed the divestment
of its blood transfusion diagnostics unit announced on
November 11, 2013 to the Spanish company Grifols S.A.,
for USD 1.7 billion in cash. The pre-tax gain on this trans-
action was USD 0.9 billion and was recorded in operat-
ing income from discontinued operations.
INNOVaTIVe MeDIcINeS – acQUISITION OF cOSTIM
pHaRMaceUTIcalS, INc.
On February 17, 2014, Novartis acquired all of the out-
standing shares of CoStim Pharmaceuticals, Inc., a Cam-
bridge, Massachusetts, US-based, privately held bio-
technology company focused on harnessing the immune
system to eliminate immune-blocking signals from can-
cer, for a total purchase consideration of USD 248 mil-
lion (at fair value excluding cash acquired). This amount
consists of an initial cash payment and the net present
value of contingent consideration of USD 153 million due
to previous CoStim shareholders, which they are eligible
to receive upon the achievement of specified develop-
ment and commercialization milestones. The purchase
price allocation resulted in net identified assets of
USD 152 million (excluding cash acquired) and goodwill
of USD 96 million. The 2014 results of operations since
the acquisition were not material.
INNOVaTIVe MeDIcINeS – DIVeSTMeNT OF IDeNIX
pHaRMaceUTIcalS, INc. (IDeNIX) SHaR eHOlDING
On August 5, 2014, Merck & Co., USA completed a ten-
der offer for Idenix. As a result, Novartis divested its 22%
shareholding in Idenix and realized a gain of approxi-
mately USD 0.8 billion which was recorded in income
from associated companies.
alcON – acQUISITION OF WaVeTec VISION SYSTeMS, INc.
(WaVeTec)
On October 16, 2014, Alcon acquired all of the outstand-
ing shares of WaveTec, a privately held company, for
USD 350 million in cash. The purchase price allocation
resulted in net identified assets of USD 180 million and
goodwill of USD 170 million. The 2014 results of opera-
tions since the date of acquisition were not material.
cORpORaTe – DIVeSTMeNT OF lTS lOHMaNN THeRapIe-
SYSTeMe aG (lTS) SHaReHOlDING
On November 5, 2014, Novartis divested its 43% share-
holding in LTS and realized a gain of approximately
USD 0.4 billion which was recorded in income from asso-
ciated companies.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 193
3. Segmentation of key figures 2016, 2015 and 2014
The businesses of Novartis are divided operationally on
a worldwide basis into three identified reporting seg-
ments, Innovative Medicines, Sandoz and Alcon. In addi-
tion, we separately report Corporate activities.
Reporting segments are presented in a manner con-
sistent with the internal reporting to the chief operating
decision maker which is the Executive Committee of
Novartis. The reporting segments are managed sepa-
rately because they each research, develop, manufac-
ture, distribute, and sell distinct products that require dif-
fering marketing strategies.
The Executive Committee of Novartis is responsible
for allocating resources and assessing the performance
of the reporting segments.
Following the internal reorganization announced on Jan-
uary 27, 2016, the reporting segments and their financial
results have been adapted to reflect in all years pre-
sented the transfers of:
— Alcon Ophthalmic Pharmaceuticals business fran-
chise from the Alcon Division to the Innovative Med-
icines Division, the products of which will continue to
be marketed with the Alcon brand name.
— Selected mature products from the Innovative Medi-
cines Division to the Retail Generics business fran-
chise of the Sandoz Division.
— The Alcon brand name intangible asset from the Alcon
Division to Corporate as it is used to market the prod-
ucts of Alcon Division and products within the Oph-
thalmology business franchise of the Innovative Med-
icines Division.
The consolidated financial statement disclosures by seg-
ment have been restated to reflect the above mentioned
internal reorganization. Accordingly, the net assets,
including a proportionate share of goodwill, and the
income and expenses related to the activities transferred
have been reallocated to the respective reporting seg-
ment in all periods presented in this financial report.
Innovative Medicines – formerly named the ‘Pharma-
ceuticals Division’ – researches, develops, manufactures,
distributes and sells patented prescription medicines.
The Innovative Medicines Division is organized into two
global business units: Novartis Oncology business unit,
which consists of the global business franchises Oncol-
ogy and Novartis Pharmaceuticals business unit, which
consists of the global business franchises Ophthalmol-
ogy, Neuroscience, Immunology and Dermatology,
Respiratory, Cardio-Metabolic and Established Medi-
cines.
Sandoz develops, manufactures, distributes and sells
prescription medicines, as well as pharmaceutical active
substances, which are not protected by valid and enforce-
able third-party patents. The Sandoz Division is orga-
nized globally in three business franchises: Retail Gener-
ics, Anti-Infectives and Biopharmaceuticals. In Retail
Generics, Sandoz develops, manufactures and markets
active ingredients and finished dosage forms of pharma-
ceuticals to third parties. Retail Generics includes the
areas of dermatology, respiratory, oncology and ophthal-
mics, as well as cardiovascular, metabolism, central ner-
vous system, pain, gastrointestinal and hormonal thera-
pies. Finished dosage form anti-infectives sold to third
parties are also part of Retail Generics. In Anti-Infectives,
Sandoz manufactures active pharmaceutical ingredients
and intermediates – mainly antibiotics – for internal use
by Retail Generics and for sale to third party customers.
In Biopharmaceuticals, Sandoz develops, manufactures
and markets protein- or other biotechnology-based
products known as biosimilars, and provides biotechnol-
ogy manufacturing services to other companies.
Alcon researches, discovers, develops, manufac-
tures, distributes and sells eye care products. The Alcon
Division is the global leader in eye care, with product
offerings in eye care devices and vision care. The Alcon
Division is organized globally in two global business fran-
chises as follows: In Surgical, Alcon develops, manufac-
tures, distributes and sells ophthalmic surgical equip-
ment, instruments, disposable products and intraocular
lenses. In Vision Care, Alcon develops, manufactures,
distributes and sells contact lenses and lens care prod-
ucts.
Income and expenses relating to Corporate include
the costs of the Group headquarters and those of cor-
porate coordination functions in major countries. In addi-
tion, Corporate includes other items of income and
expense that are not attributable to specific segments,
such as certain revenues from intellectual property
rights, certain expenses related to post-employment
benefits, environmental remediation liabilities, charitable
activities, donations and sponsorships. Usually, no allo-
cation of Corporate items is made to the segments. As
a result, Corporate assets and liabilities principally con-
sist of net liquidity (cash and cash equivalents, market-
able securities less financial debts), investments in asso-
ciated companies and current and deferred taxes and
non-segment specific environmental remediation and
post-employment benefit liabilities. Corporate also
includes the Alcon brand name intangible asset as it is
used to market the products of Alcon Division and prod-
ucts within the Ophthalmology business franchise of the
Innovative Medicines Division.
194 | Novartis Annual Report 2016
Our divisions are supported by the Novartis Institutes for
BioMedical Research, Novartis Business Services,
Global Drug Development and Novartis Technical Oper-
ations organizations.
— The Novartis Institutes for BioMedical Research
(NIBR) conducts research activities of the Innovative
Medicines Division.
— Novartis Business Services (NBS) started operations
in January 2015 as a shared services organization
providing business support services across the
Group such as information technology, real estate and
facility services, procurement, product lifecycle ser-
vices, human resources and financial reporting and
accounting operations.
— Global Drug Development organization started oper-
ations in July 2016 to oversee all drug development
activities for our Innovative Medicines Division and
the biosimilars portfolio of our Sandoz division.
— Novartis Technical Operations organization started
operations in July 2016, in order to centralize man-
agement of our manufacturing operations across our
Innovative Medicines and Sandoz divisions.
Following the Portfolio Transformation transactions in
2015, described in Note 2, Novartis has separated the
Group’s reported financial data into “continuing”
operations and “discontinued” operations:
Continuing operations comprise:
— Innovative Medicines: Innovative patent-protected
prescription medicines
— Sandoz: Generic and biosimilar pharmaceuticals
— Alcon: Eye care devices and vision care
— Corporate activities
Discontinued operations comprise:
— Vaccines: Preventive human vaccines and the blood
transfusion diagnostics unit. Excluded are certain
intellectual property rights and related other revenues
of the Vaccines Division which are now reported
under Corporate activities.
— Consumer Health: OTC (over-the-counter medicines)
and Animal Health. These two divisions were man-
aged separately. However, neither was material
enough to the Group to be disclosed separately as a
reporting segment.
— Corporate: certain transactional and other expenses
related to the portfolio transformation.
The accounting policies mentioned in Note 1 are used in
the reporting of segment results. Inter-segmental sales
are made at amounts which are considered to approxi-
mate arm’s length transactions. The Executive Commit-
tee of Novartis evaluates segmental performance and
allocates resources among the segments based on a
number of measures including net sales, operating
income and net operating assets. Segment net operat-
ing assets consist primarily of property, plant and equip-
ment, intangible assets, goodwill, inventories and trade
and other operating receivables less operating liabilities.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 195
Segmentation – Consolidated income statements
(USD millions)
Net sales to third parties from
continuing operations
Innovative Medicines1
Sandoz
Alcon
Corporate
(including eliminations)
Group
2016
2015
restated 2
2016
2015
restated 2
2016
2015
restated 2
2016
2015
restated 2
2016
2015
32 562 33 345 10 144 10 070
5 812
5 999
48 518 49 414
Sales to other segments
624
518
104
128
– 728
– 620
26
Net sales from continuing operations
33 186 33 863 10 248 10 198
5 812
5 999
– 728
– 620 48 518 49 440
Other revenues
Cost of goods sold
815
792
37
25
4
23
62
107
918
947
– 9 331 – 9 204 – 5 971 – 5 844 – 3 092 – 3 145
Gross profit from continuing operations 24 670 25 451
4 314
4 379
2 724
2 877
Marketing & Sales
– 8 435 – 8 430 – 1 681 – 1 679 – 1 882 – 1 663
Research & Development
– 7 709 – 7 685
– 814
– 782
– 516
– 468
874
208
789 – 17 520 – 17 404
276 31 916 32 983
– 11 998 – 11 772
– 9 039 – 8 935
General & Administration
– 978 – 1 031
– 300
– 346
– 410
– 450
– 506
– 648 – 2 194 – 2 475
Other income
Other expense
Operating income from
continuing operations
1 091
1 149
185
109
48
54
603
737
1 927
2 049
– 1 213 – 1 639
– 259
– 381
– 96
– 69
– 776
– 784 – 2 344 – 2 873
7 426
7 815
1 445
1 300
– 132
281
– 471
– 419
8 268
8 977
Income from associated companies
6
2
697
264
703
266
Interest expense
Other financial income and expense
Income before taxes from
continuing operations
Taxes
Net income from continuing operations
Net income 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
– 707
– 655
– 447
– 454
7 817
8 134
– 1 119 – 1 106
6 698
7 028
10 766
6 698 17 794
6 712 17 783
– 14
11
43
33
– 883
– 839
– 260
– 277
– 229
– 237
– 117
– 117 – 1 489 – 1 470
Amortization of intangible assets
– 2 470 – 2 384
– 450
– 450
– 929
– 912
– 12
– 9 – 3 861 – 3 755
Impairment charges on property,
plant & equipment, net
Impairment charges on intangible
assets, net
Impairment charges and fair value
gains on financial assets, net
– 93
39
– 2
– 97
– 5
– 1
– 2
– 21
– 102
– 80
– 522
– 138
– 65
– 27
– 4
– 1
– 591
– 166
– 55
– 32
Additions to restructuring provisions
– 236
– 232
– 46
– 93
– 36
– 25
Equity-based compensation of
Novartis equity plans
– 582
– 620
– 47
– 53
– 53
– 66
– 164
– 164
– 846
– 903
1 Formerly named the Pharmaceuticals Division
2 Restated to reflect the new divisional structures and product transfers between divisions, announced on January 27, 2016
– 77
– 25
– 72
– 132
– 104
– 49
– 343
– 399
196 | Novartis Annual Report 2016
(USD millions)
Net sales to third parties from
continuing operations
Innovative Medicines1
Sandoz
Alcon
Corporate
(including eliminations)
Group
2015
restated 2
2014
restated 2
2015
restated 2
2014
restated 2
2015
restated 2
2014
restated 2
2015
restated 2
2014
restated 2
2015
2014
33 345 34 828 10 070 10 736
5 999
6 616
49 414 52 180
Sales to other segments
518
698
128
287
– 620
– 746
26
239
Net sales from continuing operations
33 863 35 526 10 198 11 023
5 999
6 616
– 620
– 746 49 440 52 419
Other revenues
Cost of goods sold
792
631
25
12
23
32
– 9 204 – 8 724 – 5 844 – 6 293 – 3 145 – 3 204
Gross profit from continuing operations 25 451 27 433
4 379
4 742
2 877
3 444
Marketing & Sales
– 8 430 – 8 809 – 1 679 – 1 871 – 1 663 – 1 697
Research & Development
– 7 685 – 7 787
– 782
– 833
– 468
– 466
107
789
276
540
947
1 215
876 – 17 404 – 17 345
670 32 983 36 289
– 11 772 – 12 377
– 8 935 – 9 086
General & Administration
– 1 031 – 1 114
– 346
– 376
– 450
– 508
– 648
– 618 – 2 475 – 2 616
Other income
Other expense
Operating income from
continuing operations
1 149
737
109
97
54
76
737
481
2 049
1 391
– 1 639 – 1 634
– 381
– 189
– 69
– 89
– 784
– 600 – 2 873 – 2 512
7 815
8 826
1 300
1 570
281
760
– 419
– 67
8 977 11 089
Income from associated companies
812
2
4
264
1 102
266
1 918
– 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
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
Impairment charges on property,
plant & equipment, net
Impairment charges on intangible
assets, net
Impairment charges and fair value
gains on financial assets, net
Amortization of intangible assets
– 2 384 – 1 416
– 450
– 448
– 912
– 906
– 9
– 5 – 3 755 – 2 775
– 839
– 902
– 277
– 317
– 237
– 261
– 117
– 106 – 1 470 – 1 586
39
– 15
– 97
– 7
– 1
1
– 21
– 23
– 80
– 44
– 138
– 238
– 27
– 39
– 1
– 166
– 277
Additions to restructuring provisions
– 232
– 464
– 93
– 32
– 20
– 1
– 4
– 25
– 33
– 72
– 49
– 48
– 104
– 69
– 3
– 399
– 504
Equity-based compensation of
Novartis and Alcon equity plans
– 620
– 705
– 53
– 51
– 66
– 72
– 164
– 179
– 903 – 1 007
1 Formerly named the Pharmaceuticals Division
2 Restated to reflect the new divisional structures and product transfers between divisions, announced on January 27, 2016
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 197
Segmentation – Consolidated balance sheets
(USD millions)
Total assets
Total liabilities
Total equity
Net debt
Innovative Medicines1
Sandoz
Alcon
Corporate
(including eliminations)
Group
2016
2015
restated 2
2016
2015
restated 2
2016
2015
restated 2
2016
2015
restated 2
2016
2015
51 911 54 769 17 611 18 530 22 970 23 291 37 632 34 966 130 124 131 556
– 10 007 – 10 798 – 3 168 – 3 545 – 2 520 – 2 403 – 39 538 – 37 688 – 55 233 – 54 434
74 891 77 122
16 025 16 484
90 916 93 606
Net operating assets
41 904 43 971 14 443 14 985 20 450 20 888
Included in assets and liabilities are:
Total property, plant & equipment
10 410 10 464
2 374
2 788
2 163
2 025
694
705 15 641 15 982
Additions to property,
plant & equipment 3
996
1 380
316
421
396
494
127
224
1 835
2 519
Total goodwill and intangible assets
31 630 33 783 10 774 11 253 16 914 17 343
3 002
3 012 62 320 65 391
Additions to goodwill and
intangible assets 3
Total investment in associated
companies
Additions to investment in associated
companies 3
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
865
996
45
44
63
108
5
11
978
1 159
16
4
8
5
18
15
14 270 15 291 14 304 15 314
37
57
41
62
7 777
5 447
7 777
5 447
23 802 21 931 23 802 21 931
8 260
8 072
8 260
8 072
1 Formerly named the Pharmaceuticals Division
2 Restated to reflect the new divisional structures and product transfers between divisions, announced on January 27, 2016
3 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 net sales for the years ended December 31, 2016, 2015 and 2014 and for selected
non-current assets for the years ended December 31, 2016 and 2015:
2016
%
2015
%
2014
%
2016
%
2015
Net sales1
Total of selected non-current assets2
United States
17 117
35
18 079
37
17 337
33
28 484
830
2
774
2
658
1
44 413
(USD millions)
country
Switzerland
United Kingdom
Germany
France
Japan
Other
Group
Region
Europe
Americas
1 182
3 634
2 390
3 267
20 098
48 518
17 079
20 998
Asia/Africa/Australasia
10 441
48
31
7
3
47 054
28 677
7 769
2 908
188
142
2
7
5
7
1 277
3 262
2 269
3 163
3
7
5
6
1 379
3 742
2 638
3 781
3
7
5
7
6 892
2 733
199
145
42
20 590
40
22 645
44
9 399
11
9 949
100
49 414
100
52 180
100
92 265
100
96 687
35
43
22
16 472
22 414
10 528
33
45
22
18 690
22 218
11 272
36
43
21
59 879
29 831
2 555
65
32
3
63 681
30 375
2 631
%
49
30
8
3
10
100
66
31
3
Group
48 518
100
49 414
100
52 180
100
92 265
100
96 687
100
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
198 | Novartis Annual Report 2016
The Group’s largest, second and third largest customer
accounts for approximately 16%, 12% and 6% of net
sales, respectively (2015: 14%, 11% and 5%; 2014: 12%,
11% and 5% respectively). No other customer accounted
for 5% or more of net sales, in any year.
The highest amounts of trade receivables outstand-
ing were for these same three customers. They amounted
to 14%, 9% and 6%, respectively, of the trade receivables
at December 31, 2016 (2015: 13%, 9% and 6% respec-
tively).
Innovative Medicines1 net sales by business franchise
2016
USD
millions
restated
USD
millions 2
2015 Change
(2015 restated
2014 Change
(2014
USD to 2015)
USD % millions 2 USD %
to 2016)
2016
USD
millions
restated
USD
millions 2
2015 Change
(2015 restated
2014 Change
(2014
USD to 2015)
USD % millions 2 USD %
to 2016)
Oncology
Gleevec/Glivec
3 323
4 658
– 29 4 746
– 2
Respiratory
7
0
– 1
2
– 1
nm
nm
nm
47
Ultibro Breezhaler
Seebri Breezhaler
Onbrez Breezhaler/
Arcapta Neohaler
363
149
143
Subtotal cOpD3 portfolio 655
Xolair 4
Other
835
31
260
150
166
576
755
40
118
120
– 1
146
3
– 14
220
– 25
14
11
484
777
37
– 16
39
Total Respiratory
1 521
1 368
11 1 300
cardio-Metabolic
19
– 3
– 5
5
– 7
nm
nm
– 6
31
155
Galvus
1 193
1 140
5 1 224
902
951
– 5
918
4
Entresto
Other
170
14
21
0
nm
nm
0
8
12 790 13 304
– 4 11 654
14
Total cardio-Metabolic 1 377
1 161
19 1 232
Tasigna
1 739
1 632
7 1 529
Subtotal Bcr-abl
portfolio
5 062
6 290
– 20 6 275
Sandostatin
1 646
1 630
1 1 650
Afinitor/Votubia
1 516
1 607
– 6 1 575
956
729
672
635
581
91
917
565
453
402
410
79
4
926
0
0
0
279
nm
nm
nm
42
15
Exjade/Jadenu
Votrient
Tafinlar/Mekinist
Promacta/Revolade
Jakavi
Zykadia
Other
Total Oncology
business unit
Ophthalmology
Lucentis
1 835
2 060
– 11 2 441
– 16
Travoprost Group
Systane Group
619
377
Topical Olopatadine Group 335
631
380
457
– 2
734
– 14
– 1
378
1
– 27
515
– 11
Other
2 297
2 395
– 4 2 647
– 10
Total Ophthalmology
5 463
5 923
– 8 6 715
– 12
Neuroscience
Gilenya
3 109
2 776
12 2 477
12
Exelon/Exelon Patch
Other
444
124
728
141
– 39 1 009
– 28
– 12
243
– 42
Total Neuroscience
3 677
3 645
1 3 729
– 2
Immunology and Dermatology
Cosentyx
1 128
Neoral/Sandimmun(e)
Zortress/Certican
Myfortic
Ilaris
Other
Subtotal Immunology
and Dermatology,
excluding everolimus
stent drug
2 879
2 003
44 1 926
4
Everolimus stent drug
136
134
1
205
– 35
Total Immunology
and Dermatology
3 015
2 137
41 2 131
0
established Medicines
Diovan/Co-Diovan
1 073
1 284
– 16 2 345
– 45
Exforge
926
1 047
– 12 1 396
– 25
Voltaren/Cataflam
Ritalin/Focalin
525
282
558
365
– 6
632
– 12
– 23
492
– 26
Other
1 913
2 553
– 25 3 202
– 20
Total established
Medicines
4 719
5 807
– 19 8 067
– 28
Total pharmaceutical
business unit
19 772 20 041
– 1 23 174
– 14
Total division
net sales
32 562 33 345
– 2 34 828
– 4
1 Formerly named the Pharmaceuticals Division
2 Restated to reflect the new divisional structures and product transfers between
515
398
383
283
172
261
570
335
441
236
160
nm
0
nm
divisions, announced on January 27, 2016
– 10
684
– 17
19
327
2
– 13
543
– 19
20
199
8
173
19
– 8
3 Chronic obstructive pulmonary disease
4 Net sales reflect Xolair sales for all indications (e.g., including Xolair SAA and Xolair
CSU, which is managed by the Immunology and Dermatology franchise)
nm = not meaningful
The product portfolio of other segments is widely spread
in 2016, 2015 and 2014.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 199
4. associated companies
(USD millions)
Roche Holding AG, Switzerland
GlaxoSmithKline Consumer
Healthcare Holdings Ltd., UK
Idenix Pharmaceuticals Inc., US
LTS Lohmann Therapie-Systeme AG,
Germany
Net income statement effect
Other comprehensive income effect
Total comprehensive income effect
2016
464
2015
343
2014
599
2016
– 39
2015
– 149
2014
– 51
2016
425
2015
194
2014
548
234
– 79
710
– 4
944
– 83
812
436
71
20
5
2
812
436
91
Others
5
2
associated companies
related to continuing operations
703
266
1 918
671
– 153
– 31
1 374
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.
(CHF billions)
Total
comprehen- comprehen-
Revenue Net income sive income sive income
Other
December 31, 2015
June 30, 2016
48.1
25.0
6.8
4.3
– 0.8
– 0.5
6.0
3.8
(USD millions)
Balance sheet value
December 31, December 31,
2015
2016
Roche Holding AG, Switzerland
7 644
7 919
A purchase price allocation was performed on the basis
of publicly available information at the time of acquisition
of the investment. The December 31, 2016 balance sheet
value allocation is as follows:
6 448
7 194
212
201
(USD millions)
14 304
15 314
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
Balance sheet value
December 31,
2016
2 200
824
2 785
5 809
1 835
7 644
GlaxoSmithKline Consumer
Healthcare Holdings Ltd., UK
Others
Total
Roche Holding AG
The Group’s holding in Roche voting shares was 33.3%
at December 31, 2016, 2015 and 2014. This investment
represents approximately 6.3% of Roche’s total out-
standing voting and non-voting equity instruments at
December 31, 2016, 2015 and 2014.
Since full-year 2016 financial data for Roche is not
available when Novartis produces its consolidated finan-
cial results, a survey of analyst estimates is used to esti-
mate the Group’s share of Roche’s net income. Any dif-
ferences between these estimates and actual results will
be adjusted in the Group’s 2017 consolidated financial
statements when available.
The following tables show summarized financial infor-
mation of Roche, including current values of fair value
adjustments made at the time of the acquisition of the
shares, for the year ended December 31, 2015 and for
the six months ended June 30, 2016 (since full year 2016
data is not yet available):
(CHF billions)
Current assets
Non-current
assets
Current Non-current
liabilities
liabilities
December 31, 2015
June 30, 2016
28.2
26.6
63.7
62.6
23.8
24.5
28.7
29.0
The identified intangible assets principally relate to the
value of currently marketed products and are amortized
on a straight-line basis over their estimated average use-
ful life of 20 years.
In 2016, dividends received from Roche in relation to
the distribution of its 2015 net income amounted to
USD 433 million (2015: USD 429 million in relation with
the distribution of its 2014 net income).
The consolidated income statement effects from
applying Novartis accounting principles for this invest-
ment in 2016, 2015 and 2014 are as follows:
(USD millions)
2016
2015
2014
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 42 million (2015: USD 41
million; 2014: USD 45 million)
Net income effect
678
– 68
650
– 157
813
– 56
– 146
– 150
464
343
– 158
599
200 | Novartis Annual Report 2016
The publicly quoted market value of the Novartis inter-
est in Roche (SIX symbol: RO) at December 31, 2016,
was USD 12.4 billion (2015: USD 14.9 billion).
31, 2015, and for the nine months ended September 30,
2016 (interim unaudited), since full year 2016 data is not
yet available:
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 agreed to create a combined consumer healthcare
business through a combination between Novartis OTC
and GSK Consumer Healthcare. On March 2, 2015, a
new entity GlaxoSmithKline Consumer Healthcare Hold-
ings Ltd (GSK Consumer Healthcare) was formed via the
contribution of businesses from both Novartis and GSK.
At December 31, 2016 and 2015, Novartis has a 36.5%
interest in GSK Consumer Healthcare and four of eleven
seats on the GSK Consumer Healthcare Board of Direc-
tors. Furthermore, Novartis has customary minority
rights and also exit rights at a pre-defined, market-based
pricing mechanism.
Novartis has valued the contribution of 63.5% of its
OTC Division in exchange for 36.5% of the GSK Con-
sumer Healthcare business at fair value. Based on the
estimates of fair values exchanged, an investment in
associated company of USD 7.6 billion was recorded on
March 2, 2015.
The December 31, 2016 balance sheet value alloca-
tion is as follows:
(USD millions)
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 less dividends received
Balance sheet value
December 31,
2016
1 502
3 517
1 606
6 625
– 177
6 448
The identified intangible assets principally relate to the
value of the indefinite life GSK Consumer Healthcare
intangible assets. The identified intangible assets with a
definite life are amortized on a straight-line basis over
their estimated average useful life of 20 years.
The following tables show summarized financial infor-
mation of GSK Consumer Healthcare, including current
values of fair value adjustments made at the time of
acquisition, for the ten-month period ended December
(GBP billions)
Current assets
Non-current
assets
Current Non-current
liabilities
liabilities
December 31, 2015
September 30, 2016
3.8
4.2
19.5
21.2
2.8
3.0
1.8
2.1
(GBP billions)
Total
comprehen- comprehen-
Revenue Net income sive income sive income
Other
December 31, 2015
September 30, 2016
4.6
4.7
0.0
0.5
0.0
2.1
0.0
2.6
Since full-year 2016 financial data for GSK Consumer
Healthcare is not available when Novartis produces its
consolidated financial results, a projection of the latest
internal management reporting is used to estimate the
Group’s share of GSK Consumer Healthcare’s net result
for the year. Any differences between this estimate and
actual results will be adjusted in the Group’s 2017 con-
solidated financial statements when available.
In 2016, dividends received from GSK Consumer
Healthcare amounted to USD 463 million (2015: nil).
The consolidated income statement effects from
applying Novartis accounting principles for this invest-
ment in 2016 and 2015 are as follows:
(USD millions)
Novartis share of GSK Consumer Healthcare’s
estimated current-year consolidated net income
Prior-year adjustment
Amortization of fair value adjustments
relating to intangible assets and inventory,
net of taxes of USD 2 million
(2015: USD 18 million)
Net income effect
2016
2015
268
– 22
– 17
– 12
234
– 62
– 79
Other associated companies
During 2014, the shareholdings of 22% in Idenix Phar-
maceuticals, Inc. and 43% in LTS Lohmann Thera-
pie-Systeme AG were sold, realizing gains of USD 812
million and USD 421 million, respectively. Others include
a gain of USD 64 million recorded on investments in asso-
ciated companies held by the Novartis Venture Funds,
which are accounted at fair value from January 1, 2014
onwards, consistent with other investments held by these
Funds.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 201
5. Interest expense
and other financial income and expense
Interest expense
Other financial income and expense
(USD millions)
Interest expense
2016
2015
2014
(USD millions)
2016
2015
2014
– 709
– 669
– 701
Interest income
Income/(expense) arising from
discounting long-term liabilities
2
14
– 3
Total interest expense
– 707
– 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, net
Other financial expense
Monetary loss from hyperinflation
accounting
43
1
– 1
7
– 20
33
1
– 8
1
– 132
– 23
– 72
– 254
33
1
– 2
1
– 25
– 61
22
Currency result, net
– 477
Total other financial income
and expense
– 447
– 454
– 31
6. Taxes
Income before taxes
(USD millions)
Switzerland
Foreign
Income before taxes
from continuing operations
Income/(loss) before taxes
from discontinued operations
2016
3 110
4 707
2015
5 765
2 369
2014
5 245
7 027
7 817
8 134
12 272
Analysis of tax rate
The main elements contributing to the difference
between the Group’s overall applicable 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:
12 479
– 351
(As a percentage)
Applicable tax rate
2016
2015
2014
13.2 12.4 11.7
Total income before taxes
7 817
20 613
11 921
Effect of disallowed expenditures
3.5
3.5
2.9
Current and deferred income tax expense
(USD millions)
Switzerland
Foreign
2016
2015
– 709
– 317
2014
– 661
– 1 418
– 1 333
– 1 952
current income tax expense
from continuing operations
– 2 127
– 1 650
– 2 613
Effect of utilization of tax losses
brought forward from prior periods
– 0.2 – 0.2 – 0.3
Effect of income taxed at reduced rates
– 0.2 – 0.3 – 0.6
Effect of tax credits and allowances
– 2.8 – 2.7 – 1.8
Effect of tax rate change on opening balance
0.2 – 0.5
Effect of write-off of deferred tax assets
0.5
Effect of write down and reversal of
write-down of investments in subsidiaries
– 1.0 – 0.9
0.9
Effect of tax benefits expiring in 2017
– 0.5 – 0.4 – 0.8
Switzerland
Foreign
Deferred tax income
from continuing operations
Income tax expense
from continuing operations
Income tax expense
from discontinued operations
765
243
– 68
612
309
759
Effect of non-deductible losses in
Venezuela
1 008
544
1 068
– 1 119
– 1 106
– 1 545
– 1 713
– 96
Effect of prior year items
Effect of other items 1
effective tax rate
for continuing operations
Effective tax rate
for discontinued operations
effective tax rate
Total income tax expense
– 1 119
– 2 819
– 1 641
1.3
0.2
0.1
1.2
1.0
0.8
0.5 – 0.2
14.3 13.6 12.6
13.7 – 27.4
14.3 13.7 13.8
1 Other items in 2016 (+0.1%) include one-time impacts for the deferred tax effects on
the net assets of certain subsidiaries resulting from the change in their tax status
(-6.2%), the changes in uncertain tax positions (+5.1%) and other items (+1.2%).
202 | Novartis Annual Report 2016
Novartis has a substantial business presence in many
countries and is therefore subject to different income
and expense items that are non-taxable (permanent dif-
ferences) or taxed at different rates in those tax jurisdic-
tions. This results in a difference between our applicable
tax rate and effective tax rate, as shown in the table
above.
The utilization of tax-loss carry-forwards lowered the
tax charge by USD 18 million in 2016 and by USD 15 mil-
lion and USD 34 million in 2015 and 2014, respectively.
7. earnings per share
Net income/loss attributable to shareholders of Novartis aG
(USD millions)
– Continuing operations
– Discontinued operations
– Total
Number of shares (in millions)
2016
2015
2014
6 712
7 025
10 654
10 758
– 444
6 712
17 783
10 210
Weighted average number of shares outstanding used in basic earnings per share
2 378
2 403
2 426
Adjustment for vesting of restricted shares, restricted share units and dilutive shares from options
22
35
44
Weighted average number of shares in diluted earnings per share
2 400
2 438
2 470
Basic earnings per share (USD)
– Continuing operations
– Discontinued operations
– Total
Diluted earnings per share (USD)
– Continuing operations
– Discontinued operations
– Total
2.82
2.82
2.80
2.80
2.92
4.48
7.40
2.88
4.41
7.29
4.39
– 0.18
4.21
4.31
– 0.18
4.13
Basic earnings per share (EPS) is calculated by dividing
net income attributable to shareholders of Novartis AG
by the weighted average number of shares outstanding
in a reporting period. This calculation excludes the aver-
age number of issued shares purchased by the Group
and held as treasury shares.
For diluted EPS, the weighted average number of
shares outstanding is adjusted to assume the vesting of
all restricted shares, restricted share units and the
conversion of all potentially dilutive shares arising from
options on Novartis shares that have been issued.
No options were excluded from the calculation of
diluted EPS in 2014, 2015, or 2016 as all options were
dilutive in all years.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 203
8. changes in consolidated statements
of comprehensive income
The consolidated statements of comprehensive income
include the Group’s net income for the year as well as all
other valuation adjustments recorded in the Group’s con-
solidated balance sheet but which under IFRS are not
recorded in the consolidated income statement. These
include fair value adjustments to financial instruments,
actuarial gains or losses on defined benefit pension and
other post-employment plans and currency translation
effects, net of tax.
The following table summarizes these value adjustments and currency translation effects attributable to Novartis
shareholders:
(USD millions)
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
Fair value adjustments on financial instruments
Net actuarial losses from defined benefit plans
Currency translation effects
Total value adjustments in 2016
Fair value adjustments related to divestments
Value adjustments at December 31, 2016
Fair value
Fair value
adjustments adjustments on
on marketable deferred cash
flow hedges
securities
Actuarial
losses
from defined
benefit plans
Cumulative
currency
translation
effects
344
89
89
433
28
Total value
adjustments
366
110
– 822
– 59
– 4 544
4 625
21
– 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
461
– 113
100
100
– 18
– 5 413
747
– 4 223
15
– 514
– 98
– 514
– 2 389
– 2 389
– 113
15
– 514
– 2 389
– 3 001
348
– 3
– 5 915
– 1 642
– 7 212
12
12
1 Net actuarial gains of USD 10 million in 2015 and net actuarial losses of USD 65 million in 2014 were attributable to discontinued operations up to the respective divestment dates
2 Currency translation losses of USD 29 million in 2015 and USD 37 million in 2014 were attributable to discontinued operations up to the respective divestment dates
8.1) The 2016, 2015 and 2014 changes in the fair value of financial instruments were as follows:
(USD millions)
Fair value adjustments at January 1, 2016
Changes in fair value:
– Available-for-sale marketable securities
– Available-for-sale financial investments
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, 2016
Fair value
Fair value
adjustments adjustments on
on marketable deferred cash
flow hedges
securities
461
– 18
1
– 87
– 1
– 154
131
– 3
– 113
348
16
– 1
15
– 3
Total
443
1
– 87
– 1
– 154
16
131
– 4
– 98
345
204 | Novartis Annual Report 2016
(USD millions)
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
(USD millions)
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
Fair value
Fair value
adjustments adjustments on
on marketable deferred cash
flow hedges
securities
433
– 38
– 130
80
– 8
– 1
– 103
194
– 4
28
461
21
– 1
20
– 18
Fair value
Fair value
adjustments adjustments on
on marketable deferred cash
flow hedges
securities
344
– 59
– 3
91
5
– 4
– 81
87
– 6
89
23
– 2
21
433
– 38
Total
395
– 130
80
– 8
– 1
– 103
21
194
– 5
48
443
Total
285
– 3
91
5
– 4
– 81
23
87
– 8
110
395
8.2) In 2015, cumulative currency translation losses of USD 10 million have been recycled through the income state-
ment as a result of the divestments of subsidiaries. No currency translation losses have been recycled through
income statement in 2016 and 2014.
8.3) Remeasurements from defined benefit plans arise as follows:
(USD millions)
Defined benefit pension plans before tax
Other post-employment benefit plans before tax
Taxation on above items
Total after tax
Attributable to:
Shareholders of Novartis AG
Non-controlling interests
2016
2015
– 667
– 252
12
140
168
– 63
– 515
– 147
2014
– 999
– 235
412
– 822
– 514
– 147
– 822
– 1
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 205
9. changes in consolidated equity
9.1) A dividend of CHF 2.70 per share was approved at
the 2016 Annual General Meeting (AGM) for the year
ended December 31, 2015, resulting in a total dividend
payment of USD 6.5 billion in 2016 (2015: the CHF 2.60
per share dividend amounted to USD 6.6 billion, 2014:
the CHF 2.45 per share dividend amounted to USD 6.8
billion). The amount available for distribution as a divi-
dend to shareholders is based on the available distrib-
utable retained earnings of Novartis AG determined in
accordance with the legal provisions of the Swiss Code
of Obligations.
9.2) During 2016, 12.9 million shares were purchased for
USD 1.0 billion (2015: 63.6 million shares for USD 6.1 bil-
lion, 2014: 79.2 million shares for USD 6.9 billion). These
share purchases comprise of 10.3 million shares, which
were repurchased for USD 0.8 billion on the SIX Swiss
Exchange second trading line under the CHF 10 billion
share buyback approved by the shareholders at the
Annual General Meeting (AGM) in 2016, to offset the dilu-
tive impact from equity-based participation plans (2015,
49.9 million shares for USD 4.8 billion, and in 2014, 27.0
million shares for USD 2.4 billion repurchased on the SIX
Swiss Exchange second trading line under the USD 5
billion share buyback announced in November 2013,
which was completed in November 2015). Furthermore,
2.6 million shares were acquired for USD 0.2 billion from
employees which were previously granted to them under
the respective programs (2015: 4.1 million shares for
USD 0.4 billion, 2014: 5.4 million shares for USD 0.5 bil-
lion). In 2016 no shares were repurchased on the SIX
Swiss Exchange first trading line (2015: 9.6 million shares
were repurchased for USD 0.9 billion, 2014: 46.8 million
shares for USD 4.1 billion).
9.3) In 2016, Novartis reduced its share capital by can-
celling a total of 49.9 million shares which were repur-
chased during 2015 on the SIX Swiss Exchange second
trading line. In 2015, 29.2 million shares were cancelled
which were repurchased during 2013 and 2014. In 2014
no shares were cancelled.
9.4) 4.1 million shares were delivered as a result of options
being exercised related to equity-based participation
plans and the delivery of treasury shares, which contrib-
uted USD 0.2 billion (2015: 27.0 million shares for USD 1.6
billion, 2014: 41.4 million shares for USD 2.4 billion). The
average share price of the shares delivered was signifi-
cantly below market price reflecting the strike price of
the options exercised.
9.5) Equity-settled share-based compensation is
expensed in the consolidated income statement in
accordance with the vesting period of the share-based
compensation plans. The value for the shares and
options granted is credited to consolidated equity over
the respective vesting period. In 2016, 9.0 million shares
were transferred to associates as part of equity-settled
compensation (2015: 11.9 million shares, 2014: 10.3 mil-
lion shares). In addition, tax benefits arising from tax
deductible amounts exceeding the expense recognized
in the income statement are credited to equity.
9.6) During 2016, interests in subsidiaries were
acquired. The reduction in equity of USD 7 million rep-
resents the excess of the amount paid to non-controlling
interest over their carrying value and equity allocation to
non-controlling interest due to change in ownership per-
centage (2015: nil, 2014: nil).
9.7) In 2014, Novartis entered into an irrevocable, non-dis-
cretionary arrangement with a bank to repurchase
Novartis own shares on the second trading line under its
USD 5 billion share buyback as well as to mitigate dilu-
tion from equity-based participation plans. The commit-
ment under this arrangement amounted to USD 658 mil-
lion as of December 31, 2014, reflecting the expected
purchases by the bank under such trading plan over a
rolling 90 days period. In 2015, this trading plan was fully
executed and expired. As a result, there is no contingent
liability related to this plan as of December 31, 2015 and
December 31, 2016.
9.8) Changes in non-controlling interests in subsidiaries
resulted in a reduction in consolidated equity of USD 10
million in 2015 and USD 120 million in 2014. No change
to non-controlling interests in subsidiaries in 2016.
206 | Novartis Annual Report 2016
10. property, plant & equipment
The following table summarizes the movements of property, plant and equipment during 2016:
(USD millions)
Cost
January 1, 2016
Reclassifications 1
Additions
Disposals and derecognitions 2
Currency translation effects
December 31, 2016
Accumulated depreciation
January 1, 2016
Depreciation charge
Accumulated depreciation on disposals and derecognitions 2
Impairment charge
Reversal of impairment charge
Currency translation effects
December 31, 2016
Net book value at December 31, 2016
Land
Construction
in progress
Buildings
Machinery
& other
equipment
Total
688
12 857
2 810
15 093
31 448
4
24
– 8
– 21
687
630
176
– 178
– 372
– 1 226
1 226
– 19
– 111
592
409
– 656
1 835
– 861
– 622
– 1 126
13 113
2 680
14 816
31 296
– 40
– 5 188
– 7
– 10 231
– 15 466
– 3
5
– 3
1
– 530
157
– 47
6
166
1
– 11
1
1
– 956
– 1 489
630
– 61
13
441
793
– 122
20
609
– 40
– 5 436
– 15
– 10 164
– 15 655
647
7 677
2 665
4 652
15 641
Net book value of property, plant & equipment under finance lease contracts
commitments for purchases of property, plant & equipment
81
223
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 9 million in 2016 (2015: USD 21 million, 2014: USD 20 million). The capitalization rate used to
determine the amount of borrowing costs eligible for capitalization is 25% (2015: 25%, 2014: 25%) and the interest
rate used is 4% (2015: 4%, 2014: 4%).
The following table summarizes the movements of property, plant and equipment during 2015:
(USD millions)
Cost
January 1, 2015
Reclassifications 1
Additions
Disposals and derecognitions 2
Currency translation effects
December 31, 2015
Accumulated depreciation
January 1, 2015
Depreciation charge
Accumulated depreciation on disposals and derecognitions 2
Impairment charge
Reversal of impairment charge
Currency translation effects
December 31, 2015
Net book value at December 31, 2015
Land
Construction
in progress
Buildings
Machinery
& other
equipment
Total
744
11 312
3 985
15 387
31 428
12
4
– 41
– 31
688
1 833
– 2 601
408
1 665
756
442
2 519
– 332
– 364
– 59
– 180
– 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
– 462
246
– 37
9
149
– 1 005
– 1 470
594
– 82
46
501
874
– 135
55
655
32
– 4
2
– 40
– 5 188
– 7
– 10 231
– 15 466
648
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
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 207
11. Goodwill and intangible assets
The following table summarizes the movements of goodwill and intangible assets in 2016:
(USD millions)
Cost
January 1, 2016
Goodwill
Intangible Assets other than Goodwill
Acquired
research &
Alcon
Total development brand name Technologies
Currently
marketed Marketing
know-how
products
Other
intangible
assets
Total
31 585
4 119
2 980
6 563
33 385
5 960
1 341
54 348
Impact of business combinations
56
690
Reclassifications 1
Additions
Disposals and derecognitions 2
Currency translation effects
– 158
599
– 23
– 77
– 260
451
6
223
– 464
– 15
– 594
152
156
– 130
– 27
1 141
978
– 617
– 713
December 31, 2016
31 381
5 150
2 980
6 548
33 007
5 960
1 492
55 137
Accumulated amortization
January 1, 2016
Reclassifications
Amortization charge
Accumulated impairments on disposals
and derecognitions2
Impairment charge
Currency translation effects
December 31, 2016
– 411
– 650
– 3 070 – 14 221
– 1 192
– 998 – 20 131
– 225
– 576
– 2 926
– 238
– 121
– 3 861
10
7
9
– 401
– 886
– 3 637 – 16 863
– 1 430
– 981 – 23 797
390
– 96
215
123
– 5
20
535
– 591
251
225
22
– 490
Net book value at December 31, 2016
30 980
4 264
2 980
2 911
16 144
4 530
511
31 340
1 Reclassifications between various asset categories as a result of product launches of acquired In-Process Research & Development and completion of software 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.
The following table summarizes the allocation of the net book values of goodwill and intangible assets by report-
ing segment at December 31, 2016:
(USD millions)
Innovative Medicines
Sandoz
Alcon
Corporate
Goodwill
Intangible Assets other than Goodwill
Acquired
research &
Alcon
Total development brand name Technologies
Currently
marketed Marketing
know-how
products
Other
intangible
assets
Total
15 010
3 512
7 669
8 293
8
613
139
11
12 821
563
1 904
276
16 620
25
3 105
2 337
1 419
4 530
196
8 621
2 980
14
2 994
Net book value at December 31, 2016
30 980
4 264
2 980
2 911
16 144
4 530
511
31 340
The Innovative Medicines, Sandoz and Alcon divisions’
cash generating units, to which goodwill are allocated,
each comprise a group of smaller cash generating units.
The valuation method of the recoverable amount of the
cash generating units, to which goodwill is allocated, is
based on the fair value less costs of disposal.
The Alcon brand name is a Corporate asset with an
indefinite life. The intangible asset is allocated to Corpo-
rate as it is used to market the Alcon-branded products
of both the Alcon Division and the Ophthalmology busi-
ness franchise of the Innovative Medicines Division. Net
sales of these products together are the grouping of
cash generating units, which is used to determine the
recoverable amount. The valuation method is based on
the fair value less costs of disposal.
The following assumptions are used in the calcula-
tions:
(As a percentage)
Terminal growth rate
Discount rate (post-tax)
Innovative
Medicines Sandoz
Alcon Corporate
1.5
6.5
2.0
6.5
3.0
6.5
2.5
6.5
The Alcon terminal growth rate assumption of 3% is
higher than the expected inflation rate of the medical
device industry, and more specifically the ophthalmic
sub-segment of the industry. The growth rates are
expected to exceed such long-term inflation rate, due to
the impact of the demographic trend of the aging popu-
lation to which Alcon’s products are prescribed is grow-
ing faster than the general population.
The discount rates for all Divisions consider the
Group’s weighted average cost of capital, adjusted to
approximate the weighted average cost of capital of a
comparable market participant.
208 | Novartis Annual Report 2016
The fair value less costs of disposal, for all groupings
of cash generating units containing goodwill or indefinite
life intangible assets, is reviewed for the impact of rea-
sonably possible changes in key assumptions. In partic-
ular we considered an increase in the discount rate, a
decrease in the terminal growth rate and certain nega-
tive impacts on the forecasted cash flows. These rea-
sonably possible changes in key assumptions did not
indicate an impairment.
Note 1, Significant accounting policies – Impairment
of goodwill and intangible assets, provides additional dis-
closures on how the Group performs goodwill and intan-
gible asset impairment testing.
In 2016, intangible asset impairment charges for
continuing operations amounted to USD 591 million
(USD 522 million in the Innovative Medicines Division,
USD 65 million in the Sandoz Division and USD 4 mil-
lion in the Alcon Division).
In 2015, intangible asset impairment charges in con-
tinuing operations amounted to USD 206 million (USD 178
million in the Innovative Medicines Division and USD 27
million in the Sandoz Division and USD 1 million in the
Alcon Division).
In 2016, there was no reversal of prior year impair-
ment charges (2015: USD 40 million).
The following table summarizes the movements of goodwill and intangible assets in 2015:
(USD millions)
Cost
January 1, 2015
Goodwill
Intangible Assets other than Goodwill
Acquired
research &
Alcon
Total development brand name Technologies
Currently
marketed Marketing
know-how
products
Other
intangible
assets
Total
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
Currency translation effects
730
– 36
881
– 294
12 970
5
217
– 26
– 590
– 5
– 95
– 697
15
31
61
– 4
– 13
13 715
1 159
– 324
– 810
December 31, 2015
31 585
4 119
2 980
6 563
33 385
5 960
1 341
54 348
Accumulated amortization
January 1, 2015
Amortization charge
Accumulated impairments on disposals
and derecognitions,2 reclassifications
Impairment charge
Reversal of impairment charge
Currency translation effects
December 31, 2015
– 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
– 411
– 650
– 3 070 – 14 221
– 1 192
– 998 – 20 131
Net book value at December 31, 2015
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 and completion of software 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.
The following table summarizes the allocation of the net book values of goodwill and intangible assets by report-
ing segment at December 31, 2015:
(USD millions)
Innovative Medicines
Sandoz
Alcon
Corporate
Goodwill1
Intangible Assets other than Goodwill1
Acquired
research &
Alcon
Total development brand name Technologies
Currently
marketed Marketing
know-how
products
Other
intangible
assets
Total
15 110
2 770
7 802
8 255
490
202
13
15 698
631
2 308
192
18 673
22
3 451
2 849
1 158
4 768
111
9 088
7
7
2 980
18
3 005
Net book value at December 31, 2015
31 174
3 469
2 980
3 493
19 164
4 768
343
34 217
1 Restated to reflect the new divisional structures and product transfers between divisions, announced on January 27, 2016
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 209
12. Deferred tax assets and liabilities
(USD millions)
Property,
plant &
equipment
Pensions and
other benefit
obligations
assets of associates
Intangible
Tax loss Other assets,
provisions
forwards and accruals
carry-
Total
Inventories
Gross deferred tax assets at January 1, 2016
216
611
1 730
3 821
62
2 866
9 306
Gross deferred tax liabilities at January 1, 2016
– 639
– 3 962
– 401
– 565
– 5
– 1 132
– 6 704
Net deferred tax balance at January 1, 2016
– 423
– 3 351
1 329
3 256
57
1 734
2 602
at January 1, 2016
Credited/(charged) to income
Charged to equity
– 423
– 3 351
1 329
3 256
– 13
1 057
53
373
Credited/(charged) to other comprehensive income
Impact of business combinations
Other movements
140
– 400
6
– 41
20
4
27
57
55
23
11
1 734
– 517
– 44
– 2
37
– 14
2 602
1 008
– 44
138
– 336
9
Net deferred tax balance at December 31, 2016
– 405
– 2 688
1 481
3 649
146
1 194
3 377
Gross deferred tax assets at December 31, 2016
224
1 331
1 839
4 160
146
2 597
10 297
Gross deferred tax liabilities at December 31, 2016
– 629
– 4 019
– 358
– 511
– 1 403
– 6 920
Net deferred tax balance at December 31, 2016
– 405
– 2 688
1 481
3 649
146
1 194
3 377
After offsetting USD 263 million of deferred tax assets and liabilities within the same tax jurisdiction the balance amounts to:
Deferred tax assets at December 31, 2016
Deferred tax liabilities at December 31, 2016
Net deferred tax balance at December 31, 2016
10 034
– 6 657
3 377
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
2 587
8 373
– 606
– 6 478
1 981
1 895
At January 1, 2015
Credited/(charged) to income
Charged to equity
– 371
– 4 028
1 339
2 892
82
1 981
1 895
– 57
296
83
376
– 22
– 132
544
(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
– 216
29
– 13
85
– 34
377
36
1 734
2 602
– 3
57
Gross deferred tax assets at December 31, 2015
216
611
1 730
3 821
62
2 866
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
1 734
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
In 2016, USD 19 million (2015: USD 13 million, 2014:
USD 14 million) of tax-loss carry-forwards expired.
(USD millions)
One year
Two years
Three years
Four years
Five years
More than five years
Total
Not capitalized
Capitalized
2015 total
22
80
37
54
222
465
880
39
25
6
7
712
789
61
105
43
61
222
1 177
1 669
Deferred tax assets related to taxable losses of relevant
Group entities are recognized to the extent it is consid-
ered probable that future taxable profits will be available
against which such losses can be utilized in the foresee-
able future.
210 | Novartis Annual Report 2016
Deferred tax assets of USD 4.8 billion (2015: USD 3.9
billion) and deferred tax liabilities of USD 5.9 billion (2015:
USD 5.8 billion) are expected to have an impact on cur-
rent taxes payable after more than twelve months.
At December 31, 2016, unremitted earnings of USD 63
billion (2015: USD 65 billion) have been retained by con-
solidated entities for reinvestment. Therefore, no provi-
sion is made for income taxes that would be payable
upon the distribution of these earnings. If these earnings
were remitted, an income tax charge could result based
on the tax statutes currently in effect.
(USD millions)
2016
2015
Temporary differences on which no
deferred tax has been provided as they
are permanent in nature related to:
– Investments in subsidiaries
2 358
2 644
– Goodwill from acquisitions
– 28 189
– 28 202
The gross value of tax-loss carry-forwards that have, or
have not, been capitalized as deferred tax assets, with
their expiry dates is as follows:
(USD millions)
One year
Two years
Three years
Four years
Five years
More than five years
Total
Not capitalized
Capitalized
2016 total
21
30
50
75
73
405
654
12
5
5
3
25
1 913
1 963
33
35
55
78
98
2 318
2 617
13. Financial and other non-current assets
Financial assets
(USD millions)
Available-for-sale long-term
financial investments
Long-term receivables from customers
Minimum lease payments
from finance lease agreements
Contingent consideration receivables 1
Long-term loans, advances
and security deposits
Total financial assets
Other non-current assets
2016
2015
(USD millions)
1 096
1 263
Deferred compensation plans
Prepaid post-employment benefit plans
Other non-current assets
Total other non-current assets
231
147
586
136
317
216
550
120
2 196
2 466
1 Note 29 provides additional disclosures related to contingent consideration.
2016
451
47
200
698
2015
409
36
156
601
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 211
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, related to surgical equipment lease arrange-
ments. 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
91
182
63
336
– 5
– 16
– 4
– 25
2016
Present
value
86
166
59
311
Provision Net book value
– 2
– 37
– 41
– 80
84
129
18
231
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
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).
14. Inventories
(USD millions)
Raw material, consumables
Work in progress
Finished products
Total inventories
2016
705
2 700
2 850
6 255
2015
658
2 905
2 663
6 226
The amount of inventory recognized as an expense in
“Cost of goods sold” in the consolidated income state-
ments during 2016 amounted to USD 10.3 billion (2015:
USD 10.5 billion, 2014: USD 11.6 billion).
The group recognized inventory provisions amount-
ing to USD 283 million (2015: USD 356 million, 2014:
USD 1.1 billion) and reversed inventory provisions amount-
ing to USD 67 million (2015: USD 148 million, 2014:
USD 379 million).
The reversals mainly result from the release of prod-
ucts initially requiring additional quality control inspec-
tions and from the reassessment of inventory values
manufactured prior to regulatory approval but for which
approval was subsequently received.
212 | Novartis Annual Report 2016
15. Trade receivables
(USD millions)
Total gross trade receivables
Provisions for doubtful trade receivables
Total trade receivables, net
2016
8 364
– 162
8 202
2015
8 322
– 142
8 180
The following table summarizes the movement in the
provision for doubtful trade receivables:
(USD millions)
January 1
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
2016
2015
– 142
– 156
2014
– 195
15
– 76
– 68
– 92
54
2
71
11
101
15
December 31
– 162
– 142
– 156
The following sets forth the trade receivables that are
not overdue as specified in the payment terms and con-
ditions established with Novartis customers as well as
an analysis of overdue amounts and related provisions
for doubtful trade receivables:
Trade receivable balances include sales to drug whole-
salers, retailers, private health systems, government
agencies, managed care providers, pharmacy benefit
managers and government-supported healthcare sys-
tems. Novartis continues to monitor sovereign debt
issues and economic conditions in Greece, Italy, Portu-
gal, Spain, Brazil, Russia and Saudi Arabia and evaluates
trade receivables in these countries for potential collec-
tion risks. The majority of the outstanding trade receiv-
ables from these closely monitored countries are due
directly from local governments or from govern-
ment-funded entities except for Russia, which are due
from private entities. Deteriorating credit and economic
conditions and other factors in these closely monitored
countries have resulted in, and may continue to result in
an increase in the average length of time that it takes to
collect these trade receivables and may require Novartis
to re-evaluate the collectability of these trade receiv-
ables in future periods.
The gross trade receivables from these closely mon-
itored countries at December 31, 2016 amount to USD 1.5
billion (2015: USD 1.6 billion), of which USD 82 million are
past due for more than one year (2015: USD 80 million)
and for which provisions of USD 62 million have been
recorded (2015: USD 56 million). At December 31, 2016
amounts past due for more than one year are not signif-
icant in any of these countries on a standalone basis.
Trade receivables include amounts denominated in
the following major currencies:
(USD millions)
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
2016
2015
7 386
7 318
(USD millions)
262
223
185
145
163
265
255
193
156
135
US dollar (USD)
Euro (EUR)
Japanese yen (JPY)
Chinese yuan (CNY)
British pound (GBP)
Swiss franc (CHF)
Other currencies
Provisions for doubtful trade receivables
Total trade receivables, net
– 162
8 202
– 142
8 180
Total trade receivables, net
2016
3 432
1 366
567
264
160
135
2 278
8 202
2015
3 311
1 536
740
244
187
124
2 038
8 180
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 213
16. Marketable securities, commodities, time deposits,
derivative financial instruments and cash and cash
equivalents
Marketable securities, commodities, time deposits and derivative financial instruments
(USD millions)
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
2016
306
31
337
94
108
230
1
770
2015
339
6
33
378
86
164
143
2
773
At December 31, 2016 all debt securities are denominated in USD except for USD 12 million in EUR (2015: USD 22
million) and USD 10 million in JPY (2015: nil).
Cash and cash equivalents
(USD millions)
Current accounts
Time deposits and short-term investments with original maturity less than 90 days
Total cash and cash equivalents
17. Other current assets
(USD millions)
VAT receivable
Withholding tax recoverable
Income tax receivables
Prepaid expenses
– Third parties
– Associated companies
Receivables from associated companies
Other receivables and current assets
Total other current assets
2016
1 912
5 095
7 007
2015
3 074
1 600
4 674
2016
521
282
156
692
5
7
1 034
2 697
2015
609
97
171
617
4
31
1 463
2 992
214 | Novartis Annual Report 2016
18. Details of share capital and share movements
The following table shows the movement in the share capital:
(USD millions)
Share capital
Treasury shares
Outstanding share capital
Jan 1, 2014
Movement
in year
Dec 31, 2014
Movement
in year
Dec 31, 2015
Movement
in year
Dec 31, 2016
1 001
– 89
912
– 14
– 14
1 001
– 103
898
– 10
2
– 8
991
– 101
890
– 19
25
6
972
– 76
896
The following table shows the movement in the shares:
(Number of shares) 1
Jan 1, 2014
Movement
in year
Dec 31, 2014
Movement
in year
Dec 31, 2015
Movement
in year
Dec 31, 2016
Total Novartis shares
2 706 193 000
2 706 193 000 – 29 200 000 2 676 993 000 – 49 878 180 2 627 114 820
Total treasury shares
– 280 108 692 – 27 458 051 – 307 566 743
4 468 560 – 303 098 183
50 042 376 – 253 055 807
Total outstanding shares 2 426 084 308 – 27 458 051 2 398 626 257 – 24 731 440 2 373 894 817
164 196 2 374 059 013
1 All shares are voting shares, which are registered, authorized, issued and fully paid
In 2016, Novartis reduced its share capital by cancelling
a total of 49.9 million shares which were repurchased
during 2015 on the SIX Swiss Exchange second trading
line.
During 2016, 13.1 million treasury shares were deliv-
ered as a result of options being exercised and physical
share deliveries related to equity-based participation
plans (2015: 38.9 million shares, 2014: 51.7 million shares).
Novartis repurchased 10.3 million shares on the SIX
Swiss Exchange second trading line under the CHF 10
billion share buyback approved at the Annual General
Meeting (AGM) in 2016, to offset the dilutive impact from
equity-based participation plans (in 2015 49.9 million
shares and in 2014 27.0 million shares under the USD 5
billion share buyback announced in November 2013,
which was completed in November 2015). In addition, 2.6
million shares were acquired from employees, which
were previously granted to them under the respective
programs (2015: 4.1 million, 2014: 5.4 million). No shares
were repurchased on the SIX Swiss Exchange first trad-
ing line in 2016 (2015: 9.6 million, 2014: 46.8 million). With
these transactions, the total number of shares outstand-
ing was increased by 0.2 million shares in 2016 (2015:
reduction of 24.7 million shares; 2014: reduction of 27.5
million shares). At December 31, 2016, the market maker
held 10 million written call options, originally issued as
part of the share-based compensation for associates
that have not yet been exercised. The weighted average
exercise price of these options is USD 62.40 and they
have contractual lives of 10 years.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 215
19. Non-current financial debt
(USD millions)
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
2016
2015
17 285
17 193
708
82
706
87
18 075
17 986
– 178
– 1 659
17 897
16 327
5.125% USD 3 000 million bond 2009/2019 of Novartis Securities Investment Ltd., Hamilton, Bermuda,
issued at 99.822%
2 995
4.25% EUR 1 500 million bond 2009/2016 of Novartis Finance S.A., Luxembourg, Luxembourg, issued at 99.757%
4.4% USD 1 000 million bond 2010/2020 of Novartis Capital Corporation, New York, United States, issued at 99.237%
996
2 993
1 639
994
2.4% USD 1 500 million bond 2012/2022 of Novartis Capital Corporation, New York, United States, issued at 99.225%
1 490
1 488
3.7% USD 500 million bond 2012/2042 of Novartis Capital Corporation, New York, United States, issued at 98.325%
489
3.4% USD 2 150 million bond 2014/2024 of Novartis Capital Corporation, New York, United States, issued at 99.287%
2 132
4.4% USD 1 850 million bond 2014/2044 of Novartis Capital Corporation, New York, United States, issued at 99.196%
1 823
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%
625
627
491
539
318
3.0% USD 1 750 million bond 2015/2025 of Novartis Capital Corporation, New York, United States, issued at 99.010%
1 728
4.0% USD 1 250 million bond 2015/2045 of Novartis Capital Corporation, New York, United States, issued at 98.029%
1 217
488
2 130
1 823
650
652
507
557
329
1 726
1 217
0.125% EUR 1 250 million bond 2016/2023 of Novartis Finance S.A., Luxembourg, Luxembourg, issued at 99.127%
0.625% EUR 500 million bond 2016/2028 of Novartis Finance S.A., Luxembourg, Luxembourg, issued at 98.48%
Total straight bonds
1 Average interest rate 0.4% (2015: 0.7%)
1 299
516
17 285
17 193
The following tables provide a breakdown of total
non-current financial debt, including current portion by
maturity and currency:
The following table shows the comparison of balance
sheet and fair value of total non-current financial debt,
including current portion:
Breakdown by maturity:
(USD millions)
2015
Balance sheet Fair values Balance sheet
2016
2016
2015
Fair values
(USD millions)
2016
2017
2018
2019
2020
2021
After 2021
Total
Breakdown by currency:
(USD millions)
USD
EUR
JPY
CHF
Others
Total
Straight bonds
17 285
17 943
17 193
17 770
Others
Total
790
790
793
793
18 075
18 733
17 986
18 563
The fair values of straight bonds are determined by
quoted market prices. Other financial debts are recorded
at notional amounts which are a reasonable approxima-
tion of the fair values.
The following table shows the collateralized non-cur-
rent financial debt and pledged assets:
(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
2016
2015
7
94
112
2016
178
345
3 168
1 000
628
2015
1 659
170
335
3 161
998
658
12 756
11 005
18 075
17 986
2016
2015
12 952
12 946
3 092
2 981
683
665
1 348
1 393
1
18 075
17 986
216 | Novartis Annual Report 2016
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
financial debt was 76% at December 31, 2016, and 82%
at December 31, 2015.
Financial debts, including current financial debts,
contain only general default covenants. The Group is in
compliance with these covenants.
The average interest rate on total financial debt in
2016 was 2.8% (2015: 2.9%).
20. provisions and other non-current liabilities
(USD millions)
2016
2015
Accrued liability for employee benefits:
Defined benefit pension plans 1
4 490
3 952
Other long-term employee benefits
and deferred compensation
Other post-employment benefits 1
Environmental remediation provisions
Provisions for product liabilities,
governmental investigations
and other legal matters
Contingent consideration 2
Other non-current liabilities
Total provisions and
other non-current liabilities
545
1 005
708
264
840
618
507
960
791
451
712
671
8 470
8 044
1 Note 25 provides additional disclosures related to post-employment benefits.
2 Note 29 provides additional disclosures related to contingent consideration.
Novartis believes that its total provisions are adequate
based upon currently available information. However,
given the inherent difficulties in estimating liabilities in
this area, Novartis may incur additional costs beyond the
amounts provided. Management believes that such addi-
tional amounts, if any, would not be material to the
Group’s financial condition but could be material to the
results of operations or cash flows in a given period.
Environmental remediation provisions
The material components of the environmental remedi-
ation provisions consist of costs to sufficiently clean and
refurbish contaminated sites to the extent necessary,
and to treat, and where necessary, continue surveillance
at sites where the environmental remediation exposure
is less significant. The provision recorded at December
31, 2016, totals USD 0.8 billion (2015: USD 0.9 billion), of
which USD 65 million (2015: USD 80 million) is current.
A substantial portion of the environmental remedia-
tion provisions relate to the remediation of Basel regional
landfills in the adjacent border areas in Switzerland, Ger-
many and France. The provisions are re-assessed on a
yearly basis and are adjusted as necessary.
In the United States, Novartis has been named under
federal 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 envi-
ronmental liability provisions during 2016, 2015 and 2014:
(USD millions)
January 1
Cash payments
Releases
Additions
Currency translation effects
December 31
Less current provision
Non-current environmental
remediation provisions
at December 31
2016
871
– 75
1
– 24
773
– 65
2015
923
– 52
– 5
6
– 1
871
– 80
2014
1 061
– 33
– 6
2
– 101
923
– 95
708
791
828
The expected timing of the related cash outflows as of
December 31, 2016, is currently projected as follows:
(USD millions)
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
Expected
cash outflows
127
76
427
143
773
Provisions for product liabilities,
governmental investigations and other
legal matters
Novartis has established provisions for certain product
liabilities, governmental investigations and other legal
matters, where a potential cash outflow is probable and
Novartis can make a reliable estimate of the amount of
the outflow. These provisions represent the Group’s cur-
rent best estimate of the total financial effect for the mat-
ters described below and for other less significant mat-
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 217
ters. Potential cash outflows reflected in a provision may
be fully or partially off-set by insurance in certain circum-
stances.
Novartis has not established provisions for potential
damage awards for certain additional legal claims against
its subsidiaries if Novartis currently believes that a pay-
ment is either not probable or cannot be reliably esti-
mated. In total, these not-provisioned-for matters include
fewer than 500 individual product liability cases and cer-
tain other legal matters. Plaintiffs’ alleged claims in these
matters, which Novartis does not believe to be entirely
remote but which do not fulfill the conditions for the
establishment of provisions, currently aggregate to,
according to Novartis’ current best belief, approximately
USD 1.5 billion. In addition, in some of these matters there
are claims for punitive or multiple (treble) damages, civil
penalties and disgorgement of profits that in Novartis’
view are either wholly or partially unspecified or wholly
or partially unquantifiable at present; the Group believes
that information about these amounts claimed by plain-
tiffs generally is not meaningful for purposes of deter-
mining a reliable estimate of a loss that is probable or
more than remote.
A number of other legal matters are in such early
stages or the issues presented are such that the Group
has not made any provisions since it cannot currently
estimate either a potential outcome or the amount of any
potential losses. For these reasons, among others, the
Group generally is unable to make a reliable estimate of
possible loss with respect to such cases. It is therefore
not practicable to provide information about the poten-
tial financial impact of those cases.
There might also be cases for which the Group was
able to make a reliable estimate of the possible loss or
the range of possible loss, but the Group believes that
publication of such information on a case-by-case basis
would seriously prejudice the Group’s position in ongo-
ing legal proceedings or in any related settlement dis-
cussions. Accordingly, in such cases, information has
been disclosed with respect to the nature of the contin-
gency, but no disclosure is provided as to an estimate of
the possible loss or range of possible loss.
Note 28 contains additional information on contin-
gencies.
Summary of significant legal proceedings
The following is a summary of significant legal proceed-
ings to which Novartis or its subsidiaries are a party or
were a party and that concluded in 2016.
Investigations and related litigations
SOUTHeRN DISTRIcT OF NeW YORK (S.D.N.Y.) MaRKeTING
pRacTIceS INVeSTIGaTION aND lITIGaTION
In April 2013, the US government filed a civil complaint
in intervention to an individual qui tam action against
Novartis Pharmaceuticals Corporation (NPC) in the
United States District Court (USDC) for the S.D.N.Y.
involving several of NPC’s cardiovascular medications.
The suit is related to a previously disclosed 2011 inves-
tigation of the United States Attorney’s Office (USAO)
for the S.D.N.Y. relating to marketing practices, including
the remuneration of healthcare providers, in connection
with three NPC products (Lotrel, Starlix and Valturna).
The complaint, as subsequently amended, asserts fed-
eral False Claims Act and common law claims with
respect to speaker programs and other promotional
activities for certain NPC cardiovascular medications
allegedly serving as mechanisms to provide kickbacks
to healthcare professionals (HCPs). It seeks unspecified
damages, which according to the complaint are “sub-
stantial”, including treble damages and maximum civil
penalties per claim, as well as disgorgement of Novartis
profits from the alleged unlawful conduct. In August
2013, New York State filed a civil complaint in interven-
tion asserting similar claims. Neither government com-
plaint in intervention adopted the individual relator’s
claims with respect to off-label promotion of Valturna,
which were subsequently dismissed with prejudice by
the court. The individual relator continues to litigate the
kickback claims on behalf of other states and municipal-
ities. NPC vigorously contests the S.D.N.Y., New York
State and individual claims, both as to alleged liability
and amount of damages and penalties.
S.D.N.Y. / WeSTeRN DISTRIcT OF NeW YORK HealTHcaRe
FRaUD INVeSTIGaTION
In 2011, Alcon Laboratories, Inc. (ALI) received a sub-
poena from the United States Department of Health &
Human Services relating to an investigation into allega-
tions of healthcare fraud. The subpoena requests the
production of documents relating to marketing practices,
including the remuneration of healthcare providers, in
connection with certain ALI products (Vigamox, Neva-
nac, Omnipred, Econopred; surgical equipment). ALI is
cooperating with this investigation.
S.D.N.Y. GILENYA MaRKeTING pRacTIceS INVeSTIGaTION
In 2013, NPC received a civil investigative demand from
the USAO for the S.D.N.Y. requesting the production of
documents and information relating to marketing prac-
tices for Gilenya, including the remuneration of health-
care providers in connection therewith. NPC is cooper-
ating with this investigation.
NeW YORK STaTe pRIcING pOlIcY INVeSTIGaTION
In November 2014, ALI received a civil subpoena from
the New York state attorney general relating to an inves-
tigation into a unilateral pricing policy program. ALI is
cooperating with this investigation.
eaSTeRN DISTRIcT OF peNNSYlVaNIa (e.D. pa.) GeNeRIc
pRIcING aNTITRUST INVeSTIGaTION, aNTITRUST claSS
acTIONS
In March 2016, Sandoz Inc. received a subpoena from
the Antitrust Division of the US Department of Justice
(DoJ) requesting documents related to the marketing
and pricing of generic pharmaceutical products sold by
Sandoz Inc. and its subsidiaries, including Fougera Phar-
maceuticals, Inc. (Fougera), and related communications
with competitors. Sandoz Inc. is cooperating with this
investigation which it believes to be part of a broader
inquiry into industry practice.
218 | Novartis Annual Report 2016
Since September 2016, Sandoz Inc., Fougera, Lek
Pharmaceuticals d.d., Novartis AG (NAG), and Novartis
International AG (NIAG) have been sued alongside other
generic pharmaceutical companies in more than 25 puta-
tive class actions in the S.D.N.Y. and E.D. Pa. alleging that
defendants engaged in anti-competitive conduct with
regard to the sales of various generic drugs, asserting
violations of federal and state antitrust laws as well as
consumer protection laws. The claims are being vigor-
ously contested.
DISTRIcT OF MaSSacHUSeTTS (D. MaSS.) cHaRITaBle
FOUNDaTION INVeSTIGaTION
In May 2016, NPC received a subpoena from the USAO
for the D. Mass. requesting documents related to NPC’s
support of 501(c)(3) organizations that provide co-pay-
ment assistance to Medicare patients who are pre-
scribed Novartis medicines, as well as related to pricing
strategies related to Gleevec. NPC is cooperating with
this investigation which it believes to be part of a broader
inquiry into industry practices.
LUCENTIS/aVaSTIN® MaTTeRS IN ITalY aND FRaNce
In 2013, the Italian Competition Authority (ICA) opened
an investigation to assess whether Novartis Farma S.p.A.,
NAG, F. Hoffmann-La Roche AG, Genentech Inc. and
Roche S.p.A. colluded to artificially preserve the market
positions of Avastin® and Lucentis. In March 2014, the
ICA imposed a fine equivalent to USD 125 million on NAG
and Novartis Farma S.p.A. and a fine on F. Hoffmann-La
Roche AG and Roche S.p.A. equivalent to USD 122 mil-
lion. As required by Italian law, Novartis paid the ICA fine,
subject to the right to later claim recoupment. Novartis
is appealing against the fines before the Consiglio di
Stato (CdS) which has referred five legal questions to
the European Court of Justice (ECJ) for a preliminary
ruling. The ECJ’s judgment is pending. Novartis is also
appealing at the CdS the decision of the Tribunale
amministrativo regionale del Lazio which has upheld a
decision by the Italian Medicines Agency to include Avas-
tin® in a list of drugs to be reimbursed off-label for age-re-
lated macular degeneration (AMD). The CdS has referred
four legal questions to the ECJ for a preliminary ruling.
The ECJ’s judgment is pending. In the second quarter of
2014, the Italian Ministry of Health indicated in a letter
that it intended to seek a total equivalent of approxi-
mately USD 1.2 billion in damages from Novartis and
Roche entities based on the above allegations, and in
the first quarter of 2015 the Lombardia region sent a pay-
ment request equivalent to approximately USD 61 mil-
lion.
In 2014, the French Competition Authority opened an
investigation against Novartis Groupe France with
respect to the French market for anti-vascular endothe-
lial growth factor (VEGF) products indicated for the treat-
ment of wet AMD. Novartis’ appeal against the Authori-
ty’s inspection was rejected by the Supreme Court in
2016. Also in France, Novartis’ appeal is pending against
a temporary recommendation of use and reimbursement
of off-label Avastin® for neovascular AMD by hospital
ophthalmologists, in force since September 2015.
Novartis’ appeal against the decree on which the recom-
mendation is based was rejected by the Administrative
Supreme Court in 2016. In both Italy and France, Novartis
believes that allowing the widespread off-label use and
reimbursement of Avastin®, despite the presence of avail-
able licensed alternatives, would result in a breach of
applicable regulations. Novartis continues to vigorously
contest all claims in Italy and France.
JapaN INVeSTIGaTION
In December 2015, trial started against a former Novartis
Pharma K.K. (NPKK) employee, and also NPKK under
the dual liability concept in Japanese law, over allega-
tions brought by the Tokyo District Public Prosecutor
Office in two counts for alleged manipulation of data in
sub-analysis publications of the Kyoto Heart Study
regarding valsartan. The charges against NPKK are sub-
ject to a maximum total fine of JPY 4 million.
SOUTH KORea INVeSTIGaTION
In Q1 2016, the Seoul Western District Prosecutor initi-
ated a criminal investigation into, among other things,
allegations that Novartis Korea utilized medical journals
to provide inappropriate economic benefits to HCPs. In
September 2016, a criminal trial began concerning the
Prosecutor’s allegations that Novartis Korea utilized
medical journals to provide inappropriate economic ben-
efits to HCPs. Separately, upon request by the Prosecu-
tor’s office, the Korea Fair Trade Commission is investi-
gating whether sponsorships by Novartis Korea of HCPs
to overseas academic conferences constitute a violation
of fair trade laws. In addition, the Ministry of Food and
Drug Safety and the Ministry of Health and Welfare are
also reviewing the matter and are evaluating administra-
tive sanctions on Novartis Korea.
GReece INVeSTIGaTION
Novartis is investigating allegations of potentially inap-
propriate economic benefits in Greece to HCPs and oth-
ers. Information has been provided to the Greek author-
ities by Novartis (Hellas) S.A.C.I. related to these
allegations. Novartis is also responding to document
requests from the US Securities and Exchange Commis-
sion (SEC) and DoJ in connection with such allegations
and is cooperating with their investigation.
Antitrust class actions
SOlODYN®
Since the third quarter of 2013, seventeen putative class
action complaints and three other complaints have been
filed against manufacturers of the brand drug Solodyn®
and its generic equivalent, including Sandoz Inc. The
cases have been consolidated and transferred for pre-
trial purposes to the federal district court in Mass. The
plaintiffs purport to represent direct and indirect pur-
chasers of Solodyn® branded products and assert vio-
lations of federal and state antitrust laws, including alle-
gations in connection with separate settlements by
Medicis with each of the other defendants, including San-
doz Inc., of patent litigation relating to Solodyn®. Sandoz
is vigorously contesting the claims.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 219
cONTacT leNSeS
Since March 2015, more than 50 putative class action
complaints have been filed in several courts across the
US naming contact-lens manufacturers, including ALI,
and alleging violations of federal antitrust law as well as
state antitrust, consumer protection and unfair compe-
tition laws of various states in connection with the sale
of contact lenses. The cases have been consolidated in
the Middle District of Florida by the Judicial Panel on
Multidistrict Litigation and the claims are being vigor-
ously contested.
GLEEVEC
Since June 2015, NPC, Novartis Corporation (NC) and
NAG have been sued in five putative antitrust class action
complaints alleging that Novartis unlawfully obtained
delayed generic entry of Gleevec. The initial complaint
seeking to prevent Novartis from enforcing the agree-
ment with Sun Pharmaceuticals was dismissed in the
first quarter of 2016. Plaintiffs have filed a consolidated
amended complaint in the D. Mass. seeking damages on
behalf of all indirect purchasers of Gleevec in 24 differ-
ent states based on alleged violations of the respective
state antitrust laws. In November 2016, a similar class
action complaint was filed in the same court on behalf
of direct purchasers of Gleevec. The claims are being
vigorously contested.
eNOXapaRIN
In October 2015, Sandoz and Momenta Pharmaceuticals
were sued in a putative antitrust class action in federal
court in Tennessee alleging that Momenta and Sandoz
engaged in anticompetitive conduct with regard to sales
of enoxaparin, and the same allegations were made by
Amphastar in a lawsuit filed in federal court in California
and subsequently moved to federal court in Mass. (San-
doz, Momenta Pharmaceuticals and Amphastar are cur-
rently engaged in patent litigation concerning enoxapa-
rin in federal court in Mass.). The claims are being
vigorously contested.
Other matters
aVeRaGe WHOleSale pRIce (aWp) lITIGaTION
Lawsuits have been brought, the latest in February 2016,
by various US state governmental entities and private
parties against various pharmaceutical companies,
including certain Sandoz entities and NPC, alleging that
they fraudulently overstated the AWP that is or has been
used by payors, including state Medicaid agencies, to
calculate reimbursements to healthcare providers. In
2016, the Mississippi Supreme Court denied Sandoz’
motion for reconsideration of its decision which had
upheld the USD 30 million Chancery Court verdict
against Sandoz. NPC remains a defendant in an action
brought by the state of Illinois and in a putative class
action brought by private payors in New Jersey, and San-
doz is a defendant in an individual and a putative class
action in Pennsylvania. The claims are being vigorously
contested.
RECLAST/ACLASTA pRODUcT lIaBIlITY lITIGaTION
NPC is a defendant in 22 US product liability actions
involving Reclast and alleging atypical femur fracture
injuries and osteonecrosis of the jaw, most of which are
in New Jersey state or federal court coordinated with
claims against other bisphosphonate manufacturers.
After the Saskatchewan and Alberta putative class
actions were discontinued by plaintiffs in 2016 and 2017,
one Canadian putative class action brought against
numerous bisphosphonate manufacturers including
NPC, Novartis Pharmaceuticals Canada Inc. and NIAG
remains pending in Quebec. All claims are being vigor-
ously contested.
ORIel lITIGaTION
In October 2013, Shareholder Representative Services
LLC filed a complaint in New York State Court against
Sandoz Inc., two affiliates and two former officers of San-
doz AG asserting various common law and statutory con-
tract, fraud and negligent misrepresentation claims aris-
ing out of Sandoz Inc.’s purchase of Oriel Therapeutics,
Inc. In March 2015, the court dismissed all parties and
claims but for a breach of contract claim against Sandoz
Inc. Sandoz Inc. continues to vigorously contest the
claim.
eYe DROp pRODUcTS cONSUMeR claSS acTIONS
Since November 2012, six putative consumer fraud class
action litigations were commenced against Alcon (and
in four of those cases, Sandoz) in federal courts in the
Southern Districts of Illinois and Florida and the Districts
of Missouri, Mass. and New Jersey (D.N.J.). They claim
that Alcon’s, Sandoz’s and many other manufacturer
defendants’ eye drop products for glaucoma were
deceptively designed so that the drop dosage is more
than necessary to be absorbed in the eye or there is too
much solution in each bottle for the course of one-
month’s treatment, leading to wastage and higher costs
to patient consumers. Three cases remain pending
against Alcon (and two against Sandoz) at the US Court
of Appeals for the Third and Sixth Circuits and in the D.
Mass. and D.N.J. Novartis is vigorously contesting the
claims.
Concluded legal matters
NORTHeRN DISTRIcT OF TeXaS (NDTX) INVeSTIGaTION
In 2016, Alcon achieved civil settlements with the US
Office of Foreign Assets Control (OFAC) and with the
US Department of Commerce’s Bureau of Industry and
Security to pay a total of USD 9.4 million in civil mone-
tary penalties. The settlements relate to the sale and
export of medical end-use surgical and pharmaceutical
products that were licensable and in fact had been pre-
viously and subsequently licensed by OFAC for Alcon.
The USAO for the NDTX has advised Alcon that it has
closed its investigation without taking action.
cHINa INVeSTIGaTIONS
After reports of Chinese government investigations of
other pharmaceutical companies for alleged improper
use of certain China-based travel agencies to reward
healthcare providers, Novartis commenced an internal
220 | Novartis Annual Report 2016
investigation in 2013 concerning its local affiliates’ rela-
tionships with China-based travel agencies (and other
vendors). In March 2016, NAG achieved a civil settlement
with the SEC to pay USD 25 million to settle charges that
it violated the internal controls and books-and-records
provisions of the Foreign Corrupt Practices Act, without
admitting or denying the findings. Novartis also agreed
for two years to report to the SEC on the status of its
remediation and anti-corruption compliance.
ITalY MF59 INVeSTIGaTION
In May 2014, the public prosecutor of Siena had initiated
a criminal investigation with respect to allegations that
the transfer price of the adjuvant MF59 was unlawfully
marked up. The investigation concerned whether the
Focetria vaccine sold to the government was over-priced
and whether the Italian Ministry of Health paid an inflated
amount in a dispute settlement relating to the supply of
Focetria during the 2009 pandemic. Having found no ele-
ments to sustain the charges at trial, in 2016 the Judicial
Authority of Siena issued a decree of dismissal of the
investigation.
MeTOclOpRaMIDe pRODUcT lIaBIlITY lITIGaTION
Sandoz is a defendant, along with numerous brand and
generic manufacturers of Reglan® (metoclopramide), in
376 product liability actions in the state courts in Penn-
sylvania and California claiming that the use of metoclo-
pramide caused personal injuries including tardive dys-
kinesia. All cases are in the process of being resolved
through voluntary dismissal or settlement, the payment
of which is not material to Novartis.
TEKTURNA/RASILEZ/VALTURNA pRODUcT lIaBIlITY
lITIGaTION
NPC and certain other Novartis affiliates had been defen-
dants in 12 individual lawsuits pending in the USDC for
the D.N.J., and one in Alberta, Canada, claiming that
treatment with Tekturna, Rasilez and/or Valturna caused
renal failure, kidney disease or stroke. In 2016, the D.N.J.
cases have been resolved through settlement, the pay-
ment of which was not material to Novartis. The remain-
ing Alberta case is being vigorously contested, but is not
material to Novartis.
EQUA aRBITRaTION
In 2013, Sanofi K.K. had commenced an arbitration
against NPKK relating to the termination of a co-promo-
tion agreement in Japan of Equa (Galvus), which is used
to treat type 2 diabetes. The matter was concluded in
2016.
QUI TAM acTIONS
NPC was a defendant in a relator’s qui tam action in the
USDC for the E.D. Pa. asserting federal and state False
Claims Act claims relating to certain alleged marketing
practices involving Elidel®. The federal government and
several states had declined to intervene in the relator’s
action. In 2016, NPC settled this matter with the relator,
the federal government and eight states for an amount
not material to Novartis.
In 2006, 2010 and 2012, qui tam complaints were filed
in D. Mass. asserting various federal False Claims Act
and state claims relating to certain alleged improper mar-
keting practices involving Xolair against various Novartis,
Genentech and Roche entities. In 2011, the US and var-
ious state governments declined to intervene in the rela-
tors’ actions, and closed their investigations. In June
2014, the relator in the 2010 action voluntarily dismissed
his complaint with prejudice; the US and various states
subsequently consented to the dismissal. In the second
quarter of 2016, the Court of Appeals affirmed a deci-
sion by the USDC for the D. Mass. which had dismissed
with prejudice all federal claims in connection with
alleged improper marketing practices asserted by the
relators; the Court of Appeals remanded relators’ state
claims to the district court for dismissal without preju-
dice. Two similar complaints were filed in October 2016
in state courts in New York and Mass. Novartis contin-
ues to vigorously contest the claims, but they are not
material to Novartis.
eMplOYMeNT acTION
In March 2015, ALI and NC had been sued in an individ-
ual and collective action filed in the S.D.N.Y. The claims
had asserted inter alia gender discrimination, pay dis-
crimination and retaliation at Alcon. In 2016, the parties
have finalized a class settlement and settlements for the
individual plaintiffs for amounts that were not material to
Novartis.
Summary of product liability, governmental
investigations and other legal matters provision
movements
(USD millions)
January 1
Provisions related to
discontinued operations
Cash payments
Releases of provisions
Additions to provisions
Currency translation effects
December 31
Less current portion
Non-current product
liabilities, governmental
investigations and other
legal matters provisions
at December 31
2016
1 194
2015
849
– 811
– 239
243
8
395
– 131
– 256
– 223
832
– 8
1 194
– 743
2014
924
– 37
– 454
– 135
549
2
849
– 328
264
451
521
Novartis believes that its total provisions for investiga-
tions, product liability, arbitration and other legal matters
are adequate based upon currently available information.
However, given the inherent difficulties in estimating lia-
bilities, there can be no assurance that additional liabil-
ities and costs will not be incurred beyond the amounts
provided.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 221
21. current financial debt
and derivative financial instruments
(USD millions)
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
2016
2015
1 601
836
3 174
1 645
1 185
1 085
178
1 659
116
30
5 905
5 604
The consolidated balance sheet amounts of current
financial debt, other than the current portion of non-cur-
rent 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 depos-
its from the compensation of associates employed by
Swiss entities) was 3.0% in 2016 and 2.7% in 2015.
Details on commercial papers are provided in Note 29
– Liquidity risk.
22. provisions and other current liabilities
(USD millions)
Taxes other than income taxes
Restructuring provisions
Accrued expenses for goods and services received but not invoiced
Accruals for royalties
Provisions for deductions from revenue
Accruals for compensation and benefits including social security
Environmental remediation liabilities
Deferred income
Provisions for product liabilities, governmental investigations and other legal matters 1
Accrued share-based payments
Contingent considerations 2
Other payables
2016
547
222
880
550
4 183
1 993
65
287
131
199
49
722
2015
551
260
1 124
550
3 790
1 932
80
385
743
209
78
1 017
Total provisions and other current liabilities
9 828
10 719
1 Note 20 provides additional disclosures related to legal provisions
2 Note 29 provides additional disclosures related to contingent consideration
Provisions are based upon management’s best estimate
and adjusted for actual experience. Such adjustments
to the historic estimates have not been material.
222 | Novartis Annual Report 2016
Provisions for deductions from revenue
The following table shows the movement of the provi-
sions for deductions from revenue:
(USD millions)
January 1
Provisions related to
discontinued operations
2016
2015
3 790
3 533
2014
4 182
– 234
Impact of business combinations
3
Additions
16 622
15 603
14 119
Payments/utilizations
– 16 189
– 15 218
– 13 907
Changes in offset against
gross trade receivables
Currency translation effects
December 31
10
– 50
4 183
50
– 181
3 790
– 420
– 207
3 533
Restructuring provisions movements
(USD millions)
January 1
Provisions related to
discontinued operations
Additions
Cash payments
Releases
Transfers
Currency translation effects
December 31
2016
260
2015
333
343
– 260
– 66
– 76
21
222
399
– 435
– 36
– 1
260
2014
174
– 4
504
– 295
– 52
6
333
In 2016, additions to provisions of USD 343 million were
mainly related to the following reorganizations:
— The Innovative Medicines division Pharmaceuticals
business unit, realigned its operations to improve its
operating agility, to focus resources on key growth
drivers. Furthermore, research is realigning and
focusing its operations resulting in redundancies from
the consolidation of certain research teams and the
outsourcing of certain activities to qualified third party
vendors.
— Alcon division launched several initiatives to improve
its efficiencies resulting in redundancies, as it realigns
its operations to focus on its surgical and vision care
business franchises after the transfer of its ophthal-
mic pharmaceuticals business to Innovative Medi-
cines division.
— Sandoz division launched an initiative to reallocate
resources to priority, high growth and higher profit-
ability countries.
— Various groupwide initiatives to simplify organiza-
tional structure, including consolidation of manufac-
turing sites and support services.
In 2015, additions to provisions of USD 399 million were
mainly related to the following reorganizations:
— Innovative Medicines division implemented a restruc-
turing program targeted at efficiency gains in the busi-
ness franchises, other than in Oncology. It also initi-
ated initiatives related to the integration of the
oncology business acquired from GSK.
— Alcon division extended its initiative started in the
prior year to realize productivity opportunities.
— Various groupwide initiatives to simplify the organiza-
tional structure, mainly related to the manufacturing
footprint and support services.
In 2014, additions to provisions of USD 504 million were
mainly related to the following reorganizations:
— Innovative Medicines division initiatives in drug devel-
opment targeted at establishing an organizational
model for its activities that allows for greater focus
on high priority programs in specialty medicines, more
flexibility to adapt to changes in the portfolio, and
which strengthens operational excellence. Further-
more Innovative Medicines implemented a program
targeted at increasing operational leverage.
— Alcon division established an initiative to realize pro-
ductivity opportunities.
— Various groupwide initiatives to simplify organiza-
tional structure, including consolidation of manufac-
turing sites and support services.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 223
23. Details to the consolidated cash flow statements
23.1) Adjustments for non-cash items from continuing operations
(USD millions)
Taxes
Depreciation, amortization and impairments on:
Property, plant & equipment
Intangible assets
Financial assets 1
Income from associated companies
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 expense
Total
1 Including unrealized fair value gains
2016
2015
2014
1 119
1 106
1 545
1 591
4 452
132
– 703
– 935
671
956
1 154
8 437
1 550
3 921
104
1 630
3 052
69
– 266
– 1 918
– 869
773
1 642
1 109
9 070
– 622
744
1 490
735
6 725
23.2) Cash flows from changes in working capital and other operating items included in
operating cash flow from continuing operations
(USD millions)
(Increase) in inventories
(Increase) in trade receivables
(Decrease)/Increase in trade payables
Change in other net current assets and other operating cash flow items
Total
2016
– 235
– 229
– 587
974
– 77
2015
– 482
– 513
378
– 246
– 863
2014
– 506
– 367
142
106
– 625
224 | Novartis Annual Report 2016
23.3) Cash flows arising from acquisitions and divestments of businesses
The following is a summary of the cash flow impact of acquisitions and divestments. The most significant trans-
actions are described in Note 2.
2016
2016
acquisitions Divestments
2015
2015
Acquisitions Divestments
2014
2014
Acquisitions Divestments
Trade payables and other liabilities including deferred tax liabilities
372
Net identifiable assets (acquired) or divested
– 814
– 14 086
2 189
– 355
(USD millions)
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
Currency translation effects
Acquired/(divested) liquidity
Fair value of previously held equity interests
Subtotal
Refinancing of intercompany financial debt, net
Goodwill 1
Divestment gain
– 451
– 690
– 39
– 4
– 1
– 1
1
64
– 749
– 12 970
– 730
– 15
– 555
– 3
– 25
212
1 000
646
13
113
86
40
893
529
311
– 601
– 841
– 234
– 248
– 53
– 1
– 3
– 2
186
98
25
– 479
2
145
91
7
87
159
– 50
439
– 3
– 14 061
1 808
– 353
436
578
1 042
7 401
– 1 337
– 131
267
876
– 566
– 8
– 519
153
– 49
47
– 56
– 2 438
Taxes paid and other portfolio transformation related cash flows
– 748
Receivables and payables contingent consideration, net 2
Other payments and deferred consideration, net
(Deferred)/prepaid portion of sales price 3
84
– 44
Net cash flows
Of which:
– 765
– 748
– 16 507
8 924
– 331
1 060
Net cash flows used in/from discontinued operations
– 748
8 924
1 060
Net cash flows used in continuing operations
– 765
– 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 The contingent consideration of the 2016 Transcend Medical, Inc. acquisition amounted to USD 92 million. Of this amount, USD 60 million has been paid in 2016.
3 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.
23.4) Cash flows from discontinued operations
(USD millions)
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 used in/from investing activities
Total net cash flows used in/from discontinued operations
2016
– 748
– 748
– 748
2015
– 188
– 41
1
– 2
8 924
8 882
8 694
2014
– 1
– 223
4
– 18
79
– 13
1 060
889
888
1 2016 includes mainly payments for capital gains taxes and other payments related to the portfolio transformation transaction. 2015 includes proceeds of USD 10 925 million
reduced by USD 2 001 million, for payments of capital gains taxes, transaction-related costs and purchase price adjustments. 2014 includes the net proceeds related to the
divestment of the blood transfusion diagnostics unit.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 225
24. acquisitions of businesses
Fair value of assets and liabilities arising from acquisitions
(USD millions)
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
2016
451
690
39
4
1
1
2015
12 970
730
15
555
3
25
2014
234
248
53
1
3
2
– 372
– 212
– 186
814
14 086
– 1
56
– 25
2 438
869
16 499
355
– 2
131
484
1 2014 Acquisitions include 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 2016 were Transcend and Selexys, in 2015, were
the GSK Oncology products, Spinifex and Admune and
in 2014 CoStim and WaveTech. The goodwill arising out
of these acquisitions is attributable to buyer specific syn-
ergies, assembled workforce and to the accounting for
deferred tax liabilities on the acquired assets. Goodwill
of USD 18 million from 2016 and of USD 2.4 billion from
2015 is tax deductible.
226 | Novartis Annual Report 2016
25. post-employment benefits for associates
Defined benefit plans
In addition to the legally required social security schemes,
the Group has numerous independent pension and other
post-employment benefit plans. In most cases, these
plans are externally funded in entities that are legally
separate from the Group. For certain Group companies,
however, no independent plan assets exist for the pen-
sion and other post-employment benefit obligations of
associates. In these cases the related unfunded liability
is included in the balance sheet. The defined benefit obli-
gations (DBOs) of all major pension and other post-em-
ployment benefit plans are reappraised annually by inde-
pendent actuaries. Plan assets are recognized at fair
value. The major plans are based in Switzerland, the
United States, the United Kingdom, Germany and Japan,
which represent 95% of the Group’s total DBO for pen-
sion plans. Details of the plans in the two most signifi-
cant countries of Switzerland and the US are provided
below.
Swiss-based pension plans represent the most sig-
nificant portion of the Group’s total DBO and plan assets.
For the active insured members born on or after Janu-
ary 1, 1956, or having joined the plans after December
31, 2010, the benefits are partially linked to the contribu-
tions paid into the plan. Certain features of Swiss pen-
sion plans required by law preclude the plans being cat-
egorized as defined contribution plans. These factors
include a minimum interest guarantee on retirement sav-
ings accounts, a pre-determined factor for converting
the accumulated savings account balance into a pension
and embedded death and disability benefits.
All benefits granted under Swiss-based pension
plans are vested, and Swiss legislation prescribes that
the employer has to contribute a fixed percentage of an
associate’s pay to an external pension fund. Additional
employer contributions may be required whenever the
plan’s statutory funding ratio falls below a certain level.
The associate also contributes to the plan. The pension
plans are run by separate legal entities, each governed
by a Board of Trustees, which, for the principal plans,
consists of representatives nominated by Novartis and
the active insured associates. The Boards of Trustees
are responsible for the plan design and asset investment
strategy.
In June 2015, the Board of Trustees of the Novartis
Swiss Pension Fund agreed to adjust the annuity con-
version rate at retirement with effect from January 1,
2016. This amendment did not have an impact on exist-
ing members receiving benefits or on plan members born
before January 1, 1956. This amendment resulted in a
net pre-tax curtailment gain of USD 110 million (CHF 103
million) recognized in the 2015 financial statements.
The US pension plans represent the second largest
component of the Group’s total DBO and plan assets.
The principal plans (Qualified Plans) are funded, whereas
plans providing additional benefits for executives (Res-
toration Plans) are unfunded. Employer contributions are
required for Qualified Plans whenever the statutory fund-
ing ratio falls below a certain level. Furthermore, associ-
ates in the US are covered under other post-employment
benefit plans and post-retirement medical plans.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 227
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, 2016 and 2015:
(USD millions)
Benefit obligation at January 1
Current service cost
Interest cost
Past service costs and settlements
Administrative expenses
Remeasurement losses/(gains) arising from changes in financial assumptions
Remeasurement (gains) 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
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
Pension plans
Other post-employment
benefit plans
2016
2015
2016
2015
23 402
24 178
1 132
1 253
437
390
– 73
29
1 299
– 7
117
451
399
– 138
23
– 16
– 41
56
– 896
– 358
– 1 250
– 1 406
207
– 41
223
31
35
48
32
46
46
– 26
– 33
7
– 51
– 34
– 30
– 110
– 14
– 50
39
23 614
23 402
1 158
1 132
19 536
20 434
293
742
– 757
542
207
– 77
300
– 286
– 223
494
223
– 3
172
6
– 1
199
6
– 6
27
23
– 1 250
– 1 406
– 51
– 50
– 11
3
19 225
19 536
153
– 4 389
– 3 866
– 1 005
172
– 960
– 50
– 4
– 54
– 58
12
– 4
– 50
Net liability in the balance sheet at December 31
– 4 443
– 3 916
– 1 005
– 960
The reconciliation of the net liability from January 1 to December 31 is as follows:
(USD millions)
Net liability at January 1
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
Pension plans
Other post-employment
benefit plans
2016
2015
2016
2015
– 3 916
– 3 802
– 960
– 1 054
– 437
– 101
– 29
– 4
– 451
– 103
– 23
135
– 667
– 285
139
542
30
135
494
– 28
12
– 35
– 42
12
– 7
27
– 32
– 40
168
14
23
– 39
– 4 443
– 3 916
– 1 005
– 960
47
36
– 4 490
– 3 952
– 1 005
– 960
228 | Novartis Annual Report 2016
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:
(USD millions)
Switzerland United States
Rest of
the world
Total Switzerland United States
Rest of
the world
Total
Benefit obligation at December 31
15 436
3 783
4 395
23 614
15 453
3 783
4 166
23 402
2016
2015
Thereof unfunded
By type of member
Active
Deferred pensioners
Pensioners
739
497
1 236
736
466
1 202
6 426
891
831
1 460
8 777
6 196
1 515
2 346
990
909
1 392
8 578
1 489
2 398
9 010
2 061
1 420
12 491
9 257
1 884
1 285
12 426
Fair value of plan assets at December 31
13 958
2 282
2 985
19 225
14 347
2 358
2 831
19 536
Funded status
– 1 478
– 1 501
– 1 410
– 4 389
– 1 106
– 1 425
– 1 335
– 3 866
The following table shows the principal weighted average actuarial assumptions used for calculating defined ben-
efit 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
Current average life expectancy
for a 65-year-old male/female
Pension plans
Other post-employment
benefit plans
2016
2015
2014
2016
2015
2014
1.4%
0.4%
2.2%
0.5%
1.8%
0.4%
2.9%
0.8%
1.8%
0.4%
3.2%
0.9%
4.2%
4.4%
3.8%
22/24 years 21/24 years 21/24 years 21/23 years 21/23 years 22/24 years
Changes in the aforementioned actuarial assumptions
can result in significant volatility in the accounting for the
Group’s pension plans in the consolidated financial state-
ments. This can result in substantial changes in the
Group’s other comprehensive income, long-term liabili-
ties and prepaid pension assets.
The DBO is significantly impacted by assumptions
regarding the rate that is used to discount the actuari-
ally determined post-employment benefit liability. This
rate is based on yields 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
discount 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 par-
tially compensate for the decrease in the funded status.
Furthermore, pension assets also include significant
holdings of equity instruments. Share prices tend to rise
when interest rates decrease and therefore often coun-
teract the negative impact of the rising defined benefit
obligation on the funded status (although the correlation
of interest rates with equities is not as strong as with
bonds, especially 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.
Assumptions regarding life expectancy significantly
impact the DBO. An increase in longevity increases the
DBO. There is no offsetting impact from the plan assets,
as no longevity bonds or swaps are held by the pension
funds. Generational mortality tables are used where this
data is available.
The following table shows the sensitivity of the
defined benefit pension obligation to the principal actu-
arial assumptions for the major plans in Switzerland, the
United States, the United Kingdom, Germany and Japan
on an aggregated basis:
Change in 2016 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
– 767
814
830
524
– 130
65
– 64
69
– 72
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 229
The healthcare cost trend rate assumptions used for
other post- employment benefits are as follows:
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
2016
2015
2014
7.0%
7.5%
7.0%
5.0%
5.0%
5.0%
2022
2022
2021
The following table shows the weighted average plan
asset allocation of funded defined benefit pension plans
at December 31, 2016 and 2015:
(as a percentage)
Equity securities
Debt securities
Real estate
Alternative investments
Cash and other investments
Total
Long-term
target
15–40
20–60
5–20
0–20
0–15
Pension plans
2016
2015
31
35
15
15
4
34
35
14
14
3
100
100
Cash and most of the equity and debt securities have a
quoted market price in an active market. Real estate and
alternative investments, which include hedge fund and
private equity investments, usually do not have a quoted
market price.
The strategic allocation of assets of the different pen-
sion plans is determined with the objective of achieving
an investment return that, together with the contributions
paid by the Group and its associates, is sufficient to main-
tain reasonable control over the various funding risks of
the plans. Based upon the market and economic envi-
ronments, actual asset allocations may temporarily be
permitted to deviate from policy targets. The asset allo-
cation currently includes investments in shares of
Novartis AG, which, at December 31, 2016 totaled 11 mil-
lion shares with a market value of USD 0.8 billion (2015:
11 million shares with a market value of USD 1.0 billion).
The weighted average duration of the defined benefit
obligation is 14.5 years (2015: 14.1 years).
The Group’s ordinary contribution to the various pen-
sion plans is based on the rules of each plan. Additional
contributions are made whenever this is required by stat-
ute or law (i.e., usually when statutory funding levels fall
below pre-determined thresholds). The only significant
plans that are foreseen to require additional funding are
those in the United Kingdom.
The expected future cash flows in respect of pension
and other post-employment benefit plans at December
31, 2016, were as follows:
(USD millions)
Pension plans
Novartis Group contributions
2017 (estimated)
expected future benefit payments
2017
2018
2019
2020
2021
2022–2026
434
1 262
1 209
1 208
1 208
1 198
5 882
Other post-
employment
benefit plans
62
63
65
67
69
70
361
Defined contribution plans
In many subsidiaries associates are covered by defined
contribution plans. Contributions charged to the 2016
consolidated income statement for the defined contri-
bution plans were USD 338 million (2015: USD 359 mil-
lion; 2014: USD 348 million). The 2015 and 2014 amount
excludes USD 1 million and USD 14 million, respectively,
related to discontinued operations.
26. equity-based participation plans for associates
The expense related to all equity-based participation
plans in the 2016 consolidated income statement was
USD 846 million (2015: USD 968 million; 2014: USD 1.1
billion), resulting in total liabilities arising from equi-
ty-based payment transactions of USD 199 million (2015:
USD 209 million; 2014: USD 277 million, of which USD 248
million was recognized in continuing operations). In 2015
and 2014, out of the total expense an amount of USD 903
million and USD 1.0 billion was recognized in continuing
operations and USD 65 million and USD 124 million was
recognized in discontinued operations.
Equity-based participation plans can be separated
into the following plans:
Annual Incentive
The Annual Incentive of the Novartis Group CEO and the
other Executive Committee members is paid 50% in cash
in February or March of the year following the perfor-
mance period, and 50% in Novartis restricted shares or
Restricted Share Units (RSUs) that are granted in Janu-
ary of the year following the performance period,
deferred and restricted for three years. In 2016, this
Annual Incentive was extended to Novartis Top Leaders
(NTLs). The payout will be 70% in cash and 30% in
Novartis restricted shares or RSUs. Each restricted
share is entitled to voting rights and payment of dividends
230 | Novartis Annual Report 2016
during the vesting period. Each RSU is equivalent to one
Novartis share and is converted into one share at the
vesting date. RSUs do not carry any dividend, dividend
equivalent or voting rights. The executives may elect to
also receive their cash incentive partially or fully in shares
or share units that will not be subject to vesting condi-
tions. In 2016, 396 executives participate in the plan.
Share savings plans
A number of associates in certain countries as well as
certain key executives worldwide are encouraged to
invest their Annual Incentive, and in the United Kingdom
also their salary, in a 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 participation in the
share savings plan, at no additional cost to the partici-
pant, Novartis matches their investments in shares after
a holding period of three or five years.
Novartis currently has three share savings plans:
— Worldwide, 35 key executives were invited to partic-
ipate in the Leveraged Share Savings Plan (LSSP)
based on their performance in 2015. At the partici-
pant’s election, the Annual Incentive is awarded partly
or entirely in shares. The elected number of shares
was delivered in 2016 and is subject to a holding
period of five years. At the end of the holding period,
Novartis will match the invested shares at a ratio of
1-to-1 (i.e. one share awarded for each invested share).
In the US both the LSSP award and the correspond-
ing match are cash settled.
— In Switzerland, the Employee Share Ownership Plan
(ESOP) was available to 12 253 associates in 2015.
ESOP participants may choose to receive their Annual
Incentive (i) 100% in shares, (ii) 50% in shares and
50% in cash or (iii) 100% in cash. After expiration of
a three-year holding period for Novartis shares
invested under the ESOP, each participant will receive
one matching share for every two Novartis shares
invested. A total of 6 173 associates chose to receive
shares under the ESOP for their performance in 2015
and the invested shares were delivered in 2016.
— In the United Kingdom, 1 540 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 2016, 1 227
participants elected to participate in this plan.
Novartis Equity Plan “Select”
The Equity Plan “Select” is a global equity incentive plan
under which eligible associates, including Executive
Committee members up to performance year 2013 and
NTLs up to performance year 2015, may annually be
awarded a grant subject to a three year vesting period.
No awards are granted for performance ratings below a
certain threshold.
The Equity Plan “Select” currently allows its partici-
pants in Switzerland to choose the form of their equity
compensation in restricted shares or restricted share
units (RSUs). In all other jurisdictions, RSUs are typically
granted. Until 2013, participants could also choose to
receive part or the entire grant in the form of tradable
share options.
Tradable share options expire on their 10th anniver-
sary from the grant date. Each tradable share option enti-
tles the holder to purchase after vesting (and before the
10th anniversary from the grant date) one Novartis share
at a stated exercise price that equals the closing market
price of the underlying share at the grant date.
Options under Novartis Equity Plan “Select”
outside North America
The following table shows the activity associated with
the share options during the period. The weighted aver-
age prices in the table below are translated from Swiss
Francs into USD at historical rates.
2016
2015
Weighted
average
Weighted
average
Options exercise Options exercise
(millions) price (USD) (millions) price (USD)
11.7
59.9
16.1
59.2
– 2.2
61.8
– 4.1
56.7
– 0.3
66.0
Options outstanding
at January 1
Sold or exercised
Forfeited or expired
Outstanding at December 31
9.5
59.4
11.7
59.9
exercisable at December 31
9.5
59.4
7.4
56.4
All share options were granted at an exercise price which
was equal to the closing market price of the Group’s
shares at the grant date. The weighted average share
price at the dates of sale was USD 75.2.
The following table summarizes information about
share options outstanding at December 31, 2016:
Options outstanding
Number
outstanding
(millions)
Average
remaining
contractual
life (years)
Weighted
average
exercise
price (USD)
0.7
1.2
4.2
3.4
9.5
2.0
3.0
3.2
6.0
4.1
46.7
54.4
57.7
66.0
59.4
Range of
exercise prices (USD)
Following the introduction of the new compensation pro-
grams in 2014, the Novartis Group CEO and the other
Executive Committee members are no longer eligible to
participate in the share savings plans. From the 2016
performance period onwards, the NTLs are also no lon-
ger eligible to participate in these share savings plans.
Associates may only participate in one of these plans
45–49
50–54
55–59
65–70
Total
in any given year.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 231
Options under Novartis equity plan “Select” for
North America
The following table shows the activity associated with
the American Depositary Receipts (ADR) options during
the period:
2016
2015
Weighted
ADR average
options exercise
Weighted
ADR average
options exercise
(millions) price (USD) (millions) price (USD)
31.9
60.2
44.4
59.6
– 6.0
61.7 – 11.8
57.8
– 0.7
63.3
Options outstanding
at January 1
Sold or exercised
Forfeited or expired
Outstanding at December 31
25.9
59.9
31.9
60.2
exercisable at December 31
25.9
59.9
19.2
56.3
All ADR options were granted at an exercise price which
was equal to the closing market price of the ADRs at the
grant date. The weighted average ADR price at the dates
of sale or exercise was USD 77.7.
The following table summarizes information about
ADR options outstanding at December 31, 2016:
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)
2.1
2.5
11.0
10.3
25.9
2.0
3.0
4.0
6.0
4.5
46.4
53.7
58.0
66.1
59.9
Until 2014 (2013 for the Novartis Group CEO and
other key executives), the OLTPP was available. The
rewards are based on rolling three year performance
objectives focused on the Novartis Economic Value
Added (NVA). The NVA is calculated based on Group
operating income and income from associated compa-
nies adjusted for interest, taxes and cost of capital
charge. The performance realization of a plan cycle is
obtained right after the end of the third plan year by add-
ing together the annual NVA realizations of all plan years
of the plan cycle. The performance ratio for a plan cycle
is obtained by dividing the performance realization for
the plan cycle with the performance target for the plan
cycle, expressing the result as a percentage. The OLTPP
only allows a payout if the actual NVA exceeds prede-
termined target thresholds. The payout is capped at
200% of target.
Under the LTPP and OLTPP, participants are granted
a target number of Performance Share Units (PSUs) at
the beginning of every performance period, which are
converted into Novartis shares after the performance
period. PSUs granted under the LTPP do not carry vot-
ing rights, but do carry dividend equivalents that are rein-
vested in additional PSUs and paid at vesting to the
extent that performance conditions have been met. PSUs
granted under the OLTPP do not carry any dividend, div-
idend equivalent or voting rights.
At the end of the three-year performance period, the
Compensation Committee adjusts the target number of
PSUs earned based on actual performance. PSUs are
converted into unrestricted Novartis shares without an
additional vesting period.
In 2016, 375 key executives received PSU grants
under LTPP. No PSUs were granted in 2016 and 2015
under the OLTPP.
Long-Term Performance Plans
Long-Term Relative Performance Plan
In 2014, a new Long-Term Performance Plan (LTPP) was
introduced for the Novartis Group CEO and other key
executives designed to not only drive long-term share-
holder value, but also innovation. From 2015 onwards,
this LTPP was extended to all NTLs.
The rewards of the LTPP are based on three-year
performance objectives focused on financial and inno-
vation measures. The financial measure is Novartis Cash
Value Added (NCVA). The weighting of this measure is
75%. The NCVA target is approved by the Board of Direc-
tors.
The innovation measure is based on an holistic
approach under which divisional innovation targets are
set at the beginning of the cycle, comprised of up to ten
target milestones that represent the most important
research and development project milestones for each
division. At the end of the performance period, the
Research & Development Committee assists the Board
of Directors and the Compensation Committee in eval-
uating performance against the innovation targets at the
end of the cycle. The weighting of this measure is 25%.
The Long-Term Relative Performance Plan (LTRPP) was
introduced in 2014, and is an equity plan for the Novartis
Group CEO and other key executives. From 2016
onwards, NTLs are also participating in this plan. For the
2016 grant the target incentive is 125% of base compen-
sation for the Novartis Group CEO and ranges from 30%
to 80% for other Executive Committee members. It is
capped at 200% of target. LTRPP is based on the
achievement of long-term Group Total Shareholder
Return (TSR) versus our peer group of 12 companies in
the healthcare industry over rolling three-year perfor-
mance 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 stan-
dard published TSR data, which is publicly available. The
position in the peer group determines the payout range.
In 2016, 366 executives received PSU grants under
the LTRPP.
232 | Novartis Annual Report 2016
Other share awards
Selected associates, excluding the Executive Commit-
tee members, may exceptionally receive Special Share
Awards of restricted shares or RSUs. These Special
Share Awards provide an opportunity to reward out-
standing achievements or exceptional performance and
aim at retaining key contributors. They are based on a
formal internal selection process, in which the individual
performance of each candidate is thoroughly assessed
at several management levels. Special Share Awards
generally have a five-year vesting period. In exceptional
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.
Worldwide, 532 associates at different levels in the
organization were awarded restricted shares and RSUs
in 2016.
In addition, in 2016, Board members received
unrestricted shares as part of their regular compensa-
tion.
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:
Non-vested shares
at January 1
Granted
– Annual incentive
– Share savings plans
– Select North America
– Select outside North America
– Long-Term Performance Plan
– Long-Term Relative Performance Plan
– Other share awards
Vested
Forfeited
Non-vested shares
at December 31
2016
2015
Weighted
average
Number
Fair value at
fair value at
of shares grante date in grante date in
USD USD millions
in millions
Weighted
average
Number
fair value at
Fair value at
of shares grante date in grante date in
USD USD millions
in millions
20.1
87.1
1 751
24.2
70.4
1 703
0.1
4.4
4.8
1.6
1.2
0.3
0.7
– 10.4
– 1.8
73.8
78.1
72.4
74.4
79.2
58.5
65.8
68.8
73.1
7
344
348
119
95
18
46
0.1
5.0
3.9
1.7
0.7
0.1
0.9
– 716
– 132
– 14.4
– 2.1
96.6
89.6
98.8
96.7
81.0
55.8
95.1
67.3
66.7
10
448
385
165
57
6
86
– 969
– 140
21.0
89.5
1 880
20.1
87.1
1 751
Alcon, Inc., equity plans granted to
associates prior to the merger
At the completion of the merger of Alcon, Inc., into
Novartis on April 8, 2011, all awards outstanding under
the Alcon equity plans were converted into awards based
upon Novartis shares with a conversion factor of 3.0727
as defined in the Merger Agreement. The plans are fully
vested.
Share options entitle the recipient to purchase Novartis
shares at the closing market price of the former Alcon,
Inc., share on the day of grant divided by the conversion
factor.
Share-settled appreciation rights (SSAR) entitle the
participant to receive, in the form of Novartis shares, the
difference between the values of the former Alcon, Inc.,
share at the date of grant, converted into Novartis shares
using the conversion factor, and the Novartis share price
at the date of exercise.
The following table shows the activity associated with
the converted Novartis share options and SSARs during
2016 and 2015:
Weighted
Weighted
Number average Number of average
of options exercise
SSARs exercise
(millions) price (USD) (millions) price (USD)
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
0.2
36.8
1.8
36.6
– 0.1
37.6
– 0.4
38.9
0.1
36.0
1.4
35.9
0.1
36.0
1.4
35.9
Outstanding at
January 1, 2015
Exercised
Outstanding at
December 31, 2015
exercisable at
December 31, 2015
Outstanding at
January 1, 2016
Exercised
Outstanding at
December 31, 2016
exercisable at
December 31, 2016
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 233
27. Transactions with related parties
Genentech/Roche
Novartis has two agreements with Genentech, Inc., USA,
a subsidiary of Roche Holding AG which is indirectly
included in the consolidated financial statements using
equity accounting since Novartis holds 33.3% of the out-
standing voting shares of Roche.
LUCENTIS
Novartis has licensed the exclusive rights to develop and
market Lucentis outside the United States for indications
related to diseases of the eye. As part of this agreement,
Novartis paid Genentech/Roche an initial milestone and
shared the cost for the subsequent development by mak-
ing additional milestone payments upon the achievement
of certain clinical development points and product
approval. Novartis also pays royalties on the net sales of
Lucentis products outside the United States. In 2016,
Lucentis sales of USD 1.8 billion (2015: USD 2.1 billion,
2014: USD 2.4 billion) have been recognized by Novartis.
XOLAIR
In February 2004, Novartis Pharma AG, Genentech, Inc.,
and Tanox, Inc., finalized a three-party collaboration to
govern the development and commercialization of cer-
tain anti-IgE antibodies including Xolair and TNX-901.
Under this agreement, 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 Genentech/Roche are
co-promoting Xolair in the United States where Genen-
tech/Roche records all sales. Novartis records sales
outside of the United States.
Novartis markets Xolair and records all sales and
related costs outside the United States as well as co-pro-
motion costs in the United States. Genentech/Roche and
Novartis share the resulting profits from sales in the
United States, Europe and other countries, according to
agreed profit-sharing percentages. In 2016, Novartis rec-
ognized total sales of Xolair of USD 835 million (2015:
USD 755 million, 2014: USD 777 million) including sales
to them for the United States market.
The net expense for royalties, cost sharing and profit
sharing arising out of the Lucentis and Xolair agreements
with Genentech/Roche totaled USD 217 million in 2016
(2015: USD 309 million, 2014: USD 536 million).
Furthermore, Novartis has several patent license,
supply and distribution agreements with Roche.
Executive Officers and Non-Executive Directors Compensation
During 2016, there were 14 Executive Committee members (“Executive Officers”), including those who stepped
down during the year (11 members in 2015 and 14 members in 2014 also including those who stepped down).
The total compensation for members of the Executive Committee and the 13 Non-Executive Directors (12 in
2015, 14 in 2014) using the Group’s accounting policies for equity-based compensation and pension benefits was
as follows:
(USD millions)
2016
2015
2014
2016
2015
2014
2016
2015
2014
Executive Officers
Non-Executive Directors
Total
Benefits other than
equity-based compensation
Post-employment benefits
Equity-based compensation
Total
20.8
2.2
46.2
69.2
17.1
1.9
52.9
71.9
18.3
2.1
81.7
102.1
4.0
4.7
4.6
8.6
4.4
9.1
6.2
0.1
4.9
11.2
24.8
2.2
50.8
77.8
21.8
1.9
57.3
81.0
24.5
2.2
86.6
113.3
During 2016, there was a decrease in the IFRS compen-
sation expense for Executive Officers compared to 2015.
This was mainly due to lower equity-based compensa-
tion expense attributable to lower performance factors,
which was partially offset by higher benefits other than
equity-based compensation resulting from the increase
in the number of Executive Officers.
During 2015, there was a decrease in the IFRS com-
pensation expense for Executive Officers compared to
2014 mainly due to the decrease in number of Executive
Officers.
The annual incentive award, which is fully included in
equity- based compensation even when paid out in cash,
is granted in January in the year following the reporting
period.
The disclosures required by the Swiss Code of Obli-
gations and in accordance with the Swiss Ordinance
against Excessive Compensation in Stock Exchange
Listed Companies on Board and Executive compensa-
tion are shown in the Compensation Report.
234 | Novartis Annual Report 2016
Transactions with former members of the Board of
Directors
During 2016, 2015 and 2014, the following payments (or
waivers of claims) were made to former Board members
or to “persons closely” linked to them:
Prof. Dr. William R. Brody and Prof. Dr. Rolf M. Zinker-
nagel, who stepped down from the Board of Directors at
the 2014 AGM, received delegated Board membership
fees for their work on the Boards of the Novartis Insti-
tute for Tropical Diseases (Prof. Dr. Zinkernagel) and the
Genomics Institute of the Novartis Research Foundation
(Prof. Dr. Brody and Prof. Dr. Zinkernagel). During 2016,
an amount of CHF 25 000 (2015: CHF 100 000) and
CHF 50 000 (2015: CHF 200 000) was paid to Prof. Dr.
Brody and Prof. Dr. Zinkernagel, respectively, for their
work on these Boards. No further payments related to
these Board memberships will be made, as their respec-
tive mandates have ended.
Dr. Alex Krauer, Honorary Chairman, is entitled to an
amount of CHF 60 000 for annual periods from one AGM
to the next. This amount was fixed in 1998 upon his
departure from the Board in 1999, and has not been
revised since that date. An amount of CHF 60 000 was
paid to Dr. Krauer during 2016 and 2015. Due to a change
in the timing of payments, an amount of CHF 45 000 was
paid to Dr. Krauer, during 2014.
In 2016, Dr. Daniel Vasella, Honorary Chairman,
received the contractual minimum compensation of
USD 250 000 (2015: USD 250 000, 2014: USD 363 552)
under an agreement which became effective on Novem-
ber 1, 2013 and ended in 2016. Under this agreement, Dr.
Vasella is compensated at a rate of USD 25 000 per day,
with an annual guaranteed minimum fee of USD 250 000.
This amount is in line with compensation practices at
other large companies when retired Chairmen or CEOs
were retained in consulting agreements after leaving the
board of directors.
In 2014, Dr. Vasella acquired an asset from a consol-
idated entity at fair value and exercised an option to
acquire, at a future date, real estate in Risch, Zug, Swit-
zerland. The real estate transaction closed in 2015 and
Dr. Vasella acquired the Group assets from a consoli-
dated entity for an arm’s length transaction price deter-
mined on the basis of two independent external assess-
ments.
Transactions with an Executive Officer prior to start
of employment
As announced on September 24, 2015, Dr. James E.
Bradner succeeded Dr. Mark Fishman as President of
the Novartis Institutes for BioMedical Research (NIBR)
and member of the ECN with effect from March 1, 2016.
In 2015, a subsidiary acquired Dr. Bradner’s 10 million
shares (7% interest) in a non-material entity for USD 10
million. The arm’s length transaction price was deter-
mined based on the most recent round of financing of
this entity.
The above disclosures related to Dr. Vasella and Dr. Brad-
ner are made on a voluntary basis.
28. commitments and contingencies
Leasing commitments
Research & Development commitments
The Group has entered into various fixed term opera-
tional leases, mainly for cars and real estate. As of
December 31, 2016 the Group’s commitments with
respect to these leases, including estimated payment
dates, were as follows:
The Group has entered into long-term research agree-
ments with various institutions which provide for poten-
tial milestone payments by Novartis that may be capital-
ized. As of December 31, 2016 the Group’s commitments
to make payments under those agreements, and their
estimated timing, were as follows:
(USD millions)
2017
2018
2019
2020
2021
Thereafter
Total
2016
262
192
132
104
82
2 125
2 897
(USD millions)
2017
2018
2019
2020
2021
Thereafter
expense of current year
335
Total
2016
385
465
389
771
1 512
653
4 175
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 235
Other commitments
The Novartis Group entered into various purchase com-
mitments for services and materials as well as for equip-
ment in the ordinary course of business. These commit-
ments are generally entered into at current market prices
and reflect normal business operations.
Contingencies
Group companies have to observe the laws, government
orders and regulations of the country in which they
operate.
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 pro-
ceedings regarding product liability, sales and market-
ing practices, commercial disputes, employment, and
wrongful discharge, antitrust, securities, 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 busi-
ness, financial position and reputation. While Novartis
does not believe that any of these legal proceedings will
have a material adverse effect on its financial position,
litigation is inherently unpredictable and large judgments
sometimes occur. As a consequence, Novartis may in
the future incur judgments or enter into settlements of
claims that could have a material adverse effect on its
results of operations or cash flow.
Governments and regulatory authorities around the
world have been stepping up their compliance and law
enforcement activities in recent years in key areas,
including marketing practices, pricing, corruption, trade
restrictions, embargo legislation, insider trading, anti-
trust, cyber security and data privacy. Further, when one
government or regulatory authority undertakes an inves-
tigation, it is not uncommon for other governments or
regulators to undertake investigations regarding the
same or similar matters. Responding to such investiga-
tions is costly and requires an increasing amount of man-
agement’s time and attention. In addition, such investi-
gations may affect our reputation, create a risk of
potential exclusion from government reimbursement
programs in the US and other countries, and may lead
to (or arise from) litigation. These factors have contrib-
uted to decisions by Novartis and other co mpanies in the
healthcare industry, when deemed in their interest, to enter
into settlement agreements with governmental authorities
around the world prior to any formal decision by the
authorities or a court. Those government settlements
have involved and may continue to involve, in current gov-
ernment investigations and proceedings, large cash pay-
ments, sometimes in the hundreds of millions of dollars
or more, including the potential repayment of amounts
allegedly obtained improperly and other penalties,
including treble damages. In addition, settlements of gov-
ernment healthcare fraud cases often require compa-
nies to enter into corporate integrity agreements, which
are intended to regulate company behavior for a period
of years. Our affiliate Novartis Pharmaceuticals Corpo-
ration is a party to such an agreement, which will expire
in 2020. Also, matters underlying governmental investi-
gations and settlements may be the subject of separate
private litigation.
While provisions have been made for probable losses,
which management deems to be reasonable or appro-
priate, there are uncertainties connected with these
estimates.
Note 20 contains additional information on these
matters.
A number of Group companies are involved in legal
proceedings concerning intellectual property rights. The
inherent unpredictability of such proceedings means
that there can be no assurances as to their ultimate out-
come. 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.
The Group’s potential environmental remediation lia-
bility is assessed based on a risk assessment and inves-
tigation of the various sites identified by the Group as at
risk for environmental 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 per-
centage of material attributable to the Group at the reme-
diation sites relative to that attributable to other parties,
and the financial capabilities of the other potentially
responsible parties.
Note 20 contains additional information on environ-
mental liabilities.
236 | Novartis Annual Report 2016
29. Financial instruments – additional disclosures
(USD millions)
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
Note
16
2016 1
2015 1
7 007
4 674
16
16
16
13
13
13
306
31
337
989
107
586
339
6
33
378
1 173
90
550
1 682
1 813
Total financial assets – measured at fair value through other comprehensive income
2 019
2 191
Financial assets – measured at amortized costs
Trade receivables and other current assets (excluding pre-payments)
15/17
10 202
10 551
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
Trade payables
Total financial liabilities – measured at amortized costs
16
16
13
16
21
21
21
21
19
19
19
19
1
108
514
2
164
653
10 825
11 370
188
230
418
181
143
324
20 269
18 559
1 601
836
3 174
178
5 789
1 645
1 185
1 085
1 659
5 574
17 285
17 193
708
82
706
87
– 178
– 1 659
17 897
16 327
4 873
5 668
28 559
27 569
Financial liabilities – measured at fair value through the consolidated income statement
Contingent consideration (see Note 20/22) and other financial liabilities
Derivative financial instruments
1 018
1 105
21
116
30
Total financial liabilities – measured at fair value through the consolidated income statement
1 134
1 135
Total financial liabilities
29 693
28 704
1 Except for straight bonds (see Note 19), the carrying amount is a reasonable approximation of fair value.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 237
Derivative financial instruments
The following tables show the contract or underlying
principal amounts and fair values of derivative financial
instruments analyzed by type of contract at Decem-
ber 31, 2016 and 2015. Contract or underlying principal
amounts indicate the gross volume of business outstand-
ing at the consolidated balance sheet date and do not
represent amounts at risk. The fair values are determined
by reference to market prices or standard pricing mod-
els that use observable market inputs at December 31,
2016 and 2015.
(USD millions)
currency-related instruments
Contract or underlying
principal amount
Positive fair values
Negative fair values
2016
2015
2016
2015
2016
2015
Forward foreign exchange rate contracts
8 220
8 795
230
142
– 116
– 30
Over-the-Counter currency options
459
Total of currency-related instruments
8 220
9 254
230
1
143
– 116
– 30
Total derivative financial instruments included in
marketable securities and in current financial debts
8 220
9 254
230
143
– 116
– 30
The following table shows by currency contract or underlying principal amount the derivative financial instruments
at December 31, 2016 and 2015:
(USD millions)
currency-related instruments
Forward foreign exchange rate contracts
Total derivative financial instruments
(USD millions)
currency-related instruments
Forward foreign exchange rate contracts
Over-the-Counter currency options
Total of currency-related instruments
Total derivative financial instruments
EUR
USD
JPY
Other
Total
2016
3 623
3 623
3 427
3 427
43
43
1 127
1 127
8 220
8 220
EUR
USD
JPY
Other
Total
2015
2 828
4 713
42
1 212
8 795
459
3 287
3 287
4 713
4 713
42
42
1 212
1 212
459
9 254
9 254
Derivative financial instruments effective for hedge
accounting purposes
At the end of 2016 and 2015, there were no open hedg-
ing instruments for anticipated transactions.
Fair value by hierarchy
As required by IFRS, financial assets and liabilities
recorded at fair value in the consolidated financial state-
ments are categorized based upon the level of judgment
associated with the inputs used to measure their fair
value. There are three hierarchical levels, based on an
increasing amount of subjectivity associated with the
inputs to derive fair valuation for these assets and liabil-
ities, which are as follows:
The assets carried at Level 1 fair value are equity and
debt securities listed in active markets.
The assets generally included in Level 2 fair value
hierarchy are foreign exchange and interest rate deriva-
tives and certain debt securities. Foreign exchange and
interest rate derivatives are valued using corroborated
market data. The liabilities generally included in this fair
value hierarchy consist of foreign exchange and interest
rate derivatives.
Level 3 inputs are unobservable for the asset or lia-
bility. The assets generally included in Level 3 fair value
hierarchy are various investments in hedge funds and
unquoted equity security investments. Contingent con-
sideration carried at fair value is included in this cate-
gory.
238 | Novartis Annual Report 2016
(USD millions)
Financial assets
Debt 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
(USD millions)
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
Level 1
Level 2
2016
Valued at
Level 3 amortized cost
22
22
230
252
284
31
315
315
513
513
476
107
586
1 169
188
– 889
– 129
108
1
109
514
514
514
2 196
188
– 116
– 116
– 1 018
Level 1
Level 2
2015
Valued at
Level 3 amortized cost
23
23
143
166
316
6
29
351
351
700
700
164
2
166
653
653
4
4
4
473
90
550
1 113
181
– 790
– 315
– 30
– 30
– 1 105
Total
306
31
337
108
230
1
676
989
107
586
– 889
– 129
– 116
– 1 134
Total
339
6
33
378
164
143
2
687
1 173
90
550
653
2 466
181
– 790
– 315
– 30
– 1 135
The analysis above includes all financial instruments including those measured at amortized cost or at cost.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 239
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:
(USD millions)
January 1
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
Fair value adjustments recognized in the consolidated statement
of comprehensive income
Purchases
Cash receipts and payments
Disposals
Reclassification
December 31
Associated
companies at
fair value through
profit and loss
Fund
investments
2016
Available-
for-sale Contingent Contingent
financial consideration consideration
payables
receivables
investments
Other
financial
liabilities
181
94
473
550
– 790
– 315
26
1
51
3
– 28
– 1
– 24
– 156
41
– 3
– 29
188
14
5
– 5
107
– 8
122
– 18
– 70
476
– 172
– 15
229
183
586
– 889
– 129
Total of fair value gains and losses recognized
in the consolidated income statement for assets
and liabilities held at December 31, 2016
– 2
– 1
– 23
51
– 156
3
(USD millions)
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
Fair value adjustments recognized in the consolidated statement
of comprehensive income
Purchases
Cash receipts and payments
Disposals
At equity investments reclassified due to loss
of significant influence
Reclassification
December 31
Total of fair value gains and losses recognized
in the consolidated income statement for assets
and liabilities held at December 31, 2015
Associated
companies at
fair value through
profit and loss
Fund
investments
2015
Available-
for-sale Contingent Contingent
financial consideration consideration
payables
receivables
investments
Other
financial
liabilities
168
77
332
– 756
75
9
7
41
1 000
– 25
– 1
– 35
– 75
– 57
– 587
62
17
24
22
142
– 15
– 56
– 255
– 450
278
272
– 33
181
– 15
94
18
9
473
550
– 790
– 315
– 16
6
6
925
– 57
– 587
240 | Novartis Annual Report 2016
During 2016, there were several individually non-signifi-
cant transfers of available-for-sale financial investments
from level 3 to level 1 for USD 75 million mainly due to Ini-
tial Public Offerings of the invested companies. No sig-
nificant transfers from one level to the other occurred
during the 2015 reporting period.
Realized gains and losses associated with Level 3
available-for-sale marketable securities are recorded in
the consolidated income statement under “Other finan-
cial income and expense” and realized gains and losses
associated with Level 3 available-for-sale financial
investments are recorded in the consolidated income
statement under “Other income” or “Other expense”,
respectively.
If the pricing parameters for the Level 3 input were
to change for associated companies at fair value through
profit and loss, equity securities, fund investments and
for available-for-sale financial investments by 10% pos-
itively or negatively, this would change the amounts
recorded in the consolidated statement of comprehen-
sive income by USD 77 million.
For the determination of the fair value of a contingent
consideration various unobservable inputs are used. A
change in these inputs might result in a significantly
higher or lower fair value measurement. The significance
and usage of these inputs may vary among the existing
contingent considerations due to differences in the trig-
gering events for payments or in the nature of the asset
the contingent consideration relates to. Among others,
the inputs used are the probability of success, sales fore-
cast and assumptions regarding the discount rate, tim-
ing and different scenarios of triggering events. The
inputs are interrelated. If the most significant parameters
for the Level 3 input were to change by 10% positively
or negatively, or where the probability of success (POS)
is the most significant input parameter 10% were added
or deducted from the applied probability of success, for
contingent consideration payables, other financial liabil-
ities and contingent consideration receivables, this
would change the amounts recorded in the consolidated
income statement by USD 207 million and USD 182 mil-
lion, respectively.
Nature and extent of risks arising from
financial instruments
Market risk
Novartis is exposed to market risk, primarily related to
foreign currency exchange rates, interest rates and the
market value of the investments of liquid funds. The
Group actively monitors and seeks to reduce, where it
deems it appropriate to do so, fluctuations in these expo-
sures. It is the Group’s policy and practice to enter into
a variety of derivative financial instruments to manage
the volatility of these exposures and to enhance the yield
on the investment of liquid funds. It does not enter into
any financial transactions containing a risk that cannot
be quantified at the time the transaction is concluded. In
addition, it does not sell short assets it does not have, or
does not know it will have, in the future. The Group only
sells existing assets or enters into transactions and
future transactions (in the case of anticipatory hedges)
that it confidently expects it will have in the future, based
on past experience. In the case of liquid funds, the Group
writes call options on assets it has, or writes put options
on positions it wants to acquire and has the liquidity to
acquire. The Group expects that any loss in value for
these instruments generally would be offset by increases
in the value of the underlying transactions.
Foreign currency exchange rate risk
The Group uses the USD as its reporting currency. As a
result, the Group is exposed to foreign currency exchange
movements, primarily in European, Japanese and emerg-
ing market currencies. Fluctuations in the exchange rates
between the US dollar and other currencies can have a
significant effect on both the Group’s results of opera-
tions, including reported sales and earnings, as well as
on the reported value of our assets, liabilities and cash
flows. This, in turn, may significantly affect the compa-
rability of period-to-period results of operations.
Because our expenditures in Swiss francs are sig-
nificantly higher than our revenues in Swiss francs, vol-
atility in the value of the Swiss franc can have a signifi-
cant impact on the reported value of our earnings, assets
and liabilities, and the timing and extent of such volatility
can be difficult to predict. In addition, there is a risk that
certain countries could take other steps which could sig-
nificantly impact the value of their currencies.
The Group is exposed to a potential adverse devalu-
ation risk on its intercompany funding and total invest-
ment in certain subsidiaries operating in countries with
exchange controls. The most significant country in this
respect is Venezuela, where the Group is exposed to
potential devaluation losses in the income statement on
its total intercompany balances with its subsidiaries in
Venezuela.
The Group’s subsidiaries in Venezuela are experienc-
ing a significant reduction in approvals for remittance of
US dollars outside the country at the exchange rate avail-
able for imports of specific goods and services of
national priority, including medicines and medical sup-
plies. As a result, in November 2016, the Group changed
the exchange rate applied to translate the financial state-
ments of its Venezuelan subsidiaries from VEF 11 per
USD to the floating rate of DICOM (Sistema de Divisa
Complementaria) which was VEF 658 per USD as of
November 1, 2016. A corresponding USD 0.3 billion reval-
uation loss on the outstanding intercompany balances
was recognized in the fourth quarter of 2016. Due to the
reserves against the intercompany balances, the net out-
standing intercompany payable balance of Venezuela
subsidiaries was reduced to an insignificant amount as
per December 31, 2016.
The Group has an equivalent of approximately USD 2
million of cash in Venezuela local currency (VEF), which
is subject to loss of purchase power due to high inflation
in the country.
The Group manages its currency exposure by engag-
ing in hedging transactions where management deems
appropriate. Novartis may enter into various contracts
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 241
that reflect the changes in the value of foreign currency
exchange rates to preserve the value of assets, commit-
ments and anticipated transactions. Novartis also uses
forward contracts and foreign currency option contracts
to hedge.
Net investments in subsidiaries in foreign countries
are long-term investments. Their fair value changes
through movements of foreign currency exchange rates.
The Group only hedges the net investments in foreign
subsidiaries in exceptional cases.
Commodity price risk
The Group has only a very limited exposure to price risk
related to anticipated purchases of certain commodities
used as raw materials by the Group’s businesses. A
change in those prices may alter the gross margin of a
specific business, but generally by not more than 10% of
the margin and thus below the Group’s risk management
tolerance levels. Accordingly, the Group does not enter
into significant commodity futures, forward and option
contracts to manage fluctuations in prices of anticipated
purchases.
Interest rate risk
The Group addresses its net exposure to interest rate
risk mainly through the ratio of its fixed rate financial debt
to variable rate financial debt contained in its total finan-
cial debt portfolio. To manage this mix, Novartis may
enter into interest rate swap agreements, in which it
exchanges periodic payments based on a notional
amount and agreed upon fixed and variable interest
rates.
Equity risk
The Group may purchase equities as investments of its
liquid funds. As a policy, it limits its holdings in an unre-
lated company to less than 5% of its liquid funds. Poten-
tial investments are thoroughly analyzed. Call options
are written on equities that the Group owns, and put
options are written on equities which the Group wants
to buy and for which cash is available.
Credit risk
Credit risks arise from the possibility that customers may
not be able to settle their obligations as agreed. To man-
age this risk, the Group periodically assesses the finan-
cial reliability of customers, taking into account their
financial position, past experience and other factors.
Individual risk limits are set accordingly.
The Group’s largest customer accounted for approx-
imately 16% of net sales, and the second and third larg-
est customers accounted for 12% and 6% of net sales,
respectively (2015: 14%, 11% and 5%, respectively). No
other customer accounted for 5% or more of net sales
in either year.
The highest amounts of trade receivables outstand-
ing were for these same three customers. They amounted
to 14%, 9% and 6%, respectively, of the Group’s trade
receivables at December 31, 2016 (2015: 13%, 9% and
6% respectively). There is no other significant concen-
tration of credit risk.
Counterparty risk
Counterparty risk encompasses issuer risk on market-
able securities and money market instruments, credit
risk on cash, time deposits and derivatives as well as set-
tlement risk for different instruments. Issuer risk is
reduced by only buying securities which are at least A-
rated. Counterparty credit risk and settlement risk are
reduced by a policy of entering into transactions with
counterparties (banks or financial institutions) that fea-
ture a strong credit rating. Exposure to these risks is
closely monitored and kept within predetermined param-
eters. The limits are regularly assessed and determined
based upon credit analysis including financial statement
and capital adequacy ratio reviews. In addition, reverse
repurchasing agreements are contracted and Novartis
has entered into credit support agreements with various
banks for derivative transactions.
The Group’s cash and cash equivalents are held with
major regulated financial institutions, the three largest
ones hold approximately 16.5%, 6.9% and 6.7%, respec-
tively (2015: 21.8%, 9.6% and 8.6%, respectively).
The Group does not expect any losses from non-per-
formance by these counterparties and does not have any
significant grouping of exposures to financial sector or
country risk.
Liquidity risk
Liquidity risk is defined as the risk that the Group could
not be able to settle or meet its obligations on time or at
a reasonable price. Group Treasury is responsible for
liquidity, funding and settlement management. In addi-
tion, liquidity and funding risks, and related processes
and policies, are overseen by management. Novartis
manages its liquidity risk on a consolidated basis accord-
ing to business needs, tax, capital or regulatory consid-
erations, if applicable, through numerous sources of
financing in order to maintain flexibility. Management
monitors the Group’s net debt or liquidity position through
rolling forecasts on the basis of expected cash flows.
Novartis has two US commercial paper programs
under which it can issue up to USD 9.0 billion in the
aggregate of unsecured commercial paper notes.
Novartis also has a Japanese commercial paper program
under which it can issue up to JPY 150 billion (approxi-
mately USD 1.3 billion) of unsecured commercial paper
notes. Commercial paper notes totaling USD 3.2 billion
under these three programs were outstanding as per
December 31, 2016 (2015: USD 1.1 billion). Novartis fur-
ther has a committed credit facility of USD 6.0 billion,
entered into on September 23, 2015. This credit facility
is provided by a syndicate of banks and is intended to be
used as a backstop for the US commercial paper pro-
grams. It matures in September 2020 and was undrawn
as per December 31, 2016 and December 31, 2015.
242 | Novartis Annual Report 2016
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 as well as
contingent considerations at December 31, 2016 and December 31, 2015:
2016
(USD millions)
current assets
Due later than Due later than Due later than
one year
but less than
five years
three months
but less than
one year
one month
but less than
three months
Due within
one month
Marketable securities and time deposits
32
126
110
124
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 after
five years
53
94
Total
445
94
231
7 007
7 777
38
5 907
5 977
102
1 100
1 328
91
201
124
147
– 5 141
– 12 756
– 17 897
– 5 155
– 12 901
– 18 056
– 5 141
– 12 756
– 17 897
– 5 099
– 5 099
– 15
– 5 114
– 250
– 250
– 72
– 322
– 440
– 440
– 29
– 469
– 5 789
– 5 789
– 116
– 5 905
Net debt
863
1 006
– 268
– 5 017
– 12 609
– 16 025
2015
(USD millions)
current assets
Due later than Due later than Due later than
one year
but less than
five years
three months
but less than
one year
one month
but less than
three months
Due within
one month
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
Due after
five years
62
86
Total
542
86
145
4 674
5 447
40
4 674
4 736
67
38
78
238
247
148
– 4 664
– 11 663
– 16 327
– 4 676
– 11 797
– 16 473
– 4 664
– 11 663
– 16 327
– 3 258
– 289
– 2 027
– 3 258
– 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
The consolidated balance sheet amounts of financial liabilities included in the above analysis are not materially dif-
ferent to the contractual amounts due on maturity. The positive and negative fair values on derivative financial instru-
ments represent the net contractual amounts to be exchanged at maturity.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 243
The Group’s contractual undiscounted potential cash flows from derivative financial instruments to be settled on a
gross basis are as follows:
2016
(USD millions)
Derivative financial instruments and accrued interest on derivative
financial instruments
Due later than Due later than
three months
but less than
one year
one month
but less than
three months
Due within
one month
Total
Potential outflows in various currencies – from financial derivative liabilities
– 1 087
– 1 246
– 2 027
– 4 360
Potential inflows in various currencies – from financial derivative assets
1 109
1 287
2 051
4 447
2015
(USD millions)
Derivative financial instruments and accrued interest on derivative
financial instruments
Due later than Due later than
three months
but less than
one year
one month
but less than
three months
Due within
one month
Total
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
Other contractual liabilities which are not part of management’s monitoring of the net debt or liquidity consist of
the following items:
(USD millions)
2016
Due later than Due later than Due later than
one year
three months
but less than
but less than
five years
one year
one month
but less than
three months
Due after
five years
Total
Contractual interest on non-current liabilities
– 104
– 433
– 1 694
– 4 015
– 6 246
Trade payables
– 4 873
– 4 873
(USD millions)
2015
Due later than Due later than Due later than
one year
three months
but less than
but less than
five years
one year
one month
but less than
three months
Due after
five years
Total
Contractual interest on non-current liabilities
– 104
– 499
– 1 878
– 4 332
– 6 813
Trade payables and commitment for repurchase of own shares (see Note 22)
– 5 668
– 5 668
Capital risk management
Novartis strives to maintain a strong credit rating. In man-
aging its capital, Novartis focuses on maintaining a
strong balance sheet. Moody’s rated the Group as Aa3
for long-term maturities and as P-1 for short-term matur-
ities and Standard & Poor’s had a rating of AA- for long-
term and A-1+ for short-term maturities. Fitch had a long-
term rating of AA and a short-term rating of F1+.
The debt/equity ratio increased to 0.32:1 at Decem-
ber 31, 2016, compared to 0.28:1 at the beginning of the
year.
Value at risk
The Group uses a value at risk (VAR) computation to esti-
mate the potential ten-day loss in the fair value of its
financial instruments.
A ten-day period is used because of an assumption
that not all positions could be undone in one day given
the size of the positions. Apart from contingent consid-
eration, finance lease obligations, and long-term loans
and receivables, advances and security deposits the
VAR computation includes all financial assets and finan-
cial liabilities as set forth above in this Note. Trade pay-
ables and receivables are considered only to the extent
they comprise a foreign currency exposure. In addition,
commodities are included in the computation.
The VAR estimates are made assuming normal mar-
ket conditions, using a 95% confidence interval. The
Group uses a “Delta Normal” model to determine the
observed inter-relationships between movements in
interest rates, stock markets and various currencies.
These inter-relationships are determined by observing
interest rate, stock market movements and forward for-
eign currency rate movements over a sixty-day period
for the calculation of VAR amounts.
244 | Novartis Annual Report 2016
The estimated potential ten-day loss in pre-tax
income from the Group’s foreign currency instruments,
the estimated potential ten-day loss of its equity hold-
ings, and the estimated potential ten-day loss in fair value
of its interest rate sensitive instruments (primarily finan-
cial debt and investments of liquid funds under normal
market conditions) as calculated in the VAR model are
the following:
(USD millions)
All financial instruments
Analyzed by components:
Instruments sensitive to foreign
currency exchange rates
Instruments sensitive to equity
market movements
Instruments sensitive to interest rates
2016
541
222
26
328
2015
387
224
50
353
The average, high, and low VAR amounts are as follows:
(USD millions)
All financial instruments
Analyzed by components:
Instruments sensitive to foreign
currency exchange rates
Instruments sensitive to equity
market movements
Instruments sensitive to
interest rates
Average
402
2016
High
541
Low
316
203
245
147
50
99
26
308
407
234
The VAR computation is a risk analysis tool designed to
statistically estimate the maximum potential ten day loss
from adverse movements in foreign currency exchange
rates, equity prices and interest rates under normal mar-
ket conditions. The computation does not purport to rep-
resent actual losses in fair value on earnings to be
incurred by the Group, nor does it consider the effect of
favorable changes in market rates. The Group cannot
predict actual future movements in such market rates
and it does not claim that these VAR results are indica-
tive of future movements in such market rates or are rep-
resentative of any actual impact that future changes in
market rates may have on the Group’s future results of
operations or 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 moni-
tored by Group Treasury. For these calculations, the
Group uses the six-month period with the worst perfor-
mance observed over the past twenty years in each cat-
egory. For 2016 and 2015, the worst case loss scenario
was calculated as follows:
(USD millions)
All financial instruments
Analyzed by components:
Instruments sensitive to foreign
currency exchange rates
Instruments sensitive to equity
market movements
Instruments sensitive to
interest rates
2016
6
2015
12
1
4
7
6
(USD millions)
All financial instruments
Analyzed by components:
Instruments sensitive to foreign
currency exchange rates
Instruments sensitive to equity
market movements
Instruments sensitive to
interest rates
Average
337
2015
High
387
Low
237
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 invest-
ment grade credit standing of the Group.
313
418
173
55
111
33
294
380
251
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 245
30. Discontinued operations
Discontinued operations consolidated income statement segmentation
Vaccines
Consumer Health1
Corporate
(including eliminations)
Total
discontinued operations
2015
2014
2015
2014
2015
2014
2015
2014
(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
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
– 151
– 26
2 870
298
– 280
– 545
– 118
278
2 588
– 187
– 1 532
– 30
– 32
– 312
– 313
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
601
5 816
19
78
620
5 894
23
65
– 376
– 3 073
267
2 886
– 244
– 1 812
– 181
– 58
– 857
– 431
2
2
12 479
– 351
– 1 713
– 96
10 766
– 447
2015
83
– 1
– 65
2014
– 66
– 77
– 736
– 405
– 14
– 124
1 Consumer Health is the aggregation of the OTC and Animal Health divisions.
The following are included in net income from discontinued operations:
(USD millions)
Depreciation of property, plant & equipment
Amortization of intangible assets
Impairment charges on property, plant & equipment, net
Impairment charges on intangible assets, net
Additions to restructuring provisions
Equity-based compensation of Novartis equity plans
31. events subsequent to the December 31, 2016
consolidated balance sheet date
Significant transactions closed in January 2017
For significant transactions entered into in 2016 and
closed in January 2017, see Note 2.
Dividend proposal for 2016 and approval of the
Group’s 2016 consolidated financial statements
On January 24, 2017, the Novartis AG Board of Direc-
tors proposed the acceptance of the 2016 consoli-
dated financial statements of the Novartis Group for
approval by the Annual General Meeting on February
28, 2017. Furthermore, also on January 24, 2017, the
Board proposed a dividend of CHF 2.75 per share to
be approved at the Annual General Meeting on Febru-
ary 28, 2017. If approved, total dividend payments
would amount to approximately USD 6.4 billion (2015:
USD 6.6 billion) using the CHF/USD December 31, 2016
exchange rate.
246 | Novartis Annual Report 2016
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, 2016
algeria
Société par actions SANDOZ, Algiers
argentina
Novartis Argentina S.A., Buenos Aires
Alcon Laboratorios S.A., Buenos Aires
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. KG, 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 Limited, Hamilton
Novartis Securities Investment
Limited, Hamilton
Novartis BioVentures Ltd., Hamilton
Trinity River Insurance Co Limited, 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 Ltd., Santiago de Chile
china
Beijing Novartis Pharma Co., Ltd., Beijing
Novartis Pharmaceuticals (HK)
Limited, Hong Kong
China Novartis Institutes for
BioMedical Research Co., Ltd., Shanghai
Suzhou Novartis Pharma Technology
Co., Ltd., Changshu
Shanghai Novartis Trading Ltd., Shanghai
Alcon Hong Kong Limited, Hong Kong
Alcon (China) Ophthalmic Product
Co., Ltd., Beijing
Sandoz (China) Pharmaceutical Co.,
Ltd., Zhongshan
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
Alcon Pharmaceuticals (Czech
Republic) s.r.o., Prague
Sandoz s.r.o., Prague
Share/paid-in
1
capital
Equity
interest %
DZD 650.0 m
100
ARS 906.1 m
ARS 83.9 m
AUD 2.2
AUD 3.8 m
AUD 2.6 m
AUD 11.6 m
EUR 1.0 m
EUR 1.1 m
EUR 36 336
EUR 32.7 m
EUR 1.0 m
100
100
100
100
100
100
100
100
100
100
100
BDT 162.5 m
60
EUR 7.1 m
EUR 360.6 m
EUR 141 856
EUR 19.2 m
CHF 1.0 m
CHF 30 000
USD 12 000
USD 370 000
USD 30 000
CHF 100 000
BRL 265.0 m
BRL 190.0 m
2
CAD 0
CAD 0
2
CAD 1
CAD 76.8 m
CLP 2.0 bn
CLP 2.0 bn
USD 30.0 m
HKD 200
USD 320.0 m
USD 103.4 m
USD 3.2 m
HKD 77 000
USD 2.2 m
USD 36.5 m
COP 7.9 bn
COP 20.9 m
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
HRK 25.6 m
100
CZK 51.5 m
CZK 31.0 m
CZK 44.7 m
100
100
100
As at December 31, 2016
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 City
Finland
Novartis Finland Oy, Espoo
France
Novartis Groupe France S.A., Rueil-Malmaison
Novartis Pharma S.A.S., Rueil-Malmaison
Laboratoires Alcon S.A.S., Rueil-Malmaison
Sandoz S.A.S., Levallois-Perret
Germany
Novartis Deutschland GmbH, Wehr
Novartis Pharma GmbH, Nuremberg
Novartis Pharma Produktions GmbH, Wehr
Alcon Pharma GmbH, Freiburg im Breisgau
WaveLight GmbH, Erlangen
CIBA Vision GmbH, Grosswallstadt
Sandoz International GmbH, Holzkirchen
1 A Pharma GmbH, Oberhaching
Salutas Pharma GmbH, Barleben
HEXAL AG, Holzkirchen
Aeropharm GmbH, Rudolstadt
Novartis Business Services GmbH, Wehr
Gibraltar
Novista Insurance Limited, Gibraltar City
Greece
Novartis (Hellas) S.A.C.I., Metamorphosis / Athens
Alcon Laboratories Hellas-
Commercial and Industrial S.A., Maroussi, Athens
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
Optonol Ltd., Neve-Ilan
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
luxembourg
Novartis Investments S.à r.l., Luxembourg-Ville
Novartis Finance S.A., Luxembourg-Ville
Malaysia
Novartis Corporation
(Malaysia) Sdn. Bhd., Kuala Lumpur
Alcon Laboratories (Malaysia) Sdn.
Bhd., Petaling Jaya
CIBA Vision Johor Sdn. Bhd., Kuala Lumpur
Share/paid-in
1
capital
Equity
interest %
DKK 14.0 m
DKK 0.5 m
DKK 10.0 m
100
100
100
USD 4.0 m
100
EGP 193.8 m
EGP 250 000
99.77
100
EUR 459 000
100
EUR 103.0 m
EUR 43.4 m
EUR 12.9 m
EUR 5.4 m
EUR 155.5 m
EUR 25.6 m
EUR 2.0 m
EUR 512 000
EUR 6.6 m
EUR 15.4 m
EUR 100 000
EUR 26 000
EUR 42.1 m
EUR 93.7 m
EUR 26 000
EUR 25 000
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
CHF 130.0 m
100
EUR 23.4 m
EUR 5.7 m
HUF 545.6 m
HUF 883.0 m
INR 140.7 m
INR 60.0 m
INR 1.1 bn
INR 32.0 m
IDR 7.7 bn
IDR 11.9 bn
EUR 25 000
EUR 2.0 m
EUR 541 251
ILS 1 000
ILS 454 252
EUR 18.2 m
EUR 3.7 m
EUR 1.7 m
EUR 2.6 m
JPY 10.0 m
JPY 6.0 bn
JPY 500.0 m
JPY 100.0 m
USD 100.0 m
USD 100 000
MYR 3.3 m
MYR 1.0 m
MYR 10.0 m
100
100
100
100
73.4
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2016 | 247
As at December 31, 2016
Mexico
Novartis Farmacéutica, S.A. de C.V., Mexico City
Alcon Laboratorios, S.A. de C.V., Mexico City
Sandoz, S.A. de C.V., Mexico City
Morocco
Novartis Pharma Maroc SA, Casablanca
Netherlands
Novartis Netherlands B.V., Arnhem
Novartis Pharma B.V., Arnhem
Alcon Nederland B.V., Arnhem
Sandoz B.V., Almere
New Zealand
Novartis New Zealand Ltd, Auckland
Norway
Novartis Norge AS, Oslo
pakistan
Novartis Pharma (Pakistan) Limited, Karachi
panama
Novartis Pharma (Logistics), Inc., Panama City
Alcon Centroamerica S.A., Panama City
philippines
Novartis Healthcare Philippines,
Inc., Manila
Alcon Laboratories (Philippines),
Inc., Manila
Sandoz Philippines Corporation, 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 Oftalmológicos Lda., Porto Salvo
Sandoz Farmacêutica Lda., Porto Salvo
Romania
Novartis Pharma Services Romania
S.R.L., Bucharest
Alcon Romania S.R.L., Bucharest
Sandoz S.R.L., Targu-Mures
Russian Federation
Novartis Pharma LLC, Moscow
Alcon Farmacevtika LLC, Moscow
ZAO Sandoz, Moscow
Novartis Neva LLC, St. Petersburg
Saudi arabia
Saudi Pharmaceutical Distribution
Co. Ltd., Riyadh
Singapore
Novartis (Singapore) Pte Ltd., Singapore Country
Novartis Singapore Pharmaceutical
Manufacturing Pte Ltd, Singapore Country
Novartis Asia Pacific
Pharmaceuticals Pte Ltd, Singapore Country
Novartis Institute for Tropical
Diseases Pte Ltd, Singapore Country
Alcon Singapore Manufacturing Pte
Ltd, Singapore Country
CIBA Vision Asian Manufacturing and
Logistics Pte Ltd., Singapore Country
Alcon Pte Ltd, Singapore Country
Slovakia
Novartis Slovakia s.r.o., Bratislava
Slovenia
Lek Pharmaceuticals d.d., Ljubljana
Sandoz Pharmaceuticals d.d., Ljubljana
South africa
Novartis South Africa (Pty) Ltd, Midrand
Alcon Laboratories (South Africa)
(Pty) Ltd., Midrand
Sandoz South Africa (Pty) Ltd, Kempton Park
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 / Barcelona
Sandoz Farmacéutica S.A., Aravaca / Madrid
Sandoz Industrial Products S.A.,
Les Franqueses del Vallés / Barcelona
Abadia Retuerta S.A., Sardón de Duero / Valladolid
Share/paid-in
1
capital
Equity
interest %
MXN 205.0 m
MXN 5.9 m
MXN 468.2 m
100
100
100
MAD 80.0 m
100
EUR 1.4 m
EUR 4.5 m
EUR 18 151
EUR 907 560
100
100
100
100
NZD 820 000
100
NOK 1.5 m
100
PKR 3.9 bn
99.99
USD 10 000
PAB 1 000
PHP 298.8 m
PHP 16.5 m
PHP 30.0 m
PLN 44.2 m
PLN 750 000
PLN 25.6 m
PLN 11.4 m
EUR 500 000
EUR 2.4 m
EUR 4.5 m
EUR 499 900
RON 3.0 m
RON 10.8 m
RON 105.2 m
RUB 20.0 m
RUB 44.1 m
RUB 57.4 m
RUB 1.3 bn
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
SAR 26.8 m
75
SGD 100 000
SGD 45.0 m
SGD 39.0 m
SGD 2 004
SGD 101 000
SGD 1.0 m
SGD 164 000
100
100
100
100
100
100
100
EUR 2.0 m
100
EUR 48.4 m
EUR 1.5 m
ZAR 86.3 m
ZAR 201 820
ZAR 3.0 m
100
100
100
100
100
KRW 24.5 bn
KRW 33.8 bn
KRW 17.8 bn
98.55
100
100
EUR 63.0 m
EUR 11.6 m
EUR 270 450
EUR 9.3 m
EUR 6.0 m
100
100
100
100
100
As at December 31, 2016
Sweden
Novartis Sverige AB, Täby / Stockholm
Switzerland
Novartis International AG, Basel
Novartis Holding AG, Basel
Novartis International Pharmaceutical 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
Novartis Pharma Schweizerhalle AG, Muttenz
Novartis Pharma Stein AG, Stein
Novartis Pharma Schweiz AG, Risch
Alcon Switzerland SA, Risch
Alcon Pharmaceuticals Ltd., Fribourg
ESBATech, a Novartis company GmbH, Schlieren
Sandoz AG, Basel
Sandoz Pharmaceuticals AG, Risch
Roche Holding AG, Basel
Taiwan
Novartis (Taiwan) Co., Ltd., Taipei
Thailand
Novartis (Thailand) Limited, Bangkok
Alcon Laboratories (Thailand)
Limited, Bangkok
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
Sandoz Syntek Ilaç Hammaddeleri
Sanayi ve Ticaret A.S., Tuzla – Istanbul
Sandoz Grup Saglik Ürünleri
Ilaçlari Sanayi ve Ticaret A.S., Gebze – Kocaeli
United arab emirates
Novartis Middle East FZE, Dubai
United Kingdom
Novartis UK Limited, Frimley/Camberley
Novartis Pharmaceuticals UK Limited, Frimley/Camberley
Novartis Grimsby Limited, Frimley/Camberley
Alcon Eye Care UK Limited, Frimley/Camberley
Sandoz Limited, Frimley/Camberley
Glaxosmithkline Consumer Healthcare
Holdings Limited, Brentford, Middlesex
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
Novartis Institute for Functional
Genomics, Inc., San Diego, CA
Genoptix, Inc., Carlsbad, CA
Alcon Laboratories Holding Corporation, Fort Worth, TX
Alcon Laboratories, Inc., Fort Worth, TX
Alcon Refractivehorizons, LLC, Fort Worth, TX
Alcon Research, Ltd., Fort Worth, TX
Alcon Lensx, Inc., Aliso 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
Share/paid-in
1
capital
Equity
interest %
SEK 5.0 m
100
CHF 10.0 m
CHF 100.2 m
CHF 100 000
CHF 29.3 m
CHF 100 000
CHF 100 000
CHF 2.0 m
CHF 350.0 m
CHF 20.0 m
CHF 18.9 m
CHF 251 000
CHF 5.0 m
CHF 100 000
CHF 200 000
CHF 14.0 m
CHF 5.0 m
CHF 100 000
CHF 160.0 m
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
33/6
3
TWD 170.0 m
100
THB 302.0 m
THB 228.1 m
100
100
TRY 98.0 m
TRY 25.2 m
TRY 165.2 m
TRY 46.0 m
TRY 50.0 m
100
100
99.99
100
100
AED 7.0 m
100
GBP 25.5 m
GBP 5.4 m
GBP 250.0 m
GBP 550 000
GBP 2.0 m
100
100
100
100
100
GBP 100 000
36.5
USD 72.2 m
USD 1 000
USD 1
USD 5.2 m
USD 1
USD 21 000
USD 1
USD 10
USD 1 000
USD 10
USD 12.5
USD 100
USD 25 000
USD 1
USD 1
USD 3
USD 1
VEF 1.4 m
VEF 5.5 m
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
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, Nigeria, Peru, Puerto Rico, 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
248 | Novartis Annual Report 2016
Report of Novartis management
on internal control over financial reporting
The Board of Directors and management of the Group
are responsible for establishing and maintaining ade-
quate internal control over financial reporting. The
Novartis Group’s internal control system was designed
to provide reasonable assurance to the Novartis Group’s
management and Board of Directors regarding the reli-
ability of financial reporting and the preparation and fair
presentation of its published consolidated financial
statements.
All internal control systems, no matter how well designed,
have inherent limitations. Therefore, even those systems
determined to be effective may not prevent or detect
misstatements and can provide only reasonable assur-
ance with respect to financial statement preparation and
presentation. Also, projections of any evaluation of effec-
tiveness to future periods are subject to the risk that con-
trols may become inadequate because of changes in
conditions or that the degree of compliance with the pol-
icies or procedures may deteriorate.
Novartis Group management assessed the effectiveness
of the Group’s internal control over financial reporting as
of December 31, 2016. In making this assessment, it
used the criteria established in Internal Control – Inte-
grated Framework(2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission
(COSO). Based on its assessment, management has
concluded that, as of December 31, 2016, the Novartis
Group’s internal control over financial reporting was
effective based on those criteria.
PricewaterhouseCoopers AG, Switzerland, an indepen-
dent registered public accounting firm, has issued an
opinion on the existence and effec tiveness of the Group’s
internal control over financial reporting which is included
in this financial report on the pages 249 and 254 respec-
tively.
Joseph Jimenez
Chief Executive Officer
Harry Kirsch
Chief Financial Officer
Basel, January 24, 2017
FINaNcI al RepORT
Report of the statutory auditor on the consolidated financial statements of Novartis aG
Novartis Annual Report 2016 | 249
Report of the statutory auditor on the consolidated financial
statements of Novartis AG
To the general meeting of Novartis AG, Basel
Opinion
We have audited the consolidated financial statements
of Novartis AG and its consolidated subsidiaries
(“Novartis Group”), which comprise the consolidated
income statements, consolidated statements of compre-
hensive income, consolidated statements of changes in
equity, consolidated balance sheets and consolidated
cash flow statements and notes (pages 178 to 247) for
the year ended December 31, 2016.
In our opinion the consolidated financial statements
give a true and fair view of the consolidated financial
position of the Group as at December 31, 2016, and its
consolidated financial performance and its consolidated
cash flows for the year then ended in accordance with
International Financial Reporting Standards (IFRS) as
issued by the International Accounting Standards Board
and comply with Swiss law.
Basis for opinion
We conducted our audit in accordance with Swiss law,
Swiss Auditing Standards and International Standards
on Auditing (ISAs). Our responsibilities under those pro-
visions and standards are further described in the Audi-
tor’s responsibilities for the audit of the consolidated
financial statements section of our report.
We are independent of the Group in accordance with
the provisions of Swiss law and the requirements of the
Swiss audit profession, as well as the IESBA Code of
Ethics for Professional Accountants, and we have ful-
filled our other ethical responsibilities in accordance with
these requirements.
We believe that the audit evidence we have obtained
is sufficient and appropriate to provide a basis for our
opinion.
Our audit approach
Overview
— Overall Group materiality: USD 400 million which rep-
resents 5% of income before taxes from continuing
operations, rounded.
— We concluded full scope audit work at the Group’s
three operating divisions and at 28 reporting entities,
including reporting entities of the Corporate Division,
in 13 countries
— Our audit scope addressed over 67% of the Group’s
net sales and 79% of Group’s total assets
— In addition, specified procedures were performed on
a further 14 reporting entities in 11 countries repre-
senting a further 4% of the Group’s net sales and 6%
of the Group’s total assets
As key audit matters, the following areas of focus have
been identified:
— Carrying value of goodwill following group reorganization
— Carrying value of intangible assets other than goodwill
— Governmental investigations and litigations
— Rebates, discounts, allowances and returns
Audit scope
We designed our audit by determining materiality and
assessing the risks of material misstatement in the con-
solidated financial statements. In particular, we consid-
ered where subjective judgements were made; for exam-
ple, in respect of significant accounting estimates that
involved making assumptions and considering future
events that are inherently uncertain. As in all of our audits,
we also addressed the risk of management override of
internal controls, including among other matters consid-
eration of whether there was evidence of bias that rep-
resented a risk of material misstatement due to fraud.
How we tailored the audit scope
We tailored the scope of our audit in order to perform
sufficient work to enable us to provide an opinion on the
financial statements as a whole, taking into account the
structure of the Group, the accounting processes and
controls, and the industry in which the Group operates.
The Group financial statements are a consolidation of
over 300 reporting entities. We identified 28 reporting
entities that, in our view, required an audit of their com-
plete financial information due to their size or risk charac-
teristics. We worked very closely with and received full
scope reporting from the divisional audit teams for Inno-
vative Medicines, Alcon and Sandoz, in Switzerland, the
United States of America and Germany, respectively. Spe-
cific procedures were also carried out at a further 14
reporting entities to give appropriate coverage of mate-
rial balances. None of the reporting entities excluded from
our Group audit scope individually contributed more than
5% to net sales or total assets. Further specific audit pro-
cedures over group functions (including taxation, treasury,
post-retirement benefits and litigation) and the Group con-
solidation were executed directly by the Group audit team.
In order to exercise the appropriate direction and
supervision over the work of the divisional and reporting
entity auditors, the Group engagement team performed
selected site visits, audit working paper reviews and con-
ference calls with the divisional and reporting entity audi-
tors and attended selected clearance meetings with divi-
sional auditors. In addition, we hosted a planning
workshop in May 2016 for audit Partners and Managers
responsible for divisional and reporting entities.
Materiality
The scope of our audit was influenced by our applica-
tion of materiality. Our audit opinion aims to provide rea-
sonable assurance that the consolidated financial state-
250 | Novartis Annual Report 2016
ments are free from material misstatement. Misstatements
may arise due to fraud or error. They are considered
material if individually or in aggregate, they could rea-
sonably be expected to influence the economic deci-
sions of users taken on the basis of the consolidated
financial statements.
Based on our professional judgement, we determined
certain quantitative thresholds for materiality, including
the overall group materiality for the consolidated finan-
cial statements as a whole, as listed below. These,
together with qualitative considerations, helped us to
determine the scope of our audit and the nature, timing
and extent of our audit procedures and to evaluate the
effect of misstatements, if any, both individually and in
aggregate on the consolidated financial statements as
a whole.
Overall group materiality
USD 400 million
How we determined it
5% of income before taxes from continuing operations,
rounded
Rationale for the materiality benchmark applied
We chose income before taxes as the measure because,
in our view, it is the measure against which the perfor-
mance of the Group is most commonly assessed and is
a generally accepted benchmark.
We agreed with the Audit and Compliance Committee
that we would report to them misstatements identified
during our audit above USD 20 million as well as any mis-
statements below that amount which, in our view, war-
ranted reporting for qualitative reasons.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the
consolidated financial statements of the current period. These matters were addressed in the context of our audit
of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a
separate opinion on these matters.
Key audit matter
How our audit addressed the key audit matter
carrying value of goodwill following group reorgani-
zation
The Group has goodwill of USD 31.0 billion at December
31, 2016.
In January 2016 the Group announced changes to
the divisional structure with the former Pharmaceuticals
Division becoming the Innovative Medicines Division and
undertook the reorganization described in more detail in
Note 3 on page 193 of the annual report (Segmentation
of key figures 2016, 2015 and 2014).
Following the reorganization, management updated
its assessment of the groups of cash generating units
(CGUs) used as a basis for assessing goodwill and real-
located the goodwill amongst CGUs based on the rela-
tive fair values of the individual businesses.
The assessment of the carrying value of the goodwill
balances is dependent on the estimation of future cash
flows. In particular, those assessments and judgments
made to support the carrying value of the goodwill allo-
cated to the Alcon Division were critical, given the 2016
underlying results of Alcon.
Refer to Note 1 Significant accounting policies (pages
184 to 185) and Note 11 Goodwill and intangible assets
(pages 207 to 208).
We assessed and tested the design and operating effec-
tiveness of the Group’s controls over the assessment of
the carrying value of goodwill and concluded that these
operate effectively.
In relation to the reorganization we assessed the
aggregation of CGUs through review of the relevant doc-
uments of the Executive Committee of Novartis (ECN)
confirming that it is the lowest level at which manage-
ment monitors goodwill for internal purposes and that
no grouping of CGUs for goodwill impairment testing
purposes is larger than any of the Group’s operating seg-
ments.
With respect to the reallocation of goodwill relating to
the Ophthalmic Pharmaceuticals franchise, we tested the
respective models determining the relative fair values of the
businesses and the related goodwill focusing on the reason-
ableness of the key assumptions, including revenue and prof-
itability growth, the success of new product launches, ter-
minal values and discount rates, by challenging management
to substantiate its assumptions and comparing them to the
relevant industry and economic forecasts.
We tested, with the support of our valuation special-
ists, the carrying value of the goodwill allocated to Alcon
as at December 31, 2016 focusing on the reasonable-
ness of the cash flows growth rate after the forecast
period assumption of 3%, given that this rate is above
both the growth rate achieved by Alcon recently and the
rate of inflation in key markets at the end of 2016. We
also challenged management to substantiate its key
assumptions in the cash flow projections during the fore-
cast period and its intention and ability to execute their
strategic initiatives and evaluated the reasonableness of
the discount rate applied to those future cash flows.
We assessed management’s sensitivity analysis
around key estimates to quantify the downside changes
in assumptions that could result in an impairment and
the disclosures included in Note 11 Goodwill and intan-
gible assets (pages 207 to 208) of the annual report.
As a result of our procedures, as discussed with the Audit
and Compliance Committee, we determined that the con-
clusions reached by management with regard to the carry-
ing value of goodwill were reasonable and supportable.
FINaNcI al RepORT
Report of the statutory auditor on the consolidated financial statements of Novartis aG
Novartis Annual Report 2016 | 251
Key audit matter
How our audit addressed the key audit matter
carrying value of intangible assets other than good-
will
The Group has intangible assets other than goodwill
totaling USD 31.3 billion at December 31, 2016, compris-
ing research and development acquired, currently mar-
keted products, marketing know-how, technologies, the
Alcon brand name and other intangible assets. The
Group recognized specific impairments of intangible
assets other than goodwill of USD 591 million during the
year.
The assessment of the carrying values of intangible
assets is dependent on future cash flows and if these
are below initial expectations there is a risk that the
assets will be impaired. The reviews of carrying values
performed by the Group contain a number of significant
judgements and estimates such as scientific success,
revenue growth, the success of new product launches,
profit margins and discount rates.
The carrying value assessments of the following
intangible assets includes the most significant risk and
highest level of judgement:
— The Alcon brand name is an indefinite life corporate
asset and not subject to amortization.
— Certain currently marketed products which have per-
formed below management’s expectation or were, in
our view, at a greater risk of impairment.
— Products in development, as the assessment of their
carrying value is challenging due to management
being required to make judgements both as to the
probability of scientific success and regulatory
approval of the developments across indications, as
well as the probability of commercial success of the
subsequent product launches.
Refer to Note 1 Significant accounting policies (pages
184 to 185) and Note 11 Goodwill and intangible assets
(pages 207 to 208).
We assessed and tested the design and operating effec-
tiveness of the Group’s controls over the assessment of
the carrying value of intangible asset other than good-
will and concluded that these operate effectively, spe-
cifically in respect to the identification of impairment trig-
gering events.
We obtained the Group’s carrying value calculations
and assessed the key assumptions. For the Alcon brand
name and the currently marketed products these
assumptions specifically included pricing, market size
and share and competition assumptions.
In addition, for the assessment of the Alcon brand
name we challenged the indefinite life designation of the
asset considering the performance of the business in
2016 and the internal reorganization described in Note
3 on page 193 of the annual report (Segmentation of key
figures 2016, 2015 and 2014). We discussed with the
Audit and Compliance Committee and management their
judgements and conclusion on the indefinite life desig-
nation of the Alcon brand name as well as their strategic
initiatives.
For selected currently marketed products and prod-
ucts in development, with the support of our valuation
specialists, we considered third party sources to chal-
lenge expected future revenues due to actions by com-
petitors or due to changes in relevant markets.
Furthermore, for products in development we also
considered key scientific developments. We performed
our own sensitivity analysis around these key estimates
to ascertain the extent of change in those assumptions
that either individually or collectively would be required
for the intangible assets tested to be impaired.
As a result of our procedures we did not propose any
adjustments to the amount of impairment recognized in
2016. For those intangible assets where management
determined that no impairment was required, we found
that the assessments made by management were based
upon reasonable assumptions, consistently applied.
Key audit matter
How our audit addressed the key audit matter
Governmental investigations and litigations
The pharmaceuticals industry is heavily regulated which
increases inherent litigation risk.
The Group is subject to various government investi-
gations, of which the most significant are disclosed in
Note 20 Provisions and other non-current liabilities.
We specifically assessed the investigations and
related litigations in the US given their significance and
the inherent uncertainty of outcomes.
Refer to Note 1 Significant accounting policies on
page 186 and Note 20 Provisions and other non-current
liabilities (pages 216 to 220).
We assessed and tested the design and operating effec-
tiveness of the Group’s controls over the completeness,
assessment for recognition, measurement and disclo-
sures of provisions for governmental investigations and
other legal matters and concluded that these operate
effectively.
We evaluated management’s judgments in connec-
tion with the investigations and related litigations in the
US, read the respective court filings and minutes of
Board of Directors and management meetings and
inquired with the Audit and Compliance Committee, man-
agement, internal and external legal counsel.
We concluded that the judgements made by manage-
ment were in accordance with the accounting policies
described in Note 1.
252 | Novartis Annual Report 2016
Key audit matter
How our audit addressed the key audit matter
Rebates, discounts, allowances and returns
The Group distributes its products in many cases through
wholesale distributors, however the ultimate net selling
prices are determined based on the contractual arrange-
ments that the Group has with the ultimate patient’s
insurer or other payment program.
The initial revenue recognition, usually upon shipment
to the distributor requires an estimate of the net selling
price taking into consideration rebates and discounts as
well as sales returns. The estimate depends on contract
terms and regulation, as well as forecasts of sales vol-
umes by sales channel. The dispensing of the product
to the patient and the final determination of the selling
price may be several months later.
We focused our testing on the accruals for both
rebates and discounts together with sales returns rec-
ognized at the year end because, specifically for Medic-
aid and Medicare or equivalent programs in the US, the
estimation processes involve large volumes of data,
require significant judgement and can be at risk of man-
agement bias.
The provision reported as of December 31, 2016 for
revenue deductions amounted to USD 4.2 billion.
Refer to Note 22 Provisions and other current liabil-
ities (pages 221 and 222).
We performed procedures to assess the design and
operating effectiveness of the controls related to the
recording of rebates, discounts and sales returns and
the estimation of related period end reserves.
We obtained management’s calculations for the
respective estimates and performed one or more of the
following procedures on each of them: developed an
independent expectation of the reserve and/or tested
management’s estimation process to assess the reason-
ableness of the recorded reserve balances, performed
retrospective reviews and assessed subsequent events.
We also performed testing of credits issued and pay-
ments made throughout the year, reviewed related con-
tracts and independently confirmed sales terms with sig-
nificant customers and inventory levels with the largest
wholesalers.
We did not identify any material differences between
our independent expectations and the accruals and we
found the judgements made by management to be rea-
sonable.
Other information in the annual report
The Board of Directors is responsible for the other infor-
mation in the annual report. The other information com-
prises all information included in the annual report, but
does not include the consolidated financial statements,
the stand-alone financial statements of Novartis AG and
our auditor’s reports thereon. Our opinion on the con-
solidated financial statements does not cover the other
information in the annual report and we do not express
any form of assurance conclusion thereon.
In connection with our audit of the consolidated finan-
cial statements, our responsibility is to read the other
information in the annual report and, in doing so, con-
sider whether the other information is materially incon-
sistent with the consolidated financial statements or our
knowledge obtained in the audit, or otherwise appears
to be materially misstated. If, based on the work we have
performed, we conclude that there is a material misstate-
ment of this other information, we are required to report
that fact.
We have nothing to report in this regard.
Responsibilities of the Board of Directors
for the consolidated financial statements
The Board of Directors is responsible for the prepara-
tion of the consolidated financial statements that give a
true and fair view in accordance with International Finan-
cial Reporting Standards and the provision of Swiss law,
and for such internal control as the Board of Directors
determines is necessary to enable the preparation of
consolidated financial statements that are free from
material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements,
the Board of Directors is responsible for assessing the
Group’s ability to continue as a going concern, disclos-
ing, as applicable, matters related to going concern and
using the going concern basis of accounting unless the
Board of Directors either intends to liquidate the Group
or to cease operations, or has no realistic alternative but
to do so.
Auditor’s responsibilities for the audit of
the consolidated financial statements
Our objectives are to obtain reasonable assurance about
whether the consolidated financial statements as a
whole are free from material misstatement, whether due
to fraud or error, and to issue an auditor’s report that
includes our opinion. Reasonable assurance is a high
level of assurance, but is not a guarantee that an audit
conducted in accordance with Swiss law, ISAs and Swiss
Auditing Standards will always detect a material mis-
statement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually
or in the aggregate, they could reasonably be expected
to influence the economic decisions of users taken on
the basis of these consolidated financial statements.
FINaNcI al RepORT
Report of the statutory auditor on the consolidated financial statements of Novartis aG
Novartis Annual Report 2016 | 253
As part of an audit in accordance with Swiss law, ISAs
and Swiss Auditing Standards, we exercise professional
judgment and maintain professional skepticism through-
out the audit. We also:
— Identify and assess the risks of material misstatement
of the consolidated financial statements, whether due
to fraud or error, design and perform audit procedures
responsive to those risks, and obtain audit evidence
that is sufficient and appropriate to provide a basis
for our opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for
one resulting from error, as fraud may involve collu-
sion, forgery, intentional omissions, misrepresenta-
tions, or the override of internal control.
— Obtain an understanding of internal control relevant
to the audit in order to design audit procedures that
are appropriate in the circumstances.
— Evaluate the appropriateness of accounting policies
used and the reasonableness of accounting esti-
mates and related disclosures made.
— Conclude on the appropriateness of Board of Direc-
tors’ use of the going concern basis of accounting
and, based on the audit evidence obtained, whether
a material uncertainty exists related to events or con-
ditions that may cast significant doubt on the Group’s
ability to continue as a going concern. If we conclude
that a material uncertainty exists, we are required to
draw attention in our auditor’s report to the related
disclosures in the consolidated financial statements
or, if such disclosures are inadequate, to modify our
opinion. Our conclusions are based on the audit evi-
dence obtained up to the date of our auditor’s report.
However, future events or conditions may cause the
Group to cease to continue as a going concern.
— Evaluate the overall presentation, structure and con-
tent of the consolidated financial statements, includ-
ing the disclosures, and whether the consolidated
financial statements represent the underlying trans-
actions and events in a manner that achieves fair pre-
sentation.
— Obtain sufficient appropriate audit evidence regard-
ing the financial information of the entities or business
activities within the Group to express an opinion on
the consolidated financial statements. We are respon-
sible for the direction, supervision and performance
of the group audit. We remain solely responsible for
our audit opinion.
We communicate with the Board of Directors or its rel-
evant committee regarding, among other matters, the
planned scope and timing of the audit and significant
audit findings, including any significant deficiencies in
internal control that we identify during our audit.
We also provide the Board of Directors or its relevant
committee with a statement that we have complied with
relevant ethical requirements regarding independence,
and to communicate with them all relationships and other
matters that may reasonably be thought to bear on our
independence, and where applicable, related safe-
guards.
From the matters communicated with the Board of
Directors or its relevant committee, we determine those
matters that were of most significance in the audit of the
consolidated financial statements of the current period
and are therefore the key audit matters. We describe
these matters in our auditor’s report unless law or regu-
lation precludes public disclosure about the matter or
when, in extremely rare circumstances, we determine
that a matter should not be communicated in our report
because the adverse consequences of doing so would
reasonably be expected to outweigh the public interest
benefits of such communication.
Report on other legal and statutory
requirements
In accordance with article 728a paragraph 1 item 3 CO
and Swiss Auditing Standard 890, we confirm that an
internal control system exists which has been designed
for the preparation of consolidated financial statements
according to the instructions of the Board of Directors.
We recommend that the consolidated financial state-
ments submitted to you be approved.
PricewaterhouseCoopers AG
Bruno Rossi
Audit expert
Auditor in charge
Stephen Johnson
Global relationship
partner
Basel, January 24, 2017
The report set out on pages 249 to 253 is included in accordance with the requirements of Swiss Law and does not form part of the Novartis AG
Annual Report pursuant to section 13 or 15(d) of the securities exchange act of 1934 as filed with the US Securities and Exchange Commission (SEC)
on Form 20-F. The report of the Independent Registered Public Accounting Firm as included in the Form 20-F is reprinted for information purposes
on page 254.
254 | Novartis Annual Report 2016
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
of Novartis AG, Basel
In our opinion, the accompanying consolidated balance
sheets and the related consolidated income statements,
consolidated statements of comprehensive income, con-
solidated statements of changes in equity, consolidated
cash flow statements and notes (as referred to in item
18 of this Form 20-F) present fairly, in all material
respects, the financial position of Novartis AG and its
consolidated subsidiaries (Group or Company) at
December 31, 2016 and December 31, 2015, and the
results of its operations and its cash flows for each of
the three years in the period ended December 31, 2016
in conformity with International Financial Reporting Stan-
dards (IFRS) as issued by the International Accounting
Standards Board. Also in our opinion, the Company
maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2016,
based on criteria established in Internal Control – Inte-
grated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission
(COSO).
The Novartis’ Board of Directors and management of
the Group are responsible for these financial statements,
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the
“Report of Novartis Management on Internal Control Over
Financial Reporting” in item 15(b) of this Form 20-F. Our
responsibility is to express opinions on these financial
statements and on the Company’s internal control over
financial reporting based on our integrated audits. We
conducted our audits in accordance with the standards
of the Public Company Accounting Oversight Board of
the United States of America. Those standards require
that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are
free of material misstatement and whether effective
internal control over financial reporting was maintained
in all material respects. Our audits of the financial state-
ments included examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial
statements, assessing the accounting principles used
and significant estimates made by management, and
evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting
included obtaining an understanding of internal control
over financial reporting, assessing the risk that a mate-
rial weakness exists, and testing and evaluating the
design and operating effectiveness of internal control
based on the assessed risk. Our audits also included
performing such other procedures as we considered
necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting
is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes
in accordance with IFRS. A company’s internal control
over financial reporting includes those policies and pro-
cedures that (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the com-
pany; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of
financial statements in accordance with IFRS, and that
receipts and expenditures of the company are being
made only in accordance with authorizations of manage-
ment and directors of the company; and (iii) provide rea-
sonable assurance regarding prevention or timely detec-
tion of unauthorized acquisition, use, or disposition of
the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control
over financial reporting may not prevent or detect mis-
statements. Also, projections of any evaluation of effec-
tiveness to future periods are subject to the risk that con-
trols may become inadequate because of changes in
conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
PricewaterhouseCoopers AG
Bruno Rossi
Audit expert
Auditor in charge
Stephen Johnson
Global relationship
partner
Basel, January 24, 2017
The report of the Independent Registered Public Accounting Firm set out above is reprinted for information purposes only and is a copy of the report
included in the Novartis AG Annual Report pursuant to section 13 or 15(d) of the securities exchange act of 1934 as filed with the US Securities and
Exchange Commission (SEC), on Form 20-F. The report does not form part of the reporting to the general meeting as required by Swiss Law.
Financial RepoRt
Financial statements of novartis aG
Novartis Annual Report 2016 | 255
Financial statements of Novartis AG
income statements
(For the years ended December 31, 2016 and 2015)
(CHF millions)
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.
Note
2016
7 291
1 445
495
11
2015
6 168
1 098
558
8
9 242
7 832
3
– 1 140
– 1 143
– 26
– 4
– 27
– 31
– 1 170
– 1 201
8 072
6 631
4
4
5
5
440
– 194
8 318
8 318
– 177
8 141
562
– 253
6 940
1 422
– 56
8 306
– 265
8 041
256 | Novartis Annual Report 2016
Balance sheets
(At December 31, 2016 and 2015)
(CHF millions)
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
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.
Note
2016
2015
3
103
4 163
3 318
24
159
4 190
3 580
14 978
15 884
6
12 630
10 996
0
0
3
15 507
16 647
43 115
43 527
47 305
47 107
48
8
185
19
260
77
118
378
55
628
7
1 378
1 378
502
505
1 880
1 883
8
1 314
1 338
198
320
3 417
3 737
198
320
4 009
4 329
9
10
30 527
34 560
2 040
8 141
10 181
806
8 041
8 847
40 708
43 407
9
– 792
– 4 676
45 165
44 596
47 305
47 107
Financial RepoRt
notes to the financial statements of novartis aG
Novartis Annual Report 2016 | 257
Notes to the financial statements
of Novartis AG
1. introduction
The financial statements of Novartis AG, with its regis-
tered office in Basel, comply with the requirements of
the Swiss accounting legislation of the Swiss Code of
Conduct.
Novartis AG is presenting consolidated financial
statements according to IFRS. As a result, these finan-
cial statements and notes do not include additional dis-
closures, cash flow statements or a management report.
2. accounting policies
Financial income and expenses
Investments
Current assets and current liabilities denominated in for-
eign currencies are converted at year-end exchange
rates. Realized exchange gains and losses, and all unre-
alized exchange losses arising from these as well as
those from business transactions are recorded net as
financial income or financial expenses.
Derivative financial instruments
Derivative financial instruments are used for hedging pur-
poses. These instruments are valued at fair value. When
different accounting policies apply for the hedged item
and the derivative financial instrument, hedge account-
ing is applied through measuring the hedged item
together with the derivative financial instrument.
Financial assets
Financial assets are valued at acquisition cost less
adjustments for foreign currency losses and any other
impairment of value.
Investments are initially recognized at cost. Investments
in Novartis Group subsidiaries are assessed annually and
in case of an impairment adjusted to their recoverable
amount within their category.
Goodwill and other intangible assets
Goodwill and other intangible assets are capitalized and
amortized over a period of between five and 20 years.
Goodwill and other intangible assets are reviewed for
impairment on a yearly basis. If necessary, an impairment
loss is recognized.
Bonds
Bonds are valued at nominal value. Any bond premium
is accrued over the duration of the bond so that at matu-
rity the balance sheet amount will equal the amount that
is due to be paid.
Provisions
Provisions are made to cover general business risks of
the Group.
258 | Novartis Annual Report 2016
3. Goodwill and other intangible asset movements
(CHF millions)
Goodwill
Gross cost 1
Accumulated amortization
January 1
Amortization charges
December 31
net book value at December 31
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
Goodwill and other intangible assets
net book value at December 31
1 There was no change to cost value of Goodwill during 2016 and 2015.
2016
2015
22 350
22 350
– 5 703
– 4 560
– 1 140
– 1 143
– 6 843
– 5 703
15 507
16 647
11
255
– 244
11
11
– 11
– 120
– 3
112
– 11
0
– 11
0
15 507
16 647
4. Financial income and expenses
(CHF millions)
Interest
Foreign exchange
Others
total
2016
2015
Income
Expenses
Income
Expenses
440
– 134
562
– 176
– 58
– 2
– 74
– 3
440
– 194
562
– 253
5. extraordinary income and expenses, net
In 2015, a net divestment gain of CHF 1 422 million due
to the Novartis Animal Health divestment to Eli Lilly and
Company, USA, and an extraordinary expense related to
prior year direct taxes of CHF 56 million, were recorded.
Financial RepoRt
notes to the financial statements of novartis aG
Novartis Annual Report 2016 | 259
6. investments
The principal direct and indirect subsidiaries and other
holdings of Novartis AG are shown in Note 32 to the
Group’s consolidated financial statements.
7. Bonds
Straight bonds
(CHF millions)
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
Breakdowns by maturity
(CHF millions)
After 2021
total
2016
502
551
325
2015
502
551
325
1 378
1 378
2016
1 378
1 378
2015
1 378
1 378
comparison of balance sheet and fair value
(CHF millions)
Straight bonds
total
2016
Balance sheet
2016
2015
Fair values Balance sheet
2015
Fair values
1 378
1 378
1 407
1 407
1 378
1 378
1 356
1 356
On June 26, 2008, Novartis AG issued a CHF 800 mil-
lion 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).
260 | Novartis Annual Report 2016
8. Share capital
January 1
2 676 993 000
1 338.5
2 706 193 000
Number of shares canceled/capital reduced during the period
– 49 878 180
– 24.9
– 29 200 000
December 31
2 627 114 820
1 313.6
2 676 993 000
2016
Number
of shares
Share capital
CHF millions
2015
Number
of shares
Share capital
CHF millions
1 353.1
– 14.6
1 338.5
The Novartis AG share capital consists of registered
shares with a nominal value of CHF 0.50 each.
The total share capital decreased from CHF 1 338.5
million at December 31, 2015, to CHF 1 313.6 million at
December 31, 2016, due to a share capital reduction as
a result of the cancellation of 49.9 million repurchased
shares with a nominal value of CHF 24.9 million. The can-
cellation was approved at the Annual General Meeting
of February 23, 2016, and became effective on April 28,
2016. During 2015, the total share capital decreased from
CHF 1 353.1 million at December 31, 2014, to CHF 1 338.5
million at December 31, 2015, due to a share capital
reduction as a result of the cancellation of 29.2 million
repurchased shares with a nominal value of CHF 14.6
million. The cancellation was approved at the Annual
General Meeting of February 27, 2015, and became
effective on May 6, 2015.
In 2014, Novartis entered into an irrevocable, non-dis-
cretionary arrangement with a bank to repurchase its
own shares on the second trading line under its USD 5
billion share buyback as well as to mitigate dilution from
employee participation programs. In 2015, this trading
plan was fully executed and expired. As a result, there is
no contingent liability related to this plan as of Decem-
ber 31, 2015 and December 31, 2016.
Financial RepoRt
notes to the financial statements of novartis aG
Novartis Annual Report 2016 | 261
9. Reserve for treasury shares
treasury shares held by subsidiaries 1
January 1
Number of shares purchased/sold; reserves transferred
December 31
1 Excluding foundations
2016
2015
Reserve for
treasury shares
held by subsidiaries
CHF millions
Number
of shares
Reserve for
treasury shares
held by subsidiaries
CHF millions
Number
of shares
65 176 383
– 8 328 580
56 847 803
4 009
– 592
3 417
73 564 212
– 8 387 829
65 176 383
4 522
– 513
4 009
2016
2015
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
101 185 638
4 676
80 507 458
Number of shares purchased/canceled; reserves transferred
– 39 608 180
– 3 884
20 678 180
December 31
61 577 458
792
101 185 638
2 373
2 303
4 676
total treasury shares 1
January 1
Total number of shares purchased/sold or canceled;
reserves transferred
December 31
1 Excluding foundations
2016
Number of
shares
Total reserve for
treasury shares
CHF millions
2015
Number
of shares
Total reserve for
treasury shares
CHF millions
166 362 021
8 685
154 071 670
– 47 936 760
118 425 261
– 4 476
12 290 351
4 209
166 362 021
6 895
1 790
8 685
Novartis AG has met the legal requirements for legal
reserves under Articles 659 et. seq. and 663b.10 SCO
for the treasury shares.
Treasury share purchases during 2016 totaled 12.9
million (2015: 63.6 million), with an average purchase
price of CHF 75 (2015: CHF 93). Treasury share sales
totaled 4.1 million (2015: 27.0 million), with an average
sale price of CHF 56 (2015: CHF 56), and share-based
compensation transactions totaled 8.8 million shares
(2015: 11.3 million shares).
The number of treasury shares held by the company
and its subsidiaries meet the definitions and require-
ments of Article 659b SCO. At December 31, 2016, trea-
sury shares held by Novartis AG and its subsidiaries
totaled 118 425 261. As per the dividend payment date,
Novartis AG and its subsidiaries are expected to hold
108 579 219 shares. These shares are non-divi-
dend-bearing shares. It should be noted that within the
Novartis Group’s IFRS consolidated financial statements,
some entities are included in the consolidation scope –
mainly foundations, which do not qualify as subsidiaries
in the sense of Article 659b SCO.
262 | Novartis Annual Report 2016
10. Free reserves
(CHF millions)
January 1
Reduction due to cancellation of treasury shares (CHF 4 651 million / CHF 2 348 million of repurchased shares
less their nominal value of CHF 25 million / CHF 15 million)
Transfer from reserve for treasury shares
December 31
2016
2015
34 560
36 380
– 4 626
– 2333
593
513
30 527
34 560
11. contingent liabilities
(CHF millions)
Dec 31, 2016 Dec 31, 2015
Guarantees in favor of subsidiaries to cover capital and interest of bonds, credit facilities and commercial paper programs –
total maximum amount CHF 39 369 million (2015: CHF 38 445 million)
19 708
16 850
Other guarantees in favor of subsidiaries, associated companies and others –
total maximum amount CHF 4 155 million (2015: CHF 2 707 million)
total contingent liabilities
2 253
1 672
21 961
18 522
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.
12. Registration, voting restrictions
and major shareholders
The company’s Articles of Incorporation state that no
person or entity shall be registered with the right to vote
for more than 2% of the share capital as set forth in the
Commercial Register. In particular cases, the Board of
Directors may allow exemptions from the limitation for
registration in the share register.
According to the share register, shareholders own-
ing 2% or more of the Company’s capital at December 31,
excluding treasury shares held by Novartis AG and its
subsidiaries that restrict their availability for use, are as
follows:
Novartis Foundation for Employee
Participation, Basel
Emasan AG, Basel
UBS Fund Management
(Switzerland) AG, Basel
% Holding of
share capital
Dec 31, 2016
% Holding of
share capital
Dec 31, 2015
2.6
3.4
2.1
2.6
3.3
1.8
Furthermore, there are the following other significant
share holders:
Shareholders registered as nominees:
— Chase Nominees Ltd., London, holds 8.5% (2015: 8.8%).
— Nortrust Nominees, London, holds 3.9% (2015: 3.2%).
— The Bank of New York Mellon, New York, holds 4.4%
(2015: 4.6%) through its nominees The Bank of New York
Mellon, Everett, with a holding of 1.8% (2015: 1.7%) and
The Bank of New York Mellon, Brussels, with a hold-
ing of 2.6% (2015: 2.9%).
Shareholder acting as American Depositary Share (ADS)
depo sitary:
— JPMorgan Chase Bank, New York, holds 12.0% (2015:
11.2%).
Shareholder disclosed through a notification filed with
Novartis AG:
— Norges Bank (Central Bank of Norway), Oslo, holds
2.02%.
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%.
Financial RepoRt
notes to the financial statements of novartis aG
Novartis Annual Report 2016 | 263
13. equity instrument disclosures for the Board of
Directors and executive committee members
Share ownership requirements for Board members
The Chairman is required to own a minimum of 30 000
Novartis 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 Direc-
tors, to ensure alignment of their interests with share-
holders. 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 at Decem-
ber 31, 2016, all members of the Board of Directors who
have served at least three years on the Board of Direc-
tors have complied with the share ownership guidelines.
Shares, ADRs and share options owned by Board
members
The total number of vested Novartis shares and ADRs
owned by members of the Board of Directors and “per-
sons closely linked”1 to them as at December 31, 2016 is
shown in the table below.
As at December 31, 2016, no members of the Board
of Directors together with “persons closely linked”1 to
them owned 1% or more of the outstanding shares (or
ADRs) of Novartis. As at the same date, no members of
the Board of Directors held any share options to pur-
chase Novartis shares.
Shares and ADRs owned by Board members1
Number of shares 2
at
At
December 31, December 31,
2015
2016
Joerg Reinhardt
Enrico Vanni
Nancy Andrews
Dimitri Azar
497 762
480 404
17 853
15 566
2 308
609
11 217
9 292
Ton Buechner (from February 24, 2016)
1 398
NA
Srikant Datar
34 998
32 629
Elizabeth Doherty (from February 24, 2016)
839
NA
Ann Fudge
Pierre Landolt 3
Andreas von Planta
Charles L. Sawyers
William T. Winters
total 4
17 530
15 605
58 061
54 866
127 740
124 868
6 029
9 257
4 252
5 998
784 992
744 089
NA – Not applicable.
1 Includes holdings of “persons closely linked” to Board members (see definition in this
Note 13)
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 Verena A. Briner stepped down from the Board of Directors on February 23, 2016. On
February 23, 2016, Dr. Briner owned 7 507 shares.
Share ownership requirements for Executive
Committee members
Executive Committee members are required to own at
least a minimum multiple of their annual base compen-
sation in Novartis shares, Restricted Stock Units (RSUs)
or share options within five years of hire or promotion,
as set out in the table below.
In the event of a substantial rise or drop in the share
price, the Board of Directors may, at its discretion, amend
that time period accordingly.
Function
CEO
Ownership level
5 x base compensation
Other Executive Committee members
3 x base compensation
The determination of equity amounts against the share
ownership requirements is defined to include vested and
unvested Novartis shares or ADRs, as well as RSUs
acquired under the compensation plans. However,
unvested matching shares granted under the Leveraged
Share Savings Plan (LSSP), the Employee Share Own-
ership Plan (ESOP), and any unvested Performance
Share Units (PSUs) are excluded. The determination also
includes other shares as well as vested options of
Novartis shares or ADRs that are owned directly or indi-
rectly by “persons closely linked”1 to an Executive Com-
mittee member. The Compensation Committee reviews
compliance with the share ownership guideline on an
annual basis.
As at December 31, 2016, all members who have
served at least five years on the Executive Committee
have met or exceeded their personal Novartis share own-
ership requirements.
Shares, aDRs, equity rights and share options
owned by executive committee members
The following table shows the total number of shares,
ADRs, and other equity rights owned by Executive Com-
mittee members and “persons closely linked”1 to them
as at December 31, 2016.
As at December 31, 2016, no Executive Committee
members together with “persons closely linked” to them
owned 1% or more of the outstanding shares (or ADRs)
of Novartis. As at the same date, no member of the Exec-
utive Committee held any share options to purchase
Novartis shares, with the exception of André Wyss who
held 373 000.
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 act-
ing as their fiduciary.
264 | Novartis Annual Report 2016
Shares, aDRs and other equity rights owned by executive committee members1
Vested
shares
and ADRs
Unvested
shares
total at
and other December 31,
2016
equity rights 2
Vested
shares
and ADRs
Unvested
shares
Total at
and other December 31,
2015
equity rights 2
Joseph Jimenez (CEO)
347 278
273 930
621 208
284 405
322 200
606 605
Steven Baert
F. Michael Ball
James Bradner
Felix R. Ehrat
Richard Francis
Paul Hudson
Harry Kirsch
Vasant Narasimhan
Bruno Strigini
André Wyss
total 3
11 111
50 827
61 938
1 700
44 977
46 677
0
0
49 081
49 081
14 479
14 479
NA
NA
NA
NA
NA
NA
137 290
122 196
259 486
92 435
107 870
200 305
22 424
49 550
71 974
14 357
37 722
52 079
0
24 027
24 027
NA
NA
NA
47 437
108 686
156 123
46 579
100 359
146 938
7 271
79 703
86 974
4 310
92 383
96 693
NA
NA
NA
NA
NA
NA
61 475
92 875
154 350
44 660
79 917
124 577
638 596
957 737 1 596 333
484 136
693 045 1 177 181
NA – Not applicable.
1 Includes holdings of “persons closely linked” to Executive Committee members (see definition in this Note 13)
2 Includes restricted shares, RSUs and target number of PSUs. Matching shares under the ESOP and 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 David Epstein, Mark C. Fishman and Jeff George stepped down from the Executive Committee in 2016. At the time they stepped down from the Executive Committee, Mr. Epstein
owned 116 027 vested shares, and 250 225 unvested shares and other equity rights; Dr. Fishman owned 117 792 vested shares, and 83 311 unvested shares and other equity rights;
and Mr. George owned 144 368 vested shares, 141 396 vested share options, and 74 189 unvested shares and other equity rights.
Financial RepoRt
appropriation of available earnings of novartis aG as per balance sheet and declaration of dividend
Novartis Annual Report 2016 | 265
Appropriation of available earnings
of Novartis AG as per balance sheet
and declaration of dividend
(CHF)
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 2.75 (2015: CHF 2.70) on 2 518 535 601
(2015: 2 520 845 979) 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.
2016
2015
2 039 915 695
805 551 128
8 140 581 612 8 040 648 710
10 180 497 307 8 846 199 838
– 6 925 972 903 – 6 806 284 143
3 254 524 404 2 039 915 695
Assuming that this proposal by the Board of Directors is approved by the Annual General Meeting of shareholders,
payment of the dividend will be made as from March 6, 2017. The last trading day with entitlement to receive the
dividend is March 1, 2017. As from March 2, 2017 the shares will be traded ex-dividend.
266 | Novartis Annual Report 2016
Report of the statutory auditor
on the financial statements of novartis aG
To the General Meeting of Novartis AG,
Basel
Opinion
As statutory auditor, we have audited the financial state-
ments of Novartis AG which comprise the balance sheet
as at December 31, 2016 and the income statement and
notes (pages 255 to 264) for the year then ended.
In our opinion the accompanying financial statements
as at December 31, 2016 comply with Swiss law and the
company’s articles of incorporation.
Basis for opinion
We conducted our audit in accordance with Swiss law
and Swiss Auditing Standards. Our responsibilities under
those provisions and standards are further described in
the Auditor’s responsibilities for the audit of the financial
statements section of our report.
We are independent of the entity in accordance with
the provisions of Swiss law and the requirements of the
Swiss audit profession and we have fulfilled our other
ethical responsibilities in accordance with these require-
ments.
We believe that the audit evidence we have obtained
is sufficient and appropriate to provide a basis for our
opinion.
Our audit approach
Audit scope
We designed our audit by determining materiality and
assessing the risks of material misstatement in the finan-
cial statements. In particular, we considered where sub-
jective judgements were made; for example, in respect
of significant accounting estimates that involved making
assumptions and considering future events that are
inherently uncertain. As in all of our audits, we also
addressed the risk of management override of internal
controls, including among other matters, consideration
of whether there was evidence of bias that represented
a risk of material misstatement due to fraud.
Materiality
The scope of our audit was influenced by our applica-
tion of materiality. Our audit opinion aims to provide rea-
sonable assurance that the financial statements are free
from material misstatement. Misstatements may arise
due to fraud or error. They are considered material if indi-
vidually or in aggregate, they could reasonably be
expected to influence the economic decisions of users
taken on the basis of the financial statements.
Based on our professional judgement, we determined
certain quantitative thresholds for materiality, including
the overall materiality for the financial statements as a
whole as listed below. These, together with qualitative
considerations, helped us to determine the scope of our
audit and the nature, timing and extent of our audit pro-
cedures and to evaluate the effect of misstatements,
both individually and in aggregate on the financial state-
ments as a whole.
— Overall materiality: CHF 400 million
— How we determined it: 5% of income before taxes,
rounded
— Rationale for the materiality benchmark applied: We
chose income before taxes as the measure because,
in our view, it is the measure against which the per-
formance of the entity is most commonly assessed
and is a generally accepted benchmark.
We agreed with the Audit Committee that we would
report to them misstatements identified during our audit
above CHF 20 million as well as any misstatements below
that amount which, in our view, warranted reporting for
qualitative reasons.
Key Audit Matters
Key audit matters are those matters that, in our profes-
sional judgment, were of most significance in our audit
of the financial statements of the current period. We have
determined that there are no such matters to report.
Responsibilities of the Board of Directors
for the financial statements
The Board of Directors is responsible for the prepara-
tion of the financial statements in accordance with the
provisions of Swiss law and the company’s articles of
incorporation, and for such internal control as the Board
of Directors determines is necessary to enable the
preparation of financial statements that are free from
material misstatement, whether due to fraud or error.
In preparing the financial statements, the Board of
Directors is responsible for assessing the entity’s ability
to continue as a going concern, disclosing, as applica-
ble, matters related to going concern and using the going
concern basis of accounting unless the Board of Direc-
tors either intends to liquidate the entity or to cease oper-
ations, or has no realistic alternative but to do so.
Financial RepoRt
Report of the statutory auditor on the financial statements of novartis aG
Novartis Annual Report 2016 | 267
Auditor’s responsibilities for the audit of
the financial statements
Our objectives are to obtain reasonable assurance about
whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, and
to issue an auditor’s report that includes our opinion.
Reasonable assurance is a high level of assurance, but
is not a guarantee that an audit conducted in accordance
with Swiss law and Swiss Auditing Standards will always
detect a material misstatement when it exists. Misstate-
ments can arise from fraud or error and are considered
material if, individually or in the aggregate, they could
reasonably be expected to influence the economic deci-
sions of users taken on the basis of these financial state-
ments.
As part of an audit in accordance with Swiss law and
Swiss Auditing Standards, we exercise professional
judgment and maintain professional scepticism through-
out the audit. We also:
— Identify and assess the risks of material misstatement
of the financial statements, whether due to fraud or
error, design and perform audit procedures respon-
sive to those risks, and obtain audit evidence that is
sufficient and appropriate to provide a basis for our
opinion. The risk of not detecting a material misstate-
ment resulting from fraud is higher than for one result-
ing from error, as fraud may involve collusion, forgery,
intentional omissions, misrepresentations, or the
override of internal control.
— Obtain an understanding of internal control relevant
to the audit in order to design audit procedures that
are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effective-
ness of the entity’s internal control.
— Evaluate the appropriateness of accounting policies
used and the reasonableness of accounting esti-
mates and related disclosures made.
— Conclude on the appropriateness of the Board of
Directors’ use of the going concern basis of account-
ing and, based on the audit evidence obtained,
whether a material uncertainty exists related to events
or conditions that may cast significant doubt on the
entity’s ability to continue as a going concern. If we
conclude that a material uncertainty exists, we are
required to draw attention in our auditor’s report to
the related disclosures in the financial statements or,
if such disclosures are inadequate, to modify our opin-
ion. Our conclusions are based on the audit evidence
obtained up to the date of our auditor’s report. How-
ever, future events or conditions may cause the entity
to cease to continue as a going concern.
We communicate with the Board of Directors or its rel-
evant committee regarding, among other matters, the
planned scope and timing of the audit and significant
audit findings, including any significant deficiencies in
internal control that we identify during our audit.
We also provide the Board of Directors or its relevant
committee with a statement that we have complied with
relevant ethical requirements regarding independence,
and to communicate with them all relationships and other
matters that may reasonably be thought to bear on our
independence, and where applicable, related safe-
guards.
From the matters communicated with the Board of
Directors or its relevant committee, we determine those
matters that were of most significance in the audit of the
financial statements of the current period and are there-
fore the key audit matters. We describe these matters in
our auditor’s report unless law or regulation precludes
public disclosure about the matter or when, in extremely
rare circumstances, we determine that a matter should
not be communicated in our report because the adverse
consequences of doing so would reasonably be expected
to outweigh the public interest benefits of such commu-
nication.
Report on other legal and regulatory
requirements
In accordance with article 728a paragraph 1 item 3 CO
and Swiss Auditing Standard 890, we confirm that an
internal control system exists, which has been designed
for the preparation of financial statements according to
the instructions of the Board of Directors.
We further confirm that the proposed appropriation
of available earnings complies with Swiss law and the
company’s articles of incorporation. We recommend that
the financial statements submitted to you be approved.
PricewaterhouseCoopers AG
Bruno Rossi
Audit expert
Auditor in charge
Stephen Johnson
Global relationship
partner
Basel, January 24, 2017
268 | Novartis Annual Report 2016
Other information
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 caregivers, the photographs demonstrate the complex realities
of global healthcare. We are grateful to Andrea Bruce and to those who
shared their experiences for the Annual Report 2016.
Other infOrmatiOn
Other information
Novartis Annual Report 2016 | 269
Andrea Bruce
Andrea Bruce is a documentary photographer
who brings attention to people living in the
aftermath of war. She concentrates on the
social issues that are sometimes ignored and
often ignited in war’s wake.
Ms. Bruce started working in Iraq in 2003, fol-
lowing the intricacies and obstacles of the con-
flict experienced by Iraqis and the US military.
For more than 10 years, she has chronicled the
world’s most troubled areas, focusing on Iraq
and Afghanistan. Currently she is a member
and co-owner of the photo agency NOOR.
For eight years, she worked as a staff photo-
grapher for The Washington Post and later as
part of the VII Network (2010-2011). At The
Post, she originated and authored a weekly
column called “Unseen Iraq.” She also worked
at The Concord Monitor and The St. Peters-
burg Times after graduating from the Univer-
sity of North Carolina at Chapel Hill in the US
in 1995.
Her awards include top honors from the White
House News Photographers Association
(WHNPA), where she has been named Photo-
grapher of the Year four times; several awards
from the International Pictures of the Year con-
test; and the prestigious John Faber Award
from the Overseas Press Club in New York.
She received the WHNPA grant in 2010 for her
work in Ingushetia, and she was a 2011 reci-
pient of the Alicia Patterson Foundation Fellow-
ship. In 2012, she was the recipient of the first
Chris Hondros Fund Award for the “commit-
ment, willingness and sacrifice shown in her
work.” The World Press Photo awarded her 2nd
prize in the category “Daily Life,” singles, for
the image “Soldier’s Funeral” in 2014.
In 2016, Ms. Bruce finished Harvard’s Nieman
Fellowship for journalists, and she is currently
based in Cambridge, Massachusetts in the US.
Aurelia Mendez Pablo has blood
drawn as part of research in
Guatemala aimed at reducing
the health impact of smoke from
cooking fires.
270 | Novartis Annual Report 2016
Key dates for 2017
Contact
information
forward-looking
statements
Anticipated reporting dates
Annual General Meeting
february 28, 2017
First quarter 2017 results
april 25, 2017
For further information regarding
Novartis, please contact Novartis
International AG CH-4002 Basel,
Switzerland.
General information
Novartis investor event in Boston, USA
may 30-31, 2017
Tel: +41 61 324 11 11
Fax: +41 61 324 80 01
Second quarter and first half 2017 results
July 18, 2017
Investor relations
Third quarter and first nine months
2017 results
October 24, 2017
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/annualreport2016
www.novartis.com/
order2016annualreport
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
Design: phorbis communications, Basel, Switzerland
Production: Management Digital Data AG, Lenzburg, Switzerland
management Photography: Thomas Stöckli, Zürich, Switzerland
Printer: Neidhart + Schön Group, Zürich, Switzerland
© Novartis AG, 2017
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other impact on Novartis or any of our divisions of the significant
reorganizations of recent years, including the creation of the
Pharmaceuticals and Oncology business units to form the
Innovative Medicines Division, the creation of the Global Drug
Development organization and Novartis Operations (including
Novartis Technical Operations and Novartis Business Services),
the transfer of the Ophthalmic Pharmaceuticals products of our
Alcon Division to the Innovative Medicines Division, the transfer
of selected mature, non-promoted pharmaceutical products
from the Innovative Medicines Division to the Sandoz Division,
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result of the significant reorganizations of recent years, including
the creation of the Pharmaceuticals and Oncology business
units to form the Innovative Medicines Division, the creation of
the Global Drug Development organization and Novartis
Operations (including Novartis Technical Operations and
Novartis Business Services), the transfer of the Ophthalmic
Pharmaceuticals products of our Alcon Division to the Innovative
Medicines Division, the transfer of selected mature, non-pro-
moted pharmaceutical products from the Innovative Medicines
Division to the Sandoz Division, and the transactions with GSK,
Lilly or CSL. Neither can there be any guarantee that
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synergies or opportunities expected from the significant
reorganizations of recent years, including the creation of the
Pharmaceuticals and Oncology business units to form the
Innovative Medicines Division, the creation of the Global Drug
Development organization and Novartis Operations (including
Novartis Technical Operations and Novartis Business Services),
the transfer of the Ophthalmic Pharmaceuticals products of our
Alcon Division to the Innovative Medicines Division, the transfer
of selected mature, non-promoted pharmaceutical products
from the Innovative Medicines Division to the Sandoz Division,
and the transactions with GSK, Lilly or CSL may not be realized
or may take longer to realize than expected; the inherent
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Photo on the right
Field worker Expedita Ramírez Marroquín works with women in rural Guatemala, focusing on diet, prenatal
health and household characteristics. She also assists with a program around the town of San Lorenzo
aimed at reducing the health impact of smoke from cooking fires, which contributes to respiratory illness.
Back cover
Antonina Hernández, who suffers from Alzheimer’s, exercises four days a week under the guidance of
her son, Juan Pedro García Hernández, who is also her full-time caregiver.