Annual Report
2017
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.
Cover photo Ratan Singh and his wife, Ram Kali, attend a
health clinic in Triveni Vihar in Uttar Pradesh, India, supported
by a Novartis initiative that has improved access to healthcare
for India’s rural poor over the past decade.
Photo below Graduate intern Felix Peix uses CRISPR genome
editing technology at Novartis in Basel, Switzerland. CRISPR
edits the genes of targeted cells, assisting in drug discovery
and offering the potential to treat disease by deleting, repairing
or replacing specific genes.
Novartis Annual Report 2017 | 1
Contents
CHAIRMAN’S LETTER
CHIEF EXECUTIVE OFFICER’S LETTER
KEY PERFORMANCE INDICATORS – CONSOLIDATED HIGHLIGHTS
2017 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 at Novartis
Access to healthcare
Patient health and safety
Novartis access approaches: performance indicators 2017
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
Executive Committee compensation at a glance
Board compensation at a glance
Executive Committee compensation philosophy and principles
Executive Committee compensation policies
Executive Committee performance management process
2017 Executive Committee compensation
2018 Executive Committee compensation
Board compensation
Compensation governance
FINANCIAL REPORT
Operating and financial review 2017
Novartis Group consolidated financial statements
Financial statements of Novartis AG
OTHER INFORMATION
Key dates for 2018, contact information and
forward-looking statements
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2 | Novartis Annual Report 2017
Chairman’s letter
Dear shareholder,
Novartis made substantial progress in 2017. We returned
Alcon to growth, launched important new products, and
benefited from efficiency gains delivered by Novartis
Business Services and the recently established global
drug development and production organizations. These
accomplishments have helped us to deliver solid perfor-
mance. We increased sales by 2% in constant currencies,
improved net income by 12% in constant currencies, and
were able to strengthen our cash flow and core earnings
per share with the objective of continuing to create value
for our shareholders.
With the appointment of Vasant
Narasimhan as Chief Executive Officer
starting February 1, the Board of Directors
is confident Novartis is well placed to
begin a new phase of growth and
strengthen its global market position
We believe innovation will become increasingly import-
ant in view of the persistent challenges in the healthcare
environment. To remain at the forefront of innovation, we
have continued to strengthen our leadership. We have also
enhanced our ability to develop breakthrough therapies
by accelerating internal and external collaboration, pur-
suing bolt-on acquisitions and digitizing our operations.
The creation of the Chief Digital Officer position is set to
add further impetus to the transformation of Novartis.
With the appointment of Vasant Narasimhan as
Chief Executive Officer starting February 1, the Board of
Directors is confident Novartis is well placed to begin a
new phase of growth and strengthen its global market
position. As we move forward, our leadership team is
focused on driving innovation and is cultivating a company
culture aimed at helping us become one of the most
trusted partners in the healthcare industry. On behalf of
the Board of Directors, I would also like to express my
Joerg Reinhardt
gratitude to our outgoing CEO, Joseph Jimenez, who has
successfully led Novartis for eight years through a
challenging period of major patent expirations and laid
the foundation for a strong future.
We will continue to make substantial investments in
research and development and to concentrate on ex -
ploring new therapeutic pathways that help improve and
extend people’s lives. We are currently investigating
more than 70 new molecules in areas of high unmet
medical need such as cancer, respiratory disease and
heart disease.
CHAIRMAN’S LETTER
Novartis Annual Report 2017 | 3
The future of healthcare
The healthcare industry is going through a
transformative period marked by diver ging
trends.
On the one hand, digital technologies and
new biotechnological discoveries allow for
the development of breakthrough thera-
pies that can help substantially improve
the individual treatment of patients. At the
same time, aging populations are set to
lead to an increase in the cost of care due
to the rise in noncommunicable diseases.
Novartis is committed to enhancing
healthcare innovation to address high
unmet medical needs and is prepared
to leverage breakthrough technologies
in the interest of patients. We are also
collabo ra ting with healthcare providers on
new pricing solutions such as outcomes-
based payment models that can help
ease the burden on healthcare systems
while at the same time supporting
patients’ access to quality care.
For further detail, see
k Our strategy page 17
We are prepared to take calculated risks across the
research portfolio and work toward translating scientific
advances in fields such as genetics and immunology into
pharmaceutical products. As part of these efforts, we
launched three cancer therapies in 2017: Kisqali, Rydapt
and Kymriah. Kymriah, developed with the University of
Pennsylvania in the US, is the first approved chimeric
antigen receptor T-cell (CAR-T) therapy, an innovative
cell therapy that is available in the US on an industrial
scale and takes personalized medicine to a new level.
Reflecting our ambition to deliver our treatments to
as many patients as possible, we are also accelerating
our activities to improve access to healthcare in devel-
oping countries. As part of these efforts, we expanded
the reach of our Novartis Access program, which aims to
help address the rise in chronic diseases in lower-income
countries in Africa, Asia and South America.
We constantly seek ways to improve our corporate
governance, strengthen our commitment to integrity and
ethical behavior, and continue cultivating an open and
transparent dialogue with our many stakeholders. We
pursue engagement with patient groups, customers,
share holders and society as a whole. We are convinced
that this exchange benefits our company in the long term
and can also contribute to strengthening healthcare
systems.
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 2.80 at the next Annual
General Meeting.
Sincerely,
Joerg Reinhardt
Chairman of the Board of Directors
4 | Novartis Annual Report 2017
Chief Executive
Officer’s letter
Dear shareholder,
Emily Whitehead was once a little girl close to death. At
just 5 years old, she developed an aggressive form of
acute lymphoblastic leukemia (ALL) that chemotherapy
was unable to tame. Several years later, as a last hope, she
was enrolled in a clinical trial and became the first pediatric
patient in the world to receive the CAR-T cell therapy now
known as Kymriah. The therapy worked, and today Emily
is a happy, healthy 12-year-old in complete remission.
Our ability to deliver new breakthrough
treatments like Kymriah is one of the many
reasons I am proud of our company and
our performance in 2017
Our ability to deliver new breakthrough treatments like
Kymriah is one of the many reasons I am proud of our
company and our performance in 2017. Despite navi gating
the final year of the Gleevec/Glivec patent expiration,
we grew Group net sales by 2% in constant currencies
(cc). This performance is being driven by recently
launched products such as Cosentyx, which reached
multi-blockbuster status, and Entresto, which achieved
USD 507 million in full-year sales, as well as oncology
products such as Promacta/Revolade and Tafinlar +
Mekinist. Sandoz is expanding access to biosimilars, and
we have a leading portfolio with five biosimilars now on
the market. However, Sandoz net sales were down 2%
cc due to fierce price competition in the US. Alcon made
significant progress on its turnaround, returning to
growth and building momentum toward the end of the
year, supported by the launch of innovative new prod-
ucts and continued double-digit growth in sales of Dailies
Total1 contact lenses. We’ve updated Alcon’s strategic
plan, indicating its potential to grow sales at or above
market while delivering profitability at least in line with
the industry.
Joseph Jimenez
Since 2015, we have transformed our portfolio and
focused the company on leading businesses with inno-
vation power and global scale, which contributed to our
solid 2017 performance. In addition, we now have the
right organizational structure in place to enable future
growth. Notably, we’ve centralized Global Drug Devel-
opment, enabling the organization to more effectively
leverage new technologies such as advanced analytics
to speed clinical trials and bring medicines to market
faster. We’re building one of the most powerful pipelines
in the industry with multiple potential blockbusters,
and we’re pursuing strategic collaborations to further
strengthen our innovation.
At the same time, we’re leading the industry’s shift
toward outcomes-based pricing and we’re piloting new
commercial models using real-world evidence to help
illustrate the value our products bring to patients and
payers. We have implemented a novel collaboration with
the US Centers for Medicare & Medicaid Services for
Kymriah that will allow for payment only when pediatric
and young adult ALL patients respond to this therapy by
the end of the first month. The agreement also includes
CHIEF EXECUTIVE OFFICER’S LETTER
Novartis Annual Report 2017 | 5
Our unwavering commitment to R&D
Research and development (R&D) is a core
part of our strategy at Novartis. We have a
strong track record of innovation, delivering
16 major approvals as well as six FDA
breakthrough therapy designations and
16 major submissions in 2017 alone.
Innovation is going to be more important than
ever to our future success. And we can
expect the environment for innovation to get
tougher, with healthcare systems sharpening
their focus on treatments that produce the
most value for patients and society.
That is why we are working to think differently
about how we innovate. Over the last year,
we have made progress advancing open
innovation at the Novartis Institutes for
BioMedical Research, making our drug
development efforts more efficient and
effective, and harnessing new digital
technologies that can help us measure
the value our medicines deliver to society.
For further detail, see
k Innovation page 42
As many of you know, I have decided to step down
as CEO of Novartis after eight years in this position and
10 years with the company. I am confident that Vasant
Narasimhan is the right person to lead this company into
our next growth phase, and that the changes we have
made position the company for future success. I am
most thankful to our associates for their creativity, energy
and engagement. Our associates all over the world are
committed to our mission, and they are the best in the
industry. I will miss all of them. I also want to thank our
Board of Directors for their support and collaboration
over the years, and you – our shareholders – for your
continued confidence in Novartis.
Sincerely,
an indication-based pricing approach, supporting pay-
ments for a medicine based on the clinical outcomes
achieved. This potentially lowers prices for future indi-
cations, bringing savings to the healthcare system.
I’m also proud of the cultural shift we have made,
focusing on our mission of improving and extending
people’s lives. We’re having a significant impact on mil-
lions of patients every day and we reached nearly 1 bil-
lion patients in 2017 alone. As a purpose-driven organi-
zation, we ranked fourth on Fortune magazine’s “Change
the World” list in 2017, and we moved to fourth in the 2017
Dow Jones Sustainability Index World, up from seventh
in 2016. We continued to expand our efforts to eliminate
malaria, for example by working with Medicines for
Malaria Venture to initiate a clinical trial for KAF156, our
next-generation antimalarial compound with the poten-
tial to treat drug- resistant strains of the malaria parasite.
We also made progress in our efforts to expand access
to healthcare. For instance, our Novartis Access pro-
gram, which offers a portfolio of medicines for chronic
diseases at a price of USD 1 per treatment, per month,
delivered more than 800 000 treatments to lower-
income patients since its launch in 2015.
Joseph Jimenez
Chief Executive Officer
6 | Novartis Annual Report 2017
Key performance indicators
consolidated highlights
% Change
Constant
currencies
2
7
12
14
0
2
3
USD
1
4
15
16
– 1
1
2
10
% Change
11
15
2
2017
49 109
8 629
17.6
7 703
3.28
12 850
26.2
11 391
4.86
10 428
2017
82.40
83.96
2.80
87
20.4
2016
48 518
8 268
17.0
6 698
2.82
12 987
26.8
11 314
4.75
9 455
2016
74.10
72.84
2.75
97
– 13.8
Financial
Key figures1
(in USD millions, unless indicated otherwise)
Net sales to third parties
Operating income
Return on net sales (%)
Net income
Basic earnings per share2 (USD)
Core operating income
Core return on net sales (%)
Core net income
Core earnings per share2 (USD)
Free cash flow
Share information
Share price at year-end (CHF)
ADR price at year-end (USD)
Dividend3 (CHF)
Payout ratio4 (%)
Total shareholder return5 (% in USD)
For further detail, see
k Our performance page 22
k Our Financial Report page 156
1 This Annual Report includes non-IFRS financial measures such as core results,
4 Payout ratio 2017 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 179.
dividend amount in CHF at the CHF-USD exchange rate of December 31, 2017, based
on an estimated number of shares outstanding on dividend payment date, and dividing
it by the USD consolidated net income attributable to shareholders of Novartis AG in
the Group’s 2017 consolidated financial statements.
2 2017 weighted average number of shares outstanding: 2 346 million (2016: 2 378 million)
3 Dividend 2017: proposal to shareholders for approval at the Annual General Meeting on
5 Further details related to share development and total shareholder return can be found
starting on page 85.
March 2, 2018
KEY PERFORMANCE INDICATORS CONSOLIDATED HIGHLIGHTS
Novartis Annual Report 2017 | 7
Innovation
Key figures 1
Projects entering development pipeline 2
Ongoing Phase III programs 3
US FDA breakthrough therapy designations 4
Major submissions (US, EU, JP) 5
Major approvals (US, EU, JP) 5
New molecular entity (NME) approvals 6
Social
Access
Total patients reached (millions)
Patients reached through access programs (millions)
People reached through training, health education and service delivery (millions) 7
People
Full-time equivalent positions / headcount 8
Turnover: % voluntary / % overall
2017
2016
9
37
6
16
16
3
2017
927
46
15
5
29
5
24
16
3
2016
965
52
17
121 597 / 126 457
118 393 / 122 985
7.0 / 11.3
7.4 / 12.2
Women in management: % of management9 / % of Novartis Top Leaders10 / % of Board of Directors
41 / 27 / 23
40 / 25 / 25
Misconduct cases reported / allegations substantiated 11
2 031 / 1 147
1 804 / 1 313
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
0.12
1 259.9
0.08
1 320.4
For further detail, see
k Innovation page 42
k Social page 66 (corporate responsibility)
1 Includes Innovative Medicines and Sandoz biosimilars only
2 Includes programs entering confirmatory development, based on internal R&D
7 Includes reporting of the catchment of a population in the area where a program has
been implemented.
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
8 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
9 Management defined by Global Job Level Architecture and Novartis Top Leaders
10 Novartis Top Leaders comprise the approximately 350 most senior managers at
3 Includes projects with FPFV in a Phase III study but not yet filed in the US, EU or Japan
4 Number of breakthrough therapy designations by the US Food and Drug Administration
for therapies under development by Novartis
5 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)
6 Includes NMEs such as small molecules, biologics; in the EU, new fixed-dose
combinations of existing APIs
Novartis, including the Executive Committee of Novartis.
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.
12 2017 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
2018. Significant deviations will be reported on our website and restated in next year’s
Annual Report. For more detail on health, safety and environmental sustainability, see
www.novartis.com/our-company/corporate-responsibility/doing-business-
responsibly/health-safety-environment
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 2017
2017 at a glance
Who we are
Our environment
126 000
Employees worldwide (headcount)
155
Countries where Novartis
products are sold
49.1 bn
Net sales (USD)
195.5 bn
Market capitalization (USD)
on Dec. 31, 2017
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 sold in about 155 countries and
they reached nearly 1 billion people globally in 2017.
About 126 000 people of 145 nationalities work at
Novartis around the world.
For further detail, visit
k www.novartis.com/our-company
We believe biomedical innovation will continue to accel-
erate in coming years, yielding new treatments that will
have an unparalleled impact on humanity. Better under-
standing of the molecular mechanisms of disease and
new types of therapies promise to yield powerful new
medicines. The trend toward patient-specific precision
treatments will likely accelerate.
The adoption of more digital technology in science
and healthcare is likely to transform everything from drug
research to how doctors care for patients. Proliferating
sensor technology is helping researchers and doctors
gather more information about their patients’ responses
to treatment. But other trends in society raise significant
challenges. Rapidly aging populations and the growth
in chronic illnesses such as heart disease and cancer
continue to increase demand for care and put pressure
on health systems around the world. These trends raise
the importance of delivering true innovation that produces
better health outcomes for patients and society – and
doing this more efficiently.
Expected healthcare spending 2015–2020
(in USD billions and CAGR)
Average annual
growth
Global
North America
4 084
3 306
Western Europe
2 007
1 646
Asia & Australia
1 965
1 538
Latin America
401
356
Middle East & Africa
139
113
Transition economies
246
171
2020
2015
8 735
4.3%
7 077
4.3%
4.0%
5.0%
2.4%
4.2%
7.5%
Source: World Industry Outlook, Healthcare and Pharmaceuticals
The Economist Intelligence Unit, June 2017
For further detail, see
k Our environment page 15
2017 AT A GLANCE
Novartis Annual Report 2017 | 9
Our strategy
Our structure
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 believe innovation leadership will be increasingly
important to respond to future opportunities and chal-
lenges, as we strive to continue creating value for our
company, our shareholders and society. We are imple-
menting our strategy with a focus on further strengthening
innovation, driving a digital transformation, and reinforcing
our position in growing areas of healthcare.
We believe innovation leadership will be
increasingly important to respond to future
opportunities and challenges
Our values
A strong culture anchored in a talented and committed
workforce enables us to implement our strategy. We
work to reinforce a company culture that supports our
people as they grapple with a rapidly evolving healthcare
industry and the shifting expectations of society. Our six
values – innovation, quality, collaboration, performance,
courage and integrity – help guide us as we select new
recruits, shape employee development programs, and
assess individual performance and rewards.
In 2017, we focused on fully implementing the integrated
drug development and manufacturing structures we
established a year earlier. With these latest steps in our
transformation, we believe our organization is well posi-
tioned to drive forward our strategy.
Research and development is at the core of our com-
pany. The Novartis Institutes for BioMedical Research
(NIBR) is the innovation engine of Novartis. NIBR focuses
on discovering new drugs that can change the practice
of medicine. The Global Drug Development (GDD) orga-
nization oversees the development of new medicines dis-
covered by our researchers and partners. GDD allocates
resources to the most promising development projects.
Our three divisions focus on growing areas of health-
care.
• The Innovative Medicines Division has two business
units: Novartis Pharmaceuticals, with patented treat-
ments in the areas of ophthalmology, immunology and
dermatology, neuroscience, respiratory and cardiome-
ta bolic; and Novartis Oncology, with treatments for
cancers and rare diseases.
• Sandoz focuses on high-quality, affordable generics
and biosimilars.
• Alcon offers one of the world’s widest selections of
ophthalmic surgical devices and vision care products.
Novartis Operations includes our global service and
manufacturing organizations. They focus on operational
excellence and improving efficiency. Novartis Technical
Operations handles manufacturing of innovative medi-
cines and Sandoz products. Novartis Business Services
consolidates support services across our organization.
For further detail, see
k Our strategy page 17
k Our culture and values page 18
k Our structure page 19
10 | Novartis Annual Report 2017
2017 at a glance (continued)
Performance highlights
Financial
49.1 bn
Net sales (USD)
12.9 bn
Core operating income (USD)
8.6 bn
Operating income (USD)
7.7 bn
Net income (USD)
10.4 bn
Total free cash flow (USD)
Novartis delivered solid performance in 2017 as strong
sales of our growth drivers, including Cosentyx, Entresto,
Promacta/Revolade, and Tafinlar + Mekinist, continued
to offset the impact of generic competition for our cancer
drug Gleevec/Glivec. Our results underscore the breadth
and strength of our product portfolio and highlight our
success at steering through patent expirations.
Sales increased in the Innovative Medicines Division
and the Alcon eye care division returned to growth.
Sandoz Division sales declined due to increased price
competition in the US.
Novartis net sales were USD 49.1 billion, up 1% in re -
ported terms and up 2% in constant currencies (cc).
Sales volumes increased 7%, more than offsetting the
impact of patent expirations. Operating income in 2017
was USD 8.6 billion (+4%, +7% cc), mainly driven by
higher sales, productivity improvements and lower
amortization, which were partly offset by generic compe-
tition and higher marketing investments. Net income was
USD 7.7 billion (+15%, +12% cc), benefiting from growth
in operating in come and income from associated com-
panies. Earnings per share were USD 3.28 (+16%, +14%
cc), benefiting from higher net income and our share buy-
back program. Free cash flow rose 10% to USD 10.4 bil-
lion, driven mainly by improved cash flow from operating
activities.
We also present our core results, which exclude the
impact of amortization, impairments, disposals, acquisi-
tions, restructurings and other significant items, to help
investors understand our underlying performance. Core
operating income was USD 12.9 billion (−1%, 0% cc). Core
operating income margin in constant currencies
decreased 0.3 percentage points, mainly due to generic
competition for Gleevec/Glivec, and higher launch invest-
ments, which were partially offset by expanded gross
margins and productivity improvements. Exchange rate
movements had an additional negative impact of 0.3 per-
centage points, yielding a net decrease of 0.6 percent-
age points to 26.2% of net sales. Core net income was
USD 11.4 billion (+1%, +2% cc). Core earnings per share
were USD 4.86 (+2%, +3% cc).
Innovation
200+
Projects in clinical development
9.0 bn
Research and development spend (USD)
Our research and development team made strong prog-
ress in 2017. We received 16 major approvals, made 16
major submissions, and received six breakthrough
therapy designations from the US Food and Drug Admin-
istration (FDA).
The FDA approved Kymriah (tisagenlecleucel, for-
merly CTL019) to treat children and young adults with a
deadly cancer called acute lymphoblastic leukemia.
Novartis was the first company to receive approval for
this type of novel immunocellular therapy, which repro-
grams a patient’s own T-cells to fight cancer. Novartis
also filed for FDA approval for Kymriah to treat adults
with the most common form of non-Hodgkin’s lymphoma.
2017 AT A GLANCE
Novartis Annual Report 2017 | 11
Several targeted cancer therapies were also ap -
proved. They include Kisqali (ribociclib, formerly LEE011),
approved in 45 countries – including the US and in Europe
– to treat advanced or metastatic breast cancer, and
Rydapt (midostaurin), approved in the US and EU for
acute myeloid leukemia and advanced systemic masto-
cytosis.
Sandoz built on its leadership in biosimilars, with
European approvals for Rixathon (rituximab) and Erelzi
(etanercept). Alcon received European approval for the
Clareon IOL with AutonoMe, an automated, disposable,
pre-loaded IOL delivery system for cataract surgery.
Social
46 m
Patients reached through access programs
15 m
People reached through health education programs
Novartis Access, our portfolio of medicines to help fight
chronic diseases in lower-income countries, signed
agreements with three countries, bringing the total to
six. The program delivered more than 685 000 treat-
ments – each providing a one-month supply of medicine
– in 2017, and it has delivered a total of more than 800 000
treatments since its 2015 launch. Starting in 2018, we
will broaden Novartis Access into the private sector in
select countries.
Along with Novartis Oncology, Novartis Access
also partnered with the American Society for Clinical
Pathology and the American Cancer Society to improve
the management of cancer in sub-Saharan Africa.
The Novartis Foundation and partners launched
Better Hearts Better Cities to address hypertension in
low-income urban communities with interventions that
go beyond healthcare. The approach is being tested in
Mongolia, Senegal and Brazil.
Our Healthy Family programs reached more than
7.7 million people through health education sessions in
India, Kenya and Vietnam. Nearly 580 000 people
attended specific health camps. In India, the program
celebrated its 10th anniversary; it covers 11 states and
approximately 14 000 villages and small towns that are
home to more than 32 million people. At the same time,
the Kenya program broke even, joining India and Vietnam
in this regard.
We took steps to further strengthen integrity and
compliance, including approving a new Professional
Practices Policy, updating our Anti-Bribery Third-Party
Guideline, and strengthening our anti-bribery due dili-
gence process. We published a US Transparency and
Patient Access Report, which addresses important
questions about our business practices in the US.
Novartis was recognized in sustainability rankings,
including Fortune magazine’s “Change the World” list
(No. 4) and “World’s Most Admired Companies” list for
the pharmaceutical industry (No. 2). We were also fourth
in the 2017 Dow Jones Sustainability Index (DJSI) World,
and we re-entered the DJSI Europe Index for the first
time in four years. We were again recognized as one of
the world’s most sustainable companies by Corporate
Knights, and we were one of 73 companies worldwide to
make CDP’s Water A List.
For further detail, see
k Performance page 22
Governance and compensation
We continued to pursue excellence in corporate
governance in 2017. We further refreshed the Board
of Directors with the addition of Frans van Houten,
reinforcing our expertise in the area of digital health
solutions. We benefited from the experience and know l-
edge of new Board members, appointed new heads of
three Board committees, and intensified our shareholder
engagement.
Key focus areas for our Board in 2017 included CEO
succession; strategic options for Alcon; the overall
Novartis strategy, including the digital strategy; the
culture of our company; compliance; and our compen-
sation system.
During 2017, we also reviewed and adapted the
compensation systems for the Board and Executive
Committee, and enhanced our disclosures in the 2017
Compensation Report.
For further detail, see
k Governance page 82
k Compensation page 118
12 | Novartis Annual Report 2017
Novartis Annual Report 2017 | 13
Photo Mingzhu Tao, 68,
gives a helping hand to an
elderly resident at a nursing
home in Shanghai, China.
The changing patterns of life
in Chinese cities mean old
people are increasingly
being cared for at institu-
tions, and by each other,
rather than by their families
as was traditionally the norm.
14 | Novartis Annual Report 2017
Strategic overview
Surging innovation in medical science and technology is spawning
dramatic advances in healthcare. At the same time, growing and
graying populations continue to raise challenges for healthcare systems
worldwide. This dynamic environment puts a premium on finding new
treatment approaches that deliver clear value to patients and society.
1 800
The number of human proteins that
are possible drug targets, of which
only about 600 are actually targeted
by currently approved therapies
1.4 bn
The projected number of people in
the world aged 60 or over by 2030, up
from less than 1 billion today
4.3 %
The expected annual average
growth in healthcare spending
worldwide between 2015 and 2020
Our strategic approach
Our mission
Our vision
Our strategy
Discover new ways
to improve and extend
people’s lives
Be a trusted leader
in changing the
practice of medicine
Science-based
innovation
Better patient
outcomes
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 company culture is underpinned by clear values
that guide how we select and develop employees
as well as assess their performance.
k page 18
Our integrated organization is helping us remain an
innovation leader and supports ongoing efforts to
make operations more efficient and effective.
k page 19
Strategic overview
our environment
Novartis Annual Report 2017 | 15
Our environment
the healthcare industry is entering a phase of exhil-
arating progress and change. over the next two
decades, we believe biomedical innovation will
continue to accelerate – spawning new treatments
that will have unparalleled impact on humanity, with
the potential to tame scourges like cancer and heart
disease. the digital revolution that is now gaining
momentum in healthcare is likely to transform every-
thing from drug research and development to how
doctors diagnose and treat diseases. these trends
promise to help society address the changing health-
care needs of aging populations and produce better
health outcomes for patients.
methods and artificial intelligence to flag emerging
medical problems and help physicians diagnose and treat
patients. In fact, a recent study found that computers
already have an edge over doctors in their ability to
predict the likelihood that a patient will have a heart
attack over a 10-year period, based on an evaluation of
risk factors.
Patients, armed with greater access to their own
medical data, will likely play a more active role in prevent-
ing diseases and managing their own care when they
become ill. The role of physicians and other care provid-
ers will likely also evolve as they help educate patients
on treatment options and steer patients toward the most
effective choices.
Accelerating biomedical innovation
We are seeing an explosion of innovation in medical
science. Better understanding of the molecular mecha-
nisms of disease, coupled with new types of therapies,
promises to yield powerful new medicines for patients.
The trend toward patient-specific precision treatments
will likely accelerate.
Further advances in molecular biology, which has been
a mainstay of research for decades, will continue to yield
results. Scientists contributing to the Human Protein Atlas
have identified about 1 800 proteins that they believe are
possible targets for drugs. So far, only about 600 of them
are actually targeted by currently approved therapies. In
addition, new molecular techniques, such as gene edit-
ing, personalized cell therapies and harnessing the cell’s
own waste disposal system, could open new treatment
opportunities – including ones that go beyond what has
been possible using today’s drugs.
The advent of digital technologies as therapeutic
aids is also starting to alter the conventional notion of
medical treatment. For instance, mobile applications that
aim to treat substance abuse and help diabetics manage
their disease have received clearance from the US Food
and Drug Administration (FDA). Combining traditional
medicines with digital technology that helps patients
follow healthy behaviors holds great promise for im prov-
ing the quality of care as well as treatment outcomes for
patients.
Transforming how doctors diagnose and treat
diseases
Although the digital revolution has been relatively slow
to arrive in healthcare, it is gaining momentum and will
likely bring radical change in the coming years.
A growing proliferation of sensor technology is
helping researchers and doctors gather increasing
amounts of information about patients’ health and how
they res pond to treatment. Care providers are starting
to mine healthcare data using a combination of statistical
Better understanding of the molecular
mechanisms of disease, coupled with
new types of therapies, promises to yield
powerful new medicines for patients
Transforming drug research and development
Digital technology may also increasingly improve the
efficiency and effectiveness of researching and devel-
oping potential new therapies. The marriage of data and
artificial intelligence will enable complex biological
simulations that complement human scientific ingenuity.
Such tools are already being considered by the FDA as
replacements for preclinical animal studies to assess
toxicity in potential new medicines. As digital tools
become more widespread, they may be able to shorten
research times and improve the likelihood that experi-
mental drugs will prove safe and effective.
This surge in medical innovation will likely occur in an
increasingly diverse and fragmented research en vironment,
with new advances coming from a variety of sources –
sometimes unexpected ones. Molecular bio logy may
intersect with other disciplines, from engineering to
computer science, to advance the practice of medicine.
And we expect there will be greater diversity in funding
for research. Already we see governments, companies
and venture capitalists increasingly supporting academic
researchers’ efforts to advance promising experimental
therapies.
All of these factors are contributing to greater com-
petition at the forefront of innovation in medical science.
One upshot is that medicines will likely be held to a higher
standard of efficacy in the future.
16 | Novartis Annual Report 2017
Our environment (continued)
Aging populations
While accelerating medical innovation could help tame
some of the devastating diseases that still plague human-
ity, other trends in society pose significant challenges.
Rapidly aging populations continue to put pressure on
health systems around the world.
People are living longer and the worldwide elderly
population continues to grow at a rapid pace. The number
of people in the world aged 60 or over will reach about
1.4 billion by 2030, according to projections by the United
Nations, up from less than 1 billion today. Aging popula-
tions, in addition to rapid urbanization and changing
lifestyles in the developing world, are contributing to
increased prevalence of chronic ailments such as heart
disease and cancer.
At the same time, many countries are working to
ex pand access to healthcare. For example, China recently
expanded reimbursement of some medicines.
These factors are driving higher healthcare spend-
ing, which is expected to grow at an annual rate of
4.3% between 2015 and 2020, reaching a total of USD 8.7
trillion worldwide, projects the Economist Intelligence
Unit. By 2020, about half of that spending is expected
to go toward treating the three leading causes of death
worldwide: cardi ovas cular disease, cancer and respira-
tory disease.
To keep costs in check, governments and health in-
surers are already employing a variety of tactics, including
increasing the use of generics and biosimilars, imposing
price cuts, and limiting access to some innovative thera-
pies. The pharmaceutical industry is also playing a role,
exploring new pricing models and delivering innovative
new treatments that maximize benefits for patients.
Better health outcomes for patients
In pursuit of greater efficiency and effectiveness, some
healthcare systems are also expediting the transition
from a system based on fees for services toward one
based on reimbursement for specific health outcomes
in patients. In the US, for instance, a new law came into
effect in 2017 that aims to tie reimbursement more
closely to quality and health outcomes for some elderly
patients.
As the transition accelerates, we expect health
systems will increasingly find ways to discourage the use
of medical treatments that bring little or no value for
patients or healthcare systems. In parallel, they will likely
place greater value on treatments that delay the pro-
gression of disease or that help avoid events requiring
expensive acute care, such as heart attacks.
With people living longer and retirement ages rising,
we also anticipate countries and health systems will put
greater emphasis on keeping people fit and productive
later in life. And we think there will be growing emphasis
on maintaining quality of life as people age, with less
focus on extending life by a few more months.
For more detailed discussion about the risks facing
Novartis and what we’re doing to mitigate them, see
pages 175-179.
We think the trends driving changes in healthcare will
bring new opportunities for Novartis, as well as new
challenges. And we believe the changes now underway
in our industry raise the importance of delivering true
innovation that produces better health outcomes for
patients and health systems, with greater efficiency.
Strategic overview
our strategy
Novartis Annual Report 2017 | 17
Our strategy
Science and innovation remain at the heart of our
strategy, while our mission and vision are anchored in
the important role we play in society. together, our
mission, vision and strategy help guide us through a
world that is experiencing rapid advances in tech-
nology to deliver better health outcomes for patients
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
Our mission sums up our company’s reason for being.
Our vision is an aspiration to strive for, even as society’s
expectations about healthcare are changing. Our strat-
egy describes where we will channel our energy and how
we expect to continue creating value for our company,
shareholders and society.
We have been consistent in our commitment to
science-based innovation. We believe future trends in
our industry and society will only increase the impor-
tance of innovation leadership.
As we implement our strategy, we have identified key
priorities in the areas of innovation, digital techno logy
and scale.
Further strengthen innovation
Novartis has long been an innovation leader, and we are
taking steps designed to ensure we remain one. We
continue to maintain our investment in research and
development (R&D) at a level that is among the highest
in the industry. And we are ruthlessly prioritizing our R&D
spending to focus resources on the projects most likely
to deliver true innovations with the potential to change
the practice of medicine.
In an increasingly fragmented research landscape,
we are working to break down barriers to collaboration
both inside and outside our company to improve our
access to the best early-stage science.
Drive a digital transformation
We are finding new ways to harness the power of digital
technology in all aspects of our business – including
R&D, sales and operations – to improve effectiveness
and efficiency. A particular focus is advanced analytics.
Artificial intelligence and other technologies can help us
extract insights from vast pools of data from clinical
trials, from our daily interactions with physicians, and
from other sources.
Growing areas of healthcare
We will prioritize further steps to reinforce our presence
in growing areas of healthcare with unmet needs. We aim
to strengthen our position in specific therapeutic areas
in innovative medicines (including oncology, cardiology,
ophthalmology, and immunology and dermatology), as
well as in biosimilars and some specialty generics.
Geographically, we see scope to reinforce our presence
in some key markets, such as the US and Japan, and in
emerging markets that are long-term growth oppor tuni-
ties, such as China.
We believe future trends in our industry
and society will only increase the
importance of innovation leadership
Looking ahead, we think success will be driven by our
scientific expertise, how well we leverage new technolo-
gies to improve productivity, and our ongoing ability to
deliver value to our customers and patients.
Photo Ioanna Meli, 86, finds plenty to laugh about at her home
on Ikaria, a Greek island identified as one of the places in the
world where people live the longest. Mrs. Meli has been married
to her husband, Yannis, for 70 years. Experts believe family
and social activity are two keys to longevity in places like Ikaria,
along with low levels of meat eating and smoking, and frequent
moderate physical activity.
18 | Novartis Annual Report 2017
Our culture and values
we are building a company culture that supports the
success of Novartis through clear values to guide our
people in their work. a strong culture rooted in a
talented and committed workforce is essential for
implementing our strategy.
Our culture
We work to reinforce a company culture that supports
our people as they navigate a rapidly evolving healthcare
environment and shifting expectations from society.
Our values define our culture as we pursue the
Novartis strategy in line with our mission and vision. They
describe how we get things done, including the profes-
sional behavior we expect from our employees. We use
six values to guide us as we pursue new talent, shape
employee development programs, and assess individual
performance and rewards. Training programs ensure
people know our values as well as how to apply them at
work.
Our values
iNNovatioN
Innovation 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 intelligent
risks. We encourage unconventional thinking that leads
to new solutions to challenges in all of our activities,
including in science, healthcare and business.
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.
coLLaBoratioN
We foster teamwork among our employees and with
external partners to 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 focus on delivering 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.
coUrage
We want a culture where our associates speak out, chal-
lenge conventional 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.
Photo Dr. Manuel Cobos carries out a transplant operation on a
patient with liver failure in Argentina. An epidemic of chronic liver
disease linked to obesity may increase the need for such drastic
surgery. But new therapies could ultimately become available,
including compounds under development by Novartis.
iNtegritY
High performance with integrity is fundamental to the
way we operate and is critical to maintaining the trust of
society and governments. Our Code of Conduct sets
high ethical standards, and mandatory training for
employees underscores the importance of adhering to
these standards at work. We also enforce our code,
investigating allegations of misconduct and taking
decisive corrective action when necessary.
For further detail, see
k People page 28
Strategic overview
our structure
Novartis Annual Report 2017 | 19
Our structure
in 2017, we focused on fully implementing the integrat-
ed drug development and manufacturing structures
we established a year earlier. with these latest steps
in our transformation, we believe our organization is
now well positioned to drive forward our strategy –
leading in innovation, harnessing new technology, and
making the most of our global scale.
Research and development is at the core of our com-
pany, with 23 000 scientists, physicians and business
professionals worldwide focused on discovering new
treatments and developing them for patients.
The Novartis Institutes for BioMedical Research
The Novartis Institutes for BioMedical Research (NIBR)
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 (GDD) organization over-
sees the development of new medicines discovered by
our researchers and partners. GDD regularly evaluates
the potential new products in our pipeline and ensures
we allocate resources to the most promising develop-
ment projects. It also drives the adoption of common
standards and procedures, best practices and new tech-
no logies, with the aim of greater efficiency and effective-
ness.
Our divisions
iNNovative MeDiciNeS
The Innovative Medicines Division has two business
units. Novartis Pharmaceuticals focuses on patented
treatments in the areas of ophthalmology, immunology and
dermatology, neuroscience, respiratory and cardio-meta-
bolic. Novartis Oncology is focused on treatments for a
variety of cancers and rare diseases.
SaNDoZ
Sandoz offers patients and healthcare professionals
high-quality, affordable generics and biosimilars.
aLcoN
With its Surgical and Vision Care businesses, Alcon
offers one of the world’s widest selections of eye care
devices – from sophisticated equipment for delicate eye
surgery to a wide portfolio of advanced contact lenses.
Novartis Operations
Our global service and manufacturing organizations help
us benefit from our global scale and support our efforts
to improve efficiency.
NovartiS tec HNicaL oP eratioNS
Novartis Technical Operations (NTO) handles manufac-
turing of innovative medicines and Sandoz products.
NTO helps us optimize resource allocation and capacity
planning across our production sites while further
improving quality.
NovartiS BUSiNeSS ServiceS
Novartis Business Services (NBS) consolidates support
services across our organization, helping drive efficiency,
simplification, standardization and quality. NBS includes
six service domains: financial reporting and accounting
operations, human resources services, information tech-
nology, procurement, product lifecycle services, and real
estate and facility management. It helps generate pro-
ductivity gains.
Innovative Medicines
Oncology
business unit
Pharmaceuticals
business unit
te fun cti o
a
r
o
p
r
o
C
n s
Busin
e
s
s
s
e
r
v
i
c
e
s
R & D
M
anufact u r i n
g
Sandoz
Alcon
20 | Novartis Annual Report 2017
Novartis Annual Report 2017 | 21
Photo In an effort to stay
fit as they grow older, a
group of elderly friends
gather to perform tai
chi-style exercises each
morning at a shopping
center in Shanghai, China.
Such activities help people
cope with the effects of
aging as China’s large cities
come to terms with their
growing population of
seniors.
22 | Novartis Annual Report 2017
Performance
Novartis delivered solid performance in 2017. Strong growth of recently
launched products helped counter the effects of generic competition for
products that have lost patent protection, including our pioneering cancer
drug Gleevec/Glivec. Our research and development teams delivered good
results, with 16 major approvals and important progress for projects in our
pipeline. Our efforts to improve access to medicines and healthcare
worldwide continued to advance.
49.1 bn
Net sales (USD)
7.7 bn
Net income (USD)
10.4 bn
Free cash flow (USD)
Key figures1
(in USD millions, unless indicated otherwise)
Net sales to third parties
Operating income
Return on net sales (%)
Net income
Basic earnings per share2 (USD)
Core operating income
Core return on net sales (%)
Core net income
Core earnings per share2 (USD)
Free cash flow
2017
49 109
8 629
17.6
7 703
3.28
12 850
26.2
11 391
4.86
10 428
2016
48 518
8 268
17.0
6 698
2.82
12 987
26.8
11 314
4.75
9 455
% Change
USD
1
4
15
16
– 1
1
2
10
Constant
currencies
2
7
12
14
0
2
3
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 179.
2 2017 weighted average number of shares outstanding: 2 346 million (2016: 2 378 million)
Performance
Performance summary
Novartis Annual Report 2017 | 23
net sales, operating income, core operating income,1
research & development, marketing & sales
as % of net sales2
49.4
48.5
49.1
(% of net
sales)
51.9
52.2
35
30
25
20
15
10
5
0
2013
2014
2015
2016
2017
NET SALES (USD billion)
RESEARCH & DEVELOPMENT
CORE OPERATING INCOME1
MARKETING & SALES
OPERATING INCOME
1 Core operating income is 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 179.
2 2013 – 2015 reflects continuing operations as defined on page 202
2017 net sales by geographical region
(% of net sales and in USD millions)
eUroPe
36%
UnITeD STaTeS
34%
aSIa / afrIca / aUSTraLaSIa
22%
canaDa anD LaTIn amerIca
8%
17 492
16 935
10 718
3 964
ToTaL
49 109
2017 net sales by division
(in USD millions, % growth in constant currencies and divisional share of
net sales)
InnoVaTIVe meDIcIneS
67%
SanDoZ
21%
aLcon
12%
33 025 / 2%
10 060 / – 2%
6 024 / 4%
ToTaL
49 109 / 2%
Performance
summary
Financial performance
Novartis had solid performance in 2017 as strong sales
of our growth drivers, including Cosentyx (secukinumab),
Entresto (sacubitril/valsartan) and other recently launched
products, continued to offset the impact of generic com-
petition for our cancer treatment Gleevec/Glivec, which
lost patent protection in the US and Europe during 2016.
Our results underscore the breadth and strength of our
product portfolio and highlight our success at steering
through the patent expiration of one of our biggest-
selling drugs.
Our divisions had varied results. Sales increased in
the Innovative Medicines Division, and the Alcon eye care
division returned to growth in 2017. Sandoz Division sales
declined, as the effects of increased price competition
in the US more than offset growth in the rest of the world.
Net sales for Novartis were USD 49.1 billion, up 1%
in reported terms and up 2% measured in constant
currencies (cc) to remove the impact of exchange rate
move ments. Sales volumes increased 7% as growth
drivers, such as Cosentyx (USD 2.1 billion; +84%, +82%
cc), Entresto (USD 507 million; +198%, +195% cc),
Promacta/ Revolade (USD 867 million; +37%, +37% cc),
and Tafinlar + Mekinist (USD 873 million; +30%, +29%
cc), more than offset the impact of patent expirations for
Gleevec/Glivec (USD 1.9 billion; –42%, –41% cc).
The impact of currency exchange headwinds eased
in 2017 compared to what we have seen for several years,
particularly in 2015 when currency fluctuations had a
negative 10% impact on sales. To help investors assess
the impact of exchange rates on our performance, we
continue to also indicate growth rates in constant cur-
rencies.
Operating income in 2017 was USD 8.6 billion (+4%,
+7% cc), mainly driven by higher sales, productivity
improvements and lower amortization, which were partly
offset by generic competition and higher marketing
investments to support product launches. Net income
was USD 7.7 billion (+15%, +12% cc), benefiting from
growth in operating income and higher income from our
stake in GSK Consumer Healthcare Holdings Ltd.
Earnings per share were USD 3.28 (+16%, +14% cc),
benefiting from higher net income and our share buy-
back program.
Free cash flow rose 10% to USD 10.4 billion, driven
mainly by improved cash flow from operating activities.
We also present our core results, which exclude the
impact of amortization, impairments, disposals, acquisi-
tions, restructurings and other significant items, to help
investors understand our underlying performance.
Core operating income was USD 12.9 billion (–1%, 0%
cc). Core operating income margin in constant currencies
decreased 0.3 percentage points, mainly due to generic
competition for Gleevec/Glivec, and higher launch invest-
ments, which were partially offset by expanded gross
margins and productivity improvements. Movements in
exchange rates had an additional negative impact of
0.3 percentage points, yielding a net decrease of 0.6 per-
centage points to 26.2% of net sales.
24 | Novartis Annual Report 2017
Performance summary (continued)
Core net income was USD 11.4 billion (+1%, +2% cc),
benefiting from higher core income from associated
companies. Core earnings per share were USD 4.86
(+2%, +3% cc), reflecting the benefit of our share buy-
back program.
Our global functional organizations in manufacturing,
quality and business services made progress in improv-
ing our operations. Novartis Technical Operations (NTO)
and Novartis Business Services (NBS) continued to pro-
vide high-quality manufacturing and support services
while making sustained productivity improvements
through consolidation of our production network and
suppliers, and process standardization. In 2017, these
actions delivered productivity improvements of more
than USD 0.3 billion across NTO and NBS. We remain
on track to deliver our 2020 annual cost-savings goal of
USD 1 billion, mainly driven by NTO.
In 2017, NTO completed its first full year as an in te -
grated global manufacturing organization, delivering
synergies across 68 pharmaceutical production facili-
ties worldwide and improving capabilities through the
sharing of skills and excellence across the manufacturing
network.
Several new product launches in 2017 illustrated the
benefits. For example, the launch of our new cancer drug
Kisqali (ribociclib, formerly LEE011) involved contributions
from team members from different technology platforms
at several sites, as well as a joint effort from a global
supply team supporting product launches. Close colla-
boration and joint program management helped us
deliver products to patients and customers within six
hours of approval from health authorities. That compares
with four to six days in the best cases in past launches.
For recent launches – including Kisqali and Rydapt
(midostaurin) in the US, and the biosimilars Erelzi
(etanercept) and Rixathon (rituximab) in the EU – we were
able to deliver products to patients and customers within
24 hours of approval. We aspire to that timing for future
launches, as well.
Top five products – Innovative medicines
(in USD millions, % growth in USD, % growth in constant currencies)
GILENYA
COSENTYX
1 128
GLIVEC
LUCENTIS
TASIGNA
2017
2016
3 185 +2% (+2% cc)
3 109
2 071 +84% (+82% cc)
1 943 – 42% (– 41% cc)
3 323
1 888 +3% (+4% cc)
1 835
1 841 +6% (+9% cc)
1 739
Performance
Performance summary
Photo Yoga practitioners strike a warrior’s pose at an
event outside the Philadelphia Museum of Art organized
by the group Living Beyond Breast Cancer (LBBC). Since
it was founded 27 years ago, LBBC has become one of
the leading US patient advocacy organizations.
Novartis Annual Report 2017 | 25
We continued to perform well on quality, underscor-
ing the success of our sustained focus on this area in
recent years. Of 217 inspections of our facilities world-
wide by health regulators in 2017, all but two – or 99.1%
– were deemed acceptable, up from 98.1% the previous
year. Additionally, in June we successfully closed out a
warning letter from the US Food and Drug Administra-
tion (FDA) received by our site in Kalwe, India.
NBS continues to take steps to improve efficiency
through such measures as simplifying and standardizing
processes across the company, making the most of our
global scale. Working with colleagues in our Global Drug
Development (GDD) organization, for instance, NBS
has upgraded our information technology platforms,
streamlined hundreds of processes, and launched six
new systems in 2017 with the aim of better equipping
colleagues to focus on drug development activities.
These include the planning, data management, statistical
analysis, reporting, funding and management of clinical
trials. These changes are expected to simplify work for
more than 10 000 Novartis employees and facilitate
more effective interactions with 145 000 external clini-
cians supporting our studies.
Innovation performance
Our research and development team made strong prog-
ress in 2017, using new tools and approaches to address
the world’s health challenges. We received 16 major
approvals, made 16 major submissions, and received six
breakthrough therapy designations from the FDA. We
also reported positive clinical data for key molecules in
diverse therapeutic areas.
We received 16 major approvals,
made 16 major submissions, and
received six break through therapy
designations from the FDA
Oncology
2017 was a significant year in oncology with important
clinical trial results and three major regulatory approv-
als, including two new molecules and a pioneering per-
sonalized therapy for leukemia with the potential to open
a new frontier in cancer care.
The FDA cleared Kymriah (tisagenlecleucel, formerly
CTL019) to treat a deadly childhood cancer, marking the
first FDA approval for a chimeric antigen receptor T-cell
(CAR-T) therapy. The novel immunocellular therapy is a
one-time intravenous treatment that uses a patient’s own
T-cells to fight cancer. It is indicated for patients up to
25 years of age with B-cell precursor acute lymphoblastic
leukemia (ALL) that is refractory or in second or later
relapse. In studies sponsored by Novartis and led by the
University of Pennsylvania (Penn) and Children’s Hospital
of Philadelphia in the US, the therapy showed an 83%
overall remission rate in this young patient population
that has limited treatment options and historically poor
outcomes.
In addition, Kymriah has shown promising results
for the investigational treatment of adult patients
with re lapsed/refractory diffuse large B-cell lymphoma
(DLBCL), the most common form of non-Hodgkin’s
lymphoma. In a study sponsored by Novartis and led by
Penn researchers, Kymriah showed an overall response
rate of 53.1%, with 39.5% achieving a complete response
among patients with three or more months of follow-up,
or earlier discontinuation. Six months after infusion,
Kymriah showed an overall response rate of 37%, with a
complete response rate of 30%.
The FDA granted breakthrough therapy designation
to Kymriah for the treatment of adult patients with
relapsed/refractory DLBCL who have failed two or more
prior therapies. The breakthrough designation is intended
to expedite development and review of potential new
treatments for serious or life-threatening conditions.
Novartis has submitted an application to the FDA for
Kymriah for the treatment of adult patients with relapsed/
refractory DLBCL who are ineligible for autologous stem
cell transplant.
Together with our collaborators at Penn, we also
announced positive findings from a pilot study of CTL119,
a next-generation CAR-T therapy, in combination with
ibrutinib in patients with relapsed/refractory chronic
lymphocytic leukemia (CLL). Three months after treat-
ment, eight of the first nine patients had no signs of CLL
in their bone marrow, supporting the potential of this
combination therapy for high-risk CLL patients unlikely
to achieve complete remission on ibrutinib alone. Novartis
is at the forefront of investigational immunocellular
therapy, with a growing portfolio of personalized cell
therapies as part of our global collaboration with Penn.
For more on CAR-T therapy development, see page 48.
We also had several approvals for key targeted
cancer therapies. Kisqali was approved in 45 countries
around the world in 2017, including the US and in Europe.
The approval of Kisqali is for use in combination with any
aromatase inhibitor for treatment of postmenopausal
women with hormone receptor-positive (HR+)/human
epidermal growth factor receptor 2-negative (HER2-)
locally advanced or metastatic breast cancer as initial
endocrine-based therapy. Kisqali was developed under
a research collaboration with Astex Pharmaceuticals.
Rydapt received FDA and European Medicines
Agency (EMA) approvals for two rare, life-threatening
indications. In the US, Rydapt is approved in combination
with standard chemotherapy for the treatment of adult
patients with newly diagnosed acute myeloid leukemia
(AML) who are FLT3 mutation-positive. Rydapt is also
approved for adults with aggressive systemic mastocy-
tosis (ASM), systemic mastocytosis with associated
hematological neoplasm (SM-AHN), and mast cell leu-
kemia – three subtypes of systemic mastocytosis (SM)
that are collectively known as advanced SM. In the EU,
Rydapt is approved for adults with FLT3-mutated AML
26 | Novartis Annual Report 2017
Performance summary (continued)
in combination with standard chemotherapy, and alone
as a maintenance therapy in patients who have attained
complete response. It is also approved for use as mono-
therapy for the treatment of adults with ASM, SM-AHN
and mast cell leukemia.
The EMA and FDA approved Tafinlar (dabrafenib)
combined with Mekinist (trametinib) to treat patients with
advanced or metastatic non-small cell lung cancer
(NSCLC) whose tumors have the BRAF V600 mutation,
another cancer with extremely limited treatment options.
Also with Tafinlar + Mekinist, we reported results from a
pivotal Phase III adjuvant melanoma study that showed
a 53% reduction in the risk of death or recurrence in
patients with stage III BRAF V600 mutation-positive
melanoma after complete surgical resection. The FDA
granted breakthrough therapy designation for adjuvant
use of Tafinlar + Mekinist in these patients.
The use of Zykadia (ceritinib) was expanded to include
first-line treatment of patients with advanced (EU
approval) or metastatic (US approval) NSCLC whose
tumors are anaplastic lymphoma kinase-positive. In
addition, Votubia (everolimus) was approved as an
adjunctive treatment for refractory partial-onset seizures,
with or without secondary generalization, for patients
aged 2 years and older with tuberous sclerosis complex,
a rare genetic disorder.
We announced a clinical collaboration with Bristol-
Myers Squibb Co. (BMS) to evaluate potential treatments
in metastatic colorectal cancer. A joint early-stage trial
will study Mekinist in combination with BMS’ Opdivo® and
Opdivo® + Yervoy®.
Drug shows cross-disease potential
Significant immuno-oncology data emerged during a key
Phase III cardiovascular study that confirmed inflamma-
tion as a risk factor for heart disease. The study, called
Canakinumab Anti-inflammatory Thrombosis Outcomes
Study (CANTOS), evaluated quarterly injections of
ACZ885 (canakinumab) in combination with standard
care, such as cholesterol-lowering statins, in people with
a prior heart attack and inflammatory atherosclerosis.
Canakinumab lowers C-reactive protein (CRP), a signal
of inflammation. CANTOS included more than 10 000
heart attack survivors with elevated CRP but no elevated
cholesterol. Findings showed that targeting inflamma-
tion with ACZ885 significantly reduces the risk of major
adverse cardiovascular events, such as a heart attack,
stroke and cardiovascular death.
Intriguingly, patients who received ACZ885 in the
study also had low cancer death rates, especially from
lung cancer, compared to patients who received pla-
cebo. Analyses revealed a 77% reduction in lung cancer
mortality and a 67% reduction in lung cancer cases in
patients treated with 300 mg of ACZ885 compared to
the placebo arm. Along with submitting the drug for
cardiovascular indication, we plan to initiate further
Phase III lung cancer studies with ACZ885.
Additionally, we received orphan drug designation
from the FDA in our study of canakinumab for the treat-
ment of adult-onset Still’s disease, a rare type of inflam-
matory arthritis.
Psoriasis clearance
We reported results of a Phase III psoriasis study demon-
strating that Cosentyx delivers high and long-lasting skin
clearance in patients with moderate-to-severe plaque
psoriasis. High response rates were essentially main-
tained from year one to year five. Additionally, a label
update for Cosentyx was approved in the EU based on
data showing its long-term superiority over Stelara®
(ustekinumab) in moderate-to-severe plaque psoriasis
and its efficacy in the treatment of moderate-to-severe
scalp psoriasis, one of the most difficult to treat forms of
the disease.
Neuroscience
Another first-of-its-kind Phase III study, PARADIGMS,
showed Gilenya (fingolimod) significantly reduces relapses
in children and adolescents with multiple sclerosis (MS)
versus treatment with interferon beta-1a. There are no
specifically approved disease-modifying therapies for
pediatric MS. When the disease strikes before age 18,
patients often experience more frequent relapses than
adults and face disability that severely limits daily life.
In migraine prevention, both the EMA and FDA
accepted submissions for AMG 334 (erenumab), the first
and only fully human monoclonal antibody of its kind. It
is designed to block the calcitonin gene-related peptide
receptor, which plays a critical role in the activation of
migraine headaches. The filings include data from four
Phase II and Phase III clinical studies showing patients
who received AMG 334 experienced fewer monthly
migraine days than patients who received placebos. We
are developing AMG 334 with Amgen, and in 2017, we
also expanded our partnership to bring it to market.
Eye care
We announced that RTH258 (brolucizumab) met the
primary endpoint of non-inferiority in vision against
aflibercept in two pivotal Phase III trials studying neo-
vascular age-related macular degeneration (nAMD), with
a majority of patients dosed on a less frequent quar-
terly schedule. Additionally, significantly fewer patients
treated with RTH258 showed signs of disease activity
and had fluid accumulation in the eye. In nAMD, abnor-
mal blood vessels leak fluid into the eye, ultimately caus-
ing damage and blindness. Frequent injections into the
eye, a standard requirement for nAMD therapies, can be
a major inconvenience for patients and a burden on care-
givers. RTH258 could therefore address important needs
for patients with nAMD.
In our Alcon Division, we received EU approval for the
CyPass Micro-Stent, a surgical device for patients with
mild-to-moderate primary open-angle glaucoma in con-
junction with cataract surgery, or as a standalone procedure
in patients with primary open-angle glaucoma who have
failed previous medical treatments. The device was approved
by the FDA in 2016.
Alcon also received FDA approval for the AcrySof IQ
ReSTOR +2.5 D Multifocal Toric intraocular lens (IOL)
with ACTIVEFOCUS optical design for cataract surgery
patients who choose to address their astigmatism and
presbyopia at the same time.
Performance
Performance summary
Novartis Annual Report 2017 | 27
In addition, Alcon introduced its newly optimized
UltraSert delivery system pre-loaded with the AcrySof IQ
aspheric monofocal IOL for cataract surgery. The system
is designed to deliver a pristine, untouched IOL directly
into the eye of cataract surgery patients in less time.
In December, Novartis announced plans to create a
new institute dedicated to basic research and clinical
science for eye diseases in Basel, Switzerland. Novartis
joined with the University of Basel and the University
Hospital Basel to found the Institute of Molecular and
Clinical Ophthalmology Basel. The institute is expected
to start operations in 2018, with the goal to advance the
understanding of eye diseases and develop new thera-
pies for vision loss.
Liver disease
In 2017, we announced a clinical collaboration with
Allergan to explore a combination therapy for non-
alcoholic steatohepatitis (NASH), a major cause of liver
disease worldwide and the leading cause of liver
transplants for people under 50 in the US. The joint study
will evaluate a Novartis FXR agonist in combination with
Allergan’s cenicriviroc for treating NASH, which does not
have any approved treatments. In addition, we announced
an agreement with Conatus Pharmaceuticals Inc. for
potential future trials involving VAY785 (emricasan),
under study for the treatment of chronic liver diseases,
including NASH. For more on liver disease development
projects, see page 52.
Biosimilars
We received approvals and regulatory acceptances for
several important Sandoz biosimilars. The EMA approved
Rixathon, which was also accepted for review by the FDA.
The EU approval is for all indications of the reference
medicine MabThera®, used to treat blood cancers and
immunological diseases such as rheumatoid arthritis. We
also received EU approval for Erelzi to treat multiple
inflammatory diseases. Data confirms its equivalency to
the reference product Enbrel®.
The approval brings to five the number of Sandoz
biosimilars approved in the EU. The EMA accepted
regulatory submissions for two additional biosimilars,
adalimumab and infliximab, for use in all indications of their
respective reference medicines, Humira® and Remicade®,
both used to treat many immunological diseases such as
rheumatoid arthritis and inflammatory bowel disease.
Malaria
In partnership with Medicines for Malaria Venture (in
collaboration with the Bill & Melinda Gates Foundation),
we launched a patient trial for KAF156, one of our next-
generation antimalarial compounds with the potential to
treat drug-resistant strains of the malaria parasite. The
study, being done in nine countries in Africa and Asia, is
testing KAF156 in combination with a new, improved for-
mulation of the existing antimalarial lumefantrine. With
growing resistance to current treatments and nearly half
of the world’s population at risk from the disease, malaria
remains a major public health challenge. For more on
antimalarial development projects, see page 56.
Photo Dr. Martin Rausch
from Novartis in Basel,
Switzerland, uses the
Olympus 3-D microscope,
developed to investigate
complex cell physiology.
With him are oncology
scientist Rita Andraos-
Rey and Martin Stoeckli
from Olympus Schweiz.
28 | Novartis Annual Report 2017
Performance summary
(continued)
People
Scientific and technological advances are at the core of
our company, and the critical factor that determines our
ability to implement the Novartis strategy is the power of
our people to innovate. As Novartis adapts to reflect trends
in society and healthcare, our human resources strategy
has evolved to anticipate these changes. Our strategic pri-
orities in human resources include attracting, developing
and retaining people with strong, diverse skills; ensuring
our people are aligned with the evolving structure of the
organization; and shaping a culture based on our core
values that will enable the company to fulfill its purpose.
Talent: promoting excellence and diversity in
leadership
We continue to make progress in strengthening our lead-
ership pipeline. Our progress was highlighted by the
appointment of an internal candidate as our new CEO.
In September, Novartis announced the selection of
Vasant Narasimhan, who joined Novartis in 2005 and is
currently Global Head of Drug Development and Chief
Medical Officer. He becomes CEO on February 1, 2018.
We filled 67% of Novartis Top Leader (NTL) roles
internally in 2017, compared to 77% the year before. NTL
roles are the top 350 positions in the company. We also
made strategic external hires to build our pipeline of
senior leaders, facilitate longer job tenures, increase
diversity and build new capabilities in areas such as dig-
ital technologies. This approach helped us to rapidly
implement our new operating model in 2016, including
the formation of the GDD organization and NTO. The pri-
ority now is to sustain and build on the changes that we
have implemented.
We continue to make progress in
strengthening our leadership pipeline
The company’s succession strength declined slightly to
82% from 84% in 2016. This represents the percentage
of senior leadership roles for which at least one suitable
internal successor is ready to take over immediately if
required. We will continue to invest in our leadership pipe-
line through internal development and promotion as well
as external talent mapping and scouting.
We have also reduced voluntary turnover for all staff
from 7.4% to 7%, and for high performers from 5.8% to
5.2%. This has been achieved through a range of initia-
tives, one key example being the program of engage-
ment workshops at Alcon to connect employees with the
organization’s purpose, principles and history.
We continue to focus on learning and development
to build capabilities and energize employees throughout
the company. In 2017, we launched a fresh approach to
developing leaders that moves away from purely class-
room-based training toward immersive programs called
leadership journeys that last nine to 12 months. These
feature a combination of webinars, simulations, social
learning and personalized coaching support. The jour-
neys are geared toward specific groups with strategic
importance to the company, such as enterprise leaders,
female leaders, talent in emerging markets, and people
early in their careers who show potential for leadership
roles. During the first year, nearly 2 000 people partici-
pated in these programs.
In addition to these leadership journeys, the Novartis
Learning Council is providing a range of new training
opportunities across the organization. These include the
use of interactive simulations to help the sales force
expand its product knowledge, and the launch of a Global
Drug Development University in 2017 to meet the orga-
nization’s specific training requirements. The council’s
work was recognized when it was named Team of the
Year in the 2017 Learning Technologies Awards. Novartis
universities are also in place to address the learning
needs of regions and markets, including Africa, Asia,
Latin America and Russia.
In 2017, more than 46 000 employees accessed on line
training courses and supporting materials known as
Instant Learning Solutions to develop their knowledge
and skills in areas such as leadership and business. More
than 7 000 employees took part in Personal Effectiveness
Portfolio programs, which use a combination of self-
paced learning and classroom training to improve com-
munication, decision-making and other functional skills.
Performance
Performance summary
Novartis Annual Report 2017 | 29
Photo A game of backgammon at a café
on the Greek island of Ikaria, where social
interaction is one factor contributing to the
impressive longevity of its residents.
women now making up 35% of the global NTL succes-
sion pipeline. The number of African, Asian and Latin
American managers at NTL level also increased to 7%.
We believe this figure will improve, with 17% of candi-
dates in the global NTL succession pipeline now coming
from emerging markets. The Thomson Reuters global
Diversity and Inclusion Index recognized our efforts by
placing Novartis No. 6 out of all companies worldwide
based on an assessment of publicly available data.
In 2017, we focused on simplifying and modernizing
many of our people-related processes. For instance, in
terms of variable compensation, starting in 2018, awards
for all employees will be calculated based partly on the
performance of the entire enterprise to foster cross-
business collaboration and shared ownership of results.
Performance management has been streamlined to
ensure the focus is on high-quality discussion and more
continuous feedback. These conversations are now struc-
tured to build on employees’ strengths and to accelerate
their career development. In addition, beginning in 2018,
all managers will receive upward feedback from direct
reports to assist them in enhancing their own performance.
Organization: embedding the company’s new
operating model
The new integrated operating model announced in 2016
is now fully in place. The revised model and new ways of
working were embedded through a series of 235 lead-
ership forums involving 2 000 managers. These interac-
tive sessions were designed to inspire the teams, actively
engage them in the changes, and build capabilities to
ensure the future success of the new organizational
structure.
The Global Employee Survey in March 2017 showed
that 80% of respondents were aligned with the compa-
ny’s priorities and values, which is 5% higher than the
average for top-performing companies. This indicates
that staff understood how the new operating model will
enable Novartis to achieve its strategy and objectives.
Moving forward, we plan to focus on building digital
capabilities through the establishment of a new function
led by our first Chief Digital Officer Bertrand Bodson,
whose appointment was announced in August. In this
Overall, annual training hours per employee declined to
24.5 hours in 2017 from 26.9 hours in 2016, as a result
of simplified mandatory trainings using new technologies.
Our efforts to help our people learn and grow gained
recognition when our score related to human capital
development in the 2017 Dow Jones Sustainability Index
rose to 92 out of a possible 100, up from 76 the prior year.
In 2017, we continued to focus on diversity and inclu-
sion (D&I) in support of our approach to science-based
innovation. One of the major priorities of our D&I strategy
is to increase female representation in management, and
the number of female leaders at senior management
levels grew for the second year running – reaching 27%
at NTL level compared to 25% in 2016. Women now make
up 41% of Novartis management globally. Our talent pipe-
line maintained its focus on female candidates, with
People performance indicators
Full-time equivalent positions / headcount 1
Turnover: % voluntary / % overall
Voluntary turnover of high performers (%)
Internal hires / external hires (%)
2017
2016
121 597 / 126 457
118 393 / 122 985
7.0 / 11.3
5.2
55 / 45
7.4 / 12.2
5.8
47 / 53
Women in management: % of management2 / % of Novartis Top Leaders3 / % of Board of Directors
41 / 27 / 23
40 / 25 / 25
Associate nationalities / associate nationalities in management 2
Annual training hours per employee 4
145 / 112
142 / 109
24.5
26.9
1 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
2 Management defined by Global Job Level Architecture and Novartis Top Leaders
3 Novartis Top Leaders comprise the approximately 350 most senior managers at Novartis, including the Executive Committee of Novartis.
4 In 2017, we refined the training hours per employee methodology and invested in a new platform that consistently extract defined training hours per employee across the company.
30 | Novartis Annual Report 2017
Performance summary (continued)
newly created position reporting directly to the CEO, he
will be responsible for developing the company’s digital
innovation strategy, building relevant capabilities, and
establishing new ways of working across all areas of the
business.
Culture: connecting with our purpose and values
The Global Employee Survey showed that we continue
to make good progress in reinforcing our culture. A key
finding was that 83% of employees identified with the
company’s purpose, compared to an average of 72%
among top-performing organizations. Respondents felt
confident that products and services introduced by
Novartis help improve patients’ health, and most saw a
clear link between their work and the company’s goals
and objectives. Four out of five respondents felt they
played a part in programs and activities that help Novartis
be a responsible company.
The survey also showed that three-fourths of respon-
dents felt engaged and experienced a sense of pride and
energy in working for Novartis, which is slightly higher
than at other top-performing companies.
Another important finding was that employees identify
strongly with the foundations of our culture, as embodied
in the company’s Values and Behaviors. The results for
quality, integrity and courage were all higher compared to
other best-in-class companies.
However, the survey also highlighted that further
efforts are needed to simplify processes, speed up
decision- making, and anticipate and plan for future
changes. Respondents rated the organization’s ability to
sense and respond to change lower than the average for
other leading companies. Managers are using these
results to inform and shape ongoing business activities
and action plans. Initiatives include reducing the number
of approvals required and developing a new employee-
driven approach to change management that will be ini-
tiated in 2018.
Performance
Performance summary
Novartis Annual Report 2017 | 31
Social performance
Expanding access to healthcare
We have made progress in further expanding access to
our medicines, and we have taken steps to embed our
access efforts more deeply in our day-to-day business.
As of 2018, we plan to systematically integrate patient
access strategies into all our new medicine launches.
Novartis Access, our portfolio of medicines
to help fight chronic diseases, delivered
more than 685 000 treatments to patients
in lower-income countries in 2017
In 2017, we expanded our access-to-healthcare pro-
grams. Novartis Access, our portfolio of medicines to help
fight chronic diseases in lower-income countries, signed
agreements with three countries to launch the program,
bringing the total to six. Launched in 2015, the portfolio is
available to governments, nongovernmental organizations
and other public sector healthcare providers at a price of
USD 1 per treatment, per month. In 2017, we were able to
deliver more than 685 000 treatments – each providing
a one-month supply of medicine – to patients, reaching a
total of more than 800 000 treatments delivered since
launch. Starting in 2018, we will broaden the program into
the private sector in select countries.
The Novartis Malaria Initiative continued its long-
standing efforts to provide our high-quality antimalarial,
achieving yet another milestone with more than 850 mil-
lion treatments, including 350 million pediatric treatments,
delivered without profit to malaria-endemic countries
since 2001.
Our generics division, Sandoz, a global leader in bio-
similars, gained approval for two new biosimilar products
in the EU and launched them in several European markets.
The introduction of affordable, high-quality generics and
biosimilars improves access to medicines for patients
worldwide.
Even the most effective treatments have limited impact
without skilled healthcare personnel who can prevent,
diagnose and treat diseases. Healthcare systems also
need strong regulatory systems, which are vital to helping
lower-income countries improve healthcare capabilities
and patient outcomes.
Photo A patient receives a checkup at a health camp run
by Dr. Jitendra Singh in the northern Indian village of Triveni
Vihar. Free medical advice is given here under a Novartis
social business program called Arogya Parivar, or “healthy
family” in the Hindi language. The initiative is intended to
address the complex health challenges of India’s rural poor
by providing them with education and advice, supported by
access to doctors and a range of low-cost medicines.
We work on a variety of programs aimed at rein forcing
healthcare systems. The Novartis Foundation and part-
ners launched Better Hearts Better Cities, an initiative to
address the high rates of hypertension in low-income
urban communities. Better Hearts Better Cities brings
together multisector partners to co-design and implement
interventions beyond healthcare. The approach is being
tested in Mongolia, Senegal and Brazil.
Partnerships are key to expanding access. Novartis
joined 22 pharmaceutical companies to launch Access
Accelerated, a global initiative to advance access to treat-
ment and care for chronic diseases in lower-income
countries in collaboration with the World Bank Group and
the Union for International Cancer Control. Novartis is
also partnering with Last Mile Health to support the
launch of the Community Health Academy. Last Mile
Health partnered with the government of Liberia to
successfully establish its integrated community health
worker program in Liberia, and Novartis will provide a
USD 1 million donation, spread over three years, to help
scale up community health worker training programs in
sub-Saharan Africa through the academy.
The Novartis CEO is co-leading the Health Delivery
Systems initiative of the Bill & Melinda Gates Foundation
CEO Roundtable. This group aims to map company pro-
grams to build health capabilities, identify opportunities
for synergies and collaboration, and propose potential
joint initiatives that could amplify these individual efforts.
Novartis Access, in collaboration with Novartis On -
cology, launched a new partnership with the American
Society for Clinical Pathology and the American Cancer
Society to improve the management of cancer in sub-
Saharan Africa. And Sandoz expanded its partnership
with World Child Cancer to help children access treat-
ment in developing countries. The agreement now covers
three additional countries: Ghana, Mexico and Myanmar.
Patient health and safety
Working more closely with patients is an important part
of improving health outcomes. We reviewed and revised
our Commitment to Patients and Caregivers, to help
better explain what they can expect from Novartis. It will
be published in early 2018.
Counterfeit medicines pose a significant threat to
public health. To protect patients from fakes, we take a
diverse and multipronged approach. During 2017,
Novartis Global Security, with the support of local law
enforcement and health authorities, initiated seizures of
counterfeit and falsified products in more than 30 coun-
tries globally. As a result, nine illegal pharma ceutical
manufacturing facilities and assembly lines were dis-
mantled and more than 7 300 illegal online pharmacies
were shut down.
Patient education and awareness is an important step
in improving health and well-being, and in increasing dis-
ease prevention and health-seeking behavior. The
Novartis Foundation and the University of Basel, together
with other partners, launched Healthy Schools for
Healthy Communities, which aims to address poor health
in disadvantaged schools in South Africa.
Our Healthy Family programs, which are innovative
business models to reach more patients in rural areas in
32 | Novartis Annual Report 2017
Performance summary (continued)
We invested in the discovery of new antibiotics and
in the fight against antimicrobial resistance (AMR). In
2017, we reported progress in researching a novel
antibiotic candidate, LYS228, for multidrug- resistant
infections caused by the Enterobacteriaceae family of
Gram-negative pathogens. We also joined the AMR
Industry Alliance to ensure that we collectively deliver
on the specific commitments made in the Industry
Declaration on AMR and the subsequent AMR Roadmap.
Evaluating our financial, environmental and social
impact
We have developed, tested and applied a methodology
for valuing the financial, environmental and social impact
our business activities have on society. In 2016, this
methodology showed that our activities contributed
USD 65 billion to the global economy, as well as an
estimated 260 000 jobs beyond those held by our own
employees. In addition, our social impact – including
employee development and occupational safety – was
valued at USD 398 million. At the same time, we are
taking steps to minimize our negative environmental
impact, as measured by the carbon, water and waste
impacts of our own operations and supply chain, which
was valued at USD 1.2 billion for 2016.
Impact valuation is still evolving, with gaps in method-
ologies and data. For a full explanation of the evolving
methodology, see page 15 of the 2017 Novartis Corpo-
rate Responsibility Report.
Awards and recognition
In 2017, we were proud to be ranked No. 4 on Fortune
magazine’s “Change the World” list, which recognizes
companies that have a positive social impact through
activities that are part of their core business strategy.
We were also ranked fourth in the 2017 Dow Jones Sus-
tainability Index (DJSI) World, and we re-entered the
DJSI Europe Index for the first time in four years. We
were again recognized as one of the world’s most
sustainable companies by Corporate Knights, jumping
30 places to No. 68, and we were one of 73 companies
worldwide to make CDP’s Water A List in 2017. Novartis
was also ranked No. 2 on Fortune’s 2017 “World’s Most
Admired Companies” list for the pharmaceutical industry,
and we were included in the FTSE4Good Index for 2017.
the developing world, continued their expansion. In 2017,
they reached more than 7.7 million people through health
education sessions in India, Kenya and Vietnam. Nearly
580 000 people attended specific health camps. The
program in India celebrated its 10th anniversary; it covers
some 14 000 villages and small towns that are home to
more than 32 million people. The program in Kenya broke
even, joining India and Vietnam in this regard.
Ethical business practices
We took a series of steps in 2017 to further strengthen
integrity and compliance. The Novartis Executive Com-
mittee and Board of Directors approved a new harmo-
nized Professional Practices Policy. This single policy
will replace the three divisional policies that currently
govern how we interact with patients and healthcare pro-
fessionals, beginning on March 1, 2018 (except at Alcon,
where it will take effect at a later date).
We have also taken a series of steps to strengthen
our anti-bribery compliance program, including updating
our Anti-Bribery Third-Party Guideline and further
strengthening our anti-bribery due diligence process.
All Novartis Group company associates are required
to complete integrity and compliance training. In 2017,
almost 115 000 employees completed the Code of Con-
duct course. All allegations of any inappropriate behav-
ior are taken very seriously and are actively in vestigated,
and – where substantiated – appropriate disciplinary
action is taken. In 2017, the Business Practices Office
investigated 2 031 cases related to misconduct covering
2 574 allegations; 1 147 allegations were substantiated
and resulted in 521 dismissals or resignations.
We continued upgrading our compliance monitoring
efforts by conducting 230 country and monitoring visits
in 2017, an approximate increase of 40% from 2016.
Innovation
Innovation in its many forms supports our efforts to grow
in emerging markets and around the world, and can help
us respond to patients’ unmet medical needs in both the
developed and developing worlds. Infectious diseases
still take a large toll on lower-income countries. Novartis
and Medicines for Malaria Venture launched a patient
trial in Africa for KAF156, a novel compound against
multidrug-resistant malaria. KAF156 is the first com-
pound from the imidazolopiperazines, a novel class of
antimalarials, to enter Phase IIb combination studies.
Scientists from Novartis, the University of Georgia
and Washington State University in the US reported the
discovery and early validation of a drug candidate for
treating cryptosporidiosis, a diarrheal disease that is a
major cause of child mortality in lower-income countries.
Currently there are no vaccines or effective treatments.
The discovery and preclinical findings were published in
the journal Nature.
Photo The village chief of Bougoula surrounded by
his council in the West African country of Mali. Their
local clinic is taking part in a pioneering clinical study
to investigate a new antimalarial compound called
KAF156. There are hopes that the drug could prove
effective even against malaria parasites that
show resistance to available therapies.
Performance
Performance summary
Novartis Annual Report 2017 | 33
34 | Novartis Annual Report 2017
Innovative Medicines
In the Innovative medicines Division in 2017, our
growth drivers – such as Cosentyx, Entresto and other
recently launched products – more than offset the
effects of generic competition on products such as
Gleevec/Glivec that have lost patent protection. This
highlights the strength of our portfolio and our ability
to manage through patent expirations.
The Innovative Medicines Division includes the Novartis
Oncology and Novartis Pharmaceuticals business units.
Novartis Pharmaceuticals focuses on the franchises
of Ophthalmology, Immunology and Dermatology, Neu-
roscience, Respiratory, Cardio-Metabolic and Estab-
lished Medicines. Novartis Oncology’s broad portfolio of
products addresses primarily cancers of the blood,
breast, kidney, lung and skin.
Performance
Innovative Medicines Division sales were USD 33.0 bil lion,
up 1% in reported terms. In constant currencies (cc), sales
grew 2%. An 8% increase in volume more than offset the
impact of generic com petition (–5 percentage points)
and price declines (–1 percentage point). Products con-
tributing to sales growth included Cosentyx, Entresto,
Promacta/Revolade, Tafinlar + Mekinist, and Jakavi.
Regionally, sales performance was mixed. In the US,
sales rose 2% (cc) to USD 11.1 billion, overcoming the
impact of generic competition, mainly for Gleevec. Sales
in Europe were USD 11.3 billion, in line with the prior year
in constant currencies as our growth drivers offset the
impact of patent loss for Glivec. Sales rose 7% (cc) in
emerging growth markets to USD 8.4 billion. Sales in
Japan were USD 2.4 billion, in line with the prior year in
constant currencies.
Operating income was USD 7.8 billion (+5%, +7% cc),
mainly driven by higher sales, productivity improvements
and lower amortization, which offset the impact of
generic competition and investments in our growth driv-
ers.
Core operating income, which excludes certain
items,1 was USD 10.3 billion (0%, +2% cc). Core operating
income margin decreased 0.1 percentage points in con-
stant currencies, and fluctuations in exchange rates had
a further negative impact of 0.4 percentage points,
resulting in a net decrease of 0.5 percentage points to
31.3% of net sales.
Products contributing to sales growth
included Cosentyx, Entresto, Promacta/
Revolade, Tafinlar + Mekinist, and Jakavi
Photo After surviving breast cancer, Dana Donofree put her
fashion design skills to work on a range of lingerie for women
who have had breast surgery. Here she demonstrates her
products to fellow survivors.
Key figures
(in USD millions, unless indicated otherwise)
% Change
2017
2016
USD
cc 1
Net sales
Operating income
33 025
32 562
7 782
7 426
1
5
Return on net sales (%)
23.6
22.8
Core operating income 1
10 330
10 354
0
Core return on net sales (%)
31.3
Core Research & Development 1
7 049
As a % of net sales
21.3
31.8
7 112
21.8
1
Net operating assets
42 618
41 904
2
2
7
2
1
1 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 179.
Innovative medicines 2017 net sales
by business unit and franchise
(in USD millions and % growth in constant currencies)
noVarTIS oncoLoGY
BUSIneSS UnIT
37%
12 274 / – 3%
noVarTIS PHarmaceUTIcaLS
BUSIneSS UnIT
63%
20 751 / 6%
oPHTHaLmoLoGY
5 368 / – 1%
ImmUnoLoGY anD
DermaToLoGY
4 041 / 35%
neUroScIence
3 287 / 2%
reSPIraTorY
1 617 / 8%
carDIo-meTaBoLIc
524 / 182%
eSTaBLISHeD meDIcIneS
5 914 / – 5%
ToTaL
33 025 / 2%
Performance
Innovative medicines
Novartis Annual Report 2017 | 35
Novartis Oncology business unit
Oncology sales were USD 12.3 billion (–4%, –3% cc), as
strong performance of existing products and the launch
of new products, including Kisqali, Rydapt and Kymriah,
helped to partially offset the effects of generic competition
on Gleevec/Glivec (–42%, –41% cc). Significant gains on
key hematology products such as Tasigna (1.8 billion; +6%,
+9% cc), Promacta/Revolade (USD 867 million; +37%,
+37% cc) and Jakavi (USD 777 million; +34%, +32% cc) were
complemented by Tafinlar + Mekinist (USD 873 million;
+30%, +29% cc), which was approved for advanced non-small
cell lung cancer in addition to the existing use in melanoma.
Novartis Pharmaceuticals business unit
Ophthalmology
Sales in the Ophthalmology franchise were USD 5.4 bil-
lion (–2%, –1% cc), with increased sales of Lucentis (+3%,
+4% cc) and Systane helping to partially offset the impact
of generic competition.
Immunology and Dermatology
Sales in the Immunology and Dermatology franchise
reached USD 4.0 billion (+34%, +35% cc). Cosentyx saw
continued strong growth, particularly in the US and Europe,
reaching USD 2.1 billion (+84%, +82% cc). Ilaris also
con tinued strong gains (+42%, +42% cc), helping offset
declines in other products mainly due to generic com-
petition.
Neuroscience
Neuroscience franchise sales were USD 3.3 billion (+2%,
+2% cc), driven by increases for Gilenya (+2%, +2% cc).
Respiratory
Respiratory franchise sales were USD 1.6 billion (+6%,
+8% cc). Our chronic obstructive pulmonary disease
(COPD) portfolio – including Onbrez Breezhaler, Seebri
Breezhaler and Ultibro Breezhaler – achieved sales of
USD 674 million (+3%, +5% cc). Sales of Xolair, for mod-
erate-to-severe or severe persistent asthma, as well as for
chronic hives, reached USD 920 million (+10%, +11% cc).
Cardio-Metabolic
Sales for the franchise were USD 524 million (+185%,
+182% cc). Entresto, which has been launched in nearly
60 countries and used to treat more than 420 000 heart
failure patients worldwide, continued to grow and sales
reached USD 507 million (+198%, +195% cc).
Established Medicines
The Established Medicines franchise had sales of USD
5.9 billion (–7%, –5% cc). Increased sales of Galvus (USD
1.2 billion; +3%, +5% cc) and Exforge (USD 960 million;
+4%, +4% cc) were more than offset by declines for prod-
ucts such as Diovan (USD 957 million; –11%, –9% cc) and
Exelon/Exelon Patch (–14%, –14% cc) due to generic
competition.
For further detail, see
k Condensed Financial Report at
www.novartis.com/investors
2017 news highlights
In March, the FDA approved Kisqali
(ribociclib, formerly LEE011) in combination
with an aromatase inhibitor as initial
endocrine-based therapy for treatment of
postmenopausal women with hormone
receptor-positive (HR+)/human epidermal
growth factor receptor 2-negative (HER2-)
advanced or metastatic breast cancer.
In August, Novartis received FDA
approval for CAR-T therapy Kymriah
(tisagenlecleucel, formerly CTL019), to treat
patients up to 25 years of age with B-cell
precursor acute lymphoblastic leukemia
that is refractory or in second or later relapse.
In October, Novartis announced the
planned acquisition of Advanced
Accelerator Applications, a developer of
radiation therapies to diagnose and treat
certain types of cancer. The deal closed
in January 2018.
In November, Novartis announced
positive results from two Phase III studies
of RTH258 (brolucizumab) in neovascular
age-related macular degeneration (nAMD).
RTH258 met its primary endpoint of non-
inferiority versus aflibercept in mean change
in best-corrected visual acuity. Additionally,
RTH258 demonstrated superiority in three
secondary endpoints that are considered
key markers of nAMD, central subfield retinal
thickness, retinal fluid and disease activity.
Further, a majority of patients were main-
tained on a 12 week treatment schedule
immediately following the loading phase
(secondary endpoint).
36 | Novartis Annual Report 2017
Sandoz
Sandoz performance in 2017 was negatively impacted
by greater industry-wide price competition in US
generics, which was partially offset by continued growth
outside the US. Strong sales of biosimilars reinforced
global leadership in the field, with five biosimilars now
approved in europe and two in the US. overall, Sandoz
further progressed its long-term strategy, with increased
focus on key markets and future growth drivers, in-
cluding biosimilars, branded generics, value-added
medicines and over-the-counter products.
Sandoz offers approximately 1 000 high-quality, afford-
able medicines to patients and healthcare professionals
worldwide, helping support broad access to healthcare.
The division has three global businesses: Retail Generics,
Biopharmaceuticals and Anti-Infectives.
Performance
Sandoz net sales in 2017 were USD 10.1 billion, down 1%
in reported terms. In constant currencies, or cc, sales
declined 2%. A 6 percentage- point increase in volume
was more than offset by the negative 8 percentage-point
effect of price erosion. Sales rose 4% (cc) in Europe to
USD 4.6 billion. In the US, where we continue to see
customer consolidation and greater competition, sales
were USD 3.3 billion (–12% cc), mainly due to increased
industry-wide pressure on prices in generics. Sales in
Asia, Africa and Australasia were USD 1.4 billion, up 1%
in constant currencies.
Operating income was USD 1.4 billion (–5%, –7% cc),
down mainly due to pressure on prices in the US, invest-
ments in marketing and sales in key markets outside the
US, and higher manufacturing restructuring charges.
These negative impacts were partly offset by favorable
changes in product mix. Core operating income, which
excludes certain items,1 was USD 2.1 billion (0%, –1% cc).
Core operating income margin in constant currencies
increased 0.1 percentage points, and an additional 0.2
percentage-point increase from exchange rates yielded
a result of 20.7% of net sales.
Key figures
(in USD millions, unless indicated otherwise)
Net sales
Operating income
% Change
2017
2016
USD
cc 1
10 060
10 144
1 368
1 445
– 1
– 5
– 2
– 7
Return on net sales (%)
13.6
14.2
Core operating income 1
2 080
2 071
0
– 1
Core return on net sales (%)
Core Research & Development 1
As a % of net sales
20.7
774
7.7
20.4
804
7.9
4
5
Net operating assets
14 772
14 443
2
1 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 179.
Novartis Annual Report 2017 | 37
2017 news highlights
In May, the EMA accepted Sandoz
biosimilars filings for infliximab and
adalimumab, the first of four regulatory
filings accepted in 2017. The others were
rituximab by the FDA in September and
pegfilgrastim by the EMA in October.
In June, Sandoz biosimilars of rituximab
and etanercept were approved in the EU
and launched in several European markets.
In June, the US Supreme Court ruled
unanimously in favor of Sandoz in a
landmark case involving timing of the
Notice of Commercial Marketing for
biosimilars, enabling earlier patient access
to critical biosimilar medicines. The Court
also provided additional clarity on the
functioning of the process by which
biosimilar manufacturers may provide
confidential and proprietary information to
the manufacturer of the reference medicine
in the patent exchange process.
In June, the FDA accepted for
regulatory review a Sandoz application
for a substitutable generic version of key
respiratory therapy Advair Diskus®.
Performance
Sandoz
Photo Clinical investigator Dakota Hamadoun completes
paperwork at a health clinic in the Sikasso region of Mali, West
Africa. The clinic is one of 18 centers across nine countries that
are studying a potential new therapy for malaria.
1.1 bn (USD) Biopharmaceuticals
net sales, up 12% (cc)
Sandoz 2017 net sales by franchise
(in USD millions and % growth in constant currencies)
reTaIL GenerIcS
84%
BIoPHarmaceUTIcaLS
11%
anTI-InfecTIVeS
(partner label/API)
5%
8 409 / – 3%
1 135 / 12%
516 / – 2%
ToTaL
10 060 / – 2%
Retail Generics
Sandoz markets active ingredients, intermediates and
finished dosage forms of pharmaceuticals. The Retail
Generics franchise includes products in the therapeutic
areas of cardiovascular, central nervous system, derma-
tology, gastrointestinal and hormonal therapies, metab-
olism, oncology, ophthalmics, pain and respiratory, plus
finished dosage forms of anti-infectives sold under the
Sandoz name. Franchise sales in 2017 were USD 8.4 bil-
lion (–3% cc). Declines in the US (–14% cc) more than
offset increased sales in the rest of the world (+3% cc).
Biopharmaceuticals
The Biopharmaceuticals business comprises biosimilars;
contract biologics supplied to third parties; and a generic
version of Copaxone® 20 mg, Glatopa, which treats
relapsing forms of multiple sclerosis and is marketed in
the US. Global sales of Biopharmaceuticals grew 12%
(cc) to USD 1.1 billion, driven by Zarxio (filgrastim), Binocrit
(epoetin alfa), and the launch of Rixathon (rituximab) and
Erelzi (etanercept) in several European countries.
Anti-Infectives
Sandoz sells pharmaceutical ingredients and intermediates
(mainly antibiotics) to third-party customers, as well as fin-
ished dosage forms. Anti-infectives sold to third parties for
sale under their own name were USD 516 million, down 2%
(cc) due to the discontinuation of some low-margin prod-
ucts. Total Anti-Infectives sales were USD 1.4 billion, in line
with the prior year in constant currencies, and included
sales of finished dosage forms sold under the Sandoz name
of USD 880 million, up 2% (cc).
For further detail, see
k Condensed Financial Report at
www.novartis.com/investors
38 | Novartis Annual Report 2017
Alcon
alcon returned to growth in 2017, driven by operating
improvements, marketing investments and the launch
of new products. Both the Surgical and Vision care
businesses contributed to the division’s sales growth.
Photo Seventy-year-old Baozhen Mao has lived alone
in Shanghai, China, since her husband’s death last year.
She is typical of many elderly people in Chinese cities
who are becoming more self-reliant as their children
take advantage of greater social mobility to seek new
jobs and opportunities elsewhere in China or abroad.
Key figures
(in USD millions, unless indicated otherwise)
% Change
2017
2016
USD
cc 1
6 024
5 812
4
4
– 190
– 3.2
857
14.2
490
8.1
– 132
– 44 – 14
– 2.3
850
14.6
486
8.4
1
5
– 1
– 1
Alcon develops and markets innovative products to meet
the world’s growing needs for eye care and to improve
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 sophisticated equipment for precision eye surgery,
to a broad offering of advanced contact lenses and lens
care solutions.
Net sales
Operating loss
Return on net sales (%)
Core operating income 1
Core return on net sales (%)
Core Research & Development 1
As a % of net sales
Net operating assets
20 121
20 450
– 2
1 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 179.
alcon 2017 net sales by franchise
(in USD millions and % growth in constant currencies)
SUrGIcaL
61%
VISIon care
39%
3 660 / 5%
2 364 / 3%
ToTaL
6 024 / 4%
Performance
Alcon continued to implement its growth plan in 2017,
with a focus on strengthening customer relationships,
improving operations, and accelerating innovation and
sales. In the US, Alcon launched the AcrySof IQ ReSTOR
+2.5 D Multifocal Toric intraocular lens (IOL) with ACTIVE-
FOCUS optical design, which aims to improve distance
vision in cataract patients with astigmatism. Other prod-
uct launches in 2017 include the CyPass Micro-Stent in
the EU to treat glaucoma. Alcon also received European
approval for the Clareon IOL with AutonoMe pre-loaded
delivery system, the first and only automated, disposable
IOL delivery system for cataract surgery.
Alcon net sales in 2017 grew 4% to USD 6.0 billion.
In constant currencies (cc), net sales also grew 4%.
Operating loss was USD 190 million, compared to an
operating loss of USD 132 million the year before, as
higher sales were offset by continued investment in the
division’s growth plan and charges related to business
development activities.
Core operating income, which excludes certain
items,1 was USD 857 million (+1%, +5% cc). Core operating
income margin in constant currencies increased by 0.2
percentage points, offset by negative currency impact
of 0.6 percentage points, yielding a net decrease of
0.4 percentage points to 14.2% of net sales.
During 2017, we made significant progress on a
strategic review of Alcon to explore all options to maxi-
mize value for shareholders, ranging from retaining
the business to an initial public offering or a spinoff. A
final decision depends on continued sales growth and
margin improvement over multiple quarters, and any
potential action is not likely before the first half of 2019.
Also as part of the strategic review, we decided to
move over-the-counter and diagnostic ophthalmic
products from the Innovative Medicines Division to Alcon
effective January 1, 2018, where we believe they will
create the most value, given their strong synergies with
the Vision Care and Surgical businesses.
Performance
alcon
Novartis Annual Report 2017 | 39
6.0 bn (USD) Alcon net sales
Surgical
Surgical sales grew 5% (cc) to USD 3.7 billion, mainly due
to strong performance of products in the vitreoretinal
portfolio (+11% cc) and growth in cataract disposable
surgical supplies (+5% cc). Intraocular lenses for cataract
surgery grew 3% (cc), as strong performance of new
products – including the UltraSert pre-loaded IOL
delivery device, the PanOptix trifocal IOL, and AcrySof
ReSTOR Toric IOL with ACTIVEFOCUS optical design –
was partly offset by competitive pressures.
Vision Care
Vision Care sales grew 3% (cc) to USD 2.4 billion. Contact
lens sales grew 4% (cc) on the back of continued double-
digit growth of Dailies Total1, the world’s first and only
water-gradient lens. Sales of contact lens care products
were in line with the prior year in constant currencies.
For further detail, see
k Condensed Financial Report at
www.novartis.com/investors
2017 news highlights
In March, the FDA approved the
AcrySof IQ ReSTOR +2.5 D Multifocal
Toric IOL with ACTIVEFOCUS optical
design for uncom promised distance
vision and presbyopia correction in
patients with astigmatism.
In July, US reimbursement of the CyPass
Micro-Stent became effective for the
treatment of open-angle glaucoma at the
time of cataract surgery.
In October, Alcon received European
approval for the Clareon IOL with AutonoMe
pre-loaded delivery system, an automated,
disposable, pre-loaded IOL delivery system
for cataract surgery.
40 | Novartis Annual Report 2017
Photo Argentinian surgeon
Manuel Cobos and his team
board a plane to Buenos Aires
with a donor liver, which was
successfully transplanted into
a patient a few hours later. The
demand for such emergency
treatment is expected to
increase with the current
epidemic of nonalcoholic fatty
liver disease (NAFLD), a
condition linked to obesity
that can progress to more
severe diseases causing liver
failure. The global prevalence
of NAFLD is estimated at
24%, with the highest rates
reported in Latin America.
Novartis Annual Report 2017 | 41
42 | Novartis Annual Report 2017
Innovation
The Novartis Institutes for BioMedical Research works in concert with our
Global Drug Development group to bring innovative treatments to patients
around the world. In 2017, we advanced our drug discovery and development
efforts by encouraging greater collaboration and out-of-the-box thinking,
exploring new approaches that could improve how we work, and investing
in promising tools and technologies. We made progress in priority disease
areas with high unmet medical needs. We also marked several key milestones,
including US FDA approval – the first of its kind – for a type of personalized cell
therapy that could change the course of cancer care.
9.0 bn
Research and development
spending in 2017, amounting to
18.3% of net sales (USD)
23 000
Scientists, physicians and business
professionals working in research
and development worldwide
200 +
Projects in clinical development
Collaborative
science
Efficient, effective
drug development
Progress in important
disease areas
We are increasing collaboration
in research as we try to leverage
innovation from a variety of sources.
We are also exploring ways to
harness digital technology in drug
discovery, as well as new therapeutic
approaches such as cell therapies.
k page 43
We are using digital technology
and data analysis to make drug
development swifter and more
effective. And we are taking steps
to strengthen our pipeline.
k page 46
We highlight areas of our work where
we are driving significant innovation,
or where we can potentially have an
important impact on patients and
public health.
k Immuno-oncology page 48
k Multiple sclerosis page 50
k Liver disease page 52
k Ophthalmology page 53
k Asthma page 55
k Malaria page 56
InnovatIon
Discovery
Novartis Annual Report 2017 | 43
For new treatments, the journey from laboratory to patient
starts in the discovery phase where researchers try to
identify potentially groundbreaking therapies. When new
molecules show promise and have been qualified for test-
ing in humans, we organize small-scale proof- of-concept
studies to get an early read on a drug’s safety and effec-
tiveness. If those studies are successful, we decide
whether to move experimental therapies into clinical
development for testing in larger patient trials.
In this report, we describe our approach to discovery
and development, and then provide detail on our R&D
efforts in the areas of immuno-oncology, multiple sclerosis,
liver disease, ophthalmology, asthma and malaria. Our
pipeline table starting on page 58 gives a broad overview
of major development projects.
Promoting open innovation
Our efforts to increase the flow of ideas between
researchers gained momentum in 2017. We provided new
opportunities for our associates to pursue multidis-
ciplinary projects and collaborate with investigators
inside and outside the company, advancing drug dis-
covery research at Novartis while contributing tools and
knowledge to the broader scientific community.
We launched a new research concept called the
Genesis Labs, where employees together with external
collaborators can explore transformative ideas that fall
outside the scope of existing departments at NIBR. Multi-
disciplinary teams pitch ideas to a panel of scientists,
who decide which projects are most promising. In the first
year of the program, teams submitted 90 proposals, and
five projects ultimately received funding.
Discovery
The Novartis Institutes for BioMedical Research (NIBR)
is the innovation engine of Novartis. With a global team
of approximately 6 000 scientists, physicians and busi-
ness professionals, NIBR works to discover potential new
therapies that could improve health outcomes for patients.
Collaboration is critical to our success. The standard
tools of biology and chemistry leave many drug targets
– key proteins and nucleic acids known to play a role in
disease – out of reach. We are working to expand our
toolbox to hit these targets and discover treatments for
patients with limited options. This requires breaking
down barriers between disciplines and sometimes orga-
nizations.
Indeed, exciting new ideas and technologies emerge
from unexpected places, and our programs are designed
to foster connections with external innovators. NIBR is
a conduit for innovation wherever it arises, leveraging
discoveries from a variety of sources – internal and external.
We are even applying methods pioneered by the techno-
logy giants of Silicon Valley to accelerate drug discovery.
In 2017, NIBR established and expanded programs
to spark unconventional thinking by our associates as
well as collaboration across the organization and be -
yond. We encourage researchers to make connections
between different disciplines, build diverse professional
networks, and hunt for promising inventions outside the
company. Formal agreements and deals with external
investigators, academic institutions and companies
support these efforts.
Exciting new ideas and technologies
emerge from unexpected places, and
our programs are designed to foster
connections with external innovators
We launched a new research concept
called the Genesis Labs, where employees
together with external collaborators can
explore transformative ideas that fall outside
the scope of existing departments at NIBR
Members of the selected teams step away from their day
jobs to focus on their new project for six to 18 months.
They’re partnered with NIBR or academic mentors with
relevant experience. One of the winning projects, for
example, involves a device developed by an engineer
based at the Massachusetts Institute of Technology in
the US, who is a member of the team. NIBR scientists
will work with members of her lab to investigate ways to
use the device – which monitors breathing, heart rate,
gait and body elevation remotely – in clinical trials.
In 2017, we also announced a collaboration with the
University of California, Berkeley, to tackle difficult drug
targets. Research at the new Novartis-Berkeley Center
for Proteomics and Chemistry Technologies in the US
focuses on proteins that dodge conventional small mole-
cules, the standard ammunition of drug hunters. These
elusive proteins seem to be missing the indentations –
or pockets – that such small molecules need to bind to
proteins and interrupt their work. Researchers from the
two organizations use emerging technologies to identify
previously hidden binding pockets on proteins as well as
starting points for new therapeutics.
In addition to entering agreements with academic
institutions, NIBR encourages collaborations with indivi-
dual investigators and labs. In 2017, we streamlined the
process by which we provide chemical probes discovered
at Novartis to scientists around the world.
44 | Novartis Annual Report 2017
Innovation (continued)
We also expanded our Faculty of Scholars program,
inviting additional academic investigators to participate.
Each scholar is a prominent researcher with expertise
in a field that the company is interested in exploring, or
in a topic that’s relevant to an active drug discovery proj-
ect. A hematologist from Boston Children’s Hospital and
Harvard Medical School in the US, for example, recently
joined the program to advise NIBR teams working on
treatments for a blood disorder called sickle cell anemia.
Information flows freely between scholars and NIBR
researchers without the need for additional nondis clo-
sure agreements or contracts that have impeded dis-
cussions in the past, while still protecting Novartis intel-
lectual property. The academic researchers are exposed
to drug discovery research and platforms, while Novartis
scientists tap the scholars’ knowledge, learning directly
from thought leaders.
We seeded the biotechnology community with new
inventions by out-licensing drug candidates that, while
promising, fall outside our current research strategy. For
instance, we signed an agreement that gives PureTech/
resTORbio the right to develop two potential treatments
for diseases linked to age-related deterioration of the
immune system. And we penned a deal that gives
Magenta Therapeutics the right to develop a compound
that boosts the growth of blood stem cells for specific
applications.
The digital technology sector is
increasingly a source of innovation
for pharmaceutical research
The promise of digital drug discovery
The digital technology sector is increasingly a source of
innovation for pharmaceutical research. We are harness-
ing advances made by software and hardware engineers
to make drug discovery more efficient and effective as
well as to improve clinical research.
We are exploring, for example, how to use machine
learning – a field that has exploded in recent years – to
replace certain lab experiments with computer simula-
tions, with 20 projects underway. The goal is to reduce
the time and resources required to make a medicine
while improving drug design. Machine learning involves
feeding computers enormous amounts of data (what we
know) and asking them to predict what we don’t know.
One of our machine learning projects builds on the
types of algorithms that Facebook uses to recognize
individuals in photos and suggest who should be tagged.
The social media service trains its image analysis soft-
ware on millions of photos that have already been tagged.
The software is then able to recognize faces that it
has encountered before, even if the angle or lighting is
different in subsequent photos. It is much better than
humans at making these connections.
Similarly, we are asking computers to predict how
new compounds are working, based solely on images of
cells that have been treated with them. We train the soft-
ware on images of cells that have been treated with com-
pounds that we already understand. Our team recently
published a proof-of-concept study detailing its metho-
dology in the journal Bioinformatics. The approach has
the potential to cut the time required to determine the
properties and characteristics of new compounds.
Another machine learning project focuses on the
interaction between potential drugs and their protein
targets. We are training software to predict the degree
to which a compound at a particular concentration will
in teract with its target, reducing the need for lab exper-
iments.
We are also investigating how to use devices – includ-
ing wearable technologies – and apps to improve the
quality of the data that we are collecting in our clinical
trials and to shift data collection away from clinical trial
sites. NIBR researchers are conducting this work
in colla boration with colleagues in Global Drug Devel-
opment as well as external partners. For example, we
announced a partnership with Pear Therapeutics Inc. –
a digital medicine developer – to test several apps,
including one designed to monitor symptoms in patients
with multiple sclerosis.
Investing in new tools and technologies
Our investment in tools and technologies extends beyond
the digital realm. We are exploring a number of platforms
and approaches to augment our arsenal of agents with
disease-fighting potential.
For example, we have adopted a platform for gen-
erating DNA-encoded libraries to rapidly expand our
collection of small molecules that serves as a starting
point for potential new medicines. Our conventional com-
pound library contains approximately 1.5 million small
molecules. Using the new platform, we have already pro-
duced hundreds of millions of additional compounds,
which can be tested against evasive protein targets.
To build a DNA-encoded library, our researchers start
with a set of chemical building blocks, selected based
on computer simulations and desired chemical pro-
perties. They put the blocks through several rounds of
synthesis, iteratively building a collection of molecules.
Each building block includes a short DNA tag. Every
compound in the library thus carries a unique DNA
barcode recording its synthetic history: which blocks
were used to make it, and the order in which they were
added.
An entire DNA-encoded library can fit into a single
test tube, making it easy to run a simple experiment.
Researchers add a target protein to the test tube, fish
out compounds that bind to the protein, and then
sequence their DNA barcodes, identifying starting points
for drug discovery programs.
InnovatIon
Discovery
Novartis Annual Report 2017 | 45
Photo Senior investigator Paul Erbel uses three-dimensional
visuali zation at NIBR in Basel, Switzerland. This technique helps
researchers study the complex interactions between therapeutic
compounds and their molecular targets to improve drug design.
We are also rethinking the definition of a medicine.
Our work with small molecules and biological molecules
– therapeutic staples – continues, but we are also investi-
gating novel approaches to treating diseases. A new Cell
and Gene Therapy Initiative at NIBR illustrates the
breadth and depth of this effort.
The initiative brings together associates engaged in
a variety of projects that involve genetically reprogram-
ming cells. Researchers share tips and lessons learned
with their colleagues, driving the science forward. For
some projects, the strategy is to deliver genes to par ti-
cular cells where they reside in the body. For others, it’s
to remove cells from the body and alter them in the lab,
generating “living” drugs that can be given to patients.
Novartis recently received the first ever approval from
the US Food and Drug Administration (FDA) for such a
living drug: Kymriah (tisagenlecleucel). Kymriah is a
chimeric antigen receptor T-cell (CAR-T) therapy that
uses a patient’s own T-cells to fight cancer.
Our researchers and our collaborators in academic
medicine are building on this achievement, pursuing
additional applications of CAR-T technology, including
for a number of blood cancers and solid tumors.
We are also working on projects outside the oncology
field. For example, we are delivering a gene to particular
cells in the ear in an attempt to reverse hearing loss. An
early-phase clinical trial of this experimental treatment
is underway. Another project involves editing blood cells
outside the body in an effort to create a living drug for
sickle cell anemia.
This work illustrates our multifaceted approach to
drug discovery. We are mining the best ideas from a
variety of sources and translating exciting research into
potential therapies for patients.
46 | Novartis Annual Report 2017
Innovation (continued)
Development
Once we determine that a potential new treatment has
promise, we decide whether to begin larger clinical trials
to test effectiveness and safety in more patients. Since
its creation in 2016, the Global Drug Development (GDD)
group has begun moving us toward our goal of more
rapid, cost-effective and innovative drug development
powered by digital technology and data science. In 2017,
we advanced a strong portfolio that aims to address
many of the world’s significant unmet medical needs.
We doubled the number of drug candidates transitioned
from NIBR in the last year, bringing our total development
projects in clinical testing to more than 200, with 40
potential filings in the US and EU between 2017 and
2020.
Achievements last year included FDA approval for
our CAR-T therapy Kymriah, previously called CTL019, to
treat patients up to 25 years of age with B-cell precursor
acute lymphoblastic leukemia that is refractory or in sec-
ond or later relapse.
For full details on our innovation achievements in
2017, see pages 25-27 of the performance summary.
Our development strategy includes taking measures
to strengthen our pipeline, as well as adopting digital
technology to improve the efficiency and effectiveness
of clinical trials.
As part of our long-term development
strategy, we are working to anticipate
future health needs, particularly for aging
populations
Strengthening our pipeline
We are taking several steps to help ensure our potential
new treatments can deliver significant health improve-
ments for patients. We assess all of our projects on mul-
tiple criteria, such as feasibility, the potential to change
medical practice, and alignment with current capabilities.
Our late-stage pipeline covers a broad range of disease
areas, including cardio-metabolic, oncology, ophthal-
mology, respiratory, neuroscience, and immunology and
dermatology.
As part of our long-term development strategy, we
are working to anticipate future health needs, particu-
larly for aging populations. This means focusing on treat-
ments that could potentially improve quality of life and
stop or slow the progression of diseases. Examples
include treatments to fight hearing and vision impairment,
and to counter deteriorating mobility. At the same time,
we are increasingly focusing on disease areas with high
unmet medical needs, such as liver and kidney diseases.
We supplement potential new treatments coming
from our own researchers with promising innovation from
outside our organization. For instance, in 2017 we exer-
cised an option with biotechnology company Conatus
Pharmaceuticals Inc. to develop and commercialize an
experimental drug called VAY785 (emricasan) to treat
patients with fatty liver disease – an area where we are
building our pipeline.
Adopting digital technology
To strengthen our innovation capabilities and prepare us
for the future, we are investing in a variety of emerging
technologies that could help make the drug development
process smarter, faster and cheaper. These include
advanced analytical tools aimed at improving the
efficiency and effectiveness of our trials. In collaboration
with QuantumBlack, for example, we created a program
Photo Scientist Gabi Schutzius works in a
laboratory at NIBR devoted to regenerative
medicine, or the use of stem cells to replace or
repair damaged human cells, tissues or organs.
InnovatIon
Major clinical trial results in 2017
Novartis Annual Report 2017 | 47
Major clinical trial results in 2017
This table summarizes the results of major clinical trials conducted during the year and includes successful and unsuccessful outcomes.
Project/product
Indication
Trial (phase)
Outcome
Oncology
CTL019
(tisagenlecleucel,
approved in the US
as Kymriah)
Pediatric relapsed/
refractory acute
lymphoblastic leukemia
ELIANA
(Phase II)
CTL019
(tisagenlecleucel)
Diffuse large B-cell
lymphoma
JULIET
(Phase II)
In this trial, 83% of patients achieved complete remission or complete remission with incomplete blood
count recovery within three months of infusion. No minimal residual disease – a blood marker that
indicates potential relapse – was detected among responding patients. At six months, 75% of patients
remained relapse-free, and overall survival was 89%. The median duration of remission was not reached.
No new safety findings were identified.
The study showed an overall response rate of 53.1%, with 39.5% achieving a complete response, and
13.6% achieving a partial response among 81 infused patients with three or more months of follow-up,
or earlier discontinuation. At six months from infusion, the overall response rate was 37%, with a complete
response rate of 30%. The median duration of response was not reached.
Chronic lymphocytic
leukemia (CLL)
NCT02640209
(pilot study)
In the pilot trial, eight of nine evaluable patients with relapsed/refractory CLL had no signs of CLL in their
bone marrow at three months after treatment with CTL119 in combination with ibrutinib. The patients
had been taking ibrutinib for at least six months, had not been in complete remission, and had failed at
least one prior regimen before ibrutinib or carried high-risk cytogenetics or mutations.
CTL119
(CAR-T
cell therapy)
Promacta/
Revolade
(eltrombopag)
Severe aplastic
anemia (SAA)
NHLBI:
12-H-0150
(Phase I-II)
COMBI-AD
(Phase III)
Tafinlar + Mekinist Melanoma
(dabrafenib +
trametinib)
Votrient
(pazopanib)
Adjuvant renal cell
carcinoma (RCC)
PROTECT
(Phase III)
Cardiovascular and metabolism
ACZ885
(canakinumab)
Cardiovascular
risk reduction
CANTOS
(Phase III)
The study found 52% of patients with treatment-naïve SAA achieved a complete response at six months
when Promacta/Revolade was given at the initiation of and concurrently with standard immunosuppres-
sive therapy. No new safety findings were identified.
The combination BRAF- and MEK-inhibition adjuvant therapy reduced the risk of death or recurrence
by 53% vs. placebo in patients with high-risk, resected BRAF V600 mutation-positive melanoma. The
three-year relapse-free survival rate for patients treated with the combination was 58%, compared to
39% with placebo. No new safety signals were reported.
The study did not meet its primary endpoint in showing a significant improvement in disease-free survival
between Votrient (600 mg daily) vs. placebo for the adjuvant treatment of patients with locally advanced
RCC at high risk for relapse following nephrectomy. The drug did demonstrate significant benefit at a
higher daily dose (800 mg daily), but that dose had to be lowered due to adverse events.
The 10 065-patient study showed that anti-inflammatory interleukin-1 beta blockade reduced cardio-
vascular risk (MACE) by a statistically significant 15% in patients with a prior heart attack and
inflammatory atherosclerosis who received quarterly injections of ACZ885 (150 mg). Additional analysis
revealed a 77% reduction in lung cancer mortality and a 67% reduction in lung cancer cases in patients
dosed with 300 mg. The canakinumab safety profile was consistent with the known canakinumab safety
profile in approved indications. Canakinumab safety was acceptable in this high-risk population, with no
new safety concerns.
RLX030
(serelaxin)
Acute heart failure
RELAX-AHF-2
(Phase III)
The trial did not confirm a benefit in adding RLX030 to standard therapy for the treatment of patients
with acute heart failure. The study did not meet either of its two primary endpoints: reduction in cardio-
vascular death or reduction in worsening heart failure.
Immunology and dermatology
Erelzi
(biosimilar
etanercept)
Rheumatoid arthritis
(RA)
EQUIRA:
GP15-301
(Phase III)
The primary endpoint was met, demonstrating equivalent efficacy and safety of Erelzi and EU-authorized
Enbrel® in patients with moderate-to-severe active RA who had inadequate response to disease-modifying
antirheumatic drugs, including methotrexate.
Neuroscience
AMG 334
(erenumab)
Chronic migraine
STRIVE
(Phase lll)
STRIVE evaluated AMG 334, 70 mg and 140 mg, compared with placebo as a migraine prophylactic
agent in 955 patients. The primary endpoint of reduction in monthly migraine days was met, with reduc-
tions of 3.2 (70 mg) and 3.7 (140 mg) from baseline compared with 1.8 from placebo. All secondary
endpoints were met. Among these, it was shown that AMG 334 reduced migraine days by at least 50%
in 50% of the patients. The safety and tolerability profile was comparable to placebo.
BAF312
(siponimod)
Secondary progressive EXPAND
multiple sclerosis
(SPMS)
(Phase III)
The study met its primary endpoint, demonstrating that BAF312 significantly reduced the risk of three-
month confirmed disability progression vs. placebo in patients with SPMS, as measured by the Expanded
Disability Status Scale. The safety profile of BAF312 is comparable to other drugs of the same class of
S1P receptor modulators.
Gilenya
(fingolimod)
Multiple sclerosis (MS) PARADIGMS
in pediatric population
(Phase III)
PARADIGMS is the first randomized controlled trial in pediatric MS patients (aged 10 to <18 years).
Patients were treated for up to 24 months with either Gilenya or interferon beta-1a. The trial met its
primary endpoint and decreased annualized relapse rates relative to the active comparator by 82%. The
overall safety profile of patients treated with Gilenya in this pediatric population is consistent with the
safety profile observed in the adult studies.
Ophthalmology
Fovista®
(pegpleranib)
Neovascular age-related OPH1002 and
macular degeneration OPH1003
(Phase III)
(nAMD)
The two studies did not show additional improvement in best-corrected visual acuity in patients with
nAMD treated with a combination of Fovista® and Lucentis (ranibizumab) vs. standard-of-care Lucentis
monotherapy.
RTH258
(brolucizumab)
nAMD
HAWK and
HARRIER
(Phase III)
RTH258 (3 mg and 6 mg) met the primary efficacy endpoint of non-inferiority to aflibercept in mean
change in best-corrected visual acuity from baseline to week 48 in two Phase III trials (HAWK and
HARRIER) for both doses in patients with nAMD. Significantly fewer RTH258 patients showed signs of
disease activity (at week 16) as well as retinal fluid (IRF and/or SRF), and RTH258-treated patients
demonstrated superior reductions in retinal thickness (CST) – key markers used by physicians to deter-
mine injection frequency, and each a secondary endpoint. Furthermore, these results were achieved
while a majority of patients on RTH258 6 mg – 57% in HAWK and 52% in HARRIER – were maintained
on a q12w dosing interval immediately following the loading phase through week 48 (a secondary
endpoint). RTH258 safety was comparable to aflibercept, with the overall incidence of adverse events
balanced across all treatment groups in both studies.
48 | Novartis Annual Report 2017
Innovation (continued)
called Nerve Live that has collected data from 350
clinical trials over the last five years. Predictive analytics
can help us use that data to make key decisions, such
as choosing the best trial sites for a specific develop-
ment program.
We are also using app-based technologies to assist
in research. In a trial of our heart failure medicine Entresto,
for instance, we used a smart watch to track patients’
physical activity, symptoms and sleep, among other
measures. The precision of the results from this
approach allowed us to enroll slightly more than 100
patients for the trial, rather than the thousands who are
typically needed for a traditional trial where data is
recorded manually.
Although in its early stages, data-centered innovation
has great promise for helping us produce better treat-
ments more efficiently. Biomedical sensors used by
patients and physicians can provide valuable insights
into treatment effectiveness and disease progression.
Natural language processing – or computer understand-
ing of human language – could help automate the man-
agement of millions of regulatory and safety documents
each year. We believe advancements in artificial intelli-
gence will steer us toward more optimal, personalized
treatments for cancers, neurological and immunological
disorders, and other challenging diseases.
Development projects
The pipeline chart on pages 58-63 gives an overview of
projects in advanced stages of development. In addition,
several areas of our work warrant more detailed discussion
because they are areas of significant innovation, or areas of
potentially important impact on patients and public health.
Immuno-oncology
Despite recent therapeutic advances, cancer is the
second most common cause of death in the world.
Moreover, the number of new cancer cases is expected
to rise by about 70% in the next 20 years, according to
the World Health Organization. This is due in part to the
aging global population as well as environmental and
life style risk factors.
While Novartis is a leader in targeted cancer thera-
pies, we are equally focused on immunotherapy, which
harnesses the body’s immune system to help fight cancer.
Our immuno-oncology portfolio explores a range of strat-
egies to boost patients’ immune responses, and includes
our personalized CAR-T therapies.
CAR-T therapies
Called “a new frontier in medical innovation” by the FDA,
CAR-T therapies represent one of the most ambitious
treatment strategies in immuno-oncology and could even
help usher in a new era of personalized medicine. They
involve taking a patient’s T-cells (white blood cells that
help fight infections) and genetically reprogramming
them to track down and fight cells – including cancer
cells – that express a particular protein. These modified
T-cells are then reinfused into the patient.
In August, our most advanced CAR-T therapy,
Kymriah (tisagenlecleucel), received FDA approval to
treat patients up to 25 years of age with B-cell precur-
sor acute lymphoblastic leukemia (ALL) that is refractory
or in second or later relapse. Formerly known as CTL019,
Kymriah is the first CAR-T therapy approved by the FDA.
This one-time treatment – developed in collaboration
with the University of Pennsylvania (Penn) in the US –
addresses an urgent need for pediatric and young adult
patients with relapsed/refractory ALL, who have limited
treatment options. FDA approval followed a promising
study, sponsored by Novartis and led by researchers
from Children’s Hospital of Philadelphia and Penn, in
which 83% of patients who received Kymriah achieved
either complete remission or complete remission with
incomplete blood count recovery within three months. The
latter is when there is no evidence of persistent disease
but blood counts have not completely recovered.
A dedicated US production site in Morris Plains, New
Jersey, processes patients’ cells, and hundreds of CAR-T
therapies have already been manufactured for patients,
including participants in global clinical trials. A process
called leukapheresis has been combined with cryopres-
ervation to enable physicians to collect, freeze and ship
cells from patients around the world.
In April, the FDA granted breakthrough therapy des-
ignation to Kymriah for a potential second indication: the
treatment of adults with relapsed/refractory diffuse large
B-cell lymphoma (DLBCL) who have failed two or more
prior therapies. DLBCL is the most common form of
lymphoma, and 10–15% of patients do not respond to
initial therapy or relapse within three months of treat-
ment. In December, the primary analysis from the Phase
II JULIET study sponsored by Novartis and led by Penn
researchers showed an overall response rate of 53.1%
among patients who failed to respond to prior therapy,
or relapsed.
Work on future CAR-T therapies is well underway.
Using gene editing technologies from an ongoing colla-
boration with Intellia Therapeutics Inc., Novartis is re-
searching how to make CAR-T therapies even more
effective, durable and safe. One of the latest to reach the
clinic in trials at Penn’s Abramson Cancer Center is CTL119,
which has been tested in relapsed/refractory chronic
lymphocytic leukemia (CLL). CLL – the most common type
of adult leukemia – evolves slowly over many years, and
for the majority of patients, there is no curative therapy.
In May, Novartis and Penn researchers announced
the results of a small pilot study of CTL119 in combina-
tion with ibrutinib, a targeted therapy for B-cell cancers.
In CLL patients who had previously shown incomplete
responses to ibrutinib alone, eight of the nine partici-
pants had no signs of cancer in their bone marrow three
months after treatment.
We currently have a total of six CAR-T therapies that
are in clinical trials. They are part of an alliance with Penn
to further research and develop these types of therapies.
InnovatIon
Immuno-oncology
Novartis Annual Report 2017 | 49
Chimeric antigen receptor
T-cell (CAR-T) therapy
Individualized CaR-t therapy uses a patient’s own immune system
to fight certain types of cancers. a patient’s t-cells are extracted
and reprogrammed outside of the body to recognize and fight
cancer cells and other cells expressing a particular antigen.
1. LEUKaPHERESIS
A patient’s white blood cells, including T-cells,
are extracted through a specialized blood
filtration process (leukapheresis). The T-cells
are then cryopreserved and sent to our
manufacturing facility for reprogramming.
2. REPRoGRaMMED CELLS
Using an inactive virus (viral
vector), T-cells are genetically
encoded to recognize cancer
cells and other cells expressing
a specific antigen.
In PatIEnt
CELL PRoCESSInG
viral vector
CAR-T cell
6. CELL DEatH
Within the patient’s body, the CAR-T
cells have the potential to recognize
the patient’s cancer cells and other
cells expressing a specific antigen,
and attach to them, which may
initiate direct cell death.
5. CELL InFUSIon
Reprogrammed CAR-T
cells are delivered into the
patient’s blood.
CAR-T cell
cancer cell
3. EXPanSIon
Newly created CAR-T
cells undergo
expansion.
4. LYMPHoDEPLEtInG CHEMotHERaPY
Lymphodepleting chemotherapy is given
to the patient to reduce the level of white
blood cells and help the body accept the
reprogrammed CAR-T cells.
50 | Novartis Annual Report 2017
Innovation (continued)
Next-generation immunotherapies
Through acquisitions, licensing deals and academic
partnerships, we have built a robust immuno-oncology
portfolio to tackle the multiple ways that tumors defend
themselves. In recent years, checkpoint inhibitors – drugs
that stop cancer cells from “turning off” T-cells – have
shown remarkable clinical benefits. However, these
treatments do not work for all patients.
To better predict which treatments or treatment
combinations will be most effective in the right patient
populations, we are focused on developing a comprehen-
sive understanding of the interactions between cancer
and the body’s immune response. Our programs target
the three stages of the immune response that are often
suppressed by cancer: recognizing cancer cells as a
threat, overcoming the tumor’s defenses, and boosting
the anti-tumor T-cell response.
We have 18 immuno-oncology assets in the clinic.
The most advanced is PDR001 (spartalizumab), an anti-
body that helps the immune system recognize and attack
tumors. It is in 25 clinical trials, as a single agent or in
combinations.
Our trials include a Phase III study in advanced mela-
noma patients with a BRAF V600 mutation, which pro-
motes tumor growth. It aims to evaluate the safety and
efficacy of PDR001 in combination with dabrafenib and
trametinib, two commonly prescribed targeted therapies
for melanoma. PDR001 is also in 11 dose-finding/Phase
II trials for the treatment of varied cancers, such as
neuroendocrine tumors, non-small cell lung cancer and
advanced solid tumors. The first results of these 11 trials
are expected to be announced in 2018.
PDR001 binds to a checkpoint protein on T-cells
called PD-1. We are concurrently developing second-
generation checkpoint inhibitors targeting other proteins
called lymphocyte activation gene-3 (LAG-3) and T-cell
immunoglobulin and mucin domain-3 (TIM-3), as well as
the adenosine G-protein-coupled receptor A2AR. T-cells
frequently display LAG-3 or TIM-3 in addition to PD-1,
and targeting these proteins may provide strategies for
reducing the avenues available for cancers to develop
resistance to PD-1 therapies.
In collaboration with Aduro Biotech Inc., we are
exploring the potential to prompt immune responses in
tumors or indications that lack a pre-existing robust
immune response. To this end, we are co-investigating
a molecule that activates a pathway called the stimula-
tor of interferon genes (STING), which can trigger anti-
tumor immune responses.
Through these programs, our objective is to even tually
develop multifaceted – and more effective – combination
cancer therapies.
Multiple sclerosis
Multiple sclerosis (MS) is a complex disease, affecting
2.5 million people worldwide, in which the body’s own
immune system mistakenly attacks the myelin sheath
that protects nerves in the brain and spinal cord. In 2017,
we advanced our experimental compound portfolio to
treat different forms of the disease, confirmed the real-
world effectiveness of our flagship therapy Gilenya
(fingolimod), and furthered an innovative tool that may
one day predict how the disease will progress in indi-
viduals with MS.
We plan to start the submission of a therapy called
BAF312 (siponimod) for FDA review in the first quarter
of 2018. BAF312 is our second-generation sphingosine-
1- phosphate (S1P) receptor modulator, which is more
specific to receptors called types 1 and 5. Targeting the
type 1 receptor is important in preventing the release of
immune cells into blood (which causes damage), while
the type 5 receptor is located on cells in the central
nervous system and may play a beneficial role in repair
mechanisms.
In the past year, we presented findings from our
Phase III EXPAND study, which demonstrated that
BAF312 reduces the risk of disability progression in
patients with a form of the disease known as secondary
progressive multiple sclerosis.
InnovatIon
Multiple sclerosis
Novartis Annual Report 2017 | 51
Photo Women in the US city of Philadelphia take part in a
yoga event run by Living Beyond Breast Cancer, a group
that provides information and support for patients and
their families.
re lapsing MS based on four key measures: relapses,
MRI lesions, disability progression and brain shrinkage.
The study demonstrated the value of measuring lesion
changes and brain volume when assessing patients,
and showed that these can be reliably monitored using
routine imaging methods in daily clinical practice.
Additionally, we completed a novel analysis involving
the MS biomarker known as the neurofilament light chain
(NfL) protein, which is elevated in the blood and cere-
brospinal fluid of MS patients. The study compared treat-
ment with fingolimod to interferon beta-1a or placebo.
Fingolimod therapy led to early and sustained significant
reduction in NfL, further supporting the role of NfL as a
sensitive and reliable indicator of neurological damage
and treatment response in patients with relapsing-
remitting multiple sclerosis, the most common form of
the disease.
Unpredictability remains a daunting challenge in MS.
Some people experience mild sensory symptoms, while
others have marked changes in mobility and cognitive
skills. We are harnessing the power of information tech-
nology to address this uncertainty. In the US, we are
colla borating with the University of California, San
Francisco, on the development of the MS BioScreen, an
innovative system that enables users to track a wealth
of medical data (clinical, imaging and biomarker) using a
simple app. Comparison of long-term data may provide
insights into disease changes and help physicians make
more informed treatment decisions.
We will start the submission of a therapy
called BAF312 (siponimod) for FDA review
in the first quarter of 2018
Aided by the widespread use of smartphones, we are
also running two large initiatives in the US to capture and
analyze real-life data from connected patients. Called
elevateMS and Evidation, these initiatives are designed
to improve understanding of MS, predict clinical relapses,
and identify novel endpoints for use in future clinical
studies.
At the same time, we are developing a pioneering tool
with the goal of predicting disease progression and
influencing treatment early on. Through global collabora-
tions, we are accessing data from hundreds of thousands
of patients with MS, and using machine learning to build
a predictive algorithm. We will test this formula against
real-world clinical decisions. Ultimately, it’s our hope that
an effective algorithm, available through an app or web-
site, will enable physicians to prescribe the right treat-
ment for the right patient at the right time.
Our next-generation B-cell therapy OMB157 (ofatu-
mumab) aims to assist MS patients across the disease
spectrum. OMB157 is a fully human monoclonal antibody
targeting CD20-positive B-cells that play a central role in
the inflammatory cascade leading to the demyelination of
neurons (when the myelin sheath of neurons is damaged).
This causes relapses and increases disability in MS patients.
Unlike other B-cell therapies, ofatumumab can be admin-
istered by subcutaneous injections at home. Recruitment
for our Phase III ASCLEPIOS studies is on track.
When MS strikes people before age 18, they can
experience relapses at double or triple the rate of adult-
onset patients and face disability that severely limits their
daily living. In September, we announced results from our
Phase III PARADIGMS study investigating Gilenya in
pediatric MS. Data showed that oral Gilenya resulted in
a significant reduction in relapses versus interferon
beta-1a intramuscular injections. This marked the first
ever randomized, controlled Phase III study of a disease-
modifying therapy in pediatric MS.
Last year a Phase IV study of Gilenya also provided
important insights into MS and its treatment. This first-
of-its-kind trial analyzed data from both patient charts
and regular MRI scans. The results, announced in April,
confirmed Gilenya as a highly efficacious, long-term
treatment option for controlling disease activity in
of the anti-inflammatory drug VAY785 (emricasan).
Phase II trials have demonstrated that VAY785 rapidly
and durably reduces liver inflammation and cell death.
Three Phase IIb trials are currently underway to
study VAY785 in patients with NASH fibrosis. One
includes patients with compensated (asymptomatic) liver
cirrhosis, and another includes those with decompen-
sated (sympto matic) liver cirrhosis – the most advanced
stage of NASH.
We are also exploring potential combination ther apies.
In April, we announced an agreement with Allergan to
initiate a Phase II clinical trial evaluating the combi nation
of a Novartis FXR agonist and Allergan’s ceni criviroc to
treat NASH. Cenicriviroc is an oral molecule currently in
52 | Novartis Annual Report 2017
Innovation (continued)
Liver disease
In the wake of the worldwide obesity and type 2 dia betes
epidemics, fatty liver disease has become a growing
health concern. Global shifts in diet and lifestyle are
increasing the prevalence of this condition – which
occurs when fat builds up in the liver – and an estimated
1.8 billion people around the world already have a cer-
tain type called nonalcoholic fatty liver disease (NAFLD).
Our liver portfolio is anchored on developing treat-
ments for the more severe form of NAFLD, nonalcoholic
steatohepatitis (NASH), which affects up to 6.5% of the
global population and often goes undetected until
its later stages when it can be fatal. In patients with
NASH, excess fat in the liver is associated with inflamma-
tion. Both drive liver damage, and the resulting scarring
(or fibrosis) can progress to late-stage scarring (cirrhosis)
as well as liver failure. NASH is a leading cause of liver
transplants and often contributes to cardiovascular
disease, but there are currently no approved treatments
for it.
In the wake of the worldwide obesity
and type 2 diabetes epidemics, fatty
liver disease has become a growing
health concern
Our strategy is to create therapies that reduce the three
underlying traits of NASH: fat accumulation, liver inflam-
mation and liver scarring. In particular, we have been
developing a class of molecules that boost the liver’s
natural ability to process and remove excess fat through
a protein called the farnesoid X receptor (FXR), which
regulates metabolism in the primary liver cells. This effort
began as an internal exploratory proposal nearly a
decade ago and turned into a quest to find small mole-
cules to enhance the fat-reducing activity of FXR. These
FXR agonists have also been shown to reduce liver
inflammation and fibrosis.
Novartis now has two FXR agonists in Phase II clinical
trials, known as LJN452 (tropifexor) and LMB763. Both
have received FDA fast track designation, a process
intended to get important new drugs to patients earlier.
We are investigating other promising treatments to
suppress liver inflammation and fibrosis, and to improve
liver function even in patients with late-stage cirrhosis.
In May, Novartis announced it had exercised the option
to an exclusive license with Conatus Pharmaceuticals
Inc. for the global development and commercialization
Photo George Kochilas in his café, a social hub for the
elderly residents of Agios Dimitrios in Ikaria, Greece. People
on this island have one of the longest life expectancies in
the world, thanks to a diet and lifestyle that appear to
promote health, well-being and contentment.
InnovatIon
ophthalmology
Novartis Annual Report 2017 | 53
Ophthalmology
Phase III studies that reduces inflammation and fibrosis
by blocking two protein receptors involved in the immune
response. In a previous Phase IIb study, cenicriviroc
showed a significant antifibrotic benefit after one year
and was well tolerated.
In addition to developing treatments, we are working
on better, non-invasive tools to diagnose NASH. A defin-
itive NASH diagnosis is currently only possible through
a liver biopsy, an invasive procedure that can be painful.
Novartis is a key participant in LITMUS, a part of the EU
Innovative Medicines Initiative and one of the largest
international collaborations between academia and
industry to find non-invasive markers of NASH and
hepatic fibrosis.
We continue to develop innovative ophthalmic pharma-
ceuticals designed to treat the underlying causes and
effects of various eye diseases. Among our efforts, we
are working to advance investigational therapies that
could offer longer-term improvements for people with
conditions such as dry eye disease, presbyopia and
neovascular age-related macular degeneration (nAMD).
Dry eye disease impacts more than 340 million
patients worldwide and can result from a range of genetic
diseases and inflammatory disorders. Patients may
experience painful, burning, stinging or itching eyes
leading to impaired vision, and palliative treatments such
as artificial tears provide only temporary relief.
54 | Novartis Annual Report 2017
InnovatIon
asthma
Novartis Annual Report 2017 | 55
Innovation (continued)
In April, we announced we had exercised an option
to in-license a dry eye treatment called ECF843 for
ophthalmic indications outside Europe. Developed by
Lubris LLC as a new therapeutic approach, ECF843 is
a recombinant version of the lubricin protein – a naturally
occurring lubricant that dry eye patients are often
missing. Lubricin is produced by the body wherever there
is friction, particularly in locations such as the eyes and
joints. In a small Phase II clinical study, ECF843 showed
the potential to rapidly improve dry eye symptoms. A
larger Phase II study is planned to start in 2019.
Additionally, we have invested in developing the first
pharmaceutical treatment with potential disease-modi-
fying activity for presbyopia. Presbyopia – the age-related
loss of near-distance vision – affects 85% of people over
45 years old and is on the rise as the global population
ages. This condition is thought to develop when the lens
(the part of the eye that changes shape to enable focus)
gradually stiffens as proteins in lens fibers link together.
Patients typically need reading glasses, bifocals or pro-
gressive lenses.
We are working to advance investigational
therapies that could offer longer-term im-
provements for people with conditions such
as dry eye disease, presbyopia and neovas-
cular age-related macular degeneration
In late 2016, we announced the acquisition of Encore
Vision Inc. following the release of data for a first-in-class
topical eye drop that has the potential to restore flexi-
bility to the lens. This therapy, UNR844, contains a com-
pound consisting of two molecules found in the body:
lipoic acid and choline. Lipoic acid plays a role in energy
metabolism and may also act as an antioxidant, break-
ing the links between proteins in lens fibers. Choline, in
turn, helps lipoic acid penetrate the cornea to reach its
site of action in the lens.
In a Phase I/II proof-of-concept study, UNR844
showed significant promise in improving near-distance
vision, with the majority of treated patients achieving
20/40 near vision (the level needed to perform most
near-vison tasks without reading glasses) after 90 days.
There are currently no other disease-modifying treat-
ments available or in clinical development to reverse the
loss of near-distance vision. A Phase IIb study of UNR844
is planned for 2018.
Photo Minghshan Gao plays the accordion for choir
practice with elderly friends and neighbors at their local
community center in Shanghai, China. As Chinese society
evolves, elderly people are increasingly taking the lead
in caring for each other and for themselves, rather than
relying on their families as was common in the past.
We have also advanced RTH258 (brolucizumab), a
novel antibody fragment that could significantly reduce
the burden associated with the number of treatment
injections needed for nAMD. nAMD affects an estimated
20 to 25 million people worldwide and is a leading cause
of severe vision loss. It occurs when abnormal levels
of a protein called vascular endothelial growth factor
(VEGF) trigger the growth of blood vessels under the
retina, which can leak and damage central vision.
Current treatments are designed to target VEGF and
block these effects, but they require eye injections
typically around every four to eight weeks.
RTH258 is a small antibody fragment (a single chain)
that is only a fraction of the size of typical antibodies. Its
innovative architecture and small size are believed to
enable the delivery of higher doses and deeper tissue
penetration relative to full-sized antibodies, which
together may lead to longer-lasting efficacy. In 2017,
Novartis announced that in two pivotal Phase III trials
studying nAMD, RTH258 met the primary endpoint of
non-inferiority in vision against aflibercept in mean change
in best-corrected visual acuity. Additionally, RTH258
demonstrated superiority in three secondary endpoints
that are considered key markers of nAMD disease:
central subfield retinal thickness, retinal fluid and disease
activity. A majority of patients were maintained on a
12-week treatment schedule immediately following the
loading phase, which was a secondary endpoint. Novartis
expects to complete studies to enable filing in 2018.
Asthma
Novartis has been exploring new approaches to the
treatment of asthma ever since Xolair (omalizumab) was
approved in 2002 as the first biological therapy for this
inflammatory disease of the airways. There remains a
pressing need for new medicines to treat a condition that
affects around 334 million people worldwide and causes
more than 345 000 deaths per year. The disease has
a range of triggers and pathways, and Novartis is devel-
oping new options to treat many forms of asthma at all
levels of severity.
While Xolair is given by subcutaneous injection,
asthma has traditionally been treated with inhaled med-
icines that can be combined depending on the patient’s
symptoms and the severity of the condition. Although
well established, these inhaled compounds and their
associated devices remain the focus of intense innova-
tion. Novartis is currently developing QVM149, which –
if approved – could be the first triple therapy for asthma,
offering patients the combined efficacy of three medi-
cines in a single once-daily inhaled formulation.
QVM149 incorporates indacaterol, the first once-daily,
long-acting beta2-agonist; glycopyrronium bromide, a
long- acting muscarinic antagonist; and mometasone
furoate, a once-daily inhaled corticosteroid. Mometa-
sone furoate is already approved for asthma, while
indacaterol and glycopyrronium bromide are approved
to treat another common respiratory condition called
chronic obstructive pulmonary disease (COPD).
56 | Novartis Annual Report 2017
Innovation (continued)
To make this triple combination possible, the surface
properties of the inhaled particles had to be engineered
to ensure they interact correctly and are deposited in
exactly the right part of the lung – a formidable challenge
when the particles are less than five-thousandths of a
millimeter in diameter. Pivotal Phase III studies are now
underway in asthma with different doses of QVM149 as
well as with QMF149, a combination of indacaterol and
mometasone furoate. The program involves around
6 000 patients and is due for completion in 2019.
Novartis is also applying innovation to the inhalers used
to deliver such medicines. A new version of the Breezhaler
device is being developed that contains electronics to
detect whether the medicine has been inhaled correctly,
and provide feedback to patients via a smartphone app.
The first clinical study with this inhaler is due to begin this
year in COPD, and we plan to make it available when
QVM149 is launched in asthma. Ultimately the goal is for
the device to form part of a system that monitors trigger
factors such as lung function and air quality, and that issues
alerts when the patient is at increased risk of an attack of
breathlessness and wheezing, known as an exacerbation.
A new version of the Breezhaler device is
being developed that contains electronics
to detect whether the medicine has been
inhaled correctly, and provide feedback to
patients via a smartphone app
Some patients find their asthma remains inadequately
controlled and they continue to suffer exacerbations
despite using inhaled therapies. We are developing
another novel medicine that should provide better con-
trol for these patients, potentially decreasing the need
to use systemic corticosteroids and delaying the need
for a biologic. This is QAW039 (fevipiprant), a once-daily
oral tablet given as an add-on to inhaled therapies to
reduce the rate of exacerbations and improve the quality
of life of patients with uncontrolled asthma.
QAW039 is a first-in-class prostaglandin D2 receptor
antagonist. It works by blocking a pathway that activates
some of the key cells involved in asthma inflammation,
including eosinophils (a type of white blood cell) and
T-helper type 2 cells. Results of a Phase II study showed
that QAW039 reduced the number of eosinophil cells
in sputum (or phlegm) associated with asthma exacer-
bations. A pivotal Phase III program is now underway,
consisting of five trials involving around 4 000 adult and
adolescent patients with moderate-to-severe asthma.
Medicines at an earlier stage of development could
potentially treat other patient groups and disease
pathways. For example, CSJ117 represents an entirely
new form of inhaled biological therapy known as an
anti body fragment (or Fab). It targets thymic stromal
lymphopoietin, a protein in the cytokine family that plays
a key role in the development of allergic asthma.
Novartis is also developing CJM112, an antibody given
by subcutaneous injection that targets another inflam-
matory cytokine called interleukin-17A. This could provide
a new therapeutic approach for patients with severe
non-allergic asthma, for whom current medications are
largely ineffective.
Malaria
The need for innovation in malaria treatment is driven by
growing evidence that the parasites causing the disease
are becoming resistant to artemisinin, the current main-
stay of therapy. Resistant strains requiring longer courses
of treatment have emerged in Southeast Asia, and there
have also been sporadic reports from Africa, where more
than 90% of the estimated 446 000 malaria deaths
occur. With nearly half of the world’s population at risk
from malaria, Novartis and its partner organizations are
in a race against time to develop the next generation of
therapies before resistance spreads.
InnovatIon
Malaria
Novartis Annual Report 2017 | 57
Photo Adiarra Traore with her mother Fatoumata
Berthe at home in the African village of Bougoula in Mali.
Adiarra is taking part in a clinical trial to assess whether
a novel compound called KAF156 could be an effective
next-generation treatment for malaria. The disease
killed an estimated 407 000 people in Africa in 2016,
many of whom were children under 5 years old.
launched by Novartis in 1999 and now widely used as
the standard of care, is a combination of artemether and
lumefantrine. Coartem must be given twice daily for three
days, whereas KAF156 could be given once daily and
even has the potential for single- dose treatment.
The chosen partner drug for KAF156 is lumefantrine,
which has a well-established efficacy and safety profile
as one of the components of Coartem and has never
been used as monotherapy. However, lumefantrine must
be given twice daily, so Novartis researchers based in
Hyderabad, India, embarked on a project to increase its
bioavailability – or rate of absorption into the body. They
succeeded in altering the chemical formulation of
lumefantrine to increase its bioavailability by 48 times.
The new formulation can be given once daily, making it
a suitable partner for KAF156.
One important and promising
compound that is now in clinical
development is KAF156, the first in a
new class of antimalarial compounds
called imidazolopiperazines
One important and promising compound that is now
in clinical development is KAF156, the first in a new class
of antimalarial compounds called imidazolopiperazines.
Results of a proof-of-concept study published in 2016
showed this has the potential to clear malaria infection
and block transmission of the disease. KAF156 was
found to be fast-acting and potent across multiple
stages of the parasite’s lifecycle, rapidly clearing both
Plasmodium falciparum and Plasmodium vivax forms of
the disease. Crucially, it was also effective against strains
with genetic markers of resistance to the current stan-
dard treatments.
In August 2017, the next stage of development began
with the launch of a comprehensive Phase IIb clinical
trial program. This uses a complex adaptive design to
evaluate the drug at a range of doses and in different age
groups, initially in adults and adolescents and then, within
the same trial, in children as young as 2 years old. This
is vital because children are especially vulnerable to
malaria, with one child dying from the disease every two
minutes. The study is being conducted at leading centers
across nine countries in Africa and Asia where malaria
is endemic, and will continue through 2019.
The World Health Organization specifies that malaria
should be treated with a combination of drugs that have
different modes of action to decrease the potential risk that
resistance will emerge. For example, Coartem/Riamet,
Novartis is developing KAF156 with scientific and fin an-
cial support from Medicines for Malaria Venture (in col-
laboration with the Bill & Melinda Gates Foundation).
Additionally, we are investigating another compound
with a novel mechanism of action against malaria called
KAE609 (cipargamin). This belongs to a class of drugs
called spiroindolones and has also shown efficacy at
single doses. Results of a small Phase II study in
Thailand demonstrated that KAE609 rapidly cleared
both Plasmodium falciparum and Plasmodium vivax
parasites, including some showing a genetic marker of
resistance to artemisinin. A further Phase II study is now
underway to assess the optimum dosing levels, and the
outcome of this will determine future development plans
for the compound.
KAE609 was discovered through a joint research
program with the Novartis Institute for Tropical Diseases,
the Novartis Natural Products Research Group, the
Genomics Institute of the Novartis Research Foundation,
and the Swiss Tropical and Public Health Institute.
Research was supported by the Wellcome Trust, the
Singapore Economic Development Board, and Medi-
cines for Malaria Venture (MMV). Novartis is leading the
development of KAE609 in collaboration with MMV and
with financial support from the Wellcome Trust.
58 | Novartis Annual Report 2017
Pipeline
novartis is consistently rated as having one of
the industry’s most respected development
pipelines, with more than 200 projects in
clinical development, as of December 31, 2017.
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,
organized according to our development units.
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
Glossary continued on page 60
Major development projects
Project/product
Common name
Mechanism of action
Oncology
MTV273
HDM201
INC280
ABL001
ACZ885
EGF816
BYL719
Jakavi
LCI699
–
–
BCMA-targeted chimeric antigen receptor
T-cell immunotherapy
p53-HDM2 inhibitor
capmatinib
c-MET inhibitor
asciminib
BCR-ABL inhibitor
canakinumab
Anti-interleukin-1 beta monoclonal antibody
–
alpelisib
EGFR mutation modulation
PI3K-alpha inhibitor
ruxolitinib
JAK1/2 inhibitor
osilodrostat
Cortisol synthesis inhibitor
Promacta/Revolade
eltrombopag
Thrombopoietin receptor agonist
SEG101
Arzerra
PDR001
Rydapt
Kisqali
crizanlizumab
P-selectin inhibitor
ofatumumab
Anti-CD20 monoclonal antibody
spartalizumab
Anti-PD-1 monoclonal antibody
midostaurin
Signal transduction inhibitor
ribociclib
CDK4/6 inhibitor
Tafinlar + Mekinist
dabrafenib + trametinib
BRAF inhibitor + MEK inhibitor
CTL0194
tisagenlecleucel
CD19-targeted chimeric antigen receptor
T-cell immunotherapy
Afinitor/Votubia
everolimus
mTOR inhibitor
Signifor LAR
pasireotide
Somatostatin analogue
1 Some filings 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 Approved in the US as Kymriah
InnovatIon
Pipeline
Novartis Annual Report 2017 | 59
Potential indication/disease area
Route of
administration
Planned
filing dates 1,2
PHaSE l
PHaSE ll
PHaSE lll
SUBMISSIon
Multiple myeloma
Intravenous infusion
2021
Acute myeloid lymphoma
Non-small cell lung cancer (NSCLC) [lead indication];
NSCLC (EGFR mutation)
Oral
Oral
Chronic myeloid leukemia (CML) [lead indication], 3rd line; CML, 1st line
Oral
≥2022
2019
2020
NSCLC, 2nd line; NSCLC, 1st line; adjuvant NSCLC
Subcutaneous injection
2021
NSCLC
Hormone receptor-positive (HR+)/human epidermal growth
factor receptor 2-negative (HER2-) advanced breast cancer
(postmenopausal women), 2nd line (+ fulvestrant)
Oral
Oral
Acute graft-versus-host disease; chronic graft-versus-host disease
Oral
Cushing’s disease
Severe aplastic anemia, 1st line
Oral
Oral
2020
2018
2020
2018
2018
Sickle cell disease
Intravenous infusion
2019
Refractory indolent non-Hodgkin’s lymphoma
Intravenous infusion
2020
Malignant melanoma (Tafinlar + Mekinist) [lead indication];
malignant melanoma; endocrine neoplasm
Intravenous infusion
2019
Acute myeloid leukemia (FLT3 wild type)
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
Oral
≥2022
2018
BRAF V600+ melanoma (adjuvant)
Oral
US/EU registration
Pediatric/young adult acute lymphoblastic leukemia [lead indication];
r/r diffuse large B-cell lymphoma; r/r follicular lymphoma;
chronic lymphocytic leukemia; r/r diffuse large B-cell lymphoma
(+ pembrolizumab); r/r diffuse large B-cell lymphoma in 1st relapse
Intravenous infusion
US approved
EU registration
Tuberous sclerosis complex seizures
Oral
EU approved
US registration
Cushing’s disease
Long-acting release/
intramuscular injection
EU approved
US registration
60 | Novartis Annual Report 2017
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 intrave-
nous
Phase I First clinical trials of a new compound,
generally performed in a small number of
healthy human volunteers, to assess the clini-
cal safety and tolerability, as well as metabolic
and pharmacologic properties of the com-
pound
Phase II Clinical studies with patients who
have the target disease, with the aim of con-
tinuing 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.
Major development projects
Project/product
Common name
Mechanism of action
Cardiovascular and metabolism
LHW090
LIK066
MAA868
Entresto
ACZ885
Respiratory
QBW251
QMF149
QAW039
Xolair
QVM149
–
–
–
Neprilysin inhibitor
SGLT1/2 inhibitor
Factor Xl inhibitor
valsartan, sacubitril
(as sodium salt complex)
Angiotensin receptor/neprilysin inhibitor
canakinumab
Anti-interleukin-1 beta monoclonal antibody
–
CFTR potentiator
indacaterol,
mometasone furoate
(in fixed-dose combination)
Long-acting beta2-adrenergic agonist
and inhaled corticosteroid
fevipiprant
DP2 antagonist (CRTH2 antagonist)
omalizumab
Anti-IgE monoclonal antibody
indacaterol, mometasone
furoate, glycopyrronium
bromide (in fixed-dose
combination)
Long-acting beta2-adrenergic agonist,
long-acting muscarinic antagonist
and inhaled corticosteroid
Immunology and dermatology
LJN452
VAY736
VAY785
CFZ533
LOU064
ZPL389
QGE031
tropifexor
FXR agonist
–
Anti-BAFF (B-cell-activating factor)
monoclonal antibody
emricasan
Pan-caspase inhibitor
–
–
–
Blocking, non-depleting, anti-CD40
monoclonal antibody
BTK inhibitor
Histamine H4 receptor antagonist
ligelizumab
High-affinity anti-IgE monoclonal antibody
Glossary continued on page 62
Cosentyx
secukinumab
Anti-interleukin-17 monoclonal antibody
Neuroscience
EMA401
BYM338
CAD106
CNP520
BAF312
LMI070
OMB157
Gilenya
AMG 334
olodanrigan
Angiotensin ll type 2 receptor antagonist
bimagrumab
Inhibitor of activin type 2 receptor
amilomotide
Beta-amyloid-protein therapy
–
siponimod
branaplam
BACE inhibitor
Sphingosine-1-phosphate receptor modulator
SMN2 RNA splicing modulator
ofatumumab
Anti-CD20 monoclonal antibody
fingolimod
erenumab
Sphingosine-1-phosphate receptor modulator
Selective CGRP receptor antagonist
1 Some filings 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 Submission pending acceptance by the FDA and EMA
InnovatIon
Pipeline
Novartis Annual Report 2017 | 61
Potential indication/disease area
Route of
administration
Planned
filing dates 1,2
PHaSE l
PHaSE ll
PHaSE lll
SUBMISSIon
Resistant hypertension
Weight loss
Oral
Oral
≥2022
≥2022
Stroke prevention; atrial fibrillation
Subcutaneous injection
≥2022
Chronic heart failure with preserved ejection fraction
[lead indication]; post-acute myocardial infarction
Oral
2019
Secondary prevention of cardiovascular events
Subcutaneous injection
US/EU registration 5
Chronic obstructive pulmonary disease
Asthma
Asthma
Nasal polyps
Asthma
Oral
Inhalation
≥2022
2019
Oral
2020
Subcutaneous injection
2020
Inhalation
2019
Nonalcoholic steatohepatitis
Oral
≥2022
Autoimmune hepatitis [lead indication]; primary Sjögren’s syndrome
Subcutaneous injection
2021
Nonalcoholic steatohepatitis
Oral
≥2022
Solid organ transplantation
Intravenous infusion
≥2022
Chronic spontaneous urticaria
Atopic dermatitis
Chronic spontaneous urticaria;
chronic idiopathic urticaria
Oral
Oral
≥2022
2021
Subcutaneous injection
2021
Non-radiographic axial spondyloarthritis; psoriatic arthritis
head-to-head study versus adalimumab; ankylosing spondylitis
head-to-head study versus proposed Sandoz biosimilar adalimumab
Subcutaneous injection
2019
Peripheral neuropathic pain
Oral
2021
Hip fracture recovery [lead indication]; sarcopenia
Intravenous infusion
≥2022
Alzheimer’s disease
Alzheimer’s disease
Secondary progressive multiple sclerosis
Spinal muscular atrophy
Relapsing multiple sclerosis
Pediatric multiple sclerosis
Prophylaxis of migraine
Intramuscular injection
≥2022
Oral
Oral
Oral
≥2022
2018
2021
Subcutaneous injection
2019
Oral
US/EU registration
Subcutaneous injection
US/EU registration
62 | Novartis Annual Report 2017
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
ECF843
UNR844
RTH258
Lucentis
Clareon IOL with AutonoMe
pre-loaded delivery device
AcrySof IQ PanOptix IOL
AcrySof IQ PanOptix Toric IOL
A02062
A02238
A02972
A02491
A02931
A00717
A01660
Biosimilars
GP1111
GP2017
GP2013
–
cipargamin
clofazimine
Imidazolopiperazines derivative
PfATP4 inhibitor
Mycobacterial DNA binding
–
–
Boundary lubricant
Reduction of disulfide bonds
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
N/A
N/A
infliximab
TNF-alpha inhibitor
adalimumab
TNF-alpha inhibitor
rituximab
Anti-CD20 monoclonal antibody
LA-EP2006
pegfilgrastim
Pegylated granulocyte
colony-stimulating factor
1 Some filings 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 2017 | 63
Potential indication/disease area
Route of
administration
Planned
filing dates 1,2
PHaSE l
PHaSE ll
PHaSE lll
SUBMISSIon
Malaria
Malaria
Multidrug-resistant tuberculosis
Dry eye
Presbyopia
Oral
Oral
Oral
Eye drops
Eye drops
≥2022
≥2022
2018
≥2022
2021
Neovascular age-related macular degeneration [lead indication];
diabetic macular edema
Intravitreal injection
2018
Retinopathy of prematurity
Intravitreal injection
2018
Next-generation IOL
Cataract implant
US 2019
ADVANCED DEVELOPMENT
Trifocal IOL
Cataract implant
US 2019
ADVANCED DEVELOPMENT
Trifocal IOL for astigmatism
Cataract implant
US 2019
ADVANCED DEVELOPMENT
Extended depth of focus IOL
Cataract implant
Mid-tier phacoemulsification device
Cataract equipment
Digital visualization system connected with Constellation
Vitreoretinal equipment
New monthly disposable lens
New weekly disposable lens
Daily disposable line extension
New daily disposable lens
Vision care
Vision care
Vision care
Vision care
US 2019
EU 2019
US 2018
EU 2018
US 2018
EU 2018
US 2020
EU 2020
US 2020
EU 2020
EU 2018
US 2018
EU 2018
ADVANCED DEVELOPMENT
ADVANCED DEVELOPMENT
ADVANCED DEVELOPMENT
ADVANCED DEVELOPMENT
ADVANCED DEVELOPMENT
ADVANCED DEVELOPMENT
ADVANCED DEVELOPMENT
Inflammatory bowel disease; rheumatoid arthritis; plaque psoriasis
(same as originator)
Intravenous
EU registration
Arthritides (rheumatoid arthritis, ankylosing spondylitis, psoriatic
arthritis); plaque psoriasis and others (same as originator)
Subcutaneous
US/EU registration
Non-Hodgkin’s lymphoma; chronic lymphocytic leukemia;
rheumatoid arthritis; granulomatosis with polyangiitis;
microscopic polyangiitis (same as originator)
Chemotherapy-induced neutropenia and others
(same as originator)
Intravenous
Subcutaneous
EU approved
US registration
EU registration
US 20196
64 | Novartis Annual Report 2017
Novartis Annual Report 2017 | 65
Photo Home is where the
heart is for health worker
Chankey Kumar, whose
extended family – including
(left to right) his nephew, wife
and sister-in-law – lives on
the outskirts of Meerut in
northern India. Mr. Kumar’s
work takes him to some of
the country’s poorest
communities, where he
provides health education
on behalf of the Novartis
Arogya Parivar (or “healthy
family”) program.
66 | Novartis Annual Report 2017
Corporate responsibility
Corporate responsibility is embedded throughout
our company. We focus our corporate responsibility work
in two areas: expanding access to healthcare and doing
business responsibly.
Access to healthcare
46 m
Patients reached through
access programs
685 000
Novartis Access treatments, each
providing a one-month supply of
medicine, delivered to Kenya,
Lebanon, Ethiopia and Cameroon
7.7 m
People reached with health
education through our three
Healthy Family programs
Patient health and
safety
Ethical business
practices
Innovation
We began building a companywide
patient engagement strategy to
systematically embed patient
engagement in the way we work.
In early 2018, we will publish a
renewed Commitment to Patients
and Caregivers, which outlines
the ways we plan to help patients
better understand what they
can expect from Novartis.
k page 70
We continued our efforts to further
strengthen our culture of integrity
with a new, harmonized Professional
Practices Policy and an updated
Human Rights Guideline. We have
taken decisive and immediate action
to address cases of misconduct.
k page 73
We made progress against infectious
and neglected diseases, with com-
pounds to treat malaria, multidrug-
resistant Enterobacteriaceae infections
and cryptospo ridiosis. Our social
business model Novartis Access
will be expanded into the private
sector in select countries.
k page 74
Photo After drawing a crowd with a performance by street
musicians, health educator Chankey Kumar addresses
people in the northern Indian village of Mulehra on disease
prevention and healthy lifestyles. He works for Arogya
Parivar, a program launched by Novartis in 2007 to improve
access to healthcare for the country’s rural poor. This is done
by educating patients and increasing the availability of
doctors and medicines in around 14 000 rural communities.
CorPorate resPonsibility
Corporate responsibility at novartis
Novartis Annual Report 2017 | 67
Corporate responsibility at Novartis
Our corporate responsibility (CR) strategy supports our
company mission to improve and extend people’s lives
as well as our vision to be a trusted leader in changing
the practice of medicine. We discover and develop break-
through treatments and find new ways to deliver them to
as many people as possible.
Doing business responsibly is fundamental to achiev-
ing our vision. We build trust by the way we behave. We
continue to strengthen the compliance function, educate
our associates on our Values and Behaviors, and change
how we interact with customers.
To achieve our mission, we have a responsibility to
use our expertise and skills to address the needs of
underserved populations. We work to improve the afford-
ability and availability of our medicines by pioneering
sustainable and scalable access models. And we seek
effective partnerships to help deliver treatments and
quality care to as many people as possible.
segments and as a best practice in the industry. We
believe, however, that we can be even more systematic
in implementing it throughout our business. In 2017, we
therefore established a set of Access Principles that
clarify our approach to access. These will go into effect
in 2018.
At their core is a commitment to integrate patient
access strategies into all of our new medicine launches.
These strategies will be based on three key principles:
systematically assessing our research and develop-
ment portfolio against the unmet needs of underserved
populations, further im proving the affordability of our
medicines, and systematically assessing our efforts to
strengthen local healthcare systems.
We believe that by adopting these Access Principles,
we will further embed access in the heart of our business.
This will help ensure a more consistent implementation
of access programs across products and countries.
Integrating access more systematically in our business
In 2016, our access strategy was recognized by the
Access to Medicine Index as a solid framework that can
be adapted to the needs of people at specific income
Read more about our Access Principles
k page 18 of our 2017 Corporate Responsibility
Reportk on our website
68 | Novartis Annual Report 2017
Corporate responsibility (continued)
Governance of our CR activities
Our governance model for corporate responsibility
remains unchanged, with CR being ingrained in the
highest levels of our company. Our CR efforts are over-
seen by the Governance, Nomination and Corporate
Responsibilities Committee of the Novartis Board of
Directors. We appointed a new Global Head of Corpo-
rate Responsibility in 2017, and the role continues to
report directly to the CEO of Novartis.
Senior management commitment remains strong,
and the Executive Committee of Novartis (ECN) has
updated its 2018 balanced scorecard to include the topic
of access in the non-financial targets (see page 144 of
the Annual Report). The CEO continues to have specific
personal CR objectives. In 2018, the CEO and ECN
members will have an access objective as part of their
individual objectives.
Setting priorities – 2017 CR materiality assessment
In 2017, we conducted a new comprehensive analysis
of the most important CR topics for our industry and
business. This is part of a regular four-year cycle we have
established to help us better understand the issues
that matter most to our key internal and external stake-
holders.
We asked participants to rank issues by impact on
our business. Four clusters were identified as most
important: access to healthcare, patient health and
safety, ethical business practices and innovation. The
analysis was conducted via an online survey with nearly
1 400 internal stakeholders and approximately 200
external stakeholders. The survey was supplemented
with 60 follow-up interviews with selected individuals.
We plan to use the results of the materiality analysis
to guide our corporate responsibility strategy, track
issues of concern, inform and prioritize our programs,
and establish meaningful metrics against which to
measure our CR performance.
A more detailed review of the results can be found
k in our 2017 Corporate Responsibility Report
(page 11)
To ensure that our stakeholders are kept informed about
both our progress and challenges in the topics they
identified as most important, we plan to use these key
CR clusters to form the framework of our CR reporting
and disclosure efforts moving forward. This includes the
structure of the information outlined in this report.
Improving transparency
Our vision is to be a trusted leader in changing the
practice of medicine. A big part of gaining this trust is
being transparent – being open and clearly disclosing
what we do, how we work, where we are successful, and
where we face challenges. This applies across all aspects
of our business around the world.
For many years, transparent reporting has been a
central part of our CR commitment, and we continue to
make progress. In 2017, we published on our website a
US Transparency and Patient Access Report, which
highlights our approach to price adjustments, patient
assistance, investment in research and development,
and marketing in the US. This is in addition to our ongoing
disclosures, including payments to healthcare providers
and patient groups, as well as clinical trial results.
We published on our website a US
Transparency and Patient Access Report,
which highlights our approach to price
adjustments, patient assistance, invest ment
in research and development, and
marketing in the US
The transparency landscape is rapidly evolving, with
more countries – such as South Korea and Canada –
starting to introduce legislation that requires public
disclosure of payments to doctors. We are keeping pace
with the developments and are committed to meeting
new transparency requirements.
Novartis was one of the founding partners of the Pat-
ent Information Initiative for Medicines (Pat-INFORMED),
announced in October. This initiative is a partnership
between the World Intellectual Property Organization
and the pharmaceutical industry that aims to create a
global version of the US Orange Book, which lists all
patents that protect drugs approved in the US. This will
make it easier for national and international drug pro-
curement agencies to access a basic body of patent
information from a single source. Pat-INFORMED will
initially provide information on granted patents for small-
molecule products within oncology, hepatitis C, cardio-
vascular, HIV, diabetes and respiratory therapy areas,
with the database targeted to be online by mid-2018.
We also aim to be transparent about the results,
impact, challenges and key learnings from our access-
to-medicine programs. For instance, Boston University,
based in the US, is conducting an independent evaluation
of our Novartis Access program and will publish baseline
results on its website in 2018. We hope the methodology
will also help inform the measurement of other access
programs in the industry.
We recently released a 10-year report on our Healthy
Family social business programs and a two-year report
on Novartis Access.
For more disclosures, visit
k the transparency section of our website
Novartis Annual Report 2017 | 69
CorPorate resPonsibility
access to healthcare
Photo Allassane Traore undergoes
tests at the Bougoula-Hameau
clinic in Sikasso, Mali, as part of a
major clinical study of KAF156,
a potential new therapy for malaria.
This mosquito- borne disease is a
significant public health concern in
many African countries such as Mali.
There is an urgent need for more
effective medicines amid growing
concerns that malaria parasites are
developing resistance to available drugs.
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
and care. We continue our work to expand access to
medicines through a variety of approaches that provide
tailored and scalable solutions: social business initia-
tives, zero-profit models, equitable commercial models,
patient assistance programs and drug donations. Our
generics division, Sandoz, also plays an important role
in making high-quality generic medicines and biosimilars
available to more people.
Making our medicines more accessible
In 2017, our key programs continued to make inroads in
driving accessibility of our medicines. Novartis Access,
our program to fight chronic diseases in lower-income
countries, signed agreements with three countries to
launch the program, bringing the total to six: Kenya,
Ethiopia, Rwanda, Uganda, Pakistan and Cameroon. The
program offers a portfolio of 15 products to governments,
nongovernmental organizations and other public sector
healthcare providers at a price of USD 1 per treatment,
per month. In 2017, Novartis Access delivered more than
685 000 treatments – each providing a one-month
supply of medicine – to Kenya, Ethiopia, Lebanon and
Cameroon, bringing the total to more than 800 000
treatments delivered since launch in 2015.
Local brand strategies have been developed for
emerging markets to address affordability issues,
ex pand access, and help reduce the time lag between
the availability of our innovative products in higher-
income countries and lower-income countries. Novartis
has launched more than 35 local brands as of end of
2017. Initial estimates indicate that compared to traditional
commercial models, this approach enables us to reach
from three to five times more patients in low- to middle-
income countries.
The launch of our new biologic therapy for psoriasis
in India, which used a local brand approach supported
by other access solutions, is one example of how this
strategy has supported expanded access in a self-pay
market. According to a local analysis, cost was one of
the barriers to access – but lack of awareness and patient
support, and the need for in-clinic administration and
frequent hospital visits were highlighted as additional
challenges. The team developed and implemented a
program for drug administration at home, which was
more convenient for patients and helped free up care-
givers’ time as well as administrative time at the clinics.
The program also offered disease counseling for patients.
Through these efforts, significantly more patients obtained
access to the drug in the first year after launch versus
what was achieved with other biologics after several years.
Our Sandoz Division continued to help provide afford-
able options to branded, innovative medicines by deliver-
ing biosimilars and high-quality generic medicines. In 2017,
we gained approval for two new biosimilar products in the
EU and launched them in several European markets. A
biosimilar is a follow-on medicine of an existing biologic
whose patent has expired. Biologics are produced through
a complex process involving living organisms, and they
have revolutionized the treatment of many diseases. To
be approved for use, a biosimilar has to match the refer-
ence medicine in terms of safety and efficacy in patients,
demonstrating no clinically meaningful differences.
As a pioneer and global leader in biosimilars, Sandoz
has contributed significantly to increasing patient access
by freeing up funds for healthcare systems through
much-needed competition, and by driving increased use
of biologics. Sandoz biosimilars have been used in clinical
practice for more than 10 years, are available in more
than 86 countries, and have more than 340 million patient
days of experience.
For more information on our access programs, visit
k the CR section of our website
70 | Novartis Annual Report 2017
Corporate responsibility (continued)
Strengthening healthcare systems
Expanding access to affordable drugs is just the tip of
the iceberg in many developing countries. Healthcare
systems need other elements to function, such as the
capacity to detect, diagnose and treat patients; efficient
drug distribution channels; multisector partnerships;
and holistic approaches beyond traditional healthcare
players. We work with partners on a variety of programs
aimed at reinforcing healthcare systems.
The Novartis Foundation is taking on this challenge
through its new initiative, Better Hearts Better Cities, to
improve cardiovascular health in low-income urban
populations. The program seeks to improve the detection,
treatment and control of high blood pressure through a
multisector approach in a sustainable way at scale. Better
Hearts Better Cities has already launched in Ulaanbaatar
in Mongolia and in Dakar in Senegal, and plans are under-
way to launch the program in São Paulo, Brazil, in 2018.
In addition to delivering medicines, Novartis Access
offers capacity-building activities to support healthcare
systems in preventing, diagnosing and treating chronic
diseases. One example is a new collaboration with the
American Society for Clinical Pathology and the American
Cancer Society to improve cancer treatment in sub- Saharan
Africa. This complements the work the Clinton Health
Access Initiative is doing to improve access to oncology
medicines in the region. Together we aim to strengthen
the continuum of care for cancer patients, ranging from
training for better diagnosis and care, to improved access
to treatment, through to advocacy for national cancer
treatment guidelines. Beyond cancer, capacity-building
activities to screen and diagnose people for diabetes and
hypertension have started in Kenya and Cameroon.
We are partnering with the American Society
for Clinical Pathology and the American
Cancer Society to improve the management
of cancer in sub-Saharan Africa
Patient assistance programs
Fifteen years ago, Novartis introduced the Glivec Inter-
national Patient Assistance Program after recognizing
the importance of ensuring patients in lower-income
countries have access to breakthrough cancer therapy.
In partnership with The Max Foundation, the program
has provided treatment to approximately 75 000 people
since its inception.
In 2017, Novartis announced the transition of this
partnership to a new program called CMLPath to Care™,
which aims to support continued access to treatment at
no cost for the nearly 34 000 registered patients with
chronic myeloid leukemia (CML), gastrointestinal tumors
and other rare cancers. The Max Foundation will assume
responsibility for delivering treatment to these patients,
including supply chain management. Novartis will provide
funding and drug donation support. The collaborative
agreement runs through the first quarter of 2021 with an
option to extend it. During this period, Novartis expects
to donate more than USD 29 million to the collaboration,
along with approximately 315 million doses of medicine.
In the US, the Novartis Patient Assistance Founda-
tion Inc. provides medicines at no cost to eligible US
patients who are experiencing financial hardship and
have limited or no prescription drug coverage. In 2017,
we increased the income eligibility limits for all branded
products available via the program. For example, individ-
ual patients earning less than USD 75 000 per year and
families of four with an income below USD 150 000 per
year may be eligible. We plan to continue to adjust in -
come eligibility limits in accordance with changes to the
US federal poverty level and other external factors. In
addition, for US patients with commercial insurance, we
offer copay assistance programs so eligible patients
pay no more than USD 30 for a 30-day prescription (i.e.,
USD 1 per day) through retail or mail order. This program
has been expanded to include all of our branded pro-
ducts without generic alternatives as well as our bio-
similar products, subject to any limits imposed by a
patient’s individual health plan and where allowed by law.
For more information on our patient assistance programs, visit
k the CR section of our website
Formalizing the role of community health workers (CHWs)
is increasingly seen as an essential component of
building stronger healthcare systems in developing
countries. Last Mile Health, which successfully estab-
lished a CHW program in Liberia in partnership with the
government of Liberia, is developing the world’s first
digital education platform for CHWs and the leaders who
support them, called the Community Health Academy.
To help launch this academy, Novartis will provide a
USD 1 million donation over three years, in addition to
input on the curriculum, content and strategic direction
for the program.
Patient health and safety
Working more closely with patients is an important part
of improving health outcomes. Patients are often well
positioned to understand the challenges of their disease.
By proactively interacting and engaging with patients and
the patient and caregiver community, we seek out and
use their insights to inform decision-making throughout
the product development and commercialization pro-
cess for our medicines. We also collaborate with the
patient community and other stakeholders to evaluate
ways to expand access to medicine.
CorPorate resPonsibility
novartis access approaches: performance indicators 2017
Novartis Annual Report 2017 | 71
Novartis access approaches: performance indicators 2017
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 and Vietnam) 4
total
Patient assistance programs
Novartis Patient Assistance
Foundation Inc. (US)
Oncology/hematology
LMIC patient assistance
total
Zero-profit model
Malaria/Coartem
total
Donations
Alcon medical missions 9
Leprosy (WHO)
Fascioliasis/Egaten 10
Patients reached (thousands)
FTEs1
People reached (thousands)2
2017
386.5 3
579.6
966.1
2016
8.4
428.7
437.1
2017
25
498
523
2016
14
491
505
2017
2016
7 689.9
7 689.9
7 717.8
7 717.8
Patients reached (thousands)
Value USD (millions)5
2017
2016
2017
2016
55.5
51.2 6
1 466.4
1 124.7 6
82.9
138.4
83.3
1 571.1
1 579.1
134.5
3 037.5
2 703.8
Patients reached (thousands)
Value USD (millions)7
2017
2016
43 675.0 8
49 757.9
43 675.0
49 757.9
2017
58.2
58.2
2016
80.7
80.7
Patients reached (thousands)
Value USD (millions)5
2017
391.9
227.0
281.0
2016
484.0
290.0
276.2
2017
61.2
6.5
3.9
10.9
82.5
2016
73.0
4.4
<1
1.8
79.2
Medicine donations (emergency relief)
total
899.9
1 050.2
Healthcare system strengthening
Novartis Foundation
Novartis research capacity-building programs
total
Value USD (millions)11
FTEs1
People reached (thousands)2
2017
15.0
1.9
16.9
2016
14.8
3.5
18.3
2017
2016
2017
2016
14
4
18
14
6
20
7 080.6 12
8 908.6
0.6
1.0
7 081.2
8 909.6
Grand total
45 679.4
51 379.7
3 195.1
2 882.0
2017
2016
2017
2016
2017
541
2016
525
2017
2016
14 771.1
16 627.4
Patients reached (thousands)
Value USD (millions)5 7 11
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 Prior-year information was restated given the Keluarga Sehat program in Indonesia
ended in January 2017; patients identified based on referral cards have also been
excluded.
5 Wholesale acquisition cost (WAC) plus logistics costs for some programs
6 Numbers have been restated to include the Alcon US patient assistance numbers, as
the program transitioned to the Novartis Patient Assistance Foundation Inc. (US) as of
August 2016.
7 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.
8 Increased availability of generic options on the market
9 Retail value for surgical products
10 Manufacturing, testing and FTE costs
11 Operating costs
12 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
72 | Novartis Annual Report 2017
Corporate responsibility (continued)
In 2017, we began building a companywide patient
engagement strategy that is intended to systematically
and consistently embed patient engagement in the way
we work. As a first step, in early 2018, we will publish an
updated Commitment to Patients and Caregivers, which
outlines how we plan to help patients and caregivers
better understand what they can expect from Novartis.
This includes continuing to pursue our commitment to
running responsible clinical trials, transparently sharing
information about our interactions with healthcare pro-
fessionals and the patient community, and disclosing all
financial and relevant non-financial support (e.g., in-kind
donations of goods and services).
Our patient engagement efforts have been success-
ful for several of our development programs, including a
study of our promising weight loss drug LIK066. The
development team worked with several advocacy groups
as they developed and tested the new therapy. The result
was the Novartis Patient Advisory Forum on Obesity,
which brings patient advocates together with clinicians
and researchers to make patient needs a major focus
while testing LIK066 and bringing it to market. The patient
perspective has informed every element of the Phase IIb
clinical trial, from crafting language for the study and con-
sent forms, to ensuring that trial sites are patient-friendly.
In early 2018, we will publish an updated
Commitment to Patients and Caregivers,
which outlines how we plan to help patients
and caregivers better under stand what they
can expect from Novartis
Combatting counterfeit medicines
We believe counterfeit medicines, including both inno-
vative medicines and generics, pose a significant threat
to public health. This is especially true for patients, who
are generally unable to distinguish between authentic,
falsified and counterfeit products. Solving the issue
requires ongoing commitment not only from national
governments and international health organizations but
also from the pharmaceutical industry and other health-
care stakeholders, such as pharmaceutical distributors.
With regard to our own portfolio, we take a diverse
and multipronged approach. This includes continuously
monitoring and improving the security of our distribution
CorPorate resPonsibility
ethical business practices
Novartis Annual Report 2017 | 73
chain as well as the security of our product packaging.
Serialization is the process of creating a unique number
that is applied to each product to provide visibility and
full traceability within the supply chain – from the manu-
facturer to the distributor to the dispensing point (e.g.,
wholesalers and pharmacists). Serialization is one tech-
nology that helps decrease the number of falsified
products that enter the legitimate supply chain.
We investigate all reported cases of falsified and
counterfeit Novartis products, regardless of where they
are made available, including the internet and local
markets. We also maintain a global intelligence effort and
investigate illegal supply chains to identify the manu-
facturers, distributors, importers and exporters of
falsified and counterfeit medical products, and then
report confirmed cases to local law enforcement and
health authorities. During 2017, Novartis Global Security,
with the support of local law enforcement and health
authorities, initiated seizures of counterfeit and falsified
products in more than 30 countries globally. As a result,
nine illegal pharmaceutical manufacturing facilities and
assembly lines were dismantled and more than 7 300
illegal online pharmacies were shut down.
Health education and prevention
Patient education and awareness is an important step
in improving health and well-being, and in increasing
disease prevention and health-seeking behavior.
The Novartis Foundation has an array of projects
focused on interrupting the transmission of leprosy,
with the ultimate goal of eliminating the disease. These
include efforts to improve early detection by developing
a mo le cular diagnostic test and a remote diagnostic tool,
strengthening screening programs, and implementing
education campaigns to increase awareness about the
disease.
The foundation is also looking at ways to interrupt
transmission through leprosy post-exposure prophy-
laxis (LPEP) by providing preventative treatment to close
contacts of newly diagnosed patients – such as family
members and friends – to decrease the risk of transmis-
sion. This program, initially launched in 2014, is now
running in Indonesia, India, Nepal, Myanmar, Tanzania,
Sri Lanka and Brazil.
Additionally, the Novartis Foundation is working with
many partners to address hypertension around the
world. In October, the foundation launched Healthy
Schools for Healthy Communities together with the
University of Basel and other partners. Known locally as
KaziBantu, the initiative aims to address poor health in
disadvantaged schools in South Africa and is the first
Novartis Foundation program to involve the education
sector. The ultimate goal of Healthy Schools for Healthy
Communities is to improve the cardiovascular and overall
health of schoolchildren and their teachers.
Photo Klaus Artz demonstrates the actibelt® – a high-tech
movement monitoring device worn in a belt buckle – at
the Novartis Institutes for BioMedical Research in Basel,
Switzerland. Helping with the experiment are data scientist
Valeria De Luca and senior investigator Ieuan Clay, with data
scientist Eli Goldberg observing by video link from the US.
The Novartis Healthy Family programs are also
continuing to evolve. Healthy Family launched 10 years
ago in India under the name Arogya Parivar; this program
offers effective, low-cost medications against infectious
and chronic diseases that are prevalent in rural India.
Today, the program operates across 11 Indian states,
covering some 14 000 villages and small towns that are
home to more than 32 million people. Healthy Family
programs also operate in Kenya (Familia Nawiri) and
Vietnam (Cung Song Khoe), and are roughly the same
across countries: A social arm conducts health edu-
cation activities, while a separate commercial arm is
responsible for product promotion.
Since 2010, the three Healthy Family programs have
together reached more than 40 million people in rural
areas through health education sessions. More than 3
million patients have received diagnoses and treatments
at health camps over the same period of time. Novartis
plans to expand Healthy Family to more countries and
disease areas in the coming years.
In partnership with apparel company Levi’s and its
supplier Aquarelle, health workers from the Arogya
Parivar program in India will train 50 Aquarelle factory
workers and supervisors to serve as peer health educa-
tors on health topics, including women’s health. These
trained workers will then be able to deliver basic health
education to their 1 000 co-workers in biweekly ses-
sions, supporting the nurse and physician who provide
healthcare services at the factory.
Through Familia Nawiri in Kenya, Novartis is colla-
borating with Nestlé to bring health education and care
to coffee farmers. A pilot is underway whereby the coop-
eratives pay in advance the regular USD 2 fee for coffee
farmers to attend Familia Nawiri health camps when they
are unable to pay out of pocket. This system enables
farmers to access healthcare services when they need
them, even if they have no cash in hand. Cooperatives
usually pay farmers twice a year and deduct this amount
when they pay the farmers for their coffee beans.
Ethical business practices
We believe that operating ethically not only is the right
thing to do but also is fundamental to our success as a
business. We have taken significant steps to help ensure
that our associates act with integrity at all times – no
matter what situation they are facing.
Ethical behavior
We are continuing our efforts to further improve and
sustain a culture of integrity across our large, complex
and multinational organization.
Despite all of the work we have done and continue to
do, some of our employees have at times behaved in
ways that violated our policies and were inconsistent with
our culture and the expectations society has for us and
our industry. We have taken swift and decisive action to
address this. For example, in South Korea, where we
were in breach of industry standards on interactions with
healthcare professionals, we created additional internal
controls intended to ensure adherence to internal and
74 | Novartis Annual Report 2017
Corporate responsibility (continued)
Responsible supply chain management
Novartis engages with an extensive network of third
parties worldwide, and their contributions are crucial to
our success. The Novartis Supplier Code, which was
updated in 2017, sets out our expectations for suppliers
on ethical standards such as fair labor practices, health
and safety, environmental protection, animal welfare,
anti-bribery and data privacy. Through our responsible
procurement processes, we actively monitor our sup-
pliers’ ability to comply with these standards and work
with them to define improvement plans where compli-
ance issues are identified.
In 2017, we conducted 49 audits with suppliers iden-
tified as posing an elevated risk. The number of audits
was smaller than in previous years. This change was due
to various reasons, including supplier consolidation,
the fact that some suppliers were still under the audit
validity period, and the need to prioritize our resource
allocation to closing issues from previous audits.
In late 2016, we launched a new Third-Party Risk
Management program designed to help us better identify
key risk areas, such as labor rights and environmental
protection, while strengthening and streamlining our
supplier management, governance and systems. The
program aims to develop an integrated approach to third-
party risk management through one end-to-end process
underpinned by a single technology solution. We plan to
begin the rollout in regional phases, starting with Mexico
to test the model and IT solution. The global deployment
is expected to be finalized in 2019.
Innovation
Innovation is a cornerstone of the Novartis strategy and
a foundation of our future. Innovation that produces
breakthrough medicines, innovation in the way we run
our business, and the innovative use of technologies will
be critical in the coming years. Innovation in its many
forms supports our efforts to grow in emerging markets
and around the world, and can help us respond to
patients’ unmet medical needs in both the developed and
developing worlds.
Fighting neglected infectious diseases
Infectious diseases take a large toll on low- and middle-
income countries. We have teams dedicated to research-
ing and developing new treatments in this area. They
com bine the drug discovery expertise and cutting-edge
technologies of Novartis to fight infectious tropical
diseases such as malaria, kinetoplastid diseases (human
African trypanosomiasis, leishmaniasis, Chagas), and
cryptosporidiosis.
external standards. These include no longer funding
healthcare professionals from South Korea to attend
overseas academic conferences and meetings. In addi-
tion, the company has reinforced the com pliance function
and redesigned the field force evaluation system, and is
currently developing a new customer-facing model to
drive performance with integrity.
We are taking additional steps to change the way we
interact with healthcare professionals. We believe it is
essential for physicians to have the information they need
to make informed healthcare decisions, and we support
legitimate peer-to-peer medical education, including
speaker programs. We have built on our elimination of pro-
motional gifts and placed restrictions on the engagement
of healthcare professionals as promotional speakers.
From January 2018, we will sponsor physicians to
attend international congresses only when they play an
active role on behalf of Novartis. Examples include
speaking at or chairing a Novartis-sponsored session or
symposium, presenting data from Novartis-sponsored
trials, and capturing scientific insights that can be further
disseminated to the physician’s local community, which
will increase support for medical education. We are also
fully committed to transparency in these interactions and
to ensuring that all payments and transfers of value are
reported in a manner that is consistent with local laws
and regulations (e.g., the US Sunshine Act and the
European Federation of Pharmaceutical Industries and
Associations Disclosure Code).
To further support our compliance efforts, we re aligned
our existing divisional policies to create a new Group-
wide Professional Practices Policy. The new policy out-
lines how all associates should conduct business and
interact with customers, including how they should
promote medicines to healthcare professionals. It marks
a fundamental shift in the way ethics and compliance are
handled within Novartis, moving from a rules-based to
a principles-based approach. The rollout has started
across the entire Novartis organization, and the policy
will take effect on March 1, 2018 (except at Alcon, where
the effective date will be determined at a later stage).
Respect for human rights
Novartis supports the UN Guiding Principles on Business
and Human Rights (UNGP). This commitment is em pha-
sized in our latest Human Rights Guideline.
Implementing the requirements of the UNGP involves
assessing our potential and actual impacts on human
rights through a human rights impact assessment (HRIA).
In 2017, we conducted a global HRIA to identify and
prioritize key risks of negative impacts on human rights,
and to define key opportunities for addressing these. In
November, we piloted our first local human rights impact
assessment in Egypt.
More information on the human rights impact assessment can
be found
k on page 40 of our 2017 Corporate Responsibility
Report
Our Modern Slavery Act statement can be found
k on our website
CorPorate resPonsibility
innovation
Novartis Annual Report 2017 | 75
Ethics performance indicators
Novartis associates trained and certified on Code of Conduct 1
Misconduct cases reported / allegations substantiated 2
Dismissals and resignations related to misconduct 3
Regulatory inspections without major findings (%)
Suppliers posing an elevated risk under responsible procurement 4
Suppliers with active follow-up 4, 5
Suppliers audited 4
2017
114 913
2016
110 774
2 031 / 1 147
1 804 / 1 313
521
99.1
459
275
49
641
98.1
441
147
76
1 Active Novartis associates with email addresses, trained via e-learning
2 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.
3 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.
4 Includes new suppliers and new products, services or sites from existing suppliers; potential risks include labor or human rights, HSE and animal welfare
5 Follow-up includes more information requested, audits or on-site assessments.
Photo Women in the northern Indian village of Mulehra
watch a musical performance staged by health workers to
attract a receptive audience for their educational messages.
The event is one of many organized by Arogya Parivar, a
Novartis program to improve health awareness and access
to medicines in the country’s rural communities.
76 | Novartis Annual Report 2017
Corporate responsibility (continued)
In 2017, one significant achievement of our scientists
at the Novartis Institute for Tropical Diseases was the
discovery and early validation of a drug candidate for
treating cryptosporidiosis. Diarrheal diseases, such as
cryptosporidiosis, cause more than 800 000 deaths
annually, and currently there are no vaccines or effective
treatments. The findings – generated in partnership with
the University of Georgia and Washington State Uni-
versity in the US – were published in the journal Nature.
We are now working to advance the research through
collaborations with the global health community.
Novartis and Medicines for Malaria Venture
launched a Phase II clinical trial for KAF156,
a next-generation antimalarial compound
with the potential to treat drug-resistant
strains of the malaria parasite
Next-generation malaria treatments
Next-generation antimalarials are urgently needed to
tackle rising parasite resistance to current therapies. In
August, Novartis and Medicines for Malaria Venture
launched a Phase II clinical trial for KAF156, a next-
generation antimalarial compound with the potential to
treat drug-resistant strains of the malaria parasite.
KAF156 is one of two advanced antimalarial develop-
ment programs led by Novartis; the other is KAE609
(cipargamin), which also entered Phase II clinical trials
in late 2017.
Read more about our efforts to find next-generation treatments
for malaria
k on page 56 of the innovation section
Fighting antimicrobial resistance
We invested in the discovery of new antibiotics led by
infectious disease researchers in Emeryville, California,
in the US. In 2017, we reported progress in researching
a novel antibiotic candidate, LYS228, for multidrug-
resistant infections caused by the Enterobacteriaceae
family of Gram-negative pathogens, which the US
Centers for Disease Control and Pre vention lists as an
“urgent threat” to public health.
In 2017, we also joined the AMR Industry Alliance,
which formally brings together pharmaceutical, gen-
erics, diagnostics and biotech companies in an effort to
ensure that we collectively deliver on the specific
commitments made in the Industry Declaration on AMR
and the subsequent AMR Roadmap, both of which we
signed in 2016.
Social business model innovation
Beyond research and development, we are using
innovative approaches to reach more patients with our
medicines. These include our Healthy Family programs,
which have broken even in India, Vietnam and – most
recently – Kenya.
For more details on our Healthy Family programs, see
k page 73 of the Annual Report
Building on our Healthy Family programs, we evolved our
social business approach and launched Novartis Access
in 2015. Novartis Access offers a portfolio of 15 medi-
cines against chronic diseases together with capacity-
building activities to help healthcare systems prevent,
diagnose and treat these diseases. The volume potential
in the countries we are targeting made it possible to offer
the portfolio at USD 1 per treatment, per month to gov-
ernments, nongovernmental organizations and other pub-
lic sector healthcare providers in lower-income countries.
As of January 2018, Novartis Social Business will
be present in the public and private market in seven
countries offering Novartis Access medicines as well as
the entire Novartis product range registered locally,
either as a portfolio or as individual products. We hope
this enhanced flexibility will enable us to better respond
to country needs and reach people across all income
levels. Based on our on-the-ground experience and
depending on the outcomes, we may implement this
approach in more countries in the future.
Enabling access through innovative technologies
Technology can be an enabler in overcoming barriers to
access, especially for patients in remote areas. Our
program SMS for Life 2.0, launched in 2016, uses tech-
nology to enable healthcare workers to make better
decisions to eliminate stock-outs and promptly respond
to disease surveillance data. It also offers healthcare
worker training. It was deployed in more than 250 health-
care facilities in Nigeria, and we started the rollout in
Zambia in 2017, with the goal of reaching more than 500
facilities in the northern provinces. Further expansion in
other sub-Saharan and Asian countries is under discussion.
In Ghana, the Novartis Foundation telemedicine pro-
ject uses mobile technology to centralize expertise and
coach community health workers in rural communities
to strengthen healthcare capacity, avoiding unnecessary
referrals and reducing transport times and costs for
patients. The program was selected by health authorities,
out of seven other telemedicine models piloted in Ghana,
as the preferred option to be scaled on a national level.
Photo Lab technician Niawanlou Dara prepares
blood samples from malaria patients at a clinic in
Bougoula-Hameau, in the African state of Mali. The
samples are being collected for a wide-ranging clinical
study to assess the efficacy and safety of an experi-
mental new antimalarial compound called KAF156.
CorPorate resPonsibility
innovation
Novartis Annual Report 2017 | 77
78 | Novartis Annual Report 2017
independent assurance report on the
novartis 2017 corporate responsibility reporting
To the Board of Directors of
Novartis AG, Basel
We have been engaged to perform assurance proce-
dures to provide limited assurance on the following
aspects of the 2017 corporate responsibility (CR) report-
ing of Novartis AG and its consolidated subsidiaries
(Novartis Group) included in the 2017 Annual Report.
Scope and subject matter
Our limited assurance engagement focused on the
following data and information disclosed in the consoli-
dated CR reporting of the Novartis Group for the year
ended December 31, 2017:
• The “social performance indicators” on page 7, the
“people performance indicators” on page 29, the
“Novartis access approaches performance indicators”
on page 71, and the “ethics performance indicators”
on page 75 (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 is 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.
Novartis responsibilities
The Board of Directors of Novartis AG is responsible for
both the subject matter and the criteria as well as for the
selection, preparation and presentation of the information
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 misstatement, whether due to
fraud or 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) 3 000 (revised) Assurance En-
gagements Other Than Audits or Reviews of Historical
Financial Information. This standard requires that we
plan and perform the assurance engagement to obtain
limited assurance on the identified CR indicators
prepared, in all material aspects, in accordance with
Novartis Group internal policies and procedures.
A limited assurance engagement under ISAE 3 000
(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
assurance engagement than with a reasonable assur-
ance engagement.
Our independence and quality
control
We have complied with the independence and other
ethical requirements of the Code of Ethics for Profes-
sional Accountants issued by the International Ethics
Standards Board for Accountants, which is founded
on fundamental principles of integrity, objectivity,
professional competence and due care, confidentiality
and professional behavior.
Our firm applies International Standard on Quality
Control 1 and accordingly maintains a comprehensive
system of quality control, including documented policies
and procedures regarding compliance with ethical
requirements, professional standards, and applicable
legal and regulatory requirements.
CorPorate resPonsibility
independent assurance report on the novartis 2017 corporate responsibility reporting
Novartis Annual Report 2017 | 79
Summary of work performed
Limited assurance conclusion
Our assurance procedures included, among others, the
following:
• Reviewing the application of the Novartis Group inter-
nal CR reporting guidelines
• Interviewing associates responsible for internal report-
ing and data collection
• Performing tests on a sample basis of evidence sup-
porting selected CR data concerning completeness,
accuracy, adequacy and consistency
• Inspecting relevant documentation on a sample basis
• Reviewing and assessing the management reporting
We have not carried out any work on data other than
outlined in the scope and subject matter section as pre-
viously defined. We believe that the evidence we have
obtained is sufficient and appropriate to provide a basis
for our assurance conclusions.
Based on our work described in this report, nothing has
come to our attention that causes us to believe that the
CR indicators 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
Martin Kennard
Raphael Rutishauser
Basel, January 23, 2018
80 | Novartis Annual Report 2017
Novartis Annual Report 2017 | 81
Photo Transplant surgeon
Manuel Cobos prepares to
conduct surgery at the
hospital where he works in
Buenos Aires, Argentina.
Dr. Cobos is an alumnus
of the Novartis Next
Generation Scientist
program, an internship for
talented research scientists
from developing regions,
including Latin America.
82 | Novartis Annual Report 2017
Corporate governance
Contents
Dear shareholder,
Letter from the Chairman
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
82
84
85
92
106
111
113
114
2017 was an important and successful year for our
company and our Board. We made good progress in
pursuing our mission, managed the selection of the new
CEO, reinforced the Board’s membership, increased
our strategic focus on digital technology, accelerated
our corporate culture change, and further improved our
corporate governance.
Progress in pursuing our mission
At a time of big geopolitical uncertainties and increas-
ing regulatory, pricing and enforcement pressure, we
achieved a solid business performance, launched import-
ant new products, and made further efficiency gains.
Strong and diverse Board
We have a strong, diverse and independent Board. A key
to our achievements is the excellent collaboration between
our Board and our CEO and his Executive Committee.
The diversity of our Board was further strengthened
when Ton Buechner and Liz Doherty joined in February
2016, and Frans van Houten in February 2017, re inforc-
ing our expertise in finance and accounting, in digital
health solutions, as well as in leadership and manage-
ment. With their arrival, we have substantially refreshed
our Board. Two-thirds of our members have a tenure of
less than six years, balancing the benefits of continuity
and experience with new perspectives.
We appointed new members of the Audit and
Compliance Committee; the Risk Committee; and the
Governance, Nomination and Corporate Responsibilities
Committee, benefiting from the experience and know-
ledge of new Board members.
At the 2018 Annual General Meeting (AGM), Pierre
Landolt will leave our Board, having reached the statu-
tory retirement age of 70. I would like to thank Pierre for
his many contributions over the years, including his chair-
manship of the Governance, Nomination and Corporate
Responsibilities Committee. During his chairmanship, the
committee extended its mandate to also cover cor porate
responsibility, and Pierre was instrumental in driving the
Novartis corporate responsibility strategy as well as the
Board’s oversight of the many corporate responsibility
programs at Novartis.
At the end of 2017, we initiated a performance and
effectiveness evaluation of the Board’s work by an
independent expert. The outcome is encouraging. We
have made significant progress over the last few years
in our efforts to continuously improve our performance.
Corporate governanCe
Letter from the Chairman
Novartis Annual Report 2017 | 83
CEO succession
Auditor rotation
One of the most important tasks of a Board is selecting
the right CEO. After Joe Jimenez informed us that he
was considering stepping down, we conducted a thor-
ough evaluation of internal and external candidates with
the help of an executive search firm, building on our CEO
succession plan. We concluded that Vas Narasimhan
is the right choice to build on Joe’s heritage and lead
Novartis in our next growth phase. It is a phase that we
expect will be characterized by new technologies that
transform science, our business, and our interactions
with people and societies. Vas will take the helm from
Joe on February 1, 2018, completing a smooth transition
facilitated by the strong leadership team that Joe built.
I sincerely thank Joe for his dedication to our company
and for his achievements, which span a period of 10 years.
Strategy and culture
Other key areas for our Board are the strategy and cul-
ture of Novartis. During our strategy retreat in August,
one of the conclusions was that we should strengthen
our strategic focus on digital technologies to improve how
we use data in drug discovery and development; how we
engage with patients, doctors and other stakeholders;
and how we automate business processes. Our Chief
Digital Officer, a newly created role, will lead the compa-
nywide implementation of our digital strategy.
In 2017, we also accelerated our corporate culture
change. The Executive Committee took action to further
improve collaboration, reduce bureaucracy, speed up
decision-making, support smart risk-taking, increase
empowerment and trust throughout the organization,
and reinforce our interactions with the external world
and society at large.
In 2017, we discussed the question of changing our
long-standing auditor. While the Board is open to a change
in the foreseeable future, we concluded that it is in the
best interest of Novartis, our investors and other stake-
holders to continue with our current auditor. We will, of
course, continue with the yearly assessments of Price-
waterhouseCoopers’ effectiveness and independence,
and with the regular rotation of the audit partner in charge.
The matter remains high on our agenda and will be con-
tinuously reassessed.
Shareholder engagement
Let me end by addressing our engagement with you, our
shareholders. As you know, shareholder engagement is
an important aspect of our corporate governance frame-
work. Although I believe our engagement program has
in many instances aligned the views of the Board with
those of our shareholders, we recognize that a signifi-
cant number of you did not support at our 2017 AGM the
advisory vote on the 2016 Compensation Report. As a
result, we have intensified our engagement with you and
we are confident that we can further align our views.
I encourage you to actively participate and share your
perspectives.
While we achieved quite a lot in 2017, I believe there
is more work to be done. Our Board and our Executive
Committee must continue to sharpen our strategy,
strengthen our corporate culture, and accelerate the
evolution of our business model. I am very confident that
with your support, we will continue to make progress.
Joerg reinhardt
Chairman of the Board of Directors
84 | Novartis Annual Report 2017
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 and modifies 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 Responsibili-
ties Committee
• Research & Development Committee
• Risk Committee
Composition
Board members have diverse education, experience,
nationalities and interpersonal skills. Their biographies
(beginning on page 102) describe their specific qualifications.
Processes
The Board’s processes significantly influence its effective-
ness. The Board has implemented best practices for all
such processes. Important elements include Board meet-
ing agendas (to address all important topics), information
submitted to the Board (to ensure the Board receives
sufficient information from management to perform 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
Information on Board and Executive Committee com-
pensation is outlined in our Compensation Report, begin-
ning on page 118.
Corporate governanCe
our shares and our shareholders
Novartis Annual Report 2017 | 85
Our shares and our shareholders
Our shares
Capital changes
Share capital of Novartis AG
As of December 31, 2017, the share capital of Novartis
AG is CHF 1 308 422 410 fully paid-in and divided into
2 616 844 820 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-vot-
ing 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
American 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
depositary of Novartis AG – JPMorgan Chase Bank,
N.A., New York – holds the Novartis shares underly-
ing the ADRs and is registered as a shareholder in the
Novartis Share Register. An ADR is not a Novartis
share and an ADR holder is not a Novartis AG share-
holder. ADR holders exercise their voting rights by instruct-
ing 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 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.
In 2017, Novartis AG reduced its share capital by CHF 5.1
million (from CHF 1 313 557 410 to CHF 1 308 422 410) by
canceling 10.3 million Novartis shares repurchased on
the second trading line during 2016.
Number of shares
Year
As of Jan 1
Changes
in shares
As of Dec 31
Changes
in CHF
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
2017
2 627 114 820 – 10 270 000 2 616 844 820 – 5 135 000
A table with additional information on changes in the
Novartis AG share capital can be found in Note 7 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 (or 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
In 2015, Novartis repurchased under the sixth share
repurchase program 49 878 180 Novartis shares at an
average price of CHF 93.24 per Novartis share, and can-
celed them in 2016. With those repurchases, the sixth
share repurchase program was completed.
At the 2016 AGM, 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, and canceled in 2017. In 2017, a total of
66 220 000 Novartis shares were repurchased at an
average price of CHF 78.34 per Novartis share. The
Board will propose the cancellation of the Novartis
shares repurchased in 2017 to its shareholders at the
AGM 2018.
86 | Novartis Annual Report 2017
Share developments
SHare DeveLopMentS In 2017
• Swiss-listed Novartis shares increased 11.2% to
CHF 82.40
• ADRs increased 15.3% to USD 83.96
Novartis shares finished at CHF 82.40, an increase of
11.2% from the 2016 year-end closing price of CHF 74.10.
Novartis ADRs increased in 2017 by 15.3% to USD 83.96
from USD 72.84. The Swiss Market Index (SMI), in com-
parison, increased by 14.1% in 2017, whereas the world
pharmaceutical index (MSCI) increased by 10.8% during
the year. Total shareholder return for Novartis shares in
2017 was + 15.2% in CHF and + 20.4% in USD, includ-
ing an increased dividend. Over a longer-term period,
Novartis AG has consistently delivered a solid perfor-
mance, providing a 9.2% compounded annual total share-
holder return between January 1, 1996 and December
31, 2017, exceeding the 9.0% compounded returns of its
large pharmaceutical peers, or the returns of 8.5% of the
world pharmaceutical index (MSCI).
The market capitalization of Novartis AG based on
the number of Novartis shares outstanding (excluding
Novartis treasury shares) amounted to USD 195.5 billion
as of December 31, 2017, compared to USD 172 billion
as of December 31, 2016.
ContInUoUSLY r ISIng DIvIDenD SInC e 1996
The Board proposes a 2% increase in the dividend pay-
ment for 2017 to CHF 2.80 per Novartis share (2016:
CHF 2.75) for approval at the AGM on March 2, 2018.
This represents the 21st consecutive increase in the div-
idend paid per share since the creation of Novartis AG in
December 1996. If the 2017 dividend proposal is approved
by shareholders, dividends to be paid out will total approx-
imately USD 6.7 billion (2016: USD 6.5 billion). This will
result in an expected payout ratio of 87% of net income
attributable to shareholders of Novartis AG (2016: 97%).
Based on the 2017 year-end share price of CHF 82.40,
the dividend yield will be 3.4% (2016: 3.7%). The dividend
payment date has been set for March 8, 2018.
Novartis 2017 share price movement
(based on USD amounts)
120
120
115
115
110
110
105
105
100
100
95
95
Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec
NOVARTIS
PEERS
MSCI WORLD MARKETS
MSCI WORLD PHARMA
Source: Bloomberg; data are converted into US dollars and re-based to 100 at
January 1, 2017. Currency fluctuations have an influence on the representation of the
relative performance of Novartis vs. indices and peers. Peers include Abbott, AbbVie,
Amgen, AstraZeneca, BMS, Eli Lilly, GSK, J&J, Merck&Co, Pfizer, Roche, Sanofi.
Novartis 1996–2017 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 17
NOVARTIS
PEERS
MSCI WORLD MARKETS
MSCI WORLD PHARMA
Source: Datastream, Bloomberg; 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. Peers include Abbott,
AbbVie, Amgen, AstraZeneca, BMS, Eli Lilly, GSK, J&J, Merck&Co, Pfizer, Roche, Sanofi.
Corporate governanCe
our shares and our shareholders
Novartis Annual Report 2017 | 87
Key Novartis share data
Issued shares
Treasury shares 1
outstanding shares at December 31
2017
2016
2015
2 616 844 820
2 627 114 820
2 676 993 000
299 388 321
253 055 807
303 098 183
2 317 456 499
2 374 059 013
2 373 894 817
Weighted average number of shares outstanding
2 345 783 843
2 378 474 555
2 402 806 352
1 Approximately 131 million treasury shares (2016: 135 million; 2015: 137 million) are held in Novartis entities that restrict their availability for use.
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 2017: proposal to shareholders for approval at the Annual General Meeting on March 2, 2018
Key ratios – December 31
Share price (CHF)
Price/earnings ratio 1
Price/earnings ratio from
continuing operations 1
Enterprise value/EBITDA
from continuing operations
Dividend yield (%) 1
2017
25.7
2016
25.7
2015
11.9
Year-end share price
25.7
25.7
30.1
15
3.4
13
3.7
16
3.1
High 1
Low 1
2017
3.28
3.28
3.25
3.25
5.38
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
32.00
31.52
2.80
2.75
32.46
2.70
2017
82.40
85.15
69.55
2016
2015
74.10
86.80
86.45
102.30
68.15
82.20
Year-end market capitalization
(USD billions) 2
Year-end market capitalization
(CHF billions) 2
195.5
172.0
208.3
191.0
175.9
206.1
1 Based on the daily closing prices
2 Market capitalization is calculated based on the number of shares outstanding
(excluding treasury shares). Market capitalization in USD is based on the market
capitalization in CHF converted at the year-end CHF/USD exchange rate.
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
2017
83.96
86.65
70.03
2016
2015
72.84
86.04
86.21
106.12
67.59
83.96
320 833 039 315 349 314 299 578 398
1 Based on the daily closing prices
2 The depositary, JPMorgan Chase Bank, N.A., holds one Novartis AG share for every
ADR issued.
88 | Novartis Annual Report 2017
Our shareholders
Number of shares held
As of December 31, 2017
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
24 970
101 722
36 938
3 244
463
72
32
Total registered shareholders/shares
167 441
Unregistered shares
total
1 Including significant registered shareholders as listed above
% of registered
share capital
0.06
1.62
3.93
3.21
5.25
5.58
50.24
69.89
30.11
100.00
Registered shareholders by type
As of December 31, 2017
Shareholders in %
Shares in %
Individual shareholders
Legal entities 1
Nominees, fiduciaries
and ADS depositary
total
96.31
3.63
0.06
100.00
13.36
35.25
51.39
100.00
1 Excluding 6.4% of the share capital held as treasury shares by Novartis AG and its
subsidiaries
Registered shareholders by country
As of December 31, 2017
Shareholders in %
Shares in %
Belgium
France
Germany
Japan
Switzerland 1
United Kingdom
United States
Other countries
total
0.13
2.23
5.35
0.18
88.42
0.49
0.34
2.86
3.82
0.38
2.13
0.71
42.56
22.22
25.82
2.36
100.00
100.00
Registered shares held by nominees are shown in the country where the company/
affiliate entered in the Novartis Share Register as shareholder has its registered seat.
1 Excluding 6.4% of the share capital held as treasury shares by Novartis AG and its
subsidiaries
Significant shareholders
According to the Novartis Share Register, as of December
31, 2017, 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 their Novartis shares based on an exemption
granted by the Board (see page 90):1
• Shareholders: Novartis Foundation for Employee Partici-
pation, with its registered office in Basel, holding 2.5%;
Emasan AG, with its registered office in Basel, holding
3.4%; and UBS Fund Management (Switzerland) AG, with
its registered office in Basel, holding 2.0%
• Nominees: Chase Nominees Ltd., London, holding
7.8%; Nortrust Nominees Ltd., London, holding 3.8%;
and The Bank of New York Mellon, New York, holding
4.3% through its nominees, The Bank of New York Mel-
lon, Everett, holding 2.0%, and The Bank of New York
Mellon, SA/NV, Brussels, holding 2.3%
• ADS depositary: JPMorgan Chase Bank, N.A., New
York, holding 12.3%
According to a disclosure notification filed with Novartis
AG, Norges Bank (Central Bank of Norway), Oslo, held 2.1%
of the share capital of Novartis AG but was not registered
in the Novartis Share Register as of December 31, 2017.
According to a disclosure notification filed with Novartis AG
and the SIX Swiss Exchange, BlackRock, Inc., New York,
held between 3% and 5% of the share capital of Novartis
AG but was registered with less than 2% of the share capi-
tal as of December 31, 2017 in the Novartis Share Register.
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 elec-
tronic publication platform, and can be accessed via:
https://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.
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 cannot be assumed to represent the entire Novartis
AG investor base because nominees and JPMorgan
Chase Bank, N.A., as ADS depositary, are registered as
shareholders for a large number of beneficial owners.
As of December 31, 2017, Novartis AG had approxi-
mately 167 000 registered shareholders.
1 Excluding 6.4% of the share capital held as treasury shares by Novartis AG and its
subsidiaries
Corporate governanCe
our shares and our shareholders
Novartis Annual Report 2017 | 89
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 (see in particular
articles 17 and 18 of the Articles of Incorporation:
www.novartis.com/investors/company-overview/
corporate-governance).
rIgHt to vote
Each Novartis share registered with the right to vote
entitles the holder to one vote at General Meetings of
Shareholders (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 registra-
tion and voting restrictions, see page 90).
ADR holders may vote by instructing JPMorgan Chase
Bank, N.A., the ADS depositary, to exercise the voting
rights attached to the registered Novartis shares under-
lying the ADRs. JPMorgan Chase Bank, N.A., exercises
the voting rights for registered Novartis shares underly-
ing 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
General Meeting:
• Adoption and amendment of the Articles of Incorporation
• Election and removal of the Chairman of the Board,
Board and Compensation Committee members, the
Independent Proxy and external auditors
• Approval of the management report (if required) and
of the consolidated financial statements
• Approval of the financial statements of Novartis AG,
and decision on the appropriation of available 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 Committee
members
• Decision of other matters that are reserved by law or
by the Articles of Incorporation (e.g. advisory vote on
the compensation report) to the General Meeting 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 article 18 of the Articles of Incor-
poration (www.novartis.com/investors/company -overview/
corporate-governance), the approval of two-thirds of the
votes represented at the meeting is required for:
• Alteration of the purpose of Novartis AG
• Creation of shares with increased voting powers
• Implementation of restrictions on the transfer of registe-
red shares, and the removal of such restrictions
• Authorized or conditional increase of the share capital
• Increase of the share capital out of equity, by contribu-
tion in kind, for the purpose of an acquisition of prop-
erty or the grant of special rights
• Restriction or suspension of rights or options to sub-
scribe
• Change of location of the registered office of Novartis AG
• 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) following
the recommendations of the Board for such alternative
or additional motions, or (ii) against such alternative or
additional motions. They can also abstain from voting.
Novartis AG offers shareholders the opportunity to
use an online platform (the Sherpany Platform) to receive
invitations to future General Meetings exclusively by
email and to electronically give their instructions to the
Independent Proxy, grant powers of attorney to other
shareholders, and order their admission cards online.
The General Meeting registration form enables share-
holders 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 contact-
ing 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 exer-
cise shareholder rights), or a nominee who is registered
in the Novartis Share Register.
90 | Novartis Annual Report 2017
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 article 5, paragraph 3 of
the Articles of Incorporation (www.novartis.com/inves-
tors/company-overview/corporate-governance), the Board
may register nominees with the right to vote. For restric-
tions 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. Exemptions are in
force for the registered significant shareholders listed
on page 88 under Our Shareholders – Significant Share-
holders, and for Norges Bank (Central Bank of Norway),
Oslo, which as of December 31, 2017, was not registered
in the share register but according to a disclosure noti-
fication filed with Novartis AG, held 2.1% of the share
capital of Novartis AG. No further exemptions were
requested in 2017.
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 ne cessary
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 88 under
Our Shareholders – Significant Shareholders, and for
the nominee Citibank, London, which in 2015 requested
an exemption, but as of December 31, 2017, 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 (see article 18 lit. c
of the Articles of Incorporation: www.novartis.com/inves-
tors/company-overview/corporate-governance).
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 nom-
inee for the purposes of the restrictions on registration.
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, N.A., does not affect the trad-
ability of Novartis shares or ADRs. Registered Novartis
shareholders or ADR holders may therefore purchase
or sell their Novartis shares or ADRs at any time, includ-
ing 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 Compensa-
tion in Listed Companies, there are no change-of-con-
trol clauses and “golden parachute” agreements bene-
fiting Board members, Executive Committee members,
or other members of senior management. Furthermore,
employment contracts with Executive Committee mem-
bers are either for a fixed term not exceeding one year
or for an indefinite period of time with a notice period not
exceeding 12 months, and do not contain commissions
for the acquisition or transfer of enterprises or sever-
ance payments.
Corporate governanCe
our shares and our shareholders
Novartis Annual Report 2017 | 91
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 com-
pensation 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 suffi-
cient to cover the compensation of newly appointed or
promoted 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 articles 29-35 of the
Articles of Incorporation (www.novartis.com/investors/
company-overview/corporate-governance) and the Com-
pensation Report, beginning on page 118.
92 | Novartis Annual Report 2017
Our Board of Directors
Composition of the Board of Directors and its committees (as per December 31, 2017)
Chairman: J. Reinhardt
vice Chairman: E. Vanni
Board of Directors
N. Andrews
D. Azar
T. Buechner
S. Datar
E. Doherty
A. Fudge
F. van Houten
P. Landolt 1
A. von Planta
C. Sawyers
W. Winters
audit and Compliance
Committee
Compensation
Committee
governance, nominat ion
and Corporate respons-
ibilities Committee
research &
Development
Committee
E. Doherty (Chairman)
D. Azar 2
S. Datar
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
risk Committee
S. Datar (Chairman)
N. Andrews
T. Buechner
E. Doherty
A. Fudge
A. von Planta
1 P. Landolt will reach the statutory retirement age at the AGM 2018.
2 D. Azar will step down as member of the Audit and Compliance Committee as per the AGM 2018 and will be replaced by T. Buechner, subject to his re-election.
Election and term of office
Board members, the Chairman, and Compensation Com-
mittee members are elected annually and individually as
a matter of law by the shareholders at the General Meet-
ing. Board members whose term of office has expired are
immediately eligible for re-election.
The average tenure of Board members is six 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, enabling the
company to benefit from the insight and knowledge that
long-serving Board members have developed about the
company’s operations and practices.
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
Frans van Houten
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
D
CH
US
US
NLD
US
GB
US
NLD
CH
CH
US
GB/US
1956
1951
1958
1959
1965
1953
1957
1951
1960
1947
1955
1959
1961
2013
2011
2015
2012
2016
2003
2016
2008
2017
1996
2006
2013
2013
Corporate governanCe
our Board of Directors
Novartis Annual Report 2017 | 93
Board profile
Board composition
The composition of the Board should align with our status
as a listed company as well as our business portfolio, geo-
graphic reach and culture. The Board should be diverse
in all aspects, as set-out below.
Profile of individual Board members
Board members should have the following personal
qualities:
• 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 responsive
• 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 the Executive Committee
Board members’ biographies (pages 102–105) 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 is critical to its effectiveness.
When the Governance, Nomination and Corporate
Responsibilities Committee (GNCRC) of Novartis iden-
tifies new Board member candidates to be proposed to
shareholders for election, the maintenance and improve-
ment of the Board’s diversity is an important criterion.
The Board’s aspiration is to have a diverse Board in all
aspects. This includes nationality, gender, background
and experience, age, tenure, viewpoints, interests, and
technical and interpersonal skills. Background and expe-
rience in the following fields should be represented on
the Board: leadership and management; healthcare, life
sciences and medicine; research and development; engi-
neering and technology; marketing; banking, finance and
accounting; human resources; legal and public affairs;
and risk management.
gender
MALE
77 %
FEMALE
23 %
Diversity
nationality
DUTCH
15 %
GERMAN
8 %
BRITISH
15 %
SWISS
24 %
AMERICAN
38 %
Background/experience
LEADERSHIP MANAGEMENT
22 %
MARKETING
5 %
LAW
11 %
ENGINEERING/TECHNOLOGY
17 %
FINANCE/ACCOUNTING
17 %
MEDICINE/HEALTHCARE/R&D
28 %
age
>66
23 %
61–65
23 %
<55
8 %
55–60
46 %
tenure
7–9 Y
8 %
<3 Y
31 %
>9 Y
23 %
3–6 Y
38 %
94 | Novartis Annual Report 2017
Succession planning
Role of the Board and its committees
The Board is responsible for the overall direction and
supervision of management, and holds the ultimate
decision-making authority for Novartis AG, with the excep-
tion of decisions reserved for shareholders.
The Board has delegated certain of its responsibili-
ties to five committees, as set out on the next pages. In
some cases, these responsibilities are of an advisory or
preparatory nature (A/P). In other cases, they have been
fully delegated to the committee (FD), or the committee
has decision-making power that is subject to final Board
approval (FBA). 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. More-
over, committees ensure that only Board members who
are independent oversee audit and compliance, gover-
nance and compensation – as only independent Board
members are delegated in the respective committees.
The Chairman, supported by the GNCRC, ensures effec-
tive succession plans for the Board, the CEO and the
Executive Committee. These plans are discussed by the
Board in private meetings without management, and, in a
meeting without the Chairman, the succession plan for
the Chairman is discussed.
The GNCRC determines the target profile for a new
Board member, with the aim of strengthening the overall
Board composition to meet knowledge and experience
requirements in all essential fields. Factors considered
include skills and knowledge; diversity; professional back-
ground and expertise; business and other experience
relevant to the business of Novartis; the ability and will-
ingness to commit adequate time and effort to Board and
committee responsibilities; the extent to which person-
ality, background, expertise, knowledge and experience
will help build an effective and complementary Board;
and whether existing board memberships or other posi-
tions held by a candidate could lead to a potential con-
flict of interest or an independence issue.
The search for a new Board member is then launched
– normally with the support of a professional executive
search company – based on the target profile. Candi-
dates are interviewed by the Chairman and other Board
members, and evaluated by the GNCRC. The GNCRC
then makes a recommendation to the entire Board, and
the Board ultimately decides who should be proposed
to shareholders for election at the upcoming AGM.
Corporate governanCe
our Board of Directors
Novartis Annual Report 2017 | 95
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 transactions and investments of fundamental
importance to Novartis and all in excess of USD 500 Mio
— 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 2017/
approximate average
duration (hrs)
of each meeting/
attendance
9/6:00
Documents/
link
Joerg reinhardt1
Enrico Vanni
Nancy C. Andrews
Dimitri Azar
Ton Buechner
Srikant Datar
Elizabeth Doherty
Ann Fudge
Frans van Houten2
Pierre Landolt
9
9
9
9
8
9
9
9
5
9
Andreas von Planta 9
Charles L. Sawyers 9
William T. Winters
8
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/
investors/
company-overview/
corporate-governance
Charter of the Audit and
Compliance Committee
www.novartis.com/
investors/
company-overview/
corporate-governance
audit and Compliance Committee
7/3:00
The primary responsibilities of this committee include:
— Supervising external auditors (FD)**, and selecting and nominating
external auditors for election by the meeting of shareholders (FBA)***
— Overseeing internal auditors (FD)**
— Overseeing accounting policies, financial controls, and
compliance with accounting and internal control standards (FD)**
— Approving quarterly financial statements and financial results releases (FBA)***
— Overseeing internal control and compliance processes and procedures (FD)**
— Overseeing compliance with laws, and external and internal regulations (FD)**
The Audit and Compliance Committee has the authority to retain
external consultants and other advisors.
Dimitri Azar4
elizabeth Doherty1,3 7
7
7
Srikant Datar3
Andreas von Planta 7
Enrico Vanni
7
Compensation Committee
6/2:30
enrico vanni1
Srikant Datar
Ann Fudge
William T. Winters
6
6
6
6
Charter of the
Compensation
Committee
www.novartis.com/
investors/
company-overview/
corporate-governance
The primary responsibilities of this committee include:
— Designing, reviewing and recommending to the Board the compensation
policies and programs (FBA)***
— Advising the Board on the compensation of Board members
and the CEO (A/P)*
— Deciding on the compensation of Executive Committee members (FD)**
— Preparing the Compensation Report and submitting it to the Board
for approval (FBA)***
The Compensation Committee has the authority to retain external
consultants and other advisors.
1 Chairman
2 Elected new Board member at AGM 2017; see also page 97.
3 Audit Committee Financial Expert
4 Will step down as per AGM 2018, replaced by T. Buechner, subject to his re-election.
* A/P = advisory or preparatory task
** FD = fully delegated task
*** FBA = task subject to final Board approval
96 | Novartis Annual Report 2017
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 (FBA)***
— Identifying candidates for election as Board members (FBA)***
— Assessing existing Board members and recommending to the Board
whether they should stand for re-election (FBA)***
— Preparing and reviewing the succession plan for the CEO (FBA)***
— Developing and reviewing an onboarding program for new Board
members, and an ongoing education plan for existing Board members (FD)**
— Reviewing on a regular basis the Articles of Incorporation, with a view
to reinforcing shareholder rights (FD)**
— Reviewing on a regular basis the composition and size of the Board
and its committees (FBA)***
— Reviewing annually the independence status of each Board member (FBA)***
— Reviewing directorships and agreements of Board members for
conflicts of interest, and dealing with conflicts of interest (FD)**
— Overseeing the company’s strategy and governance on corporate
responsibility (FBA)***
The Governance, Nomination and Corporate Responsibilities Committee
has the authority to retain external consultants and other advisors.
Number of meetings
held in 2017/
approximate average
duration (hrs)
of each meeting/
attendance
Documents/
link
3/1:30
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/
investors/
company-overview/
corporate-governance
research & Development Committee
3/7:00
The primary responsibilities of this committee include:
— Monitoring research and development, and bringing recommendations
to the Board (FBA)***
— Assisting the Board with oversight and evaluation related to
research and development (FD)**
— 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 (A/P)*
— Advising the Board on scientific, technological, and research
and development matters (A/P)*
— Providing counsel and know-how to management in the area of
research and development (A/P)*
— 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 (A/P)*
The Research & Development Committee has the authority to retain
external consultants and other advisors.
Joerg reinhardt1
Nancy C. Andrews
Dimitri Azar
3
3
3
Charles L. Sawyers 3
Charter of the
Research & Development
Committee
www.novartis.com/
investors/
company-overview/
corporate-governance
risk Committee
5/2:00
Srikant Datar1
Nancy C. Andrews
Ton Buechner
Elizabeth Doherty
Ann Fudge
5
5
3
4
5
Andreas von Planta 5
Charter of the
Risk Committee
www.novartis.com/
investors/
company-overview/
corporate-governance
The primary responsibilities of this committee include:
— Ensuring that Novartis has implemented an appropriate and effective
risk management system and process (FBA)***
— Ensuring that all necessary steps are taken to foster a culture
of risk-adjusted decision-making without constraining reasonable
risk-taking and innovation (FBA)***
— Approving guidelines and reviewing policies and processes (FBA)***
— 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 (FBA)***
The Risk Committee has the authority to retain external consultants
and other advisors.
1 Chairman
* A/P = advisory or preparatory task
** FD = fully delegated task
*** FBA = task subject to final Board approval
Corporate governanCe
our Board of Directors
Novartis Annual Report 2017 | 97
All Board members except Frans van Houten attended
more than 75% of all Board meetings and the meetings
of their Board committees.
Mr. van Houten has an overall meeting attendance of
71% due to scheduling conflicts with Royal Philips board
meetings, which he is required to attend as CEO of the
company. In 2017, he could not resolve all of these con-
flicts following his election to the Novartis Board at the
2017 AGM. He informed the GNCRC about this issue
prior to his election.
The Novartis corporate culture and
role of the Board
The corporate culture of Novartis is 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 compensation sys-
tem supports the desired corporate culture of Novartis.
The Board also reviews the regular evaluation of the cor-
porate 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 Chairmen set their meeting agendas.
Any Board member may request a Board or committee
meeting, and the inclusion of an agenda item. Before
meetings, Board members receive materials to help them
prepare the discussions and decision-making.
Chairman
Joerg Reinhardt has been the independent, non-executive
Chairman since August 1, 2013. He has both industry and
Novartis experience, and meets the company’s indepen-
dence criteria. As independent Chairman, he can lead
the Board to represent the interests of all stake holders,
being accountable to them and creating sustainable
value through effective governance, the right strategy,
and delivery of the expected level of performance. The
independent chairmanship also ensures an appropriate
balance of power between the Board and the Execu-
tive Committee.
In this role, Mr. Reinhardt:
• Provides leadership to the Board
• Supports and mentors the CEO
• Supported by the GNCRC, ensures effective succession
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 discus-
sions, promoting constructive dialogue and effective
decision-making
• Supported by the GNCRC, ensures that all Board commit-
tees are properly established, composed and operated
• Ensures that the Board’s performance is annually evaluated
• Ensures onboarding programs for new Board members,
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
98 | Novartis Annual Report 2017
Board meetings
The Board has meetings with Executive Committee mem-
bers, as well as private meetings without them. Because
all Board members are independent, no separate meet-
ings of the independent Board members were held in
2017. Subject to additional special meetings, the Board
and Board committee meetings take place in January,
April, June, August, October and December. Typically
these meetings last two days, with the first day allo-
cated to Board committee meetings, and the second day
allocated to the meeting of the full Board.
Full Board meetings include separate sessions of the
Board without the CEO and the other Executive Com-
mittee members, of the Board with the CEO, and of the
Board with the CEO and the other Executive Committee
members.
Occasionally, other members of management and/
or external advisors are invited to attend and/or present
a specific topic at a Board meeting. The independent
advisor of the Compensation Committee is regularly
invited to attend portions of the meetings of the Com-
pensation Committee. For more information, see Infor-
mation and Control Systems of the Board vis-à-vis
Ma nagement, beginning on page 100, and our Compen-
sation Report, beginning on page 118.
Key activities of our Board and
committees in 2017
In 2017, the Board addressed in its meetings among others
the following key standard topics: strategy; Group tar-
gets; mergers and acquisitions, business development
and licensing review; financial and business reviews;
major projects; investments and transactions; corpo-
rate governance; and 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 2017 our Board and its committees
focused on a number of special topics, including:
Board of Directors:
CEO succession; strategic options for Alcon; the Novartis
digital strategy; the results of the Global Engagement
Survey 2017; and AGM analysis
Audit and Compliance Committee:
Accounting and compliance questions related to new
reporting requirements and guidelines; matters of account-
ing judgement; tax strategy as well as questions; com-
pensation disclosure; potential rotation of the external
auditors; and satisfactory resolution of high rated inter-
nal audit observations
Compensation Committee:
Compensation decisions related to the CEO succession;
review of the compensation system of the Executive
Committee and potential changes to the Annual Incen-
tive and Long-Term Relative Performance Plan; review
of the Board and committee fees and related potential
changes; review of shareholder feedback from the road-
shows; and potential enhanced disclosures in the 2017
Compensation Report
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 Chairmen;
CEO succession; reviews of our corporate responsibil-
ity activities; Novartis access-to-medicine portfolio; and
the company’s performance in Environmental, Social and
Governance (ESG) ratings and indices
Research & Development Committee:
The Novartis portfolio of research and development
projects in ophthalmology, translational medicine, chem-
ical biology and therapeutics, hepatology, non-malignant
hematology and immuno-oncology, as well as inno vation-
related incentives
Risk Committee:
Data privacy; management of people risk related to the
changed operating model; main risks and mitigations at
Alcon, Novartis Technical Operations and in IT; and over-
sight of medical and patient activities
Honorary Chairmen
Dr. Alex Krauer and Dr. Daniel Vasella have been
appointed Honorary Chairmen in recognition of their
significant achievements on behalf of Novartis. They
are not provided with Board documents and do not
attend Board meetings.
Corporate governanCe
our Board of Directors
Novartis Annual Report 2017 | 99
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 busi-
ness or relationship that could materially interfere with
the exercise of objective, unfettered and independent
judgment. Only with a majority of Board members being
independent can the Board fulfill its obligation to repre-
sent the interests of shareholders, being accountable to
them and creating sustainable value through the effec-
tive governance of Novartis. Accordingly, Novartis estab-
lished independence criteria based on international best
practice standards as outlined on the Novartis website:
https://www.novartis.com/sites/www.novartis.com/files/
independence-criteria-board-of-directors-and-its-com-
mittees.pdf
• The majority of Board members and any member of the
Audit and Compliance Committee, the Compensation
Committee, and the GNCRC must meet the company’s
independence criteria. These include, inter alia, (i) a
Board member not having received direct compensa-
tion 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 mem-
ber or family member not being employed by the exter-
nal 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 Committee,
even stricter rules apply.
• In addition, Board members are bound by the Novartis
Conflict of Interest Policy, which prevents a Board mem-
ber’s potential personal interests from influencing 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 commit-
tee considers all relevant facts and circumstances of
which it is aware – not only the explicit formal indepen-
dence 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 former colleagues.
In its meeting on December 14, 2017, 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,
2017. 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
According to article 34 of the Articles of Incorpora-
tion (www.novartis.com/investors/company-overview/
corporate-governance), no Board member may hold
more than 10 additional mandates in other companies, of
which no more than four shall be in other listed compa-
nies. Chairmanships of the boards of directors of other
listed companies count as two mandates. Each of these
mandates is subject to Board approval.
The following mandates are not subject to these
limitations:
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 mandates.
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 are granted to members of the Board.
100 | Novartis Annual Report 2017
Board performance and
effectiveness evaluation
Process
The Board conducts an annual review to evaluate its
performance, the performance of the committees and
of Board members. As part of this process, each Board
member completes 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. Any sug-
gestion for improvement is recorded and actions are
agreed upon.
Periodically, this process is conducted by an inde-
pendent consultant. In 2017, an independent performance
and effectiveness evaluation of the Board and its com-
mittees, including an assessment of individual Board
members, was conducted by the independent expert
company Egon Zehnder.
Board members
complete questionnaire
Results are collected and evaluated
by Board office
Chairman has discussion
with each Board member
Full Board discusses results
and agrees on actions
Content and results
The performance review examines the performance
and effectiveness, 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 2018
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 supervisory
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 avail-
able to the Board.
• Meetings or teleconferences are held as required
between Board members and the CEO.
• The Board regularly meets with all Executive Commit-
tee members.
• The Board receives detailed quarterly updates from
each division and business unit 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, external consultants to review the business,
better understand applicable laws and policies affect-
ing the Group, and support the Board and management
in meeting the requirements and expectations of stake-
holders and shareholders.
In particular, the Chief Financial Officer (CFO), the
Group General Counsel, and representatives of the exter-
nal auditors are invited to partly attend each Audit and
Compliance Committee meeting. Additionally, the heads
of Internal Audit, Financial Reporting & Accounting, Integ-
rity and Compliance, and Quality, as well as the Head of
the Global Business Practices Office, report on a regu-
lar 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 information, the Disclosure Review Commit-
tee is responsible for ensuring the accuracy and com-
pleteness of disclosures. The Disclosure Review Com-
mittee, which is a management committee, is chaired by
the CFO and includes the CEO; the Group General Coun-
sel; the heads of the divisions, business units, Novartis
Operations, Novartis Technical Operations, Global Drug
Development, and the Novartis Institutes for BioMedical
Research (NIBR), as well as their finance heads; and the
heads of the following corporate functions: Treasury, Tax,
Financial Reporting & Accounting, Internal Audit and
Investor Relations. The Audit and Compliance Commit-
tee reviews decisions made by the Disclosure Review
Committee before the quarterly and annual releases are
published.
Corporate governanCe
our Board of Directors
Novartis Annual Report 2017 | 101
The Risk Committee oversees the risk management
system and processes, and also reviews the risk port-
folio of the Group to ensure appropriate and profes-
sional 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 Chief Ethics and Compliance Officer,
and other senior executives are invited to these meet-
ings on a regular 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 typ-
ically 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 (see page 179). 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 applicable
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 179-183 of the operating and financial review 2017.
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.
Prior to the release of each quarter’s results, the Board
receives the actual consolidated financial statement infor-
mation and an outlook of the full-year results in accor-
dance with IFRS and “core” results (as defined by Novartis),
together with related commentary.
On an annual basis, in the fourth quarter of the year,
the Board receives and approves the operating and finan-
cial 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 non-IFRS
measures as defined by Novartis (“core results”).
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
providing 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 invites
the Head of Internal Audit to its meetings to review the
internal audit scope, audit plans and results. In 2017,
the Head of Internal Audit attended four meetings of
the Audit and Compliance Committee.
Risk management
The Group Risk Office is overseen by the Board’s inde-
pendent Risk Committee. The Compensation Committee
works closely with the Risk Committee to ensure that the
compensation system does not lead to excessive risk-tak-
ing by management (for details, see our Compensation
Report, beginning on page 118).
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.
102 | Novartis Annual Report 2017
Board of Directors
Joerg reinhardt, ph.D.
Chairman of the Board of Directors | Nationality: German | Year of Birth: 1956
Joerg Reinhardt, Ph.D., has been Chairman of the Board of Directors since 2013. He is also Chairman of the
Research & Development Committee and Chairman of the Board of Trustees of the Novartis Foundation.
From 2010 to mid-2013, Mr. Reinhardt 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. Since 2017, Mr. Reinhardt
has been a non-executive board member of Swiss Re, Switzerland. Additionally, he was a member of the
board of directors of Lonza Group AG in Switzerland from 2012 to 2013, Chairman of the Board of the Ge-
nomics Institute of the Novartis Research Foundation in the United States from 2000 to 2010, and a member
of the supervisory board of MorphoSys AG in Germany from 2001 to 2004.
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.
Vice Chairman of the Board of Directors | Nationality: Swiss | Year of Birth: 1951
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 Compensation
Committee. He is also a member of the Audit and Compliance Committee and the Governance, Nomination
and Corporate Responsibilities Committee.
Mr. Vanni retired as director of McKinsey & Company in 2007. He is a board member of several companies
in industries from healthcare to private banking, including Advanced Oncotherapy PLC in the United Kingdom,
and non-listed companies such as Lombard Odier SA, Banque Privée BCP (Suisse) SA, and Denzler & Partners
SA – all based in Switzerland. He previously served on the boards of Eclosion2 in Switzerland from 2009 to
2017, of Alcon Inc. in Switzerland from 2010 to 2011, and of Actavis PLC in Ireland in 2010.
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 Adminis-
tration from INSEAD in Fontainebleau, France. He began his career as a research engineer at the Inter national
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 pharma ceutical,
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. From 2008 to 2015, he was an independent
consultant, supporting leaders of pharmaceutical and biotechnology companies on core strategic challenges
facing the healthcare industry.
nancy C. andrews, M.D., ph.D.
Member of the Board of Directors | Nationality: American | Year of Birth: 1958
Nancy C. Andrews, M.D., Ph.D., has been a member of the Board of Directors since 2015. She qualifies as an
independent Non-Executive Director and is a member of the Research & Development Committee and the
Risk Committee.
Dr. Andrews is dean emerita of the Duke University School of Medicine and vice chancellor emerita for
academic affairs at Duke University in the United States. She served as dean and vice chancellor from
2007 to 2017. She is 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 chair of the board of directors of the American Academy of Arts and Sciences and of the
Burroughs Wellcome Fund, a member of the Massachusetts Institute of Technology (MIT) Corporation,
and former president of the American Society for Clinical Investigation. Additionally, she serves on the
council of the National Academy of Medicine and on the Scientific Management Review Board of the US
National Institutes of Health.
Dr. Andrews holds a doctorate in biology from MIT 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 2017 | 103
Dimitri azar, M.D.
Member of the Board of Directors | Nationality: American | Year of Birth: 1959
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 & Devel-
opment Committee.
Dr. Azar is senior director of ophthalmological innovation at Verily Life Sciences. He has also served as dean
of the University of Illinois at Chicago (UIC) College of Medicine in the United States since 2011, and as
professor of ophthalmology, bioengineering and pharmacology at UIC since 2006. From 2006 to 2011, he
was head of the Department of Ophthalmology and Visual Sciences at UIC. He is a member of the American
Ophthalmological Society, former president of the Chicago Ophthalmological Society, and president-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 Inc., and the scientific board of Verily – all based in the US.
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 metalloproteinases in corneal wound healing and angiogenesis has been
funded by the US National Institutes of Health since 1993. Dr. Azar practiced at the Wilmer Eye Institute at
the Johns Hopkins Hospital School of Medicine in the US, and then returned to the Massachusetts Eye and
Ear Infirmary as director of cornea and external disease. He became professor of ophthalmology with tenure
at Harvard Medical School in 2003. Dr. Azar holds a master’s degree from Harvard and an Executive Master
of Business Administration from the University of Chicago Booth School of Business in the US.
ton Buechner
Member of the Board of Directors | Nationality: Dutch | Year of Birth: 1965
Ton Buechner has been a member of the Board of Directors since February 2016. He qualifies as an independent
Non-Executive Director and is a member of the Risk Committee.
Mr. Buechner most recently served as chairman and CEO of the executive board of Dutch multinational Akzo-
Nobel from 2012 to 2017. 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 Netherlands and at Aker Kvaerner in Singapore. He is a member of the
supervisory board of Voith GmbH in Germany.
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.
Member of the Board of Directors | Nationality: American | Year of Birth: 1953
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 Risk Committee, as well as a member of the Audit and Com-
pliance Committee and the Compensation Committee. The Board of Directors has appointed him as Audit
Committee Financial Expert.
Since 1996, Mr. Datar has been the Arthur Lowes Dickinson professor of business administration at Harvard
Business School in the United States. Additionally, since 2015, he has been faculty chair of the Harvard Inno-
vation Lab and senior associate dean for university affairs at Harvard Business School. He is a member of
the boards of directors of ICF International Inc., Stryker Corp. and T-Mobile US, all in the US. He previously
served on the boards of HCL Technologies Ltd. (2012 to 2014) and KPIT Cummins Infosystems Ltd (2007 to
2012), both based in India.
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 management, measurement of productivity, new product development, innovation,
time-based competition, incentives and performance evaluation. He is the author of many scientific publica-
tions and has received several academic awards and honors. Mr. Datar has also advised and worked with
numerous companies in research, development and training.
104 | Novartis Annual Report 2017
Board of Directors (continued)
elizabeth (Liz) Doherty
Member of the Board of Directors | Nationality: British | Year of Birth: 1957
Elizabeth (Liz) Doherty has been a member of the Board of Directors since February 2016. She qualifies as an
independent Non-Executive Director and is the Chairman of the Audit and Compliance Committee and a member
of the Risk Committee. The Board of Directors has appointed her as Audit Committee Financial Expert.
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 Nether-
lands. She is a fellow of the Chartered Institute of Management Accountants; a non-executive board member
of the UK Ministry of Justice; a non-executive board member of Her Majesty’s Courts and Tribunals Service
in the UK; and an advisor to GBfoods and Affinity Petcare SA, subsidiaries of Agrolimen SA. 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. Her previous positions also include interim chief financial officer (CFO) of
Cognita Schools Ltd. from 2014 to 2015, CFO and board member of Reckitt Benckiser Group PLC from 2011
to 2013, interim CFO of City Inn in 2010, and CFO of Brambles Ltd. from 2007 to 2009.
ann Fudge
Member of the Board of Directors | Nationality: American | Year of Birth: 1951
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 Governance,
Nomination and Corporate Responsibilities 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; a trustee of Boston-based WGBH public media; and a member
of the visiting committee of Harvard Business School in the US. She served on the board of General Electric
Co. in the US from 1999 to 2015.
Ms. Fudge received her bachelor’s degree from Simmons College in the US and her Master of Business
Administration from Harvard Business School. 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.
Frans van Houten
Member of the Board of Directors | Nationality: Dutch | Year of Birth: 1960
Frans van Houten has been a member of the Board of Directors since February 28, 2017. He qualifies as an
independent Non-Executive Director.
Mr. van Houten is CEO and chairman of the executive committee and the board of management of Royal Philips,
a position he has held since 2011. Under his leadership, Philips has transformed itself into a focused health
technology company. In May 2016, he also became vice chairman and a member of the supervisory board
of Philips Lighting.
Mr. van Houten holds a master’s degree in economics and business management from Erasmus University
in Rotterdam, the Netherlands. He joined Philips in 1986 and has held multiple global senior leadership
positions. From 2009 to 2010, he was a consultant to the boards of companies including ING Group NV and
ASM International NV. Before that, he was CEO of NXP Semiconductors (a Philips spinoff) from 2004 to 2009.
pierre Landolt, ph.D.
Member of the Board of Directors | Nationality: Swiss | Year of Birth: 1947
Pierre Landolt, Ph.D., has been a member of the Board of Directors since 1996. He qualifies as an indepen-
dent Non-Executive Director and is a member of the Governance, Nomination and Corporate Responsibili-
ties 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 development. In 2007, he co-founded Amazentis SA, a startup company active in the conver-
gence 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 2017 | 105
andreas von planta, ph.D.
Member of the Board of Directors | Nationality: Swiss | Year of Birth: 1955
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 Governance, Nomination and Corporate Respon-
sibilities Committee. He is also a member of the Risk Committee and the Audit and Compliance Committee.
Mr. von Planta provides counsel to the law firm Lenz & Staehelin AG, where he was a partner from 1988
through 2017. He 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, 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, and specializes
in corporate law, corporate governance, corporate finance, company reorganizations, and mergers and
acquisitions. He previously served as chairman of Clinique Générale-Beaulieu SA from 2011 to 2016, and as
a director there from 2008 to 2016. Additionally, he was chairman of Swiss National Insurance Company Ltd.
(Nationale Suisse) from 2011 to 2015, a director at Nationale Suisse from 1997 to 2015, and a director at
Holcim Ltd. from 2003 to 2014.
Charles L. Sawyers, M.D.
Member of the Board of Directors | Nationality: American | Year of Birth: 1959
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 the US 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 mem-
ber of the US National Academy of Sciences, the National Academy of Medicine, and the American Academy
of Arts and Sciences. He serves as a science advisor for the following companies: Agios Pharmaceuticals
Inc., Housey Pharmaceutical Research Laboratories, Nextech Invest Ltd., Blueprint Medicines Corporation,
BeiGene Ltd., The Column Group, ORIC Pharmaceuticals Inc., KSQ Therapeutics Inc., Foghorn Therapeutics
Inc., and PMV Pharmaceuticals Inc.
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-developed 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
Member of the Board of Directors | Nationality: British/American | Year of Birth: 1961
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 Committee
and the Print Room theater in the United Kingdom.
Mr. Winters received his bachelor’s degree from Colgate University and his Master of Business Adminis tration
from the Wharton School of the University of Pennsylvania in the US. From 2011 to 2015, he was chairman
and CEO of Renshaw Bay, an alternative asset management firm. Prior to that, he 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.
106 | Novartis Annual Report 2017
Our management
Composition of the Executive Committee
Joseph Jimenez
Chief Executive Officer
(until January 31, 2018)
Steven Baert
Human Resources
Felix r. ehrat
Group General Counsel
Harry Kirsch
Chief Financial Officer
andré Wyss
Novartis Operations
James Bradner
Biomedical Research
vasant narasimhan
Global Drug Development
(CEO as per February 1, 2018) 1
paul Hudson
Innovative Medicines:
Pharmaceuticals
Bruno Strigini
Innovative Medicines:
Oncology
(until December 31, 2017) 2
F. Michael Ball
Alcon
richard Francis
Sandoz
1 Search for new Head Global Drug Development is ongoing; an interim Head has been appointed, who is not a member of the Executive Committee.
2 Elizabeth Barrett appointed CEO Novartis Oncology and member of the Executive Committee, effective February 1, 2018.
Executive Committee composition
The Executive Committee is headed by the CEO. Its mem-
bers 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.
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:
• Recruiting, appointing and promoting senior management
• Ensuring the efficient operation of the Group and the
achievement of optimal results
• Promoting an active internal and external communications
policy
• Developing policies and strategic plans for Board
approval, and implementing those approved
• Submitting the following to the Board for approval: invest-
ments, divestments, transactions, contracts and litiga-
tions with a value exceeding USD 500 million, import-
ant capital market and other financing transactions, as
well as all (other) matters of fundamental significance
for the Novartis Group
• 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
• Dealing with any other matters delegated by the Board
The Executive Committee is supported by a sub- committee:
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.
Corporate governanCe
our management
Novartis Annual Report 2017 | 107
CEO
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
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 management deve-
lopment plans are in place and presented to the Board
• Develops an organizational structure, and establishes
processes and systems to ensure the efficient organi-
zation of resources
• Ensures that financial results, business strategies and,
when appropriate, targets and milestones are commu-
nicated to the investment community – and generally
develops and promotes effective communication with
shareholders and other stakeholders
• Ensures that the business performance is consistent
with business principles as well as high legal and eth-
ical standards, and that the culture of Novartis is con-
sistent with the Novartis Values and Behaviors
• Leads the Innovative Medicines Division
• Develops processes and structures to ensure that cap-
ital investment proposals are reviewed thoroughly, that
associated risks are identified, and that appropriate
steps are taken to manage these risks
• Develops and maintains an effective framework of inter-
nal controls over risk in relation to all business activi-
ties of the company
• Ensures that the flow of information to the Board is
accurate, timely and clear
Mandates outside the Novartis Group
According to article 34 of the Articles of Incorpora-
tion (www.novartis.com/investors/company-overview/
corporate-governance), no Executive Committee mem-
ber may hold more than six additional mandates in other
companies, of which no more than two additional man-
dates shall be in other listed companies. Each of these
mandates is subject to Board approval. Executive Com-
mittee 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.
108 | Novartis Annual Report 2017
Executive Committee
Joseph Jimenez
Chief Executive Officer of Novartis | Nationality: American | Year of Birth: 1959
Joseph Jimenez has been Chief Executive Officer (CEO) of Novartis since 2010. Effective February 1, 2018,
Mr. Jimenez will step down as CEO.
Mr. Jimenez previously held the position of Division Head, Novartis Pharmaceuticals. He joined Novartis in
2007 as Division Head, Novartis Consumer Health. Before that, from 1998 to 2006, 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 graduated 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
Head of Human Resources of Novartis | Nationality: Belgian | Year of Birth: 1974
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
CEO, Alcon | Nationality: American | Year of Birth: 1955
F. Michael (Mike) Ball was appointed CEO of Alcon in February 2016. He is a member of the Executive
Committee of Novartis.
Mr. Ball previously served as CEO of Hospira Inc. from 2011 to 2015. Prior to that, he held a number of senior
leadership positions at Allergan Inc., including president from 2006 to 2011. Before joining Allergan in 1995,
Mr. Ball held roles of increasing responsibility in marketing and sales at Syntex Corporation and Eli Lilly & Co.
He began his career in the healthcare industry in 1981.
Mr. Ball has served on the boards of several companies based in the United States, including Kythera
Biopharmaceuticals Inc. (2013 to 2015), Hospira (2011 to 2015), IntraLase Corp. (2005 to 2006), and sTec
Inc. (2000 to 2013). He holds a Bachelor of Science and a Master of Business Administration from Queen’s
University in Canada.
James (Jay) Bradner, M.D.
President of the Novartis Institutes for BioMedical Research (NIBR) | Nationality: American | Year of Birth: 1972
James (Jay) Bradner, M.D., joined Novartis in January 2016 and became President of the Novartis Institutes
for BioMedical Research (NIBR) in March 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 from 2005 through 2015. He is
a co-founder of five biotechnology companies and has authored more than 180 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.
Corporate governanCe
our management
Novartis Annual Report 2017 | 109
Felix r. ehrat, ph.D.
Group General Counsel of Novartis | Nationality: Swiss | Year of Birth: 1957
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, and served as senior partner from 2003 to 2011, and as executive chairman of the board from
2007 to 2011. Since 2011, he has also held various other leadership positions at the Novartis Group level,
including in compliance and country management. He is chairman of Globalance Bank AG and a board member
of Geberit AG and Avenir Suisse (a think tank for economic and social issues), all headquartered in Switzerland.
He previously served as chairman and board member of several listed and non-listed companies based in
Switzerland and elsewhere.
After being admitted to the bar, Mr. Ehrat received his Master of Laws from McGeorge School of Law in the
United States in 1986, and his doctorate in law from the University of Zurich in Switzerland in 1990. He has
held leadership roles at international legal organizations including the International Bar Association and
Association Internationale des Jeunes Avocats.
richard Francis
CEO, Sandoz | Nationality: British | Year of Birth: 1968
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 cardiovascular products. He also held sales
and marketing positions at Lorex Synthélabo and Wyeth.
Mr. Francis is a member of the board of directors of Mettler-Toledo International Inc., based in the US.
He received a Bachelor of Arts in economics from Manchester Metropolitan University in the UK.
paul Hudson
CEO, Novartis Pharmaceuticals | Nationality: British | Year of Birth: 1967
Paul Hudson has been CEO of Novartis Pharmaceuticals since July 2016. He is a member of the Executive
Committee of Novartis.
Mr. Hudson joined Novartis from AstraZeneca PLC, 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 pres-
ident and primary care director, United Kingdom. Before joining AstraZeneca in 2006, 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.
Harry Kirsch
Chief Financial Officer of Novartis | Nationality: Swiss, German | Year of Birth: 1965
Harry Kirsch has been Chief Financial Officer (CFO) of Novartis since 2013. He is a member of the Executive
Committee of Novartis.
Mr. Kirsch joined Novartis in 2003 and, prior to his current position, served as CFO of the company’s Pharma-
ceuticals Division. Under his leadership, the division’s core operating income margin increased, in constant
currencies, 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 Pharma-
ceuticals Division. Mr. Kirsch joined Novartis from Procter & Gamble (P&G) in the United States, where he
was CFO of P&G’s global pharmaceutical 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.
110 | Novartis Annual Report 2017
Executive Committee (continued)
vasant (vas) narasimhan, M.D.
Global Head of Drug Development and Chief Medical Officer for Novartis | Nationality: American | Year of Birth: 1976
Vasant (Vas) Narasimhan, M.D., has been Global Head of Drug Development and Chief Medical Officer for
Novartis since February 2016. He is a member of the Executive Committee of Novartis, and effective February
1, 2018, will become Chief Executive Officer of the company.
Dr. Narasimhan previously was Global Head of Development for Novartis Pharmaceuticals, overseeing the
entire general medicines pipeline. He has also served as Global Head of the Sandoz Biopharmaceuticals and
Oncology Injectables business unit, Global Head of Development for Novartis Vaccines, North America Region
Head for Novartis Vaccines, and United States Country President for Novartis Vaccines and Diagnostics.
Before joining Novartis in 2005, he worked at McKinsey & Company.
Dr. Narasimhan received his medical degree from Harvard Medical School in the US, a master’s degree in
public policy from Harvard’s John F. Kennedy School of Government, and a bachelor’s degree in bio logical
sciences from the University of Chicago in the US. During and after his medical studies, he worked exten-
sively on a range of public health issues in developing countries. He is an elected member of the US National
Academy of Medicine and serves on the board of fellows of Harvard Medical School.
Bruno Strigini
CEO, Novartis Oncology | Nationality: French | Year of Birth: 1961
Bruno Strigini has been CEO of Novartis Oncology since July 2016. On December 31, 2017, he stepped back
from the Executive Committee of Novartis, and he will step down as CEO of Novartis Oncology in early 2018.
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) from 2009 to 2014. He previously worked
at Schering-Plough from 2006 to 2009 as group vice president and president of EUCAN Region II (encom-
passing Austria, Belgium, Greece, the Netherlands, Portugal, Switzerland, Central and Eastern Europe, the
Middle East and Africa). Before that, he held positions at UCB Celltech and SmithKline Beecham.
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
President of Novartis Operations and Country President for Switzerland | Nationality: Swiss | Year of Birth: 1967
André Wyss has been President of Novartis Operations since February 2016, and is responsible for
manufacturing, shared services and corporate affairs. He is also Country President for Switzerland and a
member of the Executive Committee of Novartis.
Mr. Wyss has been with Novartis since 1984 when he was a chemistry apprentice in manufacturing at Sandoz.
Before being appointed President of Novartis Operations, he served as Head of Novartis Business Services,
building and implementing a shared services organization across Novartis. Prior to that, he held several other
leadership positions, including US Country Head and President of Novartis Pharmaceuticals Corporation;
Head of the Pharmaceuticals 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 Adminis-
tration (HWV) in Switzerland in 1995. He is a member of the board of economiesuisse.
Secretary
Bruno Heynen
Corporate governanCe
our independent external auditors
Novartis Annual Report 2017 | 111
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. Martin Kennard, auditor in charge, began serving
in his role in 2017, and Stephen Johnson, global relation-
ship partner, began serving in his role in 2014. The Audit
and Compliance Committee together with 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 company
financial statements of Novartis AG comply with Swiss
law. Additionally, PwC is responsible for opining on the
effectiveness of internal control over financial report-
ing, on the Compensation Report and on the corporate
responsibility reporting of Novartis.
The Audit and Compliance Committee, acting on
behalf of the Board, is responsible for overseeing the
activities of PwC. In 2017, this committee held seven
meetings. PwC was invited to six 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, 2017. 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, based on this, once
a year determines whether PwC should be proposed to
the shareholders for election. Also once a year, the audi-
tor 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 conducted 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.
112 | Novartis Annual Report 2017
Audit and additional fees
PwC fees for professional services related to the 12-month
periods ended December 31, 2017 and December 31,
2016 are as follows:
Audit services
Audit-related services
Tax services
Other services
total
2017
USD million
2016
USD million
24.6
7.2
0.8
1.4
34.0
26.7
2.9
0.7
1.3
31.6
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 responsibility
assurance, other audit-related services, and in 2017 audit
services related to the Alcon strategic review.
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 account-
ing and other reporting guidance databases.
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 related 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 information
systems and the related control environment, reviews of
quarterly financial results, as well as procedures required
to issue consents and comfort letters.
Corporate governanCe
our corporate governance framework
Novartis Annual Report 2017 | 113
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 rele-
vant to the CEO’s compensation and for evaluating 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 cor porate
governance standards into the Articles of Incorporation
and the Regulations of the Board of Directors, its Com-
mittees and the Executive Committee of Novartis AG
(www.novartis.com/investors/company-overview/
corporate-governance).
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/
investors/company-overview/corporate-governance
Printed copies of the Novartis Articles of Incorpora-
tion as well as the Regulations of the Board, including
the charters of Board committees (in English), can be
obtained by writing to: Novartis AG, Attn: Corporate Sec-
retary, Lichtstrasse 35, CH-4056 Basel, Switzerland.
Electronic copies are available at: www.novartis.com/
investors/company-overview/corporate-governance.
114 | Novartis Annual Report 2017
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 31 to the Group’s con-
solidated financial statements.
Divisions
The businesses of Novartis are divided on a worldwide
basis into three operating divisions: Innovative Medicines,
with the two business units Novartis Pharmaceuticals 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 manufactur-
ing organization) and Novartis Business Services (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 75.3 million at December
31, 2017, using the quoted market share price at year-end.
Applying this share price to all the shares of the com-
pany, the market capitalization of the whole company
was USD 283.2 million, and that of the shares owned by
Novartis was USD 207.9 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, 2017, was USD 13.4 billion. The total market value of
Roche Holding AG was USD 217.6 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,
including a put option that is exercisable as of March 2,
2018 until latest 2035.
Political contributions and lobbying
Novartis makes political contributions to support 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 receiv-
ing it, or with the expectation of a direct or immediate
return for Novartis. Such contributions are fully com pliant
with applicable laws, regulations and industry codes.
Novartis only makes political contributions in countries
where such contributions from corporations are consid-
ered to reflect good corporate citizenship. Moreover,
Novartis only makes modest political contributions so as
to not create any dependency from the political parties
receiving these contributions.
In 2017, Novartis made political contributions totaling
approximately USD 2.0 million, thereof approximately
USD 600 000 in Switzerland, USD 1 365 000 in the US,
and USD 65 000 in Australia. In addition, in the US, a
political action committee established by Novartis used
funds received from Novartis employees (but not from
the company) to make political contributions totaling
approximately USD 220 000.
In Switzerland, Novartis supports political parties that
have a political agenda and that hold positions support-
ing the strategic interests of Novartis, its shareholders
and other stakeholders. Swiss political parties are com-
pletely privately financed, and the contributions of com-
panies are a crucial part thereof. This private financing
of parties 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.
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 (www.novartis.com/our-com-
pany/corporate-responsibility/doing business-responsibly/
transparency-disclosure/public-policy-advocacy).
Corporate governanCe
Further information
Novartis Annual Report 2017 | 115
Shareholder relations
The CEO, with the CFO and Investor Relations team,
supported 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 communi cation,
the Board also learns about and addresses sharehold-
ers’ expectations and concerns.
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 and other Board members,
the CEO and other Executive Committee members, and
representatives of the external auditors are present and
can answer shareholders’ questions. Other meetings
with shareholders may be attended by the Chairman,
CEO, CFO, Executive Committee members, and other
members of senior management.
Topics discussed with shareholders may include strat-
egy, business performance and corporate governance,
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 addition,
Novartis prepares an annual report on Form 20-F that is
filed with the US Securities and Exchange Commission
(SEC). Novartis discloses financial results in accordance
with IFRS on a quarterly basis, and issues press releases
from time to time regarding business developments.
Novartis furnishes press releases related 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/our-company/
corporate-responsibility, which details progress and
demonstrates the company’s commitment to be a leader
in corporate responsibility. This report reflects the best-
in-class reporting standard, the Global Reporting Initia-
tive’s G4 guidelines, and fulfills the company’s reporting
requirement 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 head quarters
in Basel. Part of the team is located in the US to coor-
dinate interaction with US investors. More 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
novartis code for senior financial officers
additional information
Information
Articles of Incorporation of Novartis AG
www.novartis.com/investors/company-overview/corporate-governance
Novartis key share data
www.novartis.com/key-share-data
Articles of Incorporation of Novartis AG
www.novartis.com/investors/company-overview/corporate-governance
Investor Relations information
www.novartis.com/investors
Board regulations
www.novartis.com/investors/company-overview/corporate-governance
Executive Committee
www.novartis.com/our-company/executive-committee
Novartis Code of Ethical Conduct for CEO and Senior Financial Officers
www.novartis.com/investors/company-overview/corporate-governance
Novartis Investor Relations
www.novartis.com/investors
116 | Novartis Annual Report 2017
Novartis Annual Report 2017 | 117
Photo Transplant surgeon
Manuel Cobos carries out
an operation in Buenos Aires,
Argentina. Dr. Cobos spent
the summer of 2016 as
an intern in the Novartis
Next Generation Scientist
program, which helps widen
the experience and skills of
researchers from emerging
countries.
118 | Novartis Annual Report 2017
Compensation Report
Contents
Dear Shareholder,
Compensation Committee Chairman’s letter
Executive Committee compensation at a glance
Board compensation at a glance
Compensation governance at a glance
Executive Committee
compensation philosophy and principles
Executive Committee compensation policies
Executive Committee
performance management process
2017 Executive Committee compensation
2018 Executive Committee compensation
2017 Board compensation
2018 Board compensation
Compensation governance
Report of the statutory auditor
on the Compensation Report of Novartis AG
118
120
122
122
123
124
126
127
143
146
151
152
153
As Chairman of the Compensation Committee, I am pleased
to present the 2017 Compensation Report of Novartis AG.
This report includes an “at a glance” management
summary of key information, followed by full details of
our Executive Committee and Board compensation for
2017, including changes that will apply from 2018.
During the year, we engaged in dialogue with many of our
major shareholders and proxy advisors to gather feedback
on our compensation systems and disclosures, and we con-
sidered this feedback when making decisions on both top-
ics. Through these discussions, we also addressed concerns
of some shareholders who opposed the 2016 Compensa-
tion Report at the 2017 Annual General Meeting (AGM).
2017 company performance
Novartis delivered strong performance in 2017, with
Group sales, net income and free cash flow ahead of tar-
get in constant currencies. Growth drivers in the Innova-
tive Medicines division, including Cosentyx, Entresto,
Promacta/Revolade, and Tafinlar + Mekinist, more than
offset the loss of exclusivity of Gleevec/Glivec. Sandoz
experienced a small decline in sales but gained market share
and outperformed peers in a challenging market. Alcon
returned to growth and made good progress toward becom-
ing a leaner and more agile medical devices company.
Novartis achieved or surpassed pipeline milestone
targets, including a number of positive readouts of major
studies. Access to healthcare programs were expanded.
Talent has been strengthened in key leadership positions
in many parts of the organization. Culture, particularly
collaboration, has been further improved.
Shareholders benefited from an annual total share-
holder return (TSR) in USD of 20.4%, including an
increased dividend.
2017 CEO realized pay
The Board determined that the CEO met or exceeded
his financial targets and strategic objectives set at the
beginning of the year, and that he role modeled the
Novartis Values and Behaviors. When determining his
compensation, the Board also considered other factors
such as the external business environment and compe-
tition. The CEO was awarded a 2017 Annual Incentive of
125% of target, i.e. CHF 3 937 542.
The first of the two Long-Term Incentives, the Long-
Term Performance Plan (LTPP) for the 2015-2017
performance cycle, based on a cumulative three-year
Novartis Cash Value Added target and long-term
innovation milestones, vested at 114% of target, i.e.
CHF 5 068 337.
The second Long-Term Incentive, the Long-Term Rel-
ative Performance Plan (LTRPP) for the 2015-2017 perfor-
mance cycle, based on three-year relative TSR compared
to the global healthcare peer group, did not vest due to our
rank at No. 12 out of 13 companies, i.e. no payout.
In light of the company’s performance, the 2017 total
realized compensation for the CEO was CHF 11 344 462,
(compared with CHF 10 556 685 in 2016), and includes
his base salary and benefits, his Annual Incentive for the
Compensation RepoRt
Compensation Committee Chairman’s letter
Novartis Annual Report 2017 | 119
2017 performance year, and the vesting of his LTPP
award for the 2015-2017 performance cycle, including
dividend equivalents.
over the last few years, resulted in a greater number of
interactions between the Compensation Committee and
shareholders and other external stakeholders.
Compensation Report transparency
To provide greater transparency, we have enhanced the
disclosures in this Compensation Report, including:
• Prospective disclosure of the retirement conditions of
the outgoing CEO, Joseph Jimenez, as well as the tar-
get compensation of the newly appointed CEO, Vas-
ant Narasimhan.
• Prospective disclosure of any 2018 increases in Exec-
utive Committee members’ target compensation, as
well as the policy for setting compensation of newly
appointed Executive Committee members.
• Realized compensation of the CEO – and for the first
time, on an aggregated basis – the other members of
the Executive Committee.
• An interim update on the one-off three-year perfor-
mance award granted in 2016 to the Alcon CEO for the
2016-2018 performance cycle.
Changes to our executive compensation system
During the year, the Compensation Committee conducted
a review of the Executive Committee compensation sys-
tem, considering business needs, feedback from dialogue
with shareholders and developments in compensation
best practices. After the review, the Board and Compen-
sation Committee approved the following changes:
• A simplified Annual Incentive balanced scorecard will be
introduced that places additional weighting on financial
performance (60% weighting) and that also focuses on
key strategic objectives in the areas of innovation, access
to healthcare, people and culture, data and digital (40%
weighting). Values and Behaviors remain a key compo-
nent of the Annual Incentive and are embedded in our cul-
ture. As such, members of the Executive Committee are
expected to demonstrate these to the highest standard.
• The performance condition for the LTRPP has been made
more stringent from the 2018-2020 performance cycle
onward. Going forward, Executive Committee members
will receive no payout if relative TSR is below the median
of the companies in our global healthcare peer group.
• Finally, in line with evolving governance practices, we
have revised our Long-Term Incentive plan rules for
retiring Executive Committee members. From grants
made in 2019 onwards, members who fulfill the retire-
ment conditions under the plan rules will receive pro-
rata vesting, rather than full vesting, of outstanding
Long-Term Incentives. The timing of this change
respects the one-year notice period required per Exec-
utive Committee employment contracts. Two members
who have already met the conditions to retire with full
vesting will be grandfathered under the current rules.
These incentives will continue to have performance
conditions applied and will vest at the end of the cycle
on the normal vesting date.
Changes to our Board compensation system from
the 2018 AGM
Board and committee membership fees have remained
unchanged since the reduction that took place at the 2014
AGM. The Board has decided to rebalance its fee struc-
ture from the 2018 AGM to better recognize the respon-
sibilities and time commitment of the committees, both of
which have increased as a result of the evolving gover-
nance and regulatory environment. In particular, develop-
ments in compensation governance requirements have,
The Board membership fee will decrease, and the
committee membership fees will increase. The Board took
into consideration external benchmarking information in
the Swiss market as well as independent advice. The
change is cost-neutral for the company, as the new fee
structure results in the same average fee per Board mem-
ber, excluding the Chairman.
In addition, following a review of practices among our
peer group companies, the share ownership requirement
for Board members will be increased from 4 000 to
5 000 shares, effective from the 2018 AGM. This minimum
share ownership increase will strengthen the alignment
of interests with those of shareholders. To allow sufficient
time for Board members to achieve the increased require-
ment, they will have four years from appointment to
acquire the minimum 5 000 shares under the new policy.
This change excludes the Chairman of the Board,
whose share ownership requirement of 30 000 shares
remains the same. In addition, all Board members will
continue to be required to hold these shares for 12 months
after retiring from the Board.
2018 CEO succession
Mr. Jimenez steps down as CEO on January 31, 2018,
and will continue to support the Board and new CEO until
his retirement date and the end of his notice period on
August 31, 2018. He will retire in full compliance with the
terms of his employment contract and the Novartis
incentive plan rules. He will receive his annual base sal-
ary and pro-rated Annual Incentive until August 31, 2018.
No new Long-Term Incentive awards will be made in Jan-
uary 2018. There will be no accelerated vesting of out-
standing Long-Term Incentives, which will remain sub-
ject to performance over their full term. There will be no
severance or non-compete payments.
Dr. Narasimhan will become CEO effective Febru-
ary 1, 2018. The Board determined Dr. Narasimhan’s com-
pensation by taking into account the fact that this is his
first Group CEO role. He will receive an annual base sal-
ary of CHF 1.55 million, with a view to increasing this over
a period of three to four years, dependent on strong per-
formance and proven ability in the role. Total perfor-
mance-based variable compensation at target will be
475% of base salary split into his Annual Incentive (150%)
and his two Long-Term Incentives (325%). This will result
in an initial total annual compensation at target of
CHF 8.91 million, 26% lower than that of Mr. Jimenez.
On behalf of Novartis and the Compensation Commit-
tee, thank you for your continued support and feedback,
which we consider extremely valuable in driving improve-
ments in our compensation systems and practices.
I invite you to send your comments to me at the follow-
ing email address: investor.relations@novartis.com.
Respectfully,
enrico Vanni, ph.D.
Chairman of the Compensation Committee
120 | Novartis Annual Report 2017
Executive Committee
compensation at a glance (pages 127 to 142)
2017 Executive Committee compensation system
Reflecting a strong focus on pay for performance and alignment with shareholder interest, variable pay represents
a significant proportion of the package. Outcomes from variable pay elements can vary significantly (from 0% to
200% of the target level), depending on the level of performance achieved.
Fixed pay and benefits
Variable pay – performance-related
annual base salary
pension and other
benefits
annual incentive
Long-term share awards
purpose
Reflects responsibil-
ities, experience and
skill sets
Tailored to local market
practices / regulations
Form of payment
Cash
Country / individual
specific
performance measures
–
–
Ltpp1
LtRpp2
Rewards long-term shareholder
value creation and innovation in line
with our strategy
Equity
• Novartis Cash
Value Added
• Innovation
milestones
• Relative TSR vs.
global sector
peers
Rewards for perfor-
mance against key
short-term targets and
Values and Behaviors
50% cash
50% equity3 deferred
for three years
Performance matrix
based on:
• Individual balanced
scorecard, including
financial targets and
individual objectives
• Values and Behaviors
1 LTPP = Long-Term Performance Plan
2 LTRPP = Long-Term Relative Performance Plan
3 Executive Committee members may elect to receive more of their Annual Incentive in equity instead of cash.
The CEO’s Annual Incentive at target is 150% of base salary, his target LTPP is 200% of base salary and his target
LTRPP is 125% of base salary. Based on Novartis’ compensation guidelines, the other members of the Executive
Committee have Annual Incentive targets that range from 90% to 120% of base salary, and have Long-Term Incentives
(LTPP and LTRPP) in total that range from 170% to 270% of base salary.
2017 CEO pay for performance – outcomes
2017 annUaL inC entiVe – noVaRtis peRFoRmanCe
Deliver financial results
• Group net sales, net income and free cash flow as a % of sales above target
ensure world-class
commercial execution
•
innovative medicines delivered strong performance; Cosentyx well ahead of target,
Entresto in line with expectations, Oncology sales slightly below target
• sandoz sales below target due to pricing pressure in the US
transform alcon into an
agile medical device company
• alcon returned to growth with sales and core operating income results ahead of target,
and all seven key approvals in innovation projects achieved
strengthen R&D
• pipeline milestone targets either achieved or surpassed, including 16 major approvals,
16 major submissions and six FDA breakthrough therapy designations
improve access to healthcare
• novartis access to healthcare programs expanded, with agreements now signed in
six countries, delivering a portfolio of 15 products for USD 1 per treatment, per month
Create a stronger company
for the future
• nto, nBs and GDD delivered or over-delivered on productivity targets
• Compliance, reputation and culture further improved
overall performance outcome
• Overall performance of the CEO was determined to be above expectations, based on achieve ments
versus the targets set by the Board, and demonstration of the Novartis Values and Behaviors
overall outcome of 125% of target
2015–2017 LonG-teRm inCentiVes
Long-term performance plan
(Ltpp)
• Novartis Cash Value Added outcome of 113% of target (75% weighting)
• Key innovation milestones outcome of 115% of target (25% weighting)
overall outcome of 114% of target
Long-term Relative performance plan
(LtRpp)
• Annual Total Shareholder Return (TSR) in USD was 20.4%. Absolute TSR growth in USD
was 0.1% over the last three years. Relative performance in USD over the three-year
performance cycle compared to peers was rank No. 12 out of 13 companies
overall outcome of 0% of target
Compensation RepoRt
executive Committee compensation at a glance
Novartis Annual Report 2017 | 121
2017 total realized pay for the CEO
The 2017 total realized pay for the CEO was CHF 11 344 462 (compared with CHF 10 556 685 in 2016), and includes
the payouts of the Annual Incentive, LTPP and LTRPP based on actual performance assessed for cycles concluding
in 2017.
Fixed pay and benefits
Variable pay − performance related
CHF 000s
annual base
salary
pension and
other benefits
2017 annual
incentive
Ltpp 2015–20171
LtRpp 2015–20171
total realized
compensation
Joseph Jimenez (CEO) 2 100
239
3 937
5 068
0
11 344
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
cycle 2015-2017.
CEO succession – compensation elements
In September 2017, Novartis announced that Mr. Jimenez will retire following eight years as CEO and will be succeeded
by Dr. Narasimhan effective February 1, 2018. An overview of the key compensation elements of the CEO succession
is provided below. All terms are fully in line with the Swiss Ordinance against Excessive Compensation in Listed
Companies.
KeY Compensation teRms
Joseph Jimenez
(retiring Ceo)
All retirement terms are consistent with employment contract and incentive plan rules
• 12-month notice period ending August 31, 2018
• No compensation increase in 2018
• Annual base salary, pension and other benefits, and Annual Incentive will be paid pro-rata in 2018
• No new Long-Term Incentive grants in January 2018
• Outstanding equity awards:
– No accelerated vesting
– Payout subject to achievement of performance conditions, share price movement and dividend
equivalents
• Incentives fully at risk, and subject to malus and clawback
Vasant narasimhan
(appointed Ceo)
Target annual compensation
p Salary
p Annual Incentive (150% of salary)
p LTPP (200% of salary; three-year cycle)
p LTRPP (125% of salary; three-year cycle)
total at target
CHF 000s
1 550
2 325
3 100
1 938
8 913
• 83% of total target compensation is variable performance-related pay
• 26% reduction versus his predecessor
• Base salary will be kept under review, with any increases based on development and performance as CEO,
consistent with the Executive Committee appointments compensation policy (details on page 124)
122 | Novartis Annual Report 2017
Board compensation at a glance (pages 146 to 150)
2017 Board compensation system
The compensation system applicable to the Board is shown below. All fees to Board members are delivered at least
50% in equity and the remainder in cash.
CHF 000s
Chairman of the Board
Board membership
Vice Chairman
Chair of the Audit and Compliance Committee
Chair 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
2017 Board compensation
AGM 2017-2018
annual fee
3 800
300
50
120
60
60
30
Total actual compensation paid to Board members in the 2017 financial year is shown in the table below.
CHF 000s
Chairman of the Board
Other 12 members of the Board
total
2017
total compensation 1
3 805
4 591
8 396
1 Includes an amount of CHF 15 622 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 298 206, and provides a right to the maximum future insured government pension benefit for the Board member.
Compensation governance at a glance
(page 152)
A summary of the compensation decision authorization levels within the parameters set by the AGM is shown below,
along with an overview of the risk management principles.
DeCision on
Compensation of Chairman and other Board members
Compensation of CEO
Compensation of other Executive Committee members
DeCision-maKinG aUtHoRit Y
Board of Directors
Board of Directors
Compensation Committee
eXeCUtiVe Committee Compensation RisK manaGement pRinCip Les
• Rigorous performance management
process
• Balanced mix of short-term and
long-term variable compensation
elements
• Performance evaluation under the
Annual Incentive includes an individual
balanced scorecard and assessed
Values and Behaviors
• Performance-based Long-Term
Incentives only, with three-year
overlapping cycles
• Good and bad leaver provisions apply to
variable compensation of leavers
• No severance payments or change- of-
• All variable compensation is capped at
control clauses
200% of target
• Contractual notice period of 12 months
• Post-contractual non-compete limited to
a maximum of 12 months from the end of
employment (annual base salary and
Annual Incentive of the prior year only)
as per contract, if applicable
• Clawback and malus principles apply to
all elements of variable compensation
• Share ownership requirements; no
hedging or pledging of Novartis share
ownership position
Compensation RepoRt
executive Committee compensation philosophy and principles
Novartis Annual Report 2017 | 123
Executive Committee
compensation philosophy and principles
Novartis compensation philosophy
Our compensation philosophy aims to ensure that Exec-
utive Committee members are rewarded according to
their success in implementing the company strategy as
well as their contribution to company performance and
long-term value creation.
pensation Committee has solicited feedback from share-
holders and the Compensation Committee’s independent
advisor in selecting peer companies for executive com-
pensation comparison purposes. External peer data is
one of the elements considered by the Board and the
Compensation Committee when making decisions on
executive pay and helps ensure the system and levels at
Novartis remain competitive.
pay for
performance
shareholder
alignment
• Variable compensation is tied directly to the
achievement of strategic company targets
• Our incentives are significantly weighted
toward long-term, equity-based plans
• Measures under the Long-Term Incentives
are calibrated to promote the creation of
shareholder value
• Executive Committee members are
expected to build and maintain substantial
shareholdings
The Compensation Committee considers executive
compensation among the peer group of 15 global health-
care companies set out in the table below, as communi-
cated in last year’s Compensation Report. The compa-
nies in this peer group were selected based on a number
of criteria that reflect our industry, as well as the size and
scope of operations. Target compensation is generally
positioned around the market median benchmark for
comparable roles within this group.
GLoBaL HeaLtHCaRe peeR GRoUp
Balanced
rewards
• Balanced set of measures to create
sustainable value
• Mix of targets based on financial metrics,
innovation, individual objectives, Values and
Behaviors, and performance vs. competitors
AbbVie
Biogen
Amgen
AstraZeneca
Bristol-Myers Squibb
Celgene
Eli Lilly & Co.
Gilead Sciences
GlaxoSmithKline
Business
ethics
• The Values and Behaviors are an integral
Johnson & Johnson
Merck & Co.
Novo Nordisk
part of our compensation system
• Forms part of the assessment of the
individual objectives for the Annual Incentive
Pfizer
Roche
Sanofi
Competitive
compensation
• Total compensation must be sufficient to
attract and retain key global talent
• Overarching emphasis on pay for
performance
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 pharmaceuticals and oncology med-
icines, generics and biosimilars, and eye care.
To align the compensation system with this strategy
and to ensure that Novartis is a high-performing organi-
zation, the company operates both a short-term Annual
Incentive and two Long-Term Incentive plans with a bal-
anced set of measures and targets.
The Board determines specific, measurable and
time-bound performance metrics for the Annual Incen-
tive and the two Long-Term Incentive plans.
Executive Committee compensation
There is fierce competition within the pharmaceutical
and biotechnology industries for top executive talent with
deep expertise, competencies and proven performance.
The Board and the Compensation Committee determine
compensation for appointed Executive Committee mem-
bers in line with the appointments compensation policy
outlined on page 124.
Approach to benchmarking
Novartis takes a rigorous approach to peer group con-
struction and maintenance. In recent years, the Com-
The Compensation Committee believes that using a con-
sistent set of peers that have a similar scope and size
enables shareholders to evaluate the compensation year
on year and make pay-for-performance comparisons.
Novartis therefore makes the commitment to sharehold-
ers to confirm benchmarking practices, including the
peer group, each year.
Although Novartis is headquartered in Switzerland,
more than a third of sales come from the US market, and
the US remains a significant talent pool for the recruit-
ment of executives by the company. All current Execu-
tive Committee members have either worked in or have
extensive experience with the US. It is therefore critical
that Novartis is able to attract and retain key talent glob-
ally, especially from the US.
For consideration of European and local practices,
the Compensation Committee also references a cross-in-
dustry peer group of Europe-headquartered multina-
tional companies selected on the basis of comparability
in size, scale, global scope of operations, and economic
influence to Novartis. Five of these companies focus
exclusively on healthcare: AstraZeneca, GlaxoSmith-
Kline, Novo Nordisk, Roche and Sanofi. Ten companies
are selected from the STOXX® All Europe 100 Index rep-
resenting multiple sectors: Anheuser-Busch InBev,
Bayer, BMW, Daimler, Danone, Heineken, L’Oréal, Merck
KgaA, Nestlé and Unilever.
While the global healthcare peer group remains the
primary comparator group for pay decisions, this sec-
ond cross-industry group, which remains unchanged
since last year, is used as an additional reference point
to assess wider market pay practices and to minimize
any distortions in Novartis compensation practices and
systems.
124 | Novartis Annual Report 2017
Executive Committee compensation policies
Executive Committee appointments compensation policy
The Compensation Committee takes a prudent approach to setting compensation. Consistent with that philosophy,
when determining the compensation arrangements for a newly appointed Executive Committee member, the
following principles are applied:
eLement oF Compensation poLiCY
Level
The overall package should be market-competitive to facilitate the recruitment of global executive talent
with deep expertise and competencies.
The Compensation Committee will always intend to pay no more than it believes is necessary to secure the
required individual.
annual base salary
The Compensation Committee may appoint individuals who are new to a role on an annual base salary that
is below the market level, with a view to increasing this toward a market level over a period of three to four
years as an individual develops in the role.
This prudent approach ensures pay levels are merit-based, with increases dependent on strong
performance and proven ability in the role over a sustained period.
incentives
The ongoing compensation package will normally include the key compensation elements and incentive
opportunities in line with those offered to current Executive Committee members.
In exceptional circumstances, higher Long-Term Incentive opportunities than those offered to current
Executive Committee members may be provided, at the Compensation Committee’s discretion.
Performance measures may include business-specific measures tailored to the specific role.
pension and other benefits
Newly appointed Executive Committee members are eligible for local market pension and other benefits in
line with the wider senior employee group.
Buy-outs
The Compensation Committee seeks to balance the need to offer competitive compensation opportunities
to acquire the talent required by the business with the principle of maintaining a strong focus on pay for
performance.
As such, when an individual forfeits variable compensation as a result of appointment at Novartis, the
Compensation Committee may offer replacement awards in such form as the Compensation Committee
considers appropriate, taking into account relevant factors.
Relevant factors include the replacement vehicle (i.e. cash, restricted share units, restricted shares or
performance share units), whether the award is contingent on meeting performance conditions or not, the
expected value of the forfeited award, the timing of forfeiture (i.e. Novartis mirrors the blocking or vesting
period of the forfeited award) and the leaver conditions, in case the recruited individual leaves Novartis
prior to the end of the blocking or vesting period.
The Compensation Committee will seek to pay no more than is required to match the commercial value or
fair value of payments and awards forfeited by the individual.
international mobility
If individuals are required to relocate or be assigned from their home location to take up their position,
relocation support may be provided in line with our global mobility policies (e.g., relocation support, tax
equalization).
Compensation RepoRt
executive Committee compensation policies
Novartis Annual Report 2017 | 125
Treatment of variable compensation for Executive Committee member leavers
The following table sets out the treatment of variable compensation for associates (including Executive Committee
members) who leave Novartis during the performance or vesting period. All variable compensation is subject to
malus and clawback provisions, including after termination of employment.
eLement oF Compensation poLiCY
annual incentive –
cash element
Retirement, termination by the company (for reasons other than performance or conduct), change of
control, disability, death
Pro-rata Annual Incentive is paid to reflect the portion of the year the individual was employed.
any other reason
No Annual Incentive
annual incentive – mandatory
deferral into restricted shares /
RsUs
If a participant leaves employment due to voluntary resignation or misconduct, unvested restricted shares
and restricted share units (RSUs) are forfeited. All awards are subject to non-compete terms until the end
of the three-year blocking date, starting from the date of grant.
annual incentive – voluntary
restricted shares / RsUs / aDRs
(Us associates only)
Awards are not subject to forfeiture during the deferral period.
Long-term incentives
(Ltpp / LtRpp)
Voluntary resignation or termination by the company for misconduct
All of the award will be forfeited.
terminated by the company for reasons other than performance or conduct, and change in control
due to divestment
Awards vest on the regular vesting date, subject to performance, on a pro-rata basis for time spent with the
company during the performance cycle. There is no accelerated vesting.
Retirement
For grants made until the end of 2018, awards vest on the normal vesting date, subject to performance,
without the application of time pro-rating. For grants made to members of the Executive Committee from
2019 onward, awards will vest on the normal vesting date, subject to performance, with the application of
time pro-rating. The timing of this change respects the one-year notice period required in the Executive
Committee employment contracts.
Death or long-term disability
Accelerated vesting at target will be applied in the case of death and long-term disability.
non-compete agreement
All awards are subject to non-compete terms against the healthcare peer group until the vesting date.
Malus and clawback
Any incentive compensation paid to Executive Commit-
tee members is subject to malus and clawback rules.
This means that the Board for the CEO, and the Com-
pensation Committee for the other Executive Commit-
tee members, may decide – subject to applicable law –
to retain any unpaid or unvested incentive compensation
(malus), or to recover incentive compensation that has
been paid or has vested in the past (clawback). This
applies in cases where the payout conflicts with internal
management standards, including company and account-
ing policies, or violates laws.
This principle applies to both the short-term Annual
Incentive and the Long-Term Incentive plans.
In 2017, malus or clawback for current or former
Executive Committee members was not required.
126 | Novartis Annual Report 2017
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. All Novartis associ-
ates, including the CEO and other Executive Committee
members, are subject to a formal three-step process:
objective setting, performance evaluation and compen-
sation determination. This process is explained below.
Performance targets are generally set before the
start of the relevant performance cycle. There is a rigor-
ous framework in place for establishing targets to ensure
they are suitably robust and challenging, and align with
the strategic priorities of the Group. The key factors
taken into account when setting targets include:
• Novartis strategic priorities.
• Internal and external market expectations.
• Regulatory factors (e.g., new launches, patent expiries).
• Investment in capital expenditure.
• Values and Behaviors.
The targets are challenged at multiple stages before they
are ultimately approved by the Board. In line with good
governance practices, the Compensation Committee
works to set targets that are ambitious and challenging
but that do not encourage undue risk taking.
Following the end of the performance cycle, the
Board and the Compensation Committee consider per-
formance against the targets originally set. The CEO and
Executive Committee members are not present while
the Board and Compensation Committee discuss their
individual performance evaluations. Prior to determining
the final outcome, related factors – such as performance
relative to peers, wider market conditions and general
industry trends – are used to inform the overall perfor-
mance assessment.
objective setting
performance evaluation
Compensation determination
• The CEO discusses his targets with the
Chairman of the Board; they are then
reviewed and approved by the Board
of Directors, based on input from the
Compensation Committee.
• For other Executive Committee
members, targets for their division or
unit are initially discussed with the CEO
and subsequently approved by the
Board and Compensation Committee.
• The CEO’s performance is assessed by
• A recommendation for the CEO’s
the Board.
• For Executive Committee members, the
CEO discusses performance for each
individual with the Chairman before
making recommendations to the Board.
• Periodic assessments, including at the
mid-year stage, ensure progress is
suitably tracked.
variable pay is made by the
Compensation Committee to the Board
for final determination.
• The CEO’s recommendations for
other Executive Committee members
are considered and approved by the
Compensation Committee, after which
the Board is notified of the outcomes.
Compensation RepoRt
2017 executive Committee compensation
Novartis Annual Report 2017 | 127
2017 Executive Committee compensation
System and performance outcomes
Annual base salary
overview
• The annual base salary is reviewed each year, taking into account the individual’s role, performance and
experience; business performance and the external environment; increases across the Group; and market
movements.
2017 annual base salaries
Annual base salary (effective March 1, 2017):
• Ceo: CHF 2 100 000 (no increase awarded during the year)
• other executive Committee members: see details on page 138
Pension and other benefits
overview
• Pension and other benefits do not constitute a significant proportion of total compensation and are
provided to Executive Committee members on the same terms as all other associates, based on country
practices and regulations.
• The company operates both defined benefit and defined contribution pension plans (see also Note 24 to
the Group’s consolidated financial statements).
• Novartis may provide other benefits according to local market practice. These include company car
provision, tax and financial planning, and insurance benefits.
• Executive Committee members who are required to relocate internationally may also receive additional
benefits (including tax equalization), in line with the company’s global mobility policies.
128 | Novartis Annual Report 2017
Annual Incentive – 2017
pLan oVeRVieW
Grant formula
Annual base
salary
x
Target
incentive %
=
Target
Annual Incentive
on-target opportunities
• Ceo: 150% of annual base salary
• other executive Committee members: 90% to 120% of annual base salary
performance measures
• Performance is measured against a balanced scorecard of quantitative targets and individual objectives;
behavior is assessed against the Novartis Values and Behaviors.
Balanced scorecard
• The 2017 balanced scorecard targets and achievements of the CEO are detailed on the next page.
• Balanced scorecards for the other Executive Committee members have quantitative objectives (weighted
60%) specific to their division or business unit. For Group function heads, these are the same as the Group
financial targets of the CEO. The individual objectives (weighted 40%) differ by role. They may include
additional financial and strategic targets, such as EPS; growth, productivity and development initiatives;
leadership; diversity; quality; and corporate responsibility initiatives, including access to medicine. They
also include managing company reputational risk.
Values and Behaviors
• The Annual Incentive also takes into account an assessment of the following six Values and Behaviors:
innovation, quality, collaboration, performance, courage and integrity.
• The Executive Committee members are expected to demonstrate these at the highest level. Further details
on the Values and Behaviors can be found on page 18.
payout matrix
• The payout matrix equally recognizes performance against the balanced scorecard of financial and non-
financial targets, and demonstration of our Values and Behaviors. The payout range is 0–200% of on-target
opportunity based on performance, as shown below:
exceeding
expectations
meeting
expectations
performance
vs. balanced
scorecard
% payout
60 – 90%
130 – 160%
170 – 200%
0 – 70%
90 – 120%
130 – 160%
partially meeting
expectations
0%
0 – 70%
60 – 90%
partially
meeting
expectations
meeting
expectations
exceeding
expectations
Values and Behaviors
assessment
Form of award
• At the end of the performance period, 50% is paid in cash and the remaining 50% is paid in Novartis
restricted shares or RSUs, deferred for three years (see table on page 125 for details on leaver treatment).
• Executives may choose to receive all or part of the cash portion of their Annual Incentive in Novartis shares
or American Depositary Receipts (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.
• Clawback and malus provisions apply to all Annual Incentive awards.
Dividend rights, voting rights
and settlement
• Restricted shares carry voting rights and dividends during vesting period. RSUs are of equivalent value but
do not carry voting rights and dividends during vesting period.
• Following the vesting period, settlement of RSUs is made in unrestricted Novartis shares or ADRs.
DisCLosURe oF Ceo annUaL inCentiVe
principles
Targets and achievements of the Annual Incentive are disclosed in arrears due to commercial sensitivity of the
targets. However, to ensure that shareholders can understand the basis for CEO Annual Incentive awards, a
detailed balanced scorecard is disclosed annually after the end of the performance cycle.
Compensation RepoRt
2017 executive Committee compensation
Novartis Annual Report 2017 | 129
2017 Ceo BaLanCeD sCoReCaRD
Balanced scorecard performance is measured in constant currencies to reflect operational performance that can be
influenced. The Board uses a stringent process to set ambitious financial targets and incentivize superior performance.
Ceo achievements – 2017
Group net sales
Corporate net result
Group net income
Group free cash flow as a % of sales
Group
financial
targets
(60%)
overall assessment of Group financial targets in constant currencies
target
| USD 48.4 billion
| USD -1.5 billion
| USD 7.0 billion
| 19%
additional financial targets
In constant currencies, operating income and earnings per share, as well as core operating income
and core earnings per share, were above target. Annual total shareholder return in USD was 20.4%.
Pharmaceuticals, Alcon and Sandoz exceeded their market share growth targets, while Oncology was
slightly below target.
ensure world-class commercial execution
The Innovative Medicines Division delivered strong performance. Cosentyx was well ahead of target,
while Entresto was in line with expectations. Oncology sales were slightly below target, mainly due to
a slower launch uptake of Kisqali. Sandoz sales were below target, impacted by industry pricing pres-
sure in the US, partly offset by continued strong growth outside the US. Strong sales in biosimilars
reinforced global leadership in the field.
individual
objectives
(40%)
transform alcon into an agile medical device company
Alcon made good progress and returned to growth in 2017, with four quarters of successive growth. Sales
and core operating income results were ahead of target. Seven key approvals were achieved (e.g., AcrySof
IQ ReSTOR +2.5 D Multifocal Toric IOL launched in the US, CyPass Micro-Stent launched in the EU), and
fundamentals in both the commercial organization and the supply chain were significantly improved.
strengthen R&D
Pipeline milestone targets were achieved or surpassed, including 16 major approvals and 16 major
submissions. Novartis received six breakthrough therapy designations from the FDA. 15 positive
readouts from major studies were delivered (e.g., CAR-T 19, RTH258, CANTOS and BAF312). Sandoz
had five key filings of biosimilars. The Novartis Institutes for BioMedical Research launched an initi-
ative to better explore new targets, showing positive results, and Global Drug Development efficacy
improved significantly.
expand access to healthcare, and corporate responsibility
Access to healthcare programs were expanded, with agreements now signed in six countries to bring
a portfolio of 15 products to participating governments and organizations for the price of USD 1 per
treatment, per month. Over USD 530 000 of such treatments were delivered in 2017. Global endorse-
ment of a new action plan to accelerate leprosy elimination was reached. Novartis reached new miles-
tones in efforts to eliminate malaria. USD 850 million in treatments have now been delivered since
2001, and Novartis initiated clinical trials for KAF156, a novel compound against multidrug-resistant
malaria. Novartis signed its first US windfarm power purchase agreement to offset carbon emissions.
Create a stronger company for the future
NTO, NBS and GDD delivered or over-delivered on productivity targets. Compliance and integrity
were strengthened. The global compliance program Step Change was fully transitioned and embed-
ded into the organization. Novartis announced the acquisition of Advanced Accelerator Applications
SA in Oncology and invested in a number of digital technologies in R&D, commercial and operations.
99% of health authority quality inspections were deemed good or acceptable. Reputation improved
further, with good progress in a number of important industry rankings. Culture, particularly collabo-
ration across the organization, further improved. Talent was upgraded in all divisions, and diversity
targets for leadership were met.
achievement
vs. target
| Above
| Above
| Above
| Strongly above
| above
Above
| Largely met
| Met
| Strongly above
| Met
| Met
overall assessment of individual objectives
overall assessment of Ceo balanced scorecard
| above
above target
annUaL inCentiVe paYoUt FoR tHe 2017 peRFoRmanCe YeaR
Ceo payout
In reaching its recommendation to the Board on the CEO’s 2017 Annual Incentive payout factor, the
Compensation Committee recognized that overall, he exceeded expectations.
overall, the Board approved an annual incentive payout of 125% of target, i.e. CHF 3 937 542 for the
Ceo.
130 | Novartis Annual Report 2017
Long-Term Performance Plan – 2015-2017 cycle
The Long-Term Performance Plan (LTPP) is the first of two Long-Term Incentive plans, which rewards creation of
long-term value and innovation, in line with our business strategy.
pLan oVeRVieW
Grant formula
on-target opportunity
and payout range
Form of award
At the start of the performance cycle, performance share units (PSUs) are granted under each of the Long-
Term Incentive plans, as follows:
step 1
Annual base
salary
step 2
Grant value
x
/
Target
incentive %
Share price
=
=
Grant value
Target number of
PSUs
on-target opportunities:
• Ceo: 200% of annual base salary
• other executive Committee members: between 140% and 190% of annual base salary
payout range: from 0% to 200% of the on-target amount based on performance
PSUs granted at the beginning of the cycle will vest at the end of the three-year performance cycle and are
converted into Novartis shares.
PSUs carry dividend equivalents that are paid in shares at the end of the cycle to the extent that
performance conditions have been met.
payout formula:
Target number of
PSUs
x
Performance factor
+
Dividend
equivalents
=
Realized PSUs
Policy information on page 125 provides details on the treatment of Long-Term Incentive awards for leavers.
For the 2015-2017 cycle, the tables below provide details on the achievements and payouts for each of the two
performance measures of the LTPP. The Novartis Cash Value Added performance measure (75% weighting) applies
equally for the CEO and the other Executive Committee members. The innovation performance measure (25%
weighting) is specific to the respective head of the division or unit, and is a weighted average of the divisions or
units for the CEO and Group function heads.
peRFoRmanCe measURe 1: noVaRtis CasH VaLUe aDDeD (nCVa) FoR 2015-2017 CYCLe (75% oF Ltpp)
Description
NCVA incentivizes sales growth and margin improvement as well as asset efficiency. It is calculated as follows:
Operating income
+
Amortization, impairments, and adjusting
for gains / losses from non-operating
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 % – WACC) x gross operational assets 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 example, 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.
During the 2015-2017 cycle, Novartis delivered an NCVA of USD 8.3 billion, 4.4% ahead of a target of USD
7.9 billion in constant currencies. This was mainly due to a much stronger operational performance in 2017,
driven especially by Cosentyx and Entresto, and Alcon returning to growth. Following the application of the
1:3 payout curve, the 104.4% achievement versus target generates a performance factor of 113% of target for
this part of the LTPP.
When determining the NCVA target for 2015-2017 in comparison to the 2014-2016 cycle, the Board took into
account predominantly the loss of exclusivity of Glivec/Gleevec, a total of USD 2.8 billion of sales in 2017
compared to 2014. They also considered the impact of the negative currency effects (strengthening of the
US dollar), which were partly offset by lower costs of capital resulting from lower interest rates.
Group performance outcome
for the 2015-2017 cycle
Compensation RepoRt
2017 executive Committee compensation
Novartis Annual Report 2017 | 131
peRFoRmanCe measURe 2: innoVation measURe FoR CYCLe 2015-2017 (25% oF Ltpp)
Description
Group performance outcome
for the 2015-2017 cycle
Innovation is a key value driver for shareholders and is critical to our future. At the beginning of the cycle,
the Research & Development Committee determines the most important target milestones, considering the
following:
• The expected future potential revenue
• The potential qualitative impact of research and development on science and medicine
• The potential impact of research and development on the treatment or care of patients
At the end of the cycle, the Compensation Committee determines the payout factor based on the
performance assessment made by the Research & Development Committee.
Payout range 0–150% based on achievement of target milestones; payout range 150–200% for truly
exceptional performance.
During the 2015-2017 performance cycle, Novartis delivered solid performance versus target on innovation,
which accelerated over the three-year performance period. Some of the successes in the Innovative
Medicines Division included approvals of Cosentyx (ankylosing spondylitis and psoriatic arthritis) and Kisqali
(metastatic breast cancer), as well as the AMG 334 (migraine) submission. The serelaxin (acute heart failure)
pivotal study readout was disappointing. Sandoz achievements included the rituximab US and EU filings,
as well as epoetin alfa EU approval. Sandoz did not achieve approval in the US and EU for pegfilgrastim.
Alcon achieved EU approval for the Clareon IOL with AutonoMe pre-loaded delivery system, and EU
approval for Dailies Total1 Multifocal. NIBR discovered several unanticipated targets using shRNA/CRISPR
and phenotypic screens, translational clinical research and integrative genomics. The achievements made
over the three-year performance cycle will have a positive impact on Novartis, the scientific and medical
community, and patient outcomes.
Following input from the Research and Development Committee, the Board approved an innovation
performance factor for the Group of 115% of target.
Ltpp paYoUt FoR tHe 2015-2017 peRFoRmanCe CYCLe
Ceo payout
overall, the Board approved an Ltpp payout of 114% of target for the Ceo, i.e. CHF 5 068 337 (including
CHF 446 250 of dividend equivalents accrued and CHF -66 618 in share price evolution over the performance
cycle).
DisCLosURe oF Ltpp taRGets
principles
LTPP targets (NCVA and long-term innovation) are considered commercially sensitive at the time of setting
and therefore are not disclosed on a prospective basis. However, to ensure that shareholders are able to
understand the link between pay and performance, we will disclose the targets, achievements and payout
after the end of the performance cycle.
132 | Novartis Annual Report 2017
Long-Term Relative Performance Plan – 2015-2017 cycle
The Long-Term Relative Performance Plan (LTRPP) is the second of two Long-Term Incentive plans, which rewards
competitive shareholder return relative to the global healthcare peer group.
pLan oVeRVieW
Grant formula
on-target opportunity
and payout range
Form of award
At the start of the performance cycle, PSUs are granted under each of the Long-Term Incentive plans, as
follows:
step 1
Annual base
salary
step 2
Grant value
x
/
Target
incentive %
Share price
=
=
Grant value
Target number of
PSUs
on-target opportunities:
• Ceo: 125% of annual base salary
• other executive Committee members: between 30% and 80% of annual base salary
payout range: from 0% to 200% of the on-target amount based on performance
PSUs granted at the beginning of the cycle will vest at the end of the three-year performance cycle and are
converted into Novartis shares.
PSUs carry dividend equivalents that paid in shares at the end of the cycle to the extent that performance
conditions have been met.
payout formula:
Target number of
PSUs
x
Performance factor
+
Dividend
equivalents
=
Realized PSUs
Policy information on page 125 provides details on the treatment of Long-Term Incentive awards for leavers.
ReLatiVe tsR peRFoRmanCe FoR CYCLe 2015-2017 (100% oF LtRpp)
Description
Performance is based on our TSR relative to a global healthcare peer group. Outperformance of this peer
group is a key indicator of the extent to which Novartis is delivering long-term value for shareholders.
The peer group and payout matrix for the 2015-2017 performance cycle are as follows:
2015-2017 peer group (12 companies, excluding novartis)1
novartis position
in the peer group
payout range2
(% of target)
Abbot
AbbVie
Amgen
Position 1 – 3
AstraZeneca
Bristol-Myers Squibb
Eli Lilly & Co.
Position 4 – 6
GlaxoSmithKline
Johnson & Johnson
Merck & Co.
Position 7 – 10
Pfizer
Roche
Sanofi
Position 11 – 13
160 – 200%
100 – 140%
20 – 80%
0%
1 From the LTRPP 2017-2019 performance cycle onward, a revised peer group of 15 global healthcare companies applies, as listed on page 123.
2 From the LTRPP 2018-2020 performance cycle onward, there will be no vesting for below median performance.
The payout matrix includes a significant reduction (including scope to reduce to nil) when Novartis does not
outperform the majority of the companies in the group.
At the end of the performance cycle, all companies are ranked in order of highest to lowest TSR in USD.
The Compensation Committee uses its discretion to determine the payout factor within the ranges shown
above, and takes into consideration factors such as absolute TSR, overall economic conditions, currency
fluctuations and other unforeseeable economic situations.
Group performance outcome
for the 2015-2017 cycle
Absolute annual TSR in USD was 20.4%. Absolute TSR over the three-year cycle was 0.1% in USD (-1.4% in
CHF). Relative TSR performance in USD was rank number 12 out of 13 companies (rank number four among
five European comparators).
The Board awarded a performance factor of 0%.
LtRpp paYoUt FoR tHe 2015-2017 peRFoRmanCe CYCLe
Ceo payout
overall, the Board approved an LtRpp payout of 0% of target for the Ceo, i.e. no payout.
Compensation RepoRt
2017 executive Committee compensation
Novartis Annual Report 2017 | 133
Realized compensation
To aid shareholders’ understanding of the link between pay and short-term and long-term performance, the
Compensation Committee has decided to disclose the realized compensation for the CEO individually and, for the
first time, the other members of the Executive Committee on an aggregated basis. Disclosing realized compensa-
tion means that the Annual Incentive and the Long-Term Incentives are disclosed at the end of their respective
performance cycles, reflecting actual payouts based on performance.
The total actual payout may vary year-on-year depending on multiple factors, including the composition of the
Executive Committee and the tenure of its members (as new members may not have vested Long-Term Incentives),
compensation increases, payout of variable compensation based on actual performance, share price fluctuations
of Long-Term Incentives, and dividend equivalents.
2017 realized compensation for the CEO and other Executive Committee members
The table below reports the fixed and other compensation for the year, including the Annual Incentive for the 2017
performance year, as well as the realized Long-Term Incentives for the 2015-2017 performance cycle. The portion
of the Annual Incentive paid in shares for the year 2017 is disclosed using the underlying value of Novartis shares
at the date of grant, while the realized value of the LTPP and LTRPP payouts (including dividend equivalents) is
calculated using the share price on the date of vesting.
2017 annual base
salary
2017 pension
benefits
2017 Annual Incentive1
Long-Term Incentives
LTPP
2015–2017 cycle
LTRPP
2015–2017 cycle
Other 2017
Compensation2
Currency
Cash (amount)
amount
Cash
equity
1
equity (value
2
at vesting date)
equity (value
2
at vesting date)
amount
3
total realized
compensation
(incl. share
4
price movement)
executive Committee members
active on December 31, 2017
Joseph Jimenez (Ceo)
aggregate realized
compensation of the other
10 eCn members
total 5
CHF 2 100 000
166 397
1 968 750
1 968 792
5 068 337
0
72 186 11 344 462
CHF 9 310 740
CHF 11 410 740
1 675 398
1 841 795
5 841 107
7 809 857
7 743 069
8 355 739
9 711 861 13 424 076
0
0
3 248 419 36 174 472
3 320 605 47 518 934
See page 134 for 2016 comparative figures.
1 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 18, 2018) of CHF 82.90 per
Novartis share and USD 86.41 per ADR.
2 The amounts represent the underlying share value of the 160 733 PSUs vesting on January 21, 2018 to the CEO and other Executive Committee members for the performance cycle
2015-2017, inclusive of earned dividend equivalents for the three-year cycle. The value is determined using the closing share price on the last trading day (January 19, 2018) before the
vesting date of CHF 83.38 per Novartis share and USD 86.94 per ADR. For two members of the Executive Committee, the vesting value is reported pro-rata based on the period they
were an Executive Committee member during the performance cycle.
3 Includes any other perquisites, benefits in kind, international assignment benefits as per the global mobility policy (e.g., housing, international health insurance, children’s school fees,
tax equalization).
4 All amounts are before deduction of the social security contribution and income tax due by the Executive Committee member.
5 Amounts for Executive Committee members paid in USD were converted at a rate of CHF 1.00 = USD 1.015, which is the same average exchange rate used in the Group’s 2017
consolidated financial statements.
The aggregate amount of realized compensation for the members of the Executive Committee shown in the table
above is CHF 47 518 934 million. This figure is below past and expected future levels, despite the fact that the
Annual Incentive and the LTPP paid out above target on average for the members, mainly due to the following fac-
tors:
• There was no payout for the LTRPP for any of the Executive Committee members in 2017, due to relative TSR
over the 2015-2017 performance cycle.
• Five members of the Executive Committee either did not receive LTPP vesting or received limited LTPP vesting
in 2017. This is because they were either recent external hires who did not receive a grant three years earlier, or
internal promotions who received lower Long-Term Incentive grants based on their compensation prior to Executive
Committee appointment.
At the start of the 2015-2017 performance cycle, the CEO was granted 48 626 target performance share units
under the LTPP at a share price of CHF 84.75, for a total target grant value of CHF 4 121 054. As shown in the table
above, the realized value of the LTPP for the CEO was CHF 5 068 337. Compared to the target value at the grant
date, this includes CHF 567 651 relating to the performance over the cycle, CHF -66 618 due to share price move-
ment and CHF 446 250 of dividend equivalents.
At the start of the 2015-2017 performance cycle, the other members of the Executive Committee were granted
80 325 target performance share units under the LTPP at a share price of CHF 84.75 (ADR price of USD 98.75 for
Executive Committee members on a US employment contract at an exchange rate of CHF 1 = USD 1.040 at grant),
for a total target grant value of CHF 6 887 395 (which is pro-rated for two Executive Committee members based
on the period they were an Executive Committee member during the performance cycle). As shown in the table
134 | Novartis Annual Report 2017
above, the realized value of the LTPP for the other members of the Executive Committee was CHF 8 355 739. Com-
pared to the target value at the grant date, this includes CHF 931 727 relating to the performance over the cycle,
CHF -195 650 due to share price and foreign exchange movements and CHF 732 267 of dividend equivalents.
The column titled “Other 2017 Compensation” in the 2017 total realized compensation of the Executive Committee
includes the following amounts:
• CHF 470 925 relating to the vesting of a buy-out award made to Richard Francis when he joined Novartis in 2014
to replace a time-vesting long-term incentive that he lost by leaving his previous employer upon joining Novartis.
• CHF 40 174 relating to the vesting of a buy-out award made to Paul Hudson to replace a time-vesting long-term
incentive he lost upon joining Novartis in 2016, and CHF 729 047 relating to the vesting of a buy-out award made
to him to replace a performance-vesting long-term incentive that he lost with his previous employer upon joining
Novartis. This latter award was granted with performance conditions attached, to mirror the forfeited award. The
performance conditions applied were the same as those for the LTPP for the 2014-2016 performance cycle (NCVA
and long-term innovation).
All abovementioned buy-out awards were disclosed at the time of grant in previous Compensation Reports.
2016 realized compensation for the CEO and other Executive Committee members
(comparative information)
For comparative purposes, 2016 realized compensation is provided below. The main reason for the higher aggre-
gate realized pay in 2016 was the overlap in compensation for outgoing and newly appointed Executive Commit-
tee members in 2016. Three members who stepped down in 2016 received ongoing contractual payments during
their notice periods while their successors were already in place.
2016 annual base
salary
2016 pension
benefits
2016 Annual Incentive1
Long-Term Incentives
LTPP
2014–2016 cycle
LTRPP
2014–2016 cycle
Other 2016
Compensation2
Currency
Cash (amount)
amount
Cash
equity
1
equity (value
2
at vesting date)
equity (value
2
at vesting date)
amount
3
total realized
compensation
(incl. share
4
price movement)
executive Committee members active on December 31, 2016
and members who stepped down during financial year 2016
Joseph Jimenez (Ceo)
aggregate realized
compensation of the other
13 eCn members 5
total 6
CHF
2 093 417
160 283
1 417 500
1 417 510
4 950 334
442 013
75 628 10 556 685
8 778 483
CHF
CHF 10 871 900
1 675 484
1 835 767
4 825 680
6 243 180
6 516 148 12 190 674
7 933 658 17 141 008
733 656
1 175 669
9 684 126 44 404 251
9 759 754 54 960 936
1 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.
2 The amounts represent the underlying share value of the PSUs vesting to Executive Committee members for the performance cycle 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, plus earned dividend equivalents during the three-year cycle.
3 Includes any other perquisites, benefits in kind, international assignment benefits as per the global mobility policy (e.g., housing, international health insurance, children’s school fees,
tax equalization). In addition, for the three Executive Committee members who stepped down during 2016, it includes, inter alia, their pro-rata compensation from the date they
stepped down from the Executive Committee to December 31, 2016.
4 All amounts are before deduction of the social security contribution and income tax due by the Executive Committee member.
5 This represents realized compensation of ten Executive Committee members who were active on December 31, 2016 as well as three members who stepped down during 2016.
6 Amounts for Executive Committee members paid in USD 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.
The column titled “Other 2016 Compensation” 2016 total realized compensation of the Executive Committee includes
the following amounts:
• CHF 1 059 750 relating to the vesting of a buy-out award made to Richard Francis when he joined Novartis in
2014 to replace a time-vesting long-term incentive that he lost by leaving his previous employer.
• CHF 191 300 relating to a cash buy-out award made to Paul Hudson when he joined Novartis in 2016 to replace
a short-term incentive that he lost by leaving his previous employer.
• USD 844 250 relating to a cash buy-out award made to James Bradner when he joined Novartis in 2016 to replace
lost entitlements at one of his former scientific companies.
All abovementioned buy-out awards were disclosed at the time of grant in previous Compensation Reports.
Compensation RepoRt
2017 executive Committee compensation
Novartis Annual Report 2017 | 135
Compensation at grant value
In accordance with the Swiss Ordinance against Excessive Compensation in Listed Companies, Novartis continues
to disclose total compensation at grant value for the CEO and other Executive Committee members. The tables
below disclose for the CEO and other Executive Committee members:
• Fixed 2017 compensation (base salary and benefits).
• The actual cash portion and the deferred portion granted in equity of the 2017 Annual Incentive.
• LTPP and LTRPP 2017-2019 performance cycle awards, which are reported at target value at grant date under
the assumption that the awards will vest at 100% achievement and excluding any share price movement and
dividend equivalents that may be accrued over the performance cycle. The future payout will only be determined
after the performance cycle concludes in three years (i.e., end of 2019), with a payout range of 0–200% of the
target value.
• Other compensation for 2017, which includes other benefits and the full amount of compensation for lost
entitlements from former employers, either paid in cash or granted in equity in the year.
To assess CEO pay for performance in 2017, including the Annual Incentive payout for the 2017 performance
year and the Long-Term Incentive payouts for the 2015-2017 performance cycle, shareholders should refer to
the 2017 realized compensation table on page 133.
2017 compensation at grant value for the CEO and other Executive Committee members
Fixed compensation and
pension benefits
Variable compensation
Actual compensation paid or granted for 2017
Long-Term Incentive 2017-2019 cycle
grants at target
2017 annual base
salary
2017 pension
benefits
2017 Annual Incentive
(performance achieved)
LTRPP
2017–2019 cycle 2017–2019 cycle
LTPP
Other 2017
compensation
Total
compensation
paid, promised
or granted 2017
Currency
Cash
(amount)
amount
1
Cash
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, 2017
Joseph Jimenez
(CEO)
Steven Baert
F. Michael Ball
James Bradner
Felix R. Ehrat
Richard Francis
Paul Hudson
Harry Kirsch
Vasant Narasimhan
Bruno Strigini
(until December 31, 2017) 6
André Wyss
total 7
CHF
CHF
USD
USD
CHF
CHF
CHF
CHF
CHF
2 100 000
775 000
1 120 000
1 066 385
928 333
841 667
958 333
1 038 333
841 667
166 397
154 652
203 546
117 394
137 334
176 362
203 485
153 854
168 562
1 968 750
663 000
873 600
898 800
223 200
425 000
950 400
800 800
807 500
1 968 792
663 034
873 605
898 837
892 833
425 028
950 449
800 814
807 529
4 200 018
1 170 069
1 792 047
1 819 043
1 581 045
1 360 002
1 536 023
1 768 053
1 360 002
2 625 038
468 056
784 043
856 033
558 028
510 010
672 046
832 012
510 010
72 186 13 101 181
4 013 029
5 940 130
5 702 347
4 335 807
4 851 017
5 467 837
5 452 576
4 545 873
119 218
293 289
45 855
15 034
1 112 948
197 101
58 710
50 603
898 333
CHF
CHF
875 000
CHF 11 410 740
210 613
154 339
1 841 795
225 000
0
7 809 857
1 440 057
225 074
1 232 060
1 408 021
9 711 861 19 381 014
540 048
528 061
8 859 147
50 000
70 526
3 589 125
4 268 007
2 080 458 61 094 873
Based on assumption of
100% payout at target.
actual payout (0–200% of
target) will be known at
the end of the three-year
cycle in January 2020.
See page 136 for 2016 comparative figures.
1 Includes mandatory employer contributions of CHF 4 336 for the CEO and CHF 50 227 for the other Executive Committee members paid by Novartis to governmental social security systems. This amount is out
of total employer contributions of CHF 2 710 445 paid in 2017 for all Executive Committee members, 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 18, 2018) of CHF 82.90 per Novartis share and USD 86.41
per ADR.
3 The amounts represent the underlying share value of the target number of PSUs granted to Executive Committee members for the performance cycle 2017-2019, 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.
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).
5 All amounts are before deduction of the social security contribution and income tax due by the Executive Committee member.
6 Bruno Strigini stepped down from the Executive Committee at the end of the 2017 business year. The LTPP and LTRPP grants for the 2017-19 performance cycle, included in the table above, will vest at the end
of the performance cycle on a pro-rata basis per his contractual agreement and subject to the plan rules .
7 Amounts in USD for F. Michael Ball and James Bradner were converted at a rate of CHF 1.00 = USD 1.015, which is the same average exchange rate used in the Group’s 2017 consolidated financial statements.
136 | Novartis Annual Report 2017
When comparing the Executive Committee compensation at grant in 2017 to the compensation at grant in 2016, it
may be noted that the two members of the Executive Committee who joined in July 2016, Mr. Hudson and Mr. Strigini,
were compensated in 2017 for the first time on a full year basis, including their Annual Incentive based on 2017
performance and full Long-Term Incentive grants.
2016 compensation at grant value for the CEO and other Executive Committee members
For comparative purposes, the table below provides the compensation at grant value for 2016.
Fixed compensation and
pension benefits
Variable compensation
Actual compensation paid or granted for 2016
Long-Term Incentive 2016-2018 cycle
grants at target
2016 annual base
salary
2016 pension
benefits
2016 Annual Incentive
(performance achieved)
LTRPP
2016–2018 cycle 2016–2018 cycle
LTPP
Other 2016
compensation
Total
compensation
paid, promised
or granted 2016
Currency
Cash
(amount)
amount
1
Cash
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 11 989 448
3 517 834
139 159
USD
1 012 308
60 574
553 574
553 603
1 742 284
762 269
4 040 748
8 725 360
USD
CHF
CHF
888 462
915 833
786 667
58 859
148 122
188 738
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
CHF
CHF
475 000
1 025 000
108 818
141 510
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)
James Bradner
(from March 1, 2016)
Felix R. Ehrat
Richard Francis
Paul Hudson
(from July 1, 2016)
Harry Kirsch
Vasant Narasimhan
(from February 1, 2016)
Bruno Strigini
(from July 1, 2016)
CHF
CHF
CHF
445 000
830 834
9 931 091
109 057
146 289
1 425 275
André Wyss
subtotal 7
executive Committee members who stepped down during 2016 8
David Epstein
(until June 30, 2016)
699 767
USD
290 385
211 863
0
5 585 643
1 074 442
211 910
1 360 001
1 275 025
7 468 241 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)
Jeff George
(until January 31, 2016)
subtotal 7
total 7
USD
175 154
107 706
195 000
0
0
0
126 454
604 314
80 000
USD
CHF
940 809
CHF 10 871 900
18 558
410 492
1 835 767
44 000
657 537
6 243 180
43 986
465 417
0
1 266 270
7 933 658 18 018 212
0
633 135
2 996 905
3 183 449
7 540 067 11 913 726
8 055 949 17 390 723 70 349 389
Based on assumption of
100% payout at target.
actual payout (0–200% of
target) will be known at
the end of the three-year
cycle in January 2019.
1 Includes mandatory employer contributions of CHF 4 336 for the CEO and CHF 70 880 for the other Executive Committee members paid by Novartis to governmental social security systems. This amount is
out of total employer contributions of CHF 3 263 989 paid in 2016 for all Executive Committee members, 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 amounts represent the underlying share value of the target number of PSUs granted to Executive Committee members for the performance cycle 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, 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, international assignment benefits as per the global mobility policy (e.g., housing, international health insurance, children’s school fees, tax equalization),
compensation granted for forfeited entitlements at previous employers and, for F. Michael Ball, a one-off performance award with target value at grant date of USD 3.9 million. In addition, for Executive
Committee members who stepped down during 2016, it includes, inter alia, their pro-rata compensation from the date they stepped down from the Executive Committee to December 31, 2016 (see also note 8
below).
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 “annual base salary”, “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” columns reflects their pro-rata compensation at target for the period to December 31, 2018.
7 Amounts in USD for Mr. Ball, James Bradner, David Epstein, Mark C. Fishman and Jeff 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.
8 For those members who stepped down from the Executive Committee in 2016, the information under the columns “annual base salary”, “pension benefits”, “Annual Incentive”, “LTPP” and “LTRPP” reflects the
pro-rata value during 2016 for the period they were an Executive Committee member. The information under the column “Other 2016 compensation” includes, inter alia, the aggregated pro-rata value from the
date they stepped down from the Executive Committee to December 31, 2016.
Compensation RepoRt
2017 executive Committee compensation
Novartis Annual Report 2017 | 137
Interim update on the Alcon CEO’s 2016 one-off performance award
(performance cycle 2016-2018)
As disclosed in last year’s Compensation Report, the
Alcon CEO received a one-off award of 50 000 perfor-
mance share units in February 2016, subject to the
achievement of targets linked to the turnaround of Alcon
during the 2016-2018 performance cycle. The targets of
this one-off performance award are separate from the
Annual Incentive or the LTPP and LTRPP targets.
The performance metrics are based on financial and
non-financial targets of Alcon, including sales growth
ahead of peers, core operating income growth ahead of
sales growth, core operating income margin at the aver-
age of peers, and successful launches of new products.
Should the Alcon CEO achieve these ambitious targets,
Alcon will be performing at a very competitive level in the
market.
After 2016, performance was tracking significantly
below target. Toward the end of 2017 (the second year
of the three-year performance cycle), Alcon began to
close that gap versus target. Sales growth is accelerat-
ing and core operating income is growing ahead of sales.
Innovation targets are being met and products in devel-
opment are beginning to emerge.
We will disclose the targets and final payout of this
Long-Term Incentive award after the full three-year per-
formance cycle concludes and once we are able to
assess Alcon’s performance relative to peers.
138 | Novartis Annual Report 2017
2017 CEO and Executive Committee member total target compensation
increases
During 2017, the CEO did not receive an increase in his total target compensation. Most other members of the
Executive Committee were awarded increases of between 0% and 3%. Exceptions are outlined below. For con-
text, the average of all Novartis employee annual base salary increases was 1% in Switzerland and 3% in the US.
Consistent with our Executive Committee appointments compensation policy (see page 124), four members
were appointed to the Executive Committee in recent years with total target compensation below the market median
level of compensation against comparable roles at external peer companies. In making its decisions, the Compen-
sation Committee took into account the annual benchmarking analysis, for each of these roles, provided by Willis
Towers Watson. The total target compensation for these members has been assessed over the last two to three
years, and increases in line with proven performance have been made, as described below.
Vasant Narasimhan
Vasant Narasimhan was promoted to Global Head of
Drug Development and Chief Medical Officer, and joined
the Executive Committee in early 2016. The Board
assessed his performance since appointment as out-
standing. He strengthened the pipeline by receiving 11
development approvals and completing 13 major sub-
missions. He also strengthened the interface between
the Novartis Institutes for BioMedical Research and
Global Drug Development. Therefore, for 2017, his annual
base salary was increased by 6.3%, and his target aggre-
gate incentive opportunity was increased from 290% of
annual base salary to 320%. Overall, his 2017 total tar-
get compensation* increased by 14% compared to 2016.
The 2018 compensation details for Dr. Narasimhan fol-
lowing his appointment as CEO, effective February 2018,
are disclosed on page 143.
Steven Baert
Steven Baert was promoted to Head of Human Resources
(HR) in 2014. During 2016, he played a leading role in the
design and transformation of the Novartis operating
model, the execution of the portfolio transformation, and
various other key HR functions. In this context, Mr. Baert
received an annual base salary increase of 4% at the
onset of 2017, and his target aggregate incentive oppor-
tunity was increased from 290% of annual base salary
to 310% for 2017. Overall, his 2017 total target compen-
sation* increased by 9% compared to 2016.
André Wyss
André Wyss was promoted to President of Novartis
Operations in 2016. He led Novartis Business Services
(NBS) to perform notably ahead of target for the second
consecutive year on all customer and financial perfor-
mance metrics during 2016. He has strengthened the
Novartis Business Services organization by improving
the governance and optimizing processes. He has
ensured great quality of service, as reflected by cus-
tomer satisfaction scores. At the onset of 2017, his annual
base salary was increased by 4% and his target aggre-
gate incentive opportunity was increased from 310% of
annual base salary to 320% for 2017. Overall, his 2017
total target compensation* increased by 6% compared
to 2016.
Richard Francis
Richard Francis was appointed Sandoz CEO in 2014. He
led his team during difficult circumstances to deliver each
quarter in 2016 at a high level against ambitious targets
in sales and profitability, and without jeopardizing sus-
tainability. Biosimilars sales were significantly ahead of
target following the filings for rituximab and etanercept
in Europe, and they will continue to be key to the suc-
cess of Sandoz. Pricing pressures persist on retail gener-
ics, especially in the US. Mr. Francis’ annual base salary
was increased by 6% at the onset of 2017, reflecting his
strong leadership since his appointment and his devel-
opment in the role during 2016. His target aggregate
incentive opportunity remained unchanged at 320% of
base salary for 2017. Overall, his 2017 total target com-
pensation* increased by 6% compared to 2016.
* Total target compensation comprises annual base salary plus the value at target of the
Annual Incentive and Long-Term Incentive awards.
Compensation RepoRt
2017 executive Committee compensation
Novartis Annual Report 2017 | 139
Additional disclosures
This section provides additional disclosures, including information about the shareholdings of the CEO and the
other Executive Committee members.
Number of equity instruments granted to the CEO and other Executive Committee members for financial
year 20171
executive Committee members active on December 31, 2017
Joseph Jimenez (CEO)
Steven Baert
F. Michael Ball
James Bradner
Felix R. Ehrat
Richard Francis
Paul Hudson
Harry Kirsch
Vasant Narasimhan
Bruno Strigini (until December 31, 2017) 4
André Wyss
total
Variable compensation
2017 Annual Incentive
(performance achieved)
LTPP
2017–2019 cycle
LTRPP
2017–2019 cycle
Equity
(number) 2
PSUs
(target number) 3
PSUs
(target number) 3
23 749
7 998
10 110
10 402
10 770
5 127
11 465
9 660
9 741
2 715
14 862
116 599
58 865
16 399
24 893
25 268
22 159
19 061
21 528
24 780
19 061
20 183
19 734
36 791
6 560
10 891
11 891
7 821
7 148
9 419
11 661
7 148
7 569
7 401
271 931
124 300
See page 140 for 2016 comparative figures.
1 The values of the awards are reported in the table “2017 compensation at grant value for the CEO and other Executive Committee members” on page 135.
2 Vested shares, restricted shares and/or RSUs granted under the Annual Incentive for performance period 2017
3 Target number of PSUs granted under the LTPP and LTRPP as applicable for the performance cycle 2017-2019
4 Bruno Strigini stepped down from the Executive Committee at the end of the 2017 business year. The LTPP and LTRPP grants for the 2017-19 performance cycle, included in the
table above, will vest at the end of the performance cycle on a pro-rata basis per his contractual agreement and subject to the plan rules
140 | Novartis Annual Report 2017
Number of equity instruments granted to the CEO and other Executive Committee members
for financial year 20161 (comparative information)
Variable compensation
2016 Annual Incentive
(performance achieved)
LTPP
2016–2018 cycle
LTRPP
2016–2018 cycle
Other
Equity
(number) 2
PSUs
(target number) 3
PSUs
(target number) 3
Equity/PSUs
(number)
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
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
32 937
4 392
9 865
9 867
6 926
6 023
0
10 339
4 573
3 388
5 333
0
0
50 000
3 607
0
0
34 502
0
0
0
0
211 371
93 643
88 109
15 968
7 984
0
0
15 968
227 339
0
0
7 984
101 627
29 902
0
6 724
36 626
124 735
1 The values of the awards are reported in the table “2016 compensation at grant value for the CEO and other Executive Committee members” on page 136.
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 cycle 2016-2018
4 Paul Hudson, Mark C. Fishman and Jeff George were not granted LTPP and LTRPP awards for the performance cycle 2016-2018.
Compensation RepoRt
2017 executive Committee compensation
Novartis Annual Report 2017 | 141
Share ownership requirements for the CEO and
other Executive Committee members
Executive Committee members are required to own at
least a minimum multiple of their annual base salary in
Novartis shares or restricted share units (RSUs) 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 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 American depositary
receipts (ADRs), as well as RSUs acquired under the
company’s compensation plans. However, unvested
matching shares granted under former matching pro-
grams such as the Leveraged Share Savings Plan (LSSP)
and the Employee Share Ownership 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 indi-
rectly by “persons closely linked” to an Executive Com-
mittee member. The Compensation Committee reviews
compliance with the share ownership guideline on an
annual basis.
Shares, ADRs and other equity rights owned by Executive Committee members at December 31, 20171
The following table shows, in alphabetical order after the CEO, the total number of shares, ADRs and other equity
rights owned by the CEO and the other Executive Committee members and “persons closely linked” to them as of
December 31, 2017.
As of December 31, 2017, no members of the Executive Committee, either individually or 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 Executive Committee held any share options to purchase Novartis shares, with the exception of André
Wyss, who held 373 000 options, purchased on a private basis.
As of December 31, 2017, all members who have served at least five years on the Executive Committee have
met or exceeded their personal Novartis share ownership requirements.
Vested shares
Unvested shares
and ADRs and other equity rights 2
as a multiple of Unvested target PSUs
(e.g., LTPP / LTRPP) 4
annual base salary 3
Matching shares
total at
under the LSSP 5 December 31, 2017
Equity ownership level
Joseph Jimenez (CEO)
287 699
Steven Baert
F. Michael Ball
James Bradner
Felix R. Ehrat
Richard Francis
Paul Hudson
Harry Kirsch
Vasant Narasimhan
Bruno Strigini
André Wyss
total
10 955
0
0
189 940
35 117
6 616
64 769
16 279
27 871
51 183
62 693
21 410
7 690
13 234
23 541
17 305
6 498
30 309
58 887
39 844
22 784
14x
3x
1x
1x
19x
5x
1x
8x
7x
6x
7x
225 685
33 715
101 532
34 130
79 764
40 453
29 695
58 792
23 413
38 930
40 456
0
0
0
0
19 950
0
0
6 277
3 426
0
0
576 077
66 080
109 222
47 364
313 195
92 875
42 809
160 147
102 005
106 645
114 423
690 429
304 195
706 565
29 653
1 730 842
1 Includes holdings of “persons closely linked” to Executive Committee members (see definition on page 142)
2 Includes unvested shares and ADRs as well as other equity rights applicable for the determination of equity amounts for the share ownership requirements, as per the definition
above
3 The multiple is calculated based on the full year annual base salary and the closing share price as at the end of the 2017 Financial Year. The share price on the final trading day of
2017 was CHF 82.40 / USD 83.96 as at December 29, 2017.
4 Target number of PSUs are disclosed pro-rata to December 31, 2017, unless the award qualified for full vesting under the relevant plan rules.
5 Matching shares under the Leveraged Share Savings Plan (LSSP) are disclosed pro-rata to December 31, 2017, unless the award qualified for full vesting under the plan rules. LSSP
participation for Executive Committee members ceased in 2014 and no new LSSP awards have been made since then. Outstanding awards will vest five years from the grant date,
subject to the LSSP plan rules.
142 | Novartis Annual Report 2017
Fixed and variable compensation
CEO and other Executive Committee members’ annual
base salary and variable compensation mix at grant value
for financial year 2017.
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
Annual
Variable
base salary 1 compensation 2
16.3%
20.7%
20.6%
19.3%
22.2%
23.6%
18.9%
19.8%
19.5%
27.0%
21.6%
20.0%
83.7%
79.3%
79.4%
80.7%
77.8%
76.4%
81.1%
80.2%
80.5%
73.0%
78.4%
80.0%
1 Excludes pension and other benefits
2 See table “2017 compensation at grant value for the CEO and other Executive
Committee members” on page 135 with regard to the disclosure
principles of variable compensation.
Other payments to Executive Committee members
During 2017, 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
Two former Executive Committee members stepped
down in 2016 and ceased employment in 2017 following
a 12-month contractual notice period. During 2017, they
received pro-rata payments of salary, pension and other
benefits, and an Annual Incentive totaling CHF 2 305 599
per their employment contracts.
Five former Executive Committee members received
payments totaling CHF 5 988 375 in line with the com-
pany’s Long-Term Incentive plan rules. The payments
related to the vesting of LTPP for the 2015-2017 perfor-
mance cycle, based on actual performance outcomes
plus dividend equivalents. No payments were or will be
made for the 2015-2017 LTRPP performance cycle.
In addition, in line with the company’s global mobility
policy, during 2017 three former members received tax
equalization payments totaling CHF 718 151 related to
incentive compensation granted during an international
assignment.
No other payments (or waivers of claims) were made
to former Executive Committee members or to “persons
closely linked” to them during 2017.
Loans to Executive Committee members
Our policy does not allow loans to be granted to current
or former members of the Executive Committee or to
“persons closely linked” to them. Therefore no loans
were granted in 2017, and none were outstanding as of
December 31, 2017.
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 26 to the Group’s audited consolidated
financial statements
The total expense for the year for compensation awarded
to Executive Committee and Board members, using
International Financial Reporting Standards (IFRS) mea-
surement rules, is presented in the Financial Report in
Note 26 to the Group’s audited consolidated financial
statements (see page 240).
Award and delivery of equity to Novartis associates
During 2017, 15.4 million unvested restricted shares (or
ADRs), RSUs and target PSUs were granted, and 10.7
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 1.98% 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.
Compensation RepoRt
2018 executive Committee compensation
Novartis Annual Report 2017 | 143
2018 Executive Committee compensation
2018 CEO succession – compensation elements
Retiring CEO, Joseph Jimenez
In September 2017, Mr. Jimenez notified the Board that
he had decided to retire, following eight years as CEO.
He steps down as CEO on January 31, 2018, and will con-
tinue to support the Board and new CEO until his retire-
ment date and the end of his 12-month notice period on
August 31, 2018.
He will retire in full compliance with the terms of his
employment contract and the Novartis incentive plan
rules. He will receive his annual base salary and pro-rated
Annual Incentive until August 31, 2018. There will be no
increase to his target compensation in 2018. No new
Long-Term Incentive awards will be made in January
2018.
In line with the incentive plan rules, there will be no
accelerated vesting of his unvested equity. The deferred
equity under the Annual Incentive for the performance
years 2015 and 2016 will respectively vest in January
2019 and 2020 per the rules of the Deferred Share Bonus
Plan. His Long-Term Incentives for the 2016-2018 and
2017-2019 performance cycles will vest on the normal
vesting dates (January 2019 and January 2020, respec-
tively), to the extent that the company performance con-
ditions are met. As Mr. Jimenez meets the retirement
conditions under the Long-Term Incentive plan rules,
these two outstanding Long-Term Incentives will not be
pro-rated in line with the plan rules. Clawback and malus,
and non-compete restrictions as defined by the plan
rules will apply.
No severance or non-compete payments will be
made to Mr. Jimenez.
Appointed CEO, Vasant Narasimhan
Dr. Narasimhan will become CEO effective February 1,
2018. The Board determined Dr. Narasimhan’s compen-
sation by taking into account his experience and skills,
CEO compensation levels at our 15 global healthcare
peer companies, advice from the Compensation Com-
mittee’s independent advisor, and the fact that this is his
first Group CEO role.
As of February 1, 2018, Dr. Narasimhan’s annual base
salary will be CHF 1.55 million. Short- and Long-Term
Incentive opportunities at target are a percentage of
annual base salary as follows: Annual Incentive at 150%
(CHF 2.32 million); LTPP at 200% (CHF 3.10 million); and
LTRPP at 125% (CHF 1.94 million). Dr. Narasimhan’s total
target compensation is CHF 8.91 million. He will also
receive pension and other benefits in line with all other
Swiss-based employees.
The Board decided to keep Dr. Narasimhan’s compen-
sation strongly performance-based (83% is subject to
performance conditions), with an emphasis on equity, to
align his interests strongly with those of shareholders. His
equity ownership requirement will be five times his annual
base salary.
Dr. Narasimhan’s initial compensation is 26% lower
than that of his predecessor. It is the Board’s intention
to keep Dr. Narasimhan’s annual base salary under
review in the coming three to four years, with a view to
increasing it subject to strong performance and proven
ability in the role.
Dr. Narasimhan’s employment contract and compen-
sation are in line with the requirements of the Ordinance
against Excessive Compensation in Listed Companies.
Other Executive Committee member appointments and departures
Retiring CEO Oncology, Bruno Strigini
Mr. Strigini stepped down from the Executive Commit-
tee on December 31, 2017. During his contractual notice
period, which ends on December 31, 2018, he will receive
his annual base salary and Annual Incentive in accor-
dance with plan rules. No new grants of Long-Term
Incentives will be made in 2018.
Mr. Strigini’s outstanding Long-Term Incentives will
be pro-rated for time employed during the performance
period. There will be no accelerated vesting, as awards
will remain subject to performance over the full cycle.
Clawback and malus, and non-compete restrictions as
defined by the plan rules will apply. No severance or
non-compete payments will be made.
Appointed CEO Oncology, Elizabeth Barrett
Novartis announced the appointment of Elizabeth Bar-
rett as the new CEO of Oncology, starting on February
1, 2018. Her annual base salary will be CHF 850 000, her
target Annual Incentive of 100%, and her target Long-
Term Incentives totaling 260%.
Elizabeth will receive compensation for loss of enti-
tlements with her previous employer on a like-for-like
basis, subject to evidence and in line with our Executive
Committee members appointment compensation policy
regarding buy-outs. The value of the replacement cash
and equity awards will be determined on the date of her
entry into the company. Therefore, details of this buy-out
will be communicated in the 2018 Compensation Report.
144 | Novartis Annual Report 2017
Changes to the 2018 Executive Committee compensation system
In 2017, the Compensation Committee conducted a
review of the Executive Committee compensation sys-
tem, taking into account developments in market prac-
tice, and alignment with the strategic objectives and tal-
ent agenda at Novartis.
The Compensation Committee believes the compen-
sation system supports the company’s strategy and
ensures a strong link between pay and performance.
In view of market changes since the current system
was implemented in 2014, the Board and Compensation
Committee have decided to make evolutionary changes
to provide greater simplicity and further enhance the link
between pay and performance. Changes are also based
on constructive feedback from shareholders as part of
our ongoing dialogue and consideration of their views.
They will take effect from January 2018.
2018 Annual Incentive
A simplified Annual Incentive balanced scorecard will be
introduced that places additional weighting on financial
performance (60% weighting) and that also focuses on
key strategic objectives in the areas of innovation, access
to healthcare, people and culture, data and digital (40%
weighting). Values and Behaviors remain a key compo-
nent of the Annual Incentive and are embedded in our
culture. As such, members of the Executive Committee
are expected to demonstrate these to the highest stan-
dard.
From 2018, the CEO balanced scorecard metrics will be
as follows:
Ceo BaLanCeD sCoRe CaRD – KeY metRiCs
Group financial targets (60% weighting)
• Group net sales
• Group operating income
• Group FCF as % of sales
• Share of peers
strategic objectives (40% weighting)
• Innovation
• Access to healthcare
• People and culture
• Data and digital
The payout schedule for the Annual Incentive will be
amended to reflect the simplified structure as follows:
peRFoRmanCe
Outstanding
Exceeds expectations
Meets expectations
Partially meets expectations
Below expectations
paYoUt
170–200%
130–160%
80–120%
40–70%
0–30%
LTRPP payout for cycles starting in 2018 onward
The performance condition for the LTRPP has been made
more stringent from the 2018-2020 performance cycle
onward. Going forward, Executive Committee members
will receive no payout if relative TSR is below the median
of the companies in our global healthcare peer group. The
Board retains the right to apply its judgment in determin-
ing the final payout, considering factors such as abso-
lute TSR, currency fluctuations and overall economic
conditions.
The payout matrix for the 2018-2020 performance
cycle onward will be as follows:
noVaRtis position
in tHe peeR GRoUp
Positions 1–2
Positions 3–5
Positions 6–8
Positions 9–16
paYoUt RanGe
(% oF taRGet)
170–200%
130–160%
80–120%
0%
Change in Executive Committee retirement rules
for the LTPP and LTRPP from 2019
In line with evolving governance practices, we have
revised our Long-Term Incentive plan rules for retiring
Executive Committee members, applicable to grants
made from 2019 onward. Going forward, members who
fulfill the retirement conditions under the plan rules will
receive pro-rata vesting, rather than full vesting, of out-
standing Long-Term Incentives. These incentives will
continue to have performance conditions applied, and
will vest at the end of the cycle on the normal vesting
date. The timing of this change respects the one-year
notice period required in the Executive Committee mem-
ber employment contracts.
Two members of the Executive Committee (the CEO
of Alcon and the General Counsel), who have already
met the retirement conditions under the plan rules for
LTPP and LTRPP, will be grandfathered under the cur-
rent rules (with the exception of the one-off performance
award granted to the CEO of Alcon in 2016, which vests
pro-rata on retirement, as per his contract).
Compensation RepoRt
2018 executive Committee compensation
Novartis Annual Report 2017 | 145
2018 Executive Committee total target compensation increases
Paul Hudson
Paul Hudson was hired externally as the CEO of the Phar-
maceuticals division in June 2016. He led the division to
overachieve its targets for 2017, contributing substan-
tially to Novartis’ overall performance for the year. His
leadership focused the division on new product perfor-
mance, securing future revenue for Novartis. He has also
enhanced the division’s culture and engagement. His
compensation was adjusted to recognize these factors,
as well as to gradually bring his compensation in line with
his global peers. In this context, Mr. Hudson will receive
an annual base salary increase of 3.1% as from March 1,
2018, and his target Long Term incentive will be increased
from 230% of annual base salary to 250% as from 2018.
No changes will be made to his Annual Incentive. Over-
all, his 2018 total target compensation will be increased
by 7.8% compared to 2017.
To aid transparency and as part of our commitment to
good governance, the Compensation Committee has
decided to voluntarily disclose the 2018 Executive Com-
mittee total target compensation increases at the start
of the year.
Details of the 2018 compensation for Mr. Jimenez as
the retiring CEO and Dr. Narasimhan as the appointed
CEO are provided on page 143.
The other members of the Executive Committee will
not be awarded any increases for 2018 with the excep-
tion of two members for reasons set out below. For con-
text, average associate merit increases were 1% in Swit-
zerland and 3% in the US.
James Bradner
James Bradner was hired externally as the President of
Novartis Institute of Biomedical Research (NIBR) in 2015.
Since he joined the organization he has delivered strong
performance and has played a key role in increasing
cooperation between NIBR and Global Drug Develop-
ment. His compensation was adjusted to recognize his
performance and also catch up towards US peers (NIBR,
as well as most of its competitors are based and head-
quartered in the US). In this context, Mr. Bradner will
receive an annual base salary increase in line with other
US associates of 3% as from March 1, 2018. He will not
receive increases to target incentives. Overall, his 2018
total target compensation will be increased by 2.8% com-
pared to 2017.
2018 Executive Committee compensation system review
The current Executive Committee compensation system
has been in place since January 2014. Each year, the
Board and Compensation Committee review it to ensure
it is in line with business needs and evolving best prac-
tice. In 2018, the review will focus particularly on the per-
formance measures for the Long Term Incentive, to
ensure they are appropriately aligned to the company’s
strategy and goals of the new CEO. The Compensation
Committee will engage in dialogue with Novartis’ major
shareholders and will consult its independent advisor on
this topic.
146 | Novartis Annual Report 2017
2017 Board compensation
Board compensation philosophy
and benchmarking
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 with effect from the 2014
AGM, and align our aggregate Board compensation with
the current levels of other large Swiss companies.
2017 Board member annual fee rates
CHF
Chairman of the Board
Board membership
Vice Chairman
Chair of the Audit and Compliance Committee
Chair 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
AGM 2017-2018
annual fee
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.
In line with market practice in Switzerland, the Board sets
compensation for its members at a level that allows for
the attraction of high-caliber individuals with global expe-
rience, including a mix of Swiss and international mem-
bers. Board members do not receive variable compen-
sation, underscoring their focus on corporate strategy,
supervision and governance. Each year at the AGM,
shareholders are requested to approve, in a binding vote,
the total compensation of the Board until the following
AGM.
The Board sets the level of compensa tion for its
Chairman and the other members to be in line with rele-
vant benchmark companies, which include other large
Switzerland-based multinational companies: ABB, Credit
Suisse, LafargeHolcim, Nestlé, Roche 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 Swiss rules
regarding Board and Executive Committee compensa-
tion related to the Ordinance against Excessive Com-
pensation in Listed Companies), and under US law (due
to the company’s secondary listing on the New York
Stock Exchange).
The Board 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
As Chairman, Joerg Reinhardt receives total annual com-
pensation 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.
For 2017, 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 2017).
Compensation RepoRt
2017 Board compensation
Novartis Annual Report 2017 | 147
Board member total compensation earned for financial year 2017
The following tables disclose the 2017 Board member total compensation and prior-year comparative information.
Board compensation is reported as the amount earned in the financial year.
Governance,
Nomination
Audit and
and Corporate Research &
Compliance Compensation Responsibilities Development
Committee
Committee
Committee
Committee
Risk
Committee
Shares
1
(number)
Cash
(CHF)
(A)
Shares
(CHF)
(B)
Other
(CHF)
2
(C)
Total
(CHF)
3
(A)+(B)+(C)
Board
membership
Vice
Chairman
Board members active on December 31, 2017
Joerg Reinhardt 4
Chair
Enrico Vanni
Nancy Andrews
Dimitri Azar
Ton Buechner
Srikant Datar
Elizabeth Doherty
Ann Fudge
Frans van Houten
(from February 28, 2017)
Pierre Landolt 6
Andreas von Planta
Charles L. Sawyers
William T. Winters
total
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
• 7
Chair 5
•
Chair
24 407 1 900 000 1 900 000 4 336 3 804 336
Chair
•
3 210 250 000 250 000 3 475 503 475
•
•
•
•
• 5
2 311 180 000 180 000
– 360 000
2 504 195 000 195 000
– 390 000
4 039
– 325 000
– 325 000
Chair 5
2 989 227 500 227 500
– 455 000
• 5
•
2 591 217 500 217 500
– 435 000
2 504 195 000 195 000
– 390 000
1 305
75 000 175 000
– 250 000
4 238
– 330 000 3 475 333 475
• 8
2 989 227 500 227 500 4 336 459 336
2 311 180 000 180 000
– 360 000
4 238
– 330 000
– 330 000
59 636 3 647 500 4 732 500 15 622 8 395 622
•
•
•
•
•
Chair
•
See next page for 2016 comparative figures.
1 The shown amounts represent the gross number of shares delivered to each Board member in 2017 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 2017 for the services from the 2016 AGM to the 2017 AGM, and (ii) the first of two equity
installments delivered in August 2017 for the services from the 2017 AGM to the 2018 AGM. The second and final equity installment for the services from the 2017 AGM to the 2018
AGM will take place in February 2018.
2 Includes an amount of CHF 15 622 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 298 206, 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 No additional committee fees for chairing the Research & Development Committee were delivered to Dr. Reinhardt.
5 From February 28, 2017
6 According to Pierre Landolt, the Sandoz Family Foundation is the economic beneficiary of the compensation.
7 Until February 27, 2017, Chair of the Audit and Compliance Committee
8 Until February 27, 2017, Chair of the Risk Committee
148 | Novartis Annual Report 2017
Board member total compensation earned for financial year 2016
(comparative information)
Governance,
Nomination
Audit and
and Corporate Research &
Compliance Compensation Responsibilities Development
Committee
Committee
Committee
Committee
Risk
Committee
Shares
1
(number)
Cash
(CHF)
(A)
Shares
(CHF)
(B)
Other
(CHF)
2
(C)
Total
(CHF)
3
(A)+(B)+(C)
Board
membership
Vice
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
– 355 000
2 567 195 000 195 000
– 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
– 360 000
4 344
– 330 000
– 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
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
2017 Board compensation
Novartis Annual Report 2017 | 149
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)
CHF
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
2017
January 1, 2017
to 2017 aGm
January 1, 2018
to 2018 aGm 2
2017 aGm
to 2018 aGm
2017 aGm
2017 aGm
Joerg Reinhardt
Other Board members
3 804 336
4 591 286
633 334
713 334
633 334
3 804 336
3 805 000
773 334
4 651 286
4 720 000
total
8 395 622
1 346 668
1 406 668
8 455 622
8 525 000
Yes
Yes
Yes
Joerg Reinhardt
Other Board members
2016
3 804 336
4 232 726
January 1, 2016
to 2016 AGM
January 1, 2017
to 2017 AGM
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
total
8 037 062
1 286 668
1 346 668
8 097 062
8 160 000
1 See page 147 for 2017 Board member compensation.
2 To be confirmed and reported in the 2018 Compensation Report
Yes
Yes
Yes
Loans to Board members
Our policy does not allow loans to be granted to current
or former members of the Board or to “persons closely
linked” to them. Therefore no loans were granted in 2017,
and none were outstanding as of December 31, 2017.
Other payments to Board members
During 2017, no payments (or waivers of claims) other
than those set out in the Board member compensation
table (including its footnotes) on page 147 were made to
current members of the Board or to “persons closely
linked” to them.
Payments to former Board members
During 2017, no payments (or waivers of claims) were
made to former Board members or to “persons closely
linked” to them, except for the payments reported in Note
26 to the Group’s audited consolidated financial state-
ments (page 240).
150 | Novartis Annual Report 2017
Additional disclosures
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 are
required to own at least 4 000 Novartis shares within
three years after joining the Board, to ensure their inter-
ests are aligned with those of shareholders. Board mem-
bers are prohibited from hedging or pledging their own-
ership positions in Novartis shares that are part of their
guideline share ownership requirement, and are required
to hold these shares for 12 months after retiring from the
Board. As of December 31, 2017, all current and former
members of the Board who were required to meet the
minimum share ownership requirements did so. From the
2018 AGM, the requirement will be increased (see details
on page 151).
Shares, ADRs and share options owned by
Board members
The total number of vested Novartis shares and ADRs
owned by members of the Board and “persons closely
linked” to them as of December 31, 2017, is shown in the
table below.
As of December 31, 2017, no members of the Board,
either individually or 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 held any share options to pur-
chase Novartis shares.
Number of shares
At December 31, 2017 1,2
Joerg Reinhardt
Enrico Vanni
Nancy Andrews
Dimitri Azar
Ton Buechner
Srikant Datar
Elizabeth Doherty
Ann Fudge
Frans van Houten
Pierre Landolt 3
Andreas von Planta
Charles L. Sawyers
William T. Winters
total
518 310
20 101
4 042
13 094
4 428
37 239
2 761
15 457
978
61 029
130 634
7 763
12 397
828 233
1 Includes holdings of “persons closely linked” to Board members (see definition on
page 142)
2 Each share provides entitlement to one vote.
3 According to Pierre Landolt, the Sandoz Family Foundation is the economic
beneficiary of the shares
Compensation RepoRt
2018 Board compensation
Novartis Annual Report 2017 | 151
2018 Board compensation
Board and committee membership fees
Share ownership requirements
The Chairman’s share ownership requirement of 30 000
shares will remain unchanged for 2018.
For the other Board members, and following a review
of market practices at our peer group companies, the
Board has decided to increase the share ownership
requirement from 4 000 to 5 000 shares, effective from
the 2018 AGM. The increase will also strengthen the
alignment of interests with those of our shareholders.
To allow sufficient time for Board members to achieve
the increased requirement, they will have four years from
appointment to acquire the minimum 5 000 shares under
the new policy. In addition, Board members will continue
to be required to hold these shares for 12 months after
retiring from the Board.
For the year 2018, the Chairman has voluntarily waived
his contractual compensation increase entitlement,
which is an amount not lower than the average annual
compensation increase awarded to associates based in
Switzerland.
Board and committee membership fees have remained
unchanged since the reduction that took place at the 2014
AGM. The Board has decided to rebalance its fee struc-
ture from the 2018 AGM to better recognize the respon-
sibilities and time commitment of the committees, both of
which have increased as a result of the evolving gover-
nance and regulatory environment. In particular, develop-
ments in compensation governance requirements have,
over the last few years, resulted in a greater number of
interactions between the Compensation Committee and
shareholders and other external stakeholders.
The Board membership fee will decrease, and the
committee membership fees will increase. The Board took
into consideration external benchmarking information in
the Swiss market and independent advice. The change is
cost-neutral for the company, as the new fee structure
results in the same average fee per Board member, exclud-
ing the Chairman. The total aggregated Board fees will
decrease in 2018 due to the reduction in the number of
Board members, following the departure of Mr. Pierre
Landolt, who will reach the age limit for Board member-
ship specified in the Articles of Incorporation.
CHF
Chairman of the Board
Board membership
Vice Chairman
Chair of the Audit and Compliance Committee
Chair of the Compensation Committee
Chair of the following committees:
• 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
AGM 2018-2019
annual fee
3 800 000
280 000
50 000
130 000
90 000
70 000
70 000
40 000
152 | Novartis Annual Report 2017
Compensation governance
Legal framework
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).
Risk management principles
The Compensation Committee, with support from its
independent advisor, reviews market trends in compen-
sation and changes in corporate governance rules and
best practices. 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 sup-
port sustainable value creation.
A summary of the risk management principles is out-
lined below.
RisK manaGement pRinCip Les
• Rigorous performance
• Contractual notice period of
management process, with
approval of targets and eval-
uation of performance for the
CEO by the Board
• Balanced mix of short-term
and long-term variable com-
pensation elements
• Performance evaluation under
the Annual Incentive includes
an individual balanced score-
card and assessed Values and
Behaviors
• Clawback and malus principles
apply to all elements of variable
compensation
• Performance-vesting Long-
Term Incentives only, with
three-year overlapping cycles
• All variable compensation is
capped at 200% of target
12 months
• Post-contractual non-com-
pete limited to a maximum
of 12 months from the end
of employment (annual base
salary and Annual Incentive
of the prior year only) as per
contract, if applicable
• Good and bad leaver
provisions apply to variable
compensation of leavers
• 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 periods
for equities and bonds, shorter vesting periods, and addi-
tional contributions to occupational pension schemes).
For share ownership requirements, please refer to
page 141 – share ownership requirements for the CEO
and other Executive Committee members.
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/
investors/company-overview/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 in line with the
Compensation Committee Charter. A summary of dis-
cussions and conclusions of each committee meeting is
delivered to the full Board. A summary of the compen-
sation decision-making authorities is set out below.
Compensation authorization levels within the
parameters set by the shareholders’ meeting
DeCision on
DeCision-maKinG aUtHoRit Y
Compensation of Chairman and
other Board members
Compensation of CEO
Compensation of other Executive
Committee members
Board of Directors
Board of Directors
Compensation Committee
Committee member independence
The Compensation Committee is composed exclusively
of members of the Board who meet the independence
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 a member
since 2011 and as Chair since 2012.
Role of the Compensation Committee’s
independent advisor
The Compensation Committee retained Frederic W.
Cook & Co. Inc., appointed in 2011, as its independent
external compensation advisor until June 2017. During
the year, as part of its normal governance practices, the
Compensation Committee conducted a market review
of compensation advisors, with a focus on companies
with extensive experience in European markets. Follow-
ing a tendering process and an analysis to ensure that
there were no conflicts-of-interest, the Compensation
Committee appointed Mercer Limited as its independent
compensation advisor with effect from July 2017.
Compensation Committee meetings held in 2017
In 2017, the Compensation Committee held six formal
meetings, and one additional joint meeting with the
Research & Development Committee to review and
endorse for approval by the Board the innovation targets
and achievements of the LTPP and Annual Incentive. The
Compensation Committee annual performance evalua-
tion was undertaken by an external specialist firm (Egon
Zehnder) as part of a wider review of the Board and each
of its committees in 2017. In addition, the Compensation
Committee reviewed its charter, as it does every year, and
recommended updates to the Board to reflect the ongo-
ing evolution of compensation governance practices.
Compensation RepoRt
Report of the statutory auditor on the Compensation Report of novartis aG
Novartis Annual Report 2017 | 153
Report of the statutory auditor
on the Compensation Report of Novartis AG
To the General Meeting of Novartis AG, Basel
An audit involves performing procedures to obtain
audit evidence on the disclosures made in the Compen-
sation Report with regard to compensation, loans and
credits in accordance with articles 14–16 of the Ordi-
nance. The procedures selected depend on the auditor’s
judgment, including the assessment of the risks of mate-
rial misstatements in the Compensation Report, whether
due to fraud or error. This audit also includes evaluating
the reasonableness of the methods applied to value com-
ponents of compensation, as well as assessing the over-
all 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, 2017 complies with
Swiss law and articles 14–16 of the Ordinance.
PricewaterhouseCoopers AG
We have audited the 2017 CEO and other Executive
Committee members’ realized compensation on pages
133-134 and the 2017 CEO and other Executive Com-
mittee members’ compensation at grant value on pages
135-136, and additional disclosures on pages 139-142 as
well as the 2017 Board Compensation on pages 146-149
and the additional disclosures on page 150 of the accom-
panying Compensation Report of Novartis AG for the
year ended December 31, 2017.
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.
martin Kennard
Audit expert
Auditor in charge
stephen Johnson
Global relationship
partner
Basel, 23 January 2018
154 | Novartis Annual Report 2017
Novartis Annual Report 2017 | 155
Photo Women in a village
near Meerut, India, are
typical of those who stand to
benefit from Arogya Parivar,
a social business program
run by Novartis to improve
healthcare provision among
42 million people living in
rural India. Arogya Parivar,
which means “healthy family”
in Hindi, is designed to
bring health education
and medical care to poor
communities in a commer-
cially sustainable way.
156 | Novartis Annual Report 2017
Financial Report
Contents
FINANCIAL REPORT
Operating and financial review 2017
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
156
157
162
163
164
165
166
168
170
175
179
184
186
191
255
Report of the statutory auditor on the
consolidated financial statements of Novartis AG 256
Financial statements of Novartis AG
262
Notes to the financial statements of Novartis AG 264
Appropriation of available earnings of Novartis AG
as per balance sheet and declaration of dividend 271
Report of the statutory auditor
on the financial statements of Novartis AG
272
Operating and
financial review 2017
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 63 of this
Annual Report.
Risk overview
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 the
markets. 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 carry a significant amount of goodwill and
other intangible assets on our consolidated balance
sheet, and may incur significant impairment charges in
the future. We pay taxes in numerous countries, and tax
authorities around the world have increased their scru-
tiny of company tax filings. In addition, tax reform initia-
tives by the OECD, EU, Switzerland and the US, will
require us to continually assess our organizational struc-
ture against tax policy trends, and could lead to an
increased risk of international tax disputes and an
increase in our effective tax rate, and could adversely
affect our financial results. We may also fail to take
advantage of rapid progress in digital technologies and
in the development of new business models, and third
parties may enter the healthcare field and could supplant
our business.
For more detail on these trends and how they could
impact our results, see details starting on page 175.
FINANCIAL REPORT
Operating and financial review 2017
Novartis Annual Report 2017 | 157
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 except software, and certain acqui-
sition-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 and related items, legal related items, impair-
ments of property, plant and equipment and financial
assets, as well as income and expense items that man-
agement deems exceptional and that are or are expected
to accumulate within the year to be over a USD 25 mil-
lion threshold. A reconciliation between IFRS results and
core results is shown on pages 181-183.
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 179 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.
Group overview
Novartis delivered solid performance in 2017 as strong
sales of our growth drivers, including Cosentyx, Entresto
and other recently launched products, continued to off-
set the impact of generic competition for our cancer
treatment Gleevec/Glivec, which lost patent protection
in the United States and Europe during 2016. Our results
underscore the breadth and strength of our product port-
folio and highlight our success at steering through the
patent expiration of one of our biggest-selling drugs.
By division, our 2017 sales were varied. In constant
currencies (cc), which removes the impact of exchange
rate movements, Innovative Medicines Division sales
increased by 2% cc (+1% in USD). Sandoz is expanding
access to biosimilars, and we have a leading portfolio
with five biosimilars now on the market, however Sandoz
net sales were down by 2% cc (–1% in USD) due to fierce
price competition in the United States. Alcon made
significant progress on its turnaround, returning to
growth and building momentum toward the end of the
year delivering sales growth of 4% cc ( +4% USD).
Net sales in 2017 for Novartis were USD 49.1 billion,
up 1% in reported terms and up 2% in constant curren-
cies. Sales volumes increased 7%, as growth drivers
such as Cosentyx (USD 2.1 billion; +84%, +82% cc),
Entresto (USD 507 million; +198%, +195% cc), Promacta/
Revolade (USD 867 million; +37%, +37% cc) and Tafinlar
+ Mekinist (USD 873 million; +30%, 29% cc) were partly
offset by the negative impact of generic competition
(-3 percentage points) and pricing (-2 percentage points).
Operating income in 2017 was USD 8.6 billion (+4%,
+7% cc) as growth drivers, productivity, lower amortiza-
tion and a gain from achievement of a sales milestone
related to the 2015 Vaccines divestment to GSK more
than offset generic erosion. Operating income margin
was 17.6% of net sales.
Net income was USD 7.7 billion (+15%, +12% cc), ben-
efiting from growth in operating income and higher
income from our stake in GSK Consumer Healthcare
Holdings Ltd. The prior year also included USD 0.3 bil-
lion exceptional charges related to Venezuela. For more
information see page 166.
Basic earnings per share were USD 3.28 (+16%, +14%
cc), up more than net income in constant currencies,
benefiting from our share buyback program.
Free cash flow amounted to USD 10.4 billion (+10%
USD) compared to USD 9.5 billion in 2016. The increase
was mainly driven by favorable working capital changes,
lower legal settlement payments out of provisions and
lower taxes paid, partly offset by the decrease in oper-
ating income adjusted for non-cash items and higher net
investments.
158 | Novartis Annual Report 2017
Key figures
(USD millions unless indicated otherwise)
Net sales to third parties
Other revenues
Cost of goods sold
Gross profit
Marketing & Sales
Research & Development
General & Administration
Other income
Other expense
Operating income
Return on net sales (%)
Income from associated companies
Interest expense
Other financial income and expense
Income before taxes
Taxes
Net income
Attributable to:
Shareholders of Novartis AG
Non-controlling interests
Basic earnings per share (USD)
Free cash flow
nm = not meaningful
Net sales by segment
Year ended
Year ended
Dec 31, 2017 Dec 31, 2016
Change
in USD
%
Change in
constant
currencies
%
49 109
48 518
1 026
918
– 17 175
– 17 520
32 960
31 916
– 12 861
– 11 998
– 8 972
– 9 039
– 2 136
– 2 194
1 969
1 927
– 2 331
– 2 344
8 629
8 268
17.6
1 108
– 777
39
8 999
17.0
703
– 707
– 447
7 817
– 1 296
– 1 119
7 703
6 698
7 703
6 712
0
3.28
– 14
2.82
10 428
9 455
1
12
2
3
– 7
1
3
2
1
4
58
– 10
nm
15
– 16
15
15
nm
16
10
2
11
2
4
– 7
1
2
1
0
7
58
– 12
nm
12
– 13
12
12
nm
14
The following table provides an overview of net sales to third parties by segment:
(USD millions)
Innovative Medicines
Sandoz
Alcon
Net sales to third parties
Year ended
Year ended
Dec 31, 2017 Dec 31, 2016
33 025
32 562
10 060
10 144
6 024
5 812
49 109
48 518
Change
in USD
%
Change in
constant
currencies
%
1
– 1
4
1
2
– 2
4
2
Additional comments on the changes in the net sales by division can be found starting on page 22.
Operating income
The following table provides an overview of operating income by segment:
(USD millions)
Innovative Medicines
Sandoz
Alcon
Corporate
Operating income
Year ended
Dec 31, 2017
% of
Year ended
net sales Dec 31, 2016
% of
net sales
7 782
1 368
– 190
– 331
8 629
23.6
13.6
– 3.2
17.6
7 426
1 445
– 132
– 471
8 268
22.8
14.2
– 2.3
17.0
Change
in USD
%
5
– 5
– 44
30
4
Change in
constant
currencies
%
7
– 7
– 14
27
7
FINANCIAL REPORT
Operating and financial review 2017
Novartis Annual Report 2017 | 159
Operating income was USD 8.6 billion (+4%, +7% cc) as
growth drivers, productivity, lower amortization and a
gain from achievement of a sales milestone related to
the 2015 Vaccines divestment to GSK more than offset
generic erosion. Operating income margin in constant
currencies increased 0.8 percentage points compared
to the prior year; currency had a negative impact of 0.2
percentage points resulting in an increase of 0.6
percentage points to 17.6% 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 331 million (+30%,
+27% cc) in 2017 compared to a net expense of USD 471
million in the prior year. The favorable decrease in
expense was mainly due to a gain from achievement of
a sales milestone related to the 2015 Vaccines divestment
to GSK, partly offset by lower gains from divestment in
real estate and lower contributions from the captive
insurance companies.
Core operating income key figures1
(USD millions unless indicated otherwise)
Core gross profit
Core Marketing & Sales
Core Research & Development
Core General & Administration
Core other income
Core other expense
Core operating income
As % of net sales
Year ended
Year ended
Dec 31, 2017 Dec 31, 2016
36 578
35 806
– 12 865
– 11 991
– 8 313
– 8 402
– 2 135
– 2 120
778
753
– 1 193
– 1 059
12 850
12 987
26.2
26.8
Change
in USD
%
Change in
constant
currencies
%
2
– 7
1
– 1
3
– 13
– 1
3
– 7
1
– 2
2
– 13
0
1 An explanation of non-IFRS measures and reconciliation tables can be found starting on page 179.
The adjustments made to operating income to arrive at
core operating income amounted to USD 4.2 billion
(2016: USD 4.7 billion), less than in the prior year due to
lower amortization and a gain from achievement of a
sales milestone related to the 2015 Vaccines divestment
to GSK.
Excluding these items, Core operating income was
USD 12.9 billion (–1%, 0% cc). Core operating income
margin in constant currencies decreased 0.3 percent-
age points, mainly due to generic competition for
Gleevec/Glivec, and higher launch investments, which
were partially offset by expanded gross margin and
productivity improvements. Currency exchange rates
had an additional negative impact of 0.3 percentage
points, yielding a net decrease of 0.6 percentage points
to 26.2% of net sales. Additional comments on the
changes in the core operating income by division can be
found starting on page 22.
The following table provides an overview of core
operating income by segment:
(USD millions)
Innovative Medicines
Sandoz
Alcon
Corporate
Year ended
Dec 31, 2017
% of
Year ended
net sales Dec 31, 2016
% of
net sales
10 330
2 080
857
– 417
31.3
20.7
14.2
10 354
2 071
850
– 288
31.8
20.4
14.6
Core operating income
12 850
26.2
12 987
26.8
Change
in USD
%
0
0
1
– 45
– 1
Change in
constant
currencies
%
2
– 1
5
– 53
0
160 | Novartis Annual Report 2017
Research and development of Innovative Medicines Division
The following table provides an overview of the reported and core research and development expense of the
Innovative Medicines Division:
(USD millions unless indicated otherwise)
Research and Exploratory Development1
Confirmatory Development1
Total Innovative Medicines Division Research and Development expense
As % of Innovative Medicines net sales to third parties
Core Research and Exploratory Development1,2
Core Confirmatory Development1,2
Year ended
Year ended
Dec 31, 2017 Dec 31, 2016
– 2 749
– 2 739
– 4 881
– 4 970
– 7 630
– 7 709
23.1
23.7
– 2 623
– 2 637
– 4 426
– 4 475
Total Core Innovative Medicines Division Research and Development expense
– 7 049
– 7 112
As % of Innovative Medicines net sales to third parties
21.3
21.8
1 Certain prior year amounts have been reclassified for comparative purposes.
2 Core excludes impairments, amortization and certain other items.
Change
in USD
%
Change in
constant
currencies
%
0
2
1
1
1
1
0
2
1
1
1
1
Innovative Medicines Division Research and Exploratory
Development expense amounted to USD 2.7 billion in
2017, in line with the prior year. Confirmatory Develop-
ment expense decreased by 2% (+2% cc) to USD 4.9 bil-
lion compared to USD 5.0 billion in 2016, driven by
resource allocation and continued productivity efforts,
including the benefit of the creation of the Novartis
Global Drug Development (GDD) organization.
Total Core Research and Development expense in
the Innovative Medicines Division as a percentage of
sales decreased by 0.7 percentage points in constant
currencies mainly due to resource allocation and contin-
ued productivity efforts. Currency exchange rates had a
negative impact of 0.2 percentage points, yielding a net
decrease of 0.5 percentage points to 21.3% of net sales.
Non-operating income and expense
The following table provides an overview of non-operating income and expense:
(USD millions unless indicated otherwise)
Operating income
Income from associated companies
Interest expense
Other financial income and expense
Income before taxes
Taxes
Net income
Basic EPS (USD)
nm = not meaningful
Year ended
Year ended
Dec 31, 2017 Dec 31, 2016
8 629
1 108
– 777
39
8 999
8 268
703
– 707
– 447
7 817
– 1 296
– 1 119
7 703
6 698
3.28
2.82
Change
in USD
%
Change in
constant
currencies
%
4
58
– 10
nm
15
– 16
15
16
7
58
– 12
nm
12
– 13
12
14
Income from associated companies increased to USD 1.1
billion, compared to USD 703 million in the prior year.
The increase was due to higher income recognized from
our investment in GSK Consumer Health-care Holdings
Ltd. (GSK Consumer Healthcare).
The estimated income from our investment in GSK
Consumer Healthcare in 2017 amounted to USD 629 mil-
lion compared to USD 234 million in 2016. The increase
is due to improved operational results of USD 89 million,
an estimate of a one-time deferred tax income of
USD 237 million, arising from a change in a Swiss can-
tonal statutory tax rate, and a positive prior year adjust-
ment of USD 47 million based on the actual audited
results for 2016, compared to a negative prior year
adjustment of USD 22 million recognized in 2016 for
2015.
FINANCIAL REPORT
Operating and financial review 2017
Novartis Annual Report 2017 | 161
The estimated income from our investment in Roche
in 2017 amounted to USD 456 million (2016: USD 464
million), which reflected our estimated share of income
for 2017 of USD 523 million (2016: USD 532 million) off-
set by the negative prior year adjustment of USD 67 mil-
lion, based on actual 2016 results (2016: negative prior
year adjustment of USD 68 million, based on actual 2015
results).
Interest expense increased to USD 777 million from
USD 707 million in the prior year due to higher outstand-
ing debt.
Other financial income and expense amounted to an
income of USD 39 million compared to an expense of
USD 447 million in the prior-year, mainly on account of
exceptional charges related to Venezuela of USD 305
million in 2016, as well as higher currency losses in 2016.
For more information see “Effects of currency fluctua-
tions” on page 166.
other provisions, reduced the US corporate tax rate from
35% to 21%, effective January 1, 2018. This required a
revaluation of the deferred tax assets and liabilities and
a portion of current tax payables to the newly enacted
tax rate at the date of enactment, which resulted in a net
tax expense of USD 61 million (0.7%). In addition, a
change in a Swiss cantonal statutory tax rate resulted in
a one-time income from our share in GSK Consumer
Healthcare the impact of which decreased the tax rate
by 0.4%.
Excluding the impact of these rate changes the
reported tax rate for 2017 would have been 14.1% com-
pared to 14.3% in the prior year.
Net income was USD 7.7 billion (+15%, +12% cc), ben-
efiting from growth in operating income and higher
income from our stake in GSK Consumer Healthcare
Holdings Ltd. The prior year also included the excep-
tional charges related to Venezuela.
The tax rate increased to 14.4% from 14.3% in the
prior year. On December 22, 2017, the US enacted tax
reform legislation (Tax Cuts and Jobs Act), which among
Basic earnings per share were USD 3.28 (+16%, +14%
cc), up more than net income in constant currencies,
benefiting from our share buyback program.
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
Core income from associated companies
Core interest expense
Core other financial income and expense
Core income before taxes
Core taxes
Core net income
Core basic EPS (USD)
nm = not meaningful
Year ended
Year ended
Dec 31, 2017 Dec 31, 2016
12 850
12 987
1 335
– 777
39
1 134
– 707
– 99
13 447
13 315
– 2 056
– 2 001
11 391
11 314
4.86
4.75
Change
in USD
%
Change in
constant
currencies
%
– 1
18
– 10
nm
1
– 3
1
2
0
18
– 12
nm
2
– 4
2
3
Core income from associated companies increased to
USD 1.3 billion from USD 1.1 billion in the prior-year period.
The core income contribution from GSK Consumer
Healthcare Holdings Ltd., increased to USD 479 million
in 2017 from USD 369 million in the prior-year period,
and the core income contribution from Roche increased
to USD 832 million from USD 760 million.
Core other financial income and expense amounted
to an income of USD 39 million, compared to an expense
of USD 99 million in 2016, mainly on account of lower
currency losses. In the prior year, the exceptional charges
of USD 0.3 billion related to Venezuela were excluded
from the 2016 core other financial expense.
The core tax rate (core taxes as a percentage of core
pre-tax income) increased to 15.3% from 15.0% in the
prior year.
Core net income was USD 11.4 billion (+1%, +2% cc),
benefiting from higher core income from associated
companies. Core earnings per share were USD 4.86
(+2%, +3% cc), reflecting the benefit of our share buyback
program.
162 | Novartis Annual Report 2017
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 2017 and 2016 are mentioned
below.
Significant transactions in 2016
Significant transactions in 2017
INNOVATIVE MEDICINES – ACQUISITION OF ZIARCO GROUP
LIMITED
On January 20, 2017, Novartis acquired Ziarco Group
Limited (Ziarco), a privately held company in the United
Kingdom, focused on the development of novel treat-
ments in dermatology. This acquisition adds a once-daily
oral H4 receptor antagonist in development for atopic
dermatitis, commonly known as eczema, to complement
the Novartis dermatology portfolio and pipeline. The fair
value of the total purchase consideration was USD 420
million. The amount consisted of an initial cash payment
of USD 325 million and the net present value of the con-
tingent consideration of USD 95 million, due to Ziarco
shareholders, which they are eligible to receive upon the
achievement of specified development milestones. The
purchase price allocation resulted in net identifiable
assets of USD 395 million and goodwill of USD 25 mil-
lion. Results of operations since the date of acquisition
were not material.
INNOVATIVE MEDICINES – ACQUISITION OF ENCORE VISION,
INC.
On January 20, 2017, Novartis acquired Encore Vision,
Inc. (Encore), a privately-held company in Fort Worth,
Texas, in the United States, focused on the development
of a novel treatment in presbyopia. The fair value of the
total purchase consideration was USD 456 million. The
amount consisted of an initial cash payment of USD 366
million and the net present value of the contingent con-
sideration of USD 90 million, due to Encore sharehold-
ers, which they are eligible to receive upon the achieve-
ment of specified development and commercialization
milestones. The purchase price allocation resulted in net
identifiable assets of USD 389 million and goodwill of
USD 67 million. Results of operations since the date of
acquisition were not material.
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 Transcend
shareholders, which they are eligible to receive upon the
achievement of specified development and commercial-
ization milestones. The purchase price allocation resulted
in net identifiable assets of USD 294 million and good-
will of USD 38 million. The 2016 results of operations
since the date of acquisition were not material.
INNOVATIVE MEDICINES – ACQUISITION OF REPRIXYS
PHARMACEUTICALS CORPORATION
On November 18, 2016, Novartis acquired Reprixys Phar-
maceuticals Corporation (Reprixys), a privately held,
US-based company specializing in the development of
therapeutics in certain hematologic and inflammatory
disorders, following receipt of results of the SUSTAIN
study. The initial interest of 19% was 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 Reprixys shareholders, which they are
eligible to receive upon the achievement of specified
development and commercialization milestones. The
purchase price allocation resulted in net identifiable
assets of USD 332 million. No goodwill was recognized.
The 2016 results of operations since the date of acqui-
sition were not material.
For further details on significant transactions, see Note 2
to the Group consolidated financial statements.
FINANCIAL REPORT
Operating and financial review 2017
Novartis Annual Report 2017 | 163
Free cash flow
Novartis defines free cash flow as cash flow from oper-
ating activities and cash flow associated with the
purchase or sale of property, plant and equipment, intan-
gible assets, other non-current assets and financial
assets, excluding marketable securities. Cash flows in
connection with the acquisition or divestment of sub-
sidiaries, 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
180. The following is a summary of the free cash flow:
(USD millions)
Operating income
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
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
2017
2016
Change
8 629
8 268
361
6 332
6 175
160
956
– 360
– 264
14 761
15 135
1 084
– 980
942
– 878
– 1 611
– 2 111
– 877
– 1 536
– 393
– 1 051
637
974
12 621
11 475
– 1 696
– 1 862
92
161
– 1 050
– 1 017
640
847
– 468
– 247
330
– 42
1
247
– 149
10 428
9 455
157
– 796
– 96
– 374
142
– 102
500
659
658
– 337
1 146
166
– 69
– 33
– 207
– 221
83
107
1
973
Free cash flow amounted to USD 10.4 billion (+10% USD)
compared to USD 9.5 billion in 2016. The increase was
mainly driven by favorable working capital changes,
lower legal settlement payments out of provisions and
lower taxes paid, partly offset by the decrease in
operating income adjusted for non-cash items and higher
net investments.
164 | Novartis Annual Report 2017
Liquidity, cash flow and capital resources
The following table summarizes the Group’s cash flow:
(USD millions)
Cash flows from operating activities
Cash flows used in investing activities from continuing operations
Cash flows used in investing activities from discontinued operations
Cash flows used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Net change in cash and cash equivalents
Change in marketable securities, commodities, time deposits and derivative financial instruments
2017
2016
Change
12 621
11 475
– 2 979
– 2 693
– 140
– 748
1 146
– 286
608
– 7 733
– 5 314
– 2 419
84
1 853
– 145
– 387
2 333
– 3
471
– 480
– 142
Change in current and non-current financial debts and derivative financial instruments
– 4 730
– 1 871
– 2 859
Change in net debt
Net debt at January 1
Net debt at December 31
– 3 022
459
– 3 481
– 16 025
– 16 484
459
– 19 047
– 16 025
– 3 022
Cash flows from operating activities amounted to
USD 12.6 billion, compared to USD 11.5 billion in 2016.
The increase of USD 1.1 billion was mainly driven by favor-
able working capital changes, lower legal settlement
payments out of provisions and lower taxes paid, partly
offset by the decrease in net income adjusted for non-
cash items.
Cash flows used in investing activities from continu-
ing operations amounted to USD 3.0 billion in 2017. This
amount included cash outflows for the purchase of prop-
erty, plant and equipment of USD 1.7 billion, for intangi-
ble assets of USD 1.1 billion, for financial assets and other
non-current assets of USD 0.5 billion and for acquisi-
tions and divestments of businesses, net (mainly the
Ziarco Group Limited and Encore Vision, Inc. acquisi-
tions) of USD 0.8 billion. This was partly offset by cash
inflows from the sale of property, plant and equipment,
intangible assets and financial assets of USD 1.1 billion.
In 2016, cash flows used in investing activities from
continuing operations amounted to USD 2.7 billion. This
amount included cash outflows for the purchase of prop-
erty, plant and equipment of USD 1.9 billion, for intangi-
ble assets of USD 1.0 billion, for financial assets and other
non-current assets of USD 0.4 billion and for acquisi-
tions and divestments of businesses, net (including the
Transcend Medical, Inc. and Reprixys Pharmaceuticals
Corporation acquisitions) of USD 0.8 billion. This was
partly offset by cash inflows from the sale of property,
plant and equipment, intangible assets and financial
assets of USD 1.3 billion and from the net proceeds from
sales of marketable securities and commodities of
USD 0.1 billion.
Cash flows used in investing activities from discon-
tinued operations, which consists of payments out of
provisions related to the portfolio transformation trans-
actions, amounted to USD 0.1 billion, compared to
USD 0.7 billion in 2016, which also included capital gains
taxes.
The cash flows used in financing activities amounted
to USD 7.7 billion, compared to USD 5.3 billion in 2016.
The 2017 amount included cash outflows for the dividend
payment of USD 6.5 billion and for net treasury share
transactions of USD 5.2 billion. The net cash inflows from
current and non-current financial debts of USD 4.0 bil-
lion were mainly from the issuance of bonds denomi-
nated in US dollar and euro for a notional amount of
USD 3.0 billion and EUR 1.85 billion (USD 2.0 billion),
respectively, partially offset by the repayment of current
and non-current financial debt of USD 0.9 billion.
The 2016 cash flows used in financing activities
amounted to USD 5.3 billion, which included cash out-
flows for the dividend payment of USD 6.5 billion and for
net treasury share transactions of USD 0.9 billion. The
net cash inflows from current and non-current financial
debts of USD 2.1 billion was mainly from the increase in
short-term borrowings of USD 1.8 billion and from the
issuance of two euro denominated bonds for total pro-
ceeds of USD 1.9 billion, partially offset by the repayment
at maturity of a euro denominated bond of USD 1.7 bil-
lion.
Group net debt
Group net debt consists of:
(USD millions)
2017
2016
Change
Non-current financial debts
– 23 224
– 17 897
– 5 327
Current financial debts
and derivative financial
instruments
– 5 308
– 5 905
597
Total financial debt
– 28 532
– 23 802
– 4 730
Less liquidity
Cash and cash equivalents
8 860
7 007
1 853
Marketable securities,
commodities, time deposits
and derivative financial
instruments
Total liquidity
625
770
9 485
7 777
– 145
1 708
Net debt at December 31
– 19 047
– 16 025
– 3 022
Group net debt increased to USD 19.0 billion at the end
of 2017 from USD 16.0 billion at the end of 2016, mainly
due to increased borrowings.
FINANCIAL REPORT
Operating and financial review 2017
Novartis Annual Report 2017 | 165
Total financial debt increased by USD 4.7 billion to
USD 28.5 billion at December 31, 2017, from USD 23.8
billion at December 31, 2016.
The long-term credit rating for the company contin-
ues to be double-A (Moody’s Aa3; Standard & Poor’s
AA–; Fitch AA).
Non-current financial debt increased by USD 5.3 bil-
lion to USD 23.2 billion at December 31, 2017 from
USD 17.9 billion at December 2016, mainly due to the
issuance of bonds in the first quarter that are denomi-
nated in US dollar and euro for a notional amount of
USD 3.0 billion and EUR 1.85 billion (USD 2.0 billion),
respectively.
Current financial debt decreased by USD 0.6 billion
to USD 5.3 billion at December 31, 2017, from USD 5.9
billion at December 31, 2016, mainly due to a reduction
in short-term borrowings. Overall current financial debt
consists of the current portion of non-current financial
debt of USD 0.4 billion and other short-term borrowings
of USD 4.9 billion, including derivatives and commercial
paper.
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 2.3 billion
under these three programs were outstanding as per
December 31, 2017. 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
for the US commercial paper programs. It matures in
September 2020 and was undrawn as per December 31,
2017.
We are not aware of any significant demands to
change the level of liquidity needed to support our nor-
mal business activities. We make use of various borrow-
ing facilities provided by several financial institutions. We
also successfully issued various bonds in previous years
(including 2016 and 2017), 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.
The maturity schedule of our net debt can be found
in Note 28 to the consolidated financial statements on
page 249.
The following table provides a breakdown of liquidity and
financial debt by currency:
Liquidity and financial debt by currency
(as of December 31)
Liquidity
in % 2017 1
Liquidity
in % 2016 1
Financial
debt in %
2017 2
Financial
debt in %
2016 2
US dollar (USD)
77
Euro (EUR)
Swiss franc (CHF)
Japanese yen (JPY)
Other
8
5
1
9
100
77
9
5
9
100
63
20
11
4
2
66
13
13
5
3
100
100
1 Liquidity includes cash and cash equivalents, marketable securities, commodities and
time deposits.
2 Financial debt includes non-current and current financial debt.
Contractual obligations
The following table summarizes the Group’s contractual obligations and other commercial commitments, as well
as the effect these obligations and commitments are expected to have on the Group’s liquidity and cash flow in
future periods:
(USD millions)
Non-current financial debt, including current portion
Interest on non-current financial debt, including current portion
Operating leases
Unfunded pensions and other post-employment benefit plans
Research & Development potential milestone commitments
Property, plant & equipment purchase commitments
Acquisition of business and intangible asset commitments 1
Total contractual cash obligations
Payments due by period
Total
23 583
6 244
3 169
2 179
4 306
318
4 000
43 799
Less than
1 year
359
620
309
121
780
247
4 000
6 436
2–3 years
4–5 years
After
5 years
5 170
4 679
13 375
977
384
249
788
255
257
1 535
1 154
71
3 859
2 221
1 552
837
8 386
7 133
21 844
1 For acquisition of business commitments, please refer to Note 2 to the Group consolidated financial statements.
The Group intends to fund the Research & Development,
Property, plant & equipment and intangible asset pur-
chase commitments with internally generated resources.
The Group intends to fund the acquisition of business
(USD 3.9 billion) mainly through external short- and long-
term debt.
166 | Novartis Annual Report 2017
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 operations based on IFRS
values for 2017 and 2016 for currencies most important
to the Group:
2017
2016
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
%
%
%
%
37
26
2
6
4
2
3
2
2
2
14
42
22
15
4
3
2
1
1
1
1
8
38
26
2
7
4
3
3
2
2
1
12
43
23
15
5
3
2
1
1
1
1
5
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, it could impact the effective
prices we would be able to charge for our products and
also have an adverse impact on both our consolidated
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 was Ven-
ezuela, where the Group incurred significant foreign
exchange losses in 2015 and 2016.
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
supplies. Since November 2016, the Group has applied
the floating rate of DICOM (Sistema de Divisa Comple-
mentaria) to translate the financial statements of its
Venezuelan subsidiaries. This change from the rate appli-
cable for imports of specific goods and services of
national priority to the floating rate of DICOM resulted in
a USD 0.3 billion revaluation loss on the outstanding
intercompany balances in 2016. The net outstanding
intercompany payable balance of Venezuela sub sidiaries
was not significant at December 31, 2017 and at Decem-
ber 31, 2016, due to reserves against the intercompany
balances.
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
2017, 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
currency 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, 15 and 28 to the Group’s
consolidated financial statements.
FINANCIAL REPORT
Operating and financial review 2017
Novartis Annual Report 2017 | 167
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
Australian dollar (AUD)
Brazilian real (BRL)
Canadian dollar (CAD)
Swiss franc (CHF)
Chinese yuan (CNY)
Euro (EUR)
British pound (GBP)
Japanese yen (JPY (100))
Russian ruble (RUB (100))
Average for year
Year-end
2017
0.766
0.313
0.771
1.016
0.148
1.129
1.288
0.892
1.715
2016 Change in %
0.744
0.288
0.755
1.015
0.151
1.107
1.355
0.922
1.498
3
9
2
0
– 2
2
– 5
– 3
14
2017
0.779
0.302
0.797
1.024
0.154
1.195
1.347
0.888
1.734
2016 Change in %
0.722
0.307
0.741
0.978
0.144
1.051
1.227
0.854
1.648
8
– 2
8
5
7
14
10
4
5
The following table provides a summary of the currency
impact on key Group figures due to their conversion into
USD, the Group’s reporting currency, of the financial data
from entities reporting in non-US dollars. Constant
currency (cc) calculations apply the exchange rates of
the prior year to the current year financial data for entities
reporting in non-US dollars.
Currency impact on key figures
Net sales
Operating income
Net income
Core operating income
Core net income
Change in
constant
currencies %
2017
2
7
12
0
2
For additional information on the effects of currency
fluctuations, see Note 28 to the Group’s consolidated
financial statements.
Percentage
Change in point currency
Change in
constant
impact currencies %
2016
2017
Percentage
Change in point currency
impact
2016
USD %
2016
– 1
– 3
3
– 1
– 1
0
– 3
1
– 2
– 3
– 2
– 8
– 5
– 6
– 6
– 2
– 5
– 6
– 4
– 3
USD %
2017
1
4
15
– 1
1
168 | Novartis Annual Report 2017
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, 2017 Dec 31, 2016
Change
16 464
15 641
31 750
30 980
823
770
29 997
31 340
– 1 343
26 660
27 232
104 871
105 193
6 867
8 600
3 256
6 255
8 202
2 697
9 485
7 777
28 208
24 931
133 079
130 124
74 227
74 891
23 224
17 897
– 572
– 322
612
398
559
1 708
3 277
2 955
– 664
5 327
12 225
15 127
– 2 902
35 449
33 024
2 425
5 169
5 308
4 873
5 905
12 926
11 431
23 403
22 209
58 852
55 233
133 079
130 124
296
– 597
1 495
1 194
3 619
2 955
Total non-current assets of USD 104.9 billion at Decem-
ber 31, 2017, decreased by USD 0.3 billion compared to
December 31, 2016.
Should there be a substantial deterioration in our eco-
nomic exposure with respect to those countries, we may
change the terms of trade on which we operate.
Property, plant and equipment increased by USD 0.8
billion to USD 16.5 billion, mainly due to the favorable
currency translation adjustments, as net additions were
offset by depreciation.
Goodwill increased by USD 0.8 billion to USD 31.8
billion, mainly due to USD 0.7 billion favorable currency
translation adjustments.
Intangible assets other than goodwill decreased by
USD 1.3 billion to USD 30.0 billion, as net additions of
USD 2.4 billion and favorable currency translation adjust-
ments of USD 0.7 billion were more than offset by amor-
tization and impairment charges totaling USD 4.4 billion.
Financial and other non-current assets decreased by
USD 0.6 billion to USD 26.7 billion, as a decrease in the
deferred tax assets of USD 1.8 billion was partly offset
by an increase of USD 1.1 billion in the investments in
associated companies, mainly due to favorable currency
translation adjustments.
Total current assets increased by USD 3.3 billion to
USD 28.2 billion at December 31, 2017, due to an increase
in cash and cash equivalents, marketable securities,
commodities and derivatives of USD 1.7 billion. Invento-
ries and other current assets increased by USD 0.6 bil-
lion each, and trade receivables by USD 0.4 billion.
Based on our current incurred loss provisioning
approach, we consider that our provisions for doubtful
trade receivables are adequate. We continue to monitor
the level of trade receivables particularly in Greece, Italy,
Portugal, Spain, Brazil, Russia, Saudi Arabia and Turkey.
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, Brazil and Turkey, which are due
from private entities. The gross trade receivables from
these countries at December 31, 2017 amount to USD 1.7
billion (2016: USD 1.7 billion), of which USD 124 million
are past due for more than one year (2016: USD 82 mil-
lion), and for which provisions of USD 95 million have
been recorded (2016: USD 63 million). At December 31,
2017, amounts past due for more than one year are not
significant in any of these countries.
The following table provides an overview of the aging
analysis of total trade receivables and the total amount
of the provision for doubtful trade receivables as of
December 31, 2017 and 2016:
(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
2017
7 758
279
2016
7 386
262
230
223
137
137
249
185
145
163
Provisions for doubtful trade receivables
Total trade receivables, net
– 190
8 600
– 162
8 202
FINANCIAL REPORT
Operating and financial review 2017
Novartis Annual Report 2017 | 169
There is also a risk that certain countries could devalue
their currency. Currency exposures are described in
more detail in the “Effects of currency fluctuations” sec-
tion on page 166.
Trade payables increased by USD 0.3 billion to
USD 5.2 billion, and other current liabilities increased by
USD 1.5 billion to USD 12.9 billion.
Current income tax liabilities increased by USD 0.1
billion to USD 1.7 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 amounts related to uncer-
tain tax positions, are appropriate based on currently
known facts and circumstances.
In our key countries, Switzerland and the United States,
assessments have been agreed by the tax authorities up
to 2014 in Switzerland and up to 2012 in the United States,
with the exception of one open United States position
related to the 2007 tax filing and one for the 2010 tax filing.
Other non-current liabilities which include deferred
tax liabilities, provisions and other non-current liabilities
decreased by USD 2.9 billion to USD 12.2 billion at Decem-
ber 31, 2017, mainly due to a reduction of the pension obli-
gations of USD 1.3 billion resulting from actuarial gains
and a change in the accounting for a component of the
Swiss pension plan from defined benefit to defined con-
tribution plan.
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 0.7 billion to
USD 74.2 billion at December 31, 2017, compared to
USD 74.9 billion at December 31, 2016. The decrease was
mainly on account of USD 6.5 billion for the dividend pay-
ment and net treasury share purchases of USD 5.3 billion.
These amounts resulting from transactions with share-
holders were partially offset by net income of USD 7.7 bil-
lion, favorable currency translation differences of USD 2.2
billion, net actuarial gains from defined benefit plans of
USD 0.9 billion, and equity-based compensation of
USD 0.6 billion.
The Group’s liquidity amounted to USD 9.5 billion at
December 31, 2017, compared to USD 7.8 billion at
December 31, 2016, and net debt increased to USD 19.0
billion at December 31, 2017, compared to USD 16.0 bil-
lion at December 31, 2016. The debt/equity ratio
increased to 0.38:1 at December 31, 2017, compared to
0.32:1 at December 31, 2016.
Summary of equity movements attributable to Novartis AG shareholders
Number of outstanding shares (in millions)
Issued share capital and reserves
attributable to Novartis AG shareholders
Balance at beginning of year
Shares acquired to be canceled
Other share purchases
Exercise of options and employee transactions
Equity-based compensation
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
2017
2016
Change
Change USD millions USD millions USD millions
2016
2017
2 374.1
2 373.9
0.2
74 832
77 046
– 2 214
– 66.2
– 10.3
– 55.9
– 5 270
– 784
– 4 486
– 3.8
– 2.6
4.6
8.8
4.1
9.0
– 1.2
0.5
– 0.2
– 304
– 208
255
612
214
664
– 6 495
– 6 475
7 703
6 712
– 7
2 835
– 2 330
– 96
41
– 52
– 20
991
7
5 165
– 664
Balance at end of year
2 317.5
2 374.1
– 56.6
74 168
74 832
During 2017, 13.4 million treasury shares for USD 0.9 bil-
lion were delivered as a result of options being exercised
and physical share deliveries related to equity-based
participation plans (2016: 13.1 million shares for USD 0.9
billion). Novartis repurchased in total 66.2 million shares
for USD 5.3 billion on the SIX Swiss Exchange second
trading line under the CHF 10 billion share buyback
authority approved at the 2016 Annual General Meeting
(AGM) (2016: 10.3 million shares for USD 0.8 billion). This
included 56.4 million shares bought for USD 4.5 billion
under the up-to USD 5.0 billion share buyback announced
in January 2017, and 9.8 million shares bought for USD 0.8
billion to offset the dilutive impact from equity-based par-
ticipation plans (2016: 10.3 million shares for USD 0.8 bil-
lion). In addition, 3.8 million shares for USD 0.3 billion were
acquired from employees, which were previously granted
to them under the respective programs (2016: 2.6 million
for USD 0.2 billion). No shares were repurchased on the
SIX Swiss Exchange first trading line in 2017 and 2016.
With these transactions, the total number of shares out-
standing decreased by 56.6 million shares in 2017 (2016:
increase of 0.2 million shares).
170 | Novartis Annual Report 2017
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.
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 esti-
mated based on the terms of individual agreements, his-
torical experience, product pricing, and projected prod-
uct growth rates. These provisions are adjusted based
on established processes and experiences from filing
data with individual 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.
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.
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, and to ensure patient access to our prod-
ucts. Since rebates are contractually agreed upon, the
related provisions are estimated 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.
We offer rebates to key managed healthcare and pri-
vate plans in an effort to sustain and increase market
share of our products, and to ensure patient access.
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
FINANCIAL REPORT
Operating and financial review 2017
Novartis Annual Report 2017 | 171
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 2017, 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
experiences for the Innovative Medicines, Sandoz and Alcon Divisions:
Provisions for deductions from revenue
Income statement charge
(USD millions)
2017
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 2017
2016
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 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
1 461
1 020
1 702
4 183
1 165
1 024
1 601
3 790
– 3 684
– 62
3 875
1 590
131
– 1 954
80
2 186
– 107
1 356
65 – 11 814
– 127
12 045
– 145
1 726
196 – 17 452
– 109
18 106
– 252
4 672
– 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
172 | Novartis Annual Report 2017
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
2017
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 2017
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
USD millions
– 3 303
– 1 722
– 2 698
– 7 723
– 3 051
– 1 352
– 2 736
– 7 139
43 994
100.0
– 3 303
– 956
– 2 678
– 2 290
– 4 988
– 3 246
– 10 969
33 025
– 7.5
– 6.1
– 11.3
– 24.9
75.1
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
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.
FINANCIAL REPORT
Operating and financial review 2017
Novartis Annual Report 2017 | 173
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
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;
• behavior of competitors (launch of competing products,
marketing initiatives, etc.);
• probability of obtaining regulatory approvals;
• future tax rates;
• appropriate royalty rate for the Alcon brand name;
• appropriate terminal growth rate; 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 10 starting on page 214.
In 2017, intangible asset impairment charges of USD 709
million were recognized, of which USD 591 million was
recorded in the Innovative Medicines Division, USD 61
million in the Sandoz Division, and USD 57 million in the
Alcon Division.
In 2016, intangible asset impairment charges for con-
tinuing operations of USD 591 million were recognized,
of which USD 522 million was recorded in the Innovative
Medicines Division, USD 65 million in the Sandoz Divi-
sion, and USD 4 million in the Alcon Division.
In 2017 and in 2016, there were no reversals of pri-
or-year impairment charges.
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 10 to the Group’s
consolidated financial statements.
Additionally, net impairment charges for property,
plant and equipment during 2017 amounted to USD 157
million (2016: USD 102 million).
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, Brazil, Russia, Saudi Arabia, Tur-
key and other countries, and evaluates trade receivables
in these countries for potential collection risks. Substan-
tially all of the trade receivables overdue from Greece,
Italy, Portugal, Spain and Saudi Arabia are due directly
from local governments or from government-funded enti-
ties. Deteriorating credit and economic conditions as well
as other factors in these 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 receiv-
ables and may require Novartis to re-evaluate the col-
lectability 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 owners, representing contractually defined
potential amounts as a liability or asset. Usually for
Novartis these are linked to milestone or royalty pay-
ments related to certain assets and are recognized as a
financial liability or financial asset at their fair value, which
is then re-measured at each subsequent reporting 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, are 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 In-Process Research and Develop-
ment (IPR&D). Changes in contingent consideration
assets are recognized in “Other income” or “Other
expense”, depending on its nature.
The effect of unwinding the discount over time is rec-
ognized for contingent liabilities in “Interest expense”
and for contingent assets in “other financial income and
expense” in the consolidated income statement.
174 | Novartis Annual Report 2017
Impairment of associated companies
accounted for at equity
Novartis considers investments in associated companies for
impairment evaluation whenever objective evidence
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
difference in the consolidated income statement under
“Income from associated companies”.
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 assump-
tions about the interest rates we apply to estimate future
defined benefit obligations and net periodic pension
expense, as well as rates of future pension increases. In
addition, our actuarial consultants provide our management
with historical statistical information 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 2017,
a decrease in the interest rate we apply in determining the
present value of the defined benefit obligations of
one-quarter of one percent would have increased our
year-end defined benefit pension obligation for plans in
Switzerland, United States, United Kingdom, Germany and
Japan, which represent 94% of the Group total defined
benefit pension obligation, by approximately USD 0.8 bil-
lion. Similarly, if the 2017 interest rate had been one quar-
ter of one percentage point lower than actually assumed,
the net periodic pension cost for pension plans in these
countries, which represent about 82% of the Group’s total
net periodic pension cost for pension plans, would have
increased by approximately USD 23 million. Depending
on events, such differences could have a material effect
on our total equity. For more information on obligations
under retirement and other post-employment benefit
plans and underlying actuarial assumptions, see Note 24
to the Group’s consolidated financial statements.
Provisions and Contingencies
A number of Group companies are involved in various gov-
ernment investigations and legal proceedings (intellectual
property, sales and marketing practices, product liability,
commercial, employment and wrongful discharge, envi-
ronmental claims, etc.) arising out of the normal conduct
of their businesses. For more information, see Note 19 and
Note 27 to 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 United States,
the European Union, 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”.
In addition, effective 2013, the United States govern-
ment implemented a medical device sales tax that is lev-
ied on the Alcon Division’s United States sales of prod-
ucts which that 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. In Decem-
ber 2015, Congress enacted a law that included a two-
year moratorium on applying the medical device excise
tax, which expired on December 31, 2017. On January 22,
2018, the US Congress extended the moratorium for an
additional two years.
FINANCIAL REPORT
Operating and financial review 2017
Novartis Annual Report 2017 | 175
Taxes
New accounting pronouncements
We prepare and file our tax returns based on an inter-
pretation of tax laws and regulations, and we 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
property globally to deliver goods and services, the
transfer prices within the Group as well as arrangements
between subsidiaries to finance research and develop-
ment 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
uncertain tax positions, are appropriate based on cur-
rently known facts and circumstances.
See Note 1 to the Group’s consolidated financial state-
ments.
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, 2017.
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. Anticipating
and managing these risks can influence 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 in 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 & Compliance and the Business Practices
Office providing support and controlling the effective-
ness of risk management in these areas.
Financial risk management is described in more detail
in Note 28 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 Division, as
well as certain products of our Alcon and Sandoz
Divisions, are protected by patent or other intellectual
property rights, allowing us to exclusively market those
products. The loss of exclusivity has had, and will con-
tinue to have, an adverse effect on our results. In 2017,
the impact of generic competition on our net sales
amounted to approximately USD 2.0 billion.
Some of our best-selling products face or are expected
to face considerable competition due to the expiration of
patent or other intellectual property protection. For exam-
ple, we faced generic competition for Gleevec/Glivec in
the United States, European Union and Japan throughout
2017, which will continue. Patent protection for our
Sandostatin products has expired and generic versions
of Sandostatin SC are available in the United States, Euro-
pean Union and Japan. Diovan and Co-Diovan/Diovan
HCT, which had long been our best-selling products,
have generic competitors in the United States, European
Union and Japan. Looking forward, intellectual property
protecting a number of our major products will expire at
various times in the coming years, raising the likelihood
of further generic competition. Among our products
expected to begin losing intellectual property in key
countries during the next three years are Gilenya, our
everolimus products (Afinitor/Votubia and Certican/
Zortress), Exjade/Jadenu and Lucentis.
To counter the impact of patent expirations, we con-
tinuously invest in R&D to rejuvenate our portfolio. For
example, in 2017, we invested 18.3% of total net sales in
176 | Novartis Annual Report 2017
R&D. One measure of the output of our efforts is the per-
formance of our growth drivers, including Cosentyx and
Entresto, the launches of Kisqali, Kymriah and Rydapt in
2017, and the newly launched Sandoz biosimilars.
Novartis also has a number of late-stage product candi-
dates in its pipeline with the potential to come to market
in the next few years.
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 than has been
required in the past, the inclusion of significantly higher
numbers of patients in clinical trials, and more detailed
analyses of the trials. As a result, despite significant
efforts by health authorities such as the FDA to acceler-
ate the development of new drugs, the already lengthy
and expensive process of obtaining regulatory approv-
als 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 United States in 2015, many countries still lack
fully developed regulatory frameworks for the develop-
ment and approval of biosimilars. Further delays in estab-
lishing regulatory frameworks, or any other difficulties
that may arise in the development or marketing of bio-
similars, 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 has taken steps
to accelerate innovation. It has started to see the results
of its efforts, with the approval and launch of intraocular
lens innovations in 2016 and 2017, including Clareon and
PanOptix IOLs, AutonoMe and Ultrasert IOL delivery
systems, and, ReSTOR Toric IOL with ACTIVEFOCUS
optical design, as well as CyPass micro-stent and 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 products
Our ability to grow depends not only on our pipeline deliv-
ery, but also on our commercial success, particularly with
respect to our key growth drivers, 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, and loss of intellectual
property protection. In addition, our revenue could be
significantly impacted by the timing and rate of commer-
cial acceptance of 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 particular, our Alcon Division and our US Sandoz
business each has suffered declines in sales and profits
in recent years due at least in part to increased compe-
tition for its products, although Alcon’s results improved
in 2017, returning to growth. There can be no certainty
either that Sandoz US sales will recover, or that Alcon’s
improved results will be repeated in the coming years.
In any event, such competition and the costs of our
efforts to improve these businesses’ performance, as
well as other factors, can be expected to affect the busi-
ness, financial condition or results of operations of these
organizations, at least in the near term. In addition,
despite the devotion of significant resources to our
efforts to improve the performance of Alcon and Sandoz
US, those efforts may ultimately prove insufficient.
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 of significant con-
troversies about prices for pharmaceuticals that some
members of the public have considered excessive. These
factors have intensified the pressures we face regard-
ing the prices we charge for our drugs, and our ability to
establish satisfactory rates of reimbursement for our
products by governments, insurers and other payors.
In our Sandoz Division, for example, sales declined
in 2017 due to intense industry pricing pressure in the
US. Sales growth outside the United States was unable
to fully compensate.
We expect scrutiny to continue in 2018, and the fol-
lowing years, as governments and insurers around the
world strive to reduce healthcare costs through steps
such as restricting access to higher-priced new medi-
cines, increasing coinsurance or copays owed by patients
for medicines, increasing the use of generics, and impos-
ing price cuts. In this environment, we believe it is more
FINANCIAL REPORT
Operating and financial review 2017
Novartis Annual Report 2017 | 177
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 United States
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 sig-
nificant global compliance program in place, and we
devote substantial time and resources to efforts to
ensure that our business is conducted in a legal and pub-
licly acceptable manner. Despite these efforts, any fail-
ure to comply with the law could lead to substantial lia-
bilities that may not be covered by insurance and could
affect our business and reputation.
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 2017 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 United States and
other countries, and potentially lead to large damage
payments and agreements intended to regulate com-
pany behavior. This is why we continued to strengthen
the Integrity & Compliance function in 2017. The function
now has 473 employees, and is headed by our Chief Eth-
ics and Compliance Officer, who reports directly to the
CEO of Novartis. The Chief Ethics and Compliance Offi-
cer is also Head of Litigation, reporting to the Group Gen-
eral Counsel of Novartis. By bringing the Integrity & Com-
pliance and Legal functions closer together, we can
evaluate facts that might be at issue in lawsuits to deter-
mine if additional compliance actions or policies are war-
ranted. We expect this will help us constantly 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, in addi-
tion to our own high quality standards, introduce a greater
chance for disruptions and liabilities. Any significant fail-
ure by us or our third party suppliers to comply with these
requirements or the health authorities’ expectations, may
cause us to shut down the production facilities or pro-
duction lines. Alternately, we may be forced to shut them
down by a government health authority.
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 processes,
we have worked for several years to adopt a single
high-quality standard across the company. We believe
these efforts are having an impact. The results of inspec-
tions by regulatory agencies in 2017 were consistent with
the year before. Out of a total of 217 inspections, all but
two (99%) were without major findings.
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.
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 facing local
financial difficulties, including countries experiencing
high inflation rates and highly indebted countries facing
large capital outflows, may impose controls on the
exchange of foreign currency. Such exchange controls
could limit our ability to distribute retained earnings from
our local affiliates, or to pay intercompany payables due
from those countries.
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 activity.
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, including the acquisition of
Alcon and the oncology assets acquired from GSK. As
a result, we may incur significant impairment charges if
the fair value of intangible assets and groupings of cash
generating units containing goodwill are less than their
carrying value on the Group’s consolidated balance
sheet at any point in time.
178 | Novartis Annual Report 2017
We regularly review our long-lived intangible and tan-
gible assets for impairment. In 2017, for example, we
recorded intangible asset impairment charges of
USD 709 million, including the cost of discontinuing the
development of RLX030 (serelaxin). Impairment testing
may lead to additional impairment charges in the future.
Any significant impairment charges could have a mate-
rial adverse effect on our results of operations and finan-
cial condition.
In general, such tax reform efforts, including with
respect to tax base or rate, transfer pricing, intercom-
pany dividends, cross border transactions, controlled
corporations, and limitations on tax relief allowed on the
interest on intercompany debt, will require us to contin-
ually assess our organizational structure against tax pol-
icy trends, and could lead to an increased risk of inter-
national tax disputes and an increase in our effective tax
rate, and could adversely affect our financial results.
Tax
Our worldwide operations are taxed under the laws of
the jurisdictions in which we operate. However, the inte-
grated nature of our worldwide operations can produce
conflicting claims from revenue authorities in different
countries as to the profits to be taxed in the individual
countries, including disputes relating to transfer pricing.
The majority of the jurisdictions in which we operate have
double tax treaties with other foreign jurisdictions, which
provide a framework for mitigating the impact of double
taxation on our revenues and capital gains. However,
mechanisms developed to resolve such conflicting
claims are largely untried, and can be expected to be
very lengthy.
In recent years, tax authorities around the world have
increased their scrutiny of company tax filings, and 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 its Anti Tax Avoidance Directive, which seeks to
prevent tax avoidance by companies and to ensure that
companies pay appropriate taxes in the markets where
profits are effectively made and business is effectively
performed. The European Commission also continues
to extend the application of its policies seeking to limit
fiscal aid by Member States to particular companies, and
the related investigation of the Member States’ practices
regarding the issuance of rulings on tax matters relating
to individual companies.
These OECD and EU tax reform initiatives also need
local country implementation, including in our home
country of Switzerland, which may result in significant
changes to established tax principles. Although we have
taken steps to be in compliance with the evolving OECD
and EU tax initiatives, and will continue to do so, signifi-
cant uncertainties remain as to the outcome of these
efforts.
In addition, in the United States, the president on
December 22, 2017, signed into law the Tax Cuts and
Jobs Act of 2017, which includes substantial changes to
the US taxation of individuals and businesses. Although
the new law substantially decreased tax rates applica-
ble to corporations, we do not yet know what all of the
consequences of this new statute will be, including
whether the law will have any unintended consequences.
In particular, significant uncertainties remain as to how
the US government will implement the new law, includ-
ing with respect to the tax qualification of interest deduc-
tions, the concept of a territorial tax regime, royalty pay-
ments and cost of goods sold.
IT security, data integrity and data privacy
We are heavily dependent on critical, complex and inter-
dependent information technology (IT) systems, includ-
ing internet-based systems, to support business pro-
cesses.
The size and complexity of our IT systems, and in
some instances their age, make them potentially vulner-
able to external and internal security incidents, break-
downs, malicious intrusions, cybercrimes, including
State-sponsored cybercrimes, malware, misplaced and
lost data, programming and human errors, and other sim-
ilar events. Although we have devoted and continue to
devote significant resources and management attention
to cybersecurity and to business continuity efforts, like
many companies, we have experienced certain of these
events and expect to continue to experience them in the
future, as the external cyber-attack threaat only keeps
growing. We believe that the data security incidents we
have experienced to date have not resulted in significant
disruptions to our operations, and have not had a signif-
icant adverse effect on our results of operations, or on
third parties. However, we may not be able to prevent
breakdowns or breaches in our systems and we may not
be able to prevent such events from having a material
adverse effect on our business, financial condition,
results of operation, or reputation.
In addition, our routine business operations, includ-
ing through the use of information technologies such as
the Internet, social media, mobile technologies, and tech-
nology-based medical devices, increasingly involve our
gathering personal information (including sensitive per-
sonal information) about patients, vendors, customers,
employees, collaborators and others. Breaches of our
systems or those of our third-party contractors, or other
failures to protect such information, could expose such
people’s personal information to unauthorized persons.
Any such event could give rise to significant potential lia-
bility and reputational harm, including potentially sub-
stantial monetary penalties. We also make significant
efforts to ensure that any international transfers of per-
sonal data are done in compliance with applicable law.
Any additional restraints that may be placed on our abil-
ity to transfer such data could have a material adverse
effect on our business, financial condition, results of
operations and reputation.
Transformational technologies and business
models
Rapid progress in digital technologies and in the devel-
opment of new business models is substantially trans-
forming numerous industries around the world, while
sometimes quickly rendering established businesses
uncompetitive or obsolete. To take advantage of these
opportunities, Novartis has embarked upon a digital
transformation strategy, with the goal of making Novartis
FINANCIAL REPORT
Operating and financial review 2017
Novartis Annual Report 2017 | 179
an industry leader in leveraging advanced analytics and
other new technologies. At the same time, there is a risk
that other companies with specialized expertise or busi-
ness models may enter the healthcare field, potentially
disrupting our relationships with patients, healthcare pro-
fessionals, customers, distributors and suppliers, with
unknown potential consequences for us.
If we should fail to succeed in our efforts at a digital
transformation of our company, then there is a risk that
we may fail to create the innovative new products, tools
or techniques that such technologies may make possi-
ble, or may fail to create them as quickly and efficiently
as such technologies may enable. We may also lose
opportunities to engage with our stakeholders and to
profit from improved business processes, and may lose
the resources devoted to these efforts to transform our
business. At the same time, should third parties suc-
cessfully enter the healthcare field with disruptive new
technologies or business models, then we potentially
may see our business supplanted in whole or in part by
these new entrants.
Non-IFRS measures as defined by Novartis
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, except software, and certain acqui-
sition-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 and related items, legal related items, impair-
ments of property, plant and equipment and financial
assets, as well as income and expense items that man-
agement deems exceptional and that are or are expected
to accumulate within the year to be over a USD 25 mil-
lion threshold.
Novartis believes that investor understanding of the
Group’s performance is enhanced by disclosing core
measures of performance since they exclude items that
can vary significantly from year to year, the core mea-
sures enable better comparison of business perfor-
mance across years. For this same reason, Novartis uses
these core measures in addition to IFRS and other mea-
sures as important factors in assessing the Group’s per-
formance.
The following are examples of how these core mea-
sures are utilized:
• In addition to monthly reports containing financial infor-
mation prepared under IFRS, senior management
receives a monthly analysis incorporating these core
measures.
• Annual budgets are prepared for both IFRS and core
measures.
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/impairments 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 cur-
rencies 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, since 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.
180 | Novartis Annual Report 2017
Growth rate calculation
Novartis Cash Value Added
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.
Free cash flow
Free cash flow is presented as additional information
because management believes it is a useful supplemen-
tal indicator of the Group’s ability to operate without reli-
ance on additional 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 stra-
tegic opportunities and for returning to shareholders.
Free cash flow is a non-IFRS measure, which means it
should not be interpreted as a measure determined
under IFRS. Free cash flow is not intended to be a sub-
stitute measure for cash flow from operating activities
as determined under IFRS.
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, as
well as intangible, other non-current and financial assets,
excluding marketable securities. The definition of free
cash flow used by Novartis does not include amounts
related to changes in investments in associated compa-
nies or related acquisitions or divestments of subsidiar-
ies.
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 Long-Term Perfor-
mance Plan introduced in 2014. More information on
NCVA is presented as part of the Compensation Report
on page 130.
Additional information
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)
2017
2016
Change
Operating income
8 629
8 268
361
Depreciation of property,
plant & equipment
Amortization of intangible
assets
Impairments of property,
plant & equipment, and
intangible assets
EBITDA
1 520
1 489
31
3 690
3 861
– 171
866
693
14 705
14 311
173
394
Net debt
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. Net
debt is a non-IFRS measure, which means it should not
be interpreted as a measure determined under IFRS.
Novartis defines net debt as current and non-current
financial debt less cash and cash equivalents, current
investments and derivative financial instruments.
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, 2017 Dec 31, 2016
Change
Market capitalization
195 541
172 048
23 493
Non-controlling interests
59
59
0
Financial debts and
derivatives
28 532
23 802
4 730
Liquidity
– 9 485
– 7 777
– 1 708
Enterprise value
214 647
188 132
26 515
Enterprise value/EBITDA
15
13
Impairments
Intangible assets
Property, plant & equipment
related to the Group-wide
rationalization of manufacturing sites
Other property, plant & equipment
Financial assets
Acquisition or divestment of
businesses and related items
- Income
- Expense
Total acquisition or divestment of
businesses and related items, net
Other items
Divestment gains
Restructuring and related items
- Income
- Expense
Legal-related items
- Income
- Expense
Additional income
Additional expense
Total other items
Total adjustments
FINANCIAL REPORT
Operating and financial review 2017
Novartis Annual Report 2017 | 181
2017 and 2016 reconciliation from IFRS results to core results
Innovative Medicines
Sandoz
Alcon
Corporate
Group
(USD millions unless indicated otherwise)
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
IFRS Operating income
7 782
7 426
1 368
1 445
– 190
– 132
– 331
– 471
8 629
8 268
Amortization of intangible assets
2 243
2 440
454
460
901
901
3 598
3 801
591
522
61
65
57
4
709
591
Total impairment charges
675
617
134
66
7
77
1
76
18
60
13
– 7
8
67
90
29
86
197
197
99
226
99
1 092
4
– 6
84
117
786
– 2
32
– 68
41
30
– 27
– 115
– 229
– 117
– 297
130
223
162
264
15
– 6
45
– 33
– 368
– 608
– 6
– 48
– 368
– 662
– 53
268
– 41
418
– 7
134
– 23
123
– 4
34
– 4
33
– 1
29
– 5
65
– 65
465
– 21
35
– 534
273
– 99
205
– 61
84
61
– 21
96
– 3
– 51
– 13
– 372
– 22
– 960
– 400
– 102
2 548
2 928
124
712
6
100
20
60
61
77
46
100
339
– 298
90
– 514
626
1 047
982
– 86
183
4 221
4 719
– 73
639
– 99
205
– 96
251
165
Core operating income
10 330 10 354
2 080
2 071
857
850
– 417
– 288 12 850 12 987
as % of net sales
31.3% 31.8% 20.7% 20.4% 14.2% 14.6%
26.2% 26.8%
Income from associated companies
Core adjustments to income from
associated companies, net of tax
Interest expense
– 1
1
Other financial income and expense 1
Taxes, adjusted for above items (core taxes)
Core net income
Core net income attributable
to shareholders of Novartis AG
Core basic EPS (USD) 2
23
6
1 086
697
1 108
703
226
431
227
431
– 777
– 707
39
– 99
– 2 056 – 2 001
11 391 11 314
11 391 11 307
4.86
4.75
1 Adjusted for charges of USD 0.3 billion in 2016 related mainly to devaluation losses in Venezuela.
2 Earnings per share (EPS) is calculated on the amount of net income attributable to shareholders of Novartis AG.
182 | Novartis Annual Report 2017
2017 and 2016 reconciliation from Group IFRS results to Group core results
2017 (USD millions unless indicated otherwise)
Gross profit
Operating income
Income before taxes
Taxes 5
Net income
Basic EPS (USD) 6
Amortization
of intangible
assets 1
IFRS results
Acquisition or
divestment of
businesses and
Impairments 2
related items 3 Other items 4 Core results
32 960
8 629
8 999
– 1 296
7 703
3.28
3 401
3 598
3 974
92
1 092
1 093
125
36 578
– 514
12 850
– 664
13 447
45
45
– 2 056
11 391
4.86
The following are adjustments to arrive at Core Gross Profit
Cost of goods sold
– 17 175
3 401
92
125
– 13 557
The following are adjustments to arrive at Core Operating Income
Marketing & Sales
Research & Development
General & Administration
Other income
Other expense
– 12 861
– 8 972
– 2 136
1 969
– 2 331
197
680
– 4
– 12 865
– 218
– 8 313
1
– 2 135
– 9
329
– 117
– 1 065
778
162
647
– 1 193
The following are adjustments to arrive at Core Income before taxes
Income from associated companies
1 108
376
1
– 150
1 335
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 376 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; Research & Development and Other expense include
impairment charges related to financial assets; Research & Development, Other income and Other expense include reversals and charges related to the impairment of property,
plant and equipment.
3 Acquisition or divestment of businesses and 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.
4 Other items: Cost of goods sold, Other Income and Other expense include net restructuring and other charges related to the Group-wide rationalization of manufacturing sites;
Cost of goods sold, Research & Development, General & Administration, Other income and Other expense include other restructuring income and charges and related items;
Marketing & Sales includes an income from the release of a provision; Research & Development includes fair value adjustments to contingent consideration liabilities; Other income
and Other expense include legal-related items; Other income also includes a gain from a Swiss pension plan amendment, product and financial asset divestment gains, a partial
reversal of a prior period charge, an income from a settlement of a contract dispute and a fair value adjustment to contingent consideration sales milestone receivables; Other
expense also includes a provision for contract termination costs, a charge for onerous contracts and an amendment to the Swiss Pension Plan; Income from associated companies
includes an adjustment of USD 150 million for the Novartis share of the estimated GSK Consumer Healthcare Holdings Ltd. core items.
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 of USD 4.4 billion to arrive at the core results before tax amounts to USD 760 million. The average tax rate on the
adjustments is 17.1%.
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 2017
Novartis Annual Report 2017 | 183
2016 (USD millions unless indicated otherwise)
Gross profit
Operating income
Income before taxes
Taxes 5
Net income
Basic EPS (USD) 6
The following are adjustments to arrive at Core Gross Profit
Other revenues
Cost of goods sold
31 916
8 268
7 817
– 1 119
6 698
2.82
918
The following are adjustments to arrive at Core Operating Income
Marketing & Sales
Research & Development
General & Administration
Other income
Other expense
– 11 998
– 9 039
– 2 194
1 927
– 2 344
Amortization
of intangible
assets 1
IFRS results
Acquisition or
divestment of
businesses and
Impairments 2
related items 3 Other items 4 Core results
3 758
3 801
4 097
96
786
786
36
35 806
– 33
– 33
165
648
12 987
13 315
– 2 001
11 314
4.75
– 17 520
3 758
96
– 50
868
86
– 13 580
7
– 11 991
99
74
– 8 402
– 2 120
43
495
– 10
205
– 297
– 867
753
264
816
– 1 059
The following are adjustments to arrive at Core Income before taxes
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 of businesses and 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 is 16.0%.
6 Earnings per share (EPS) is calculated on the amount of net income attributable to shareholders of Novartis AG.
184 | Novartis Annual Report 2017
Summary of quarterly
and Group financial data
Summary of quarterly financial data for 2017 and 2016
(USD millions unless indicated otherwise)
Q1
Q2
Q3
Q4
2017
Q1
Q2
Q3
Q4
2016
Net sales to third parties
11 539 12 242 12 413 12 915 49 109 11 600 12 470 12 126 12 322 48 518
Other revenues
Cost of goods sold
Gross profit
Marketing & Sales
Research & Development
General & Administration
Other income
Other expense
Operating income
246
252
279
249
1 026
210
209
215
284
918
– 4 105 – 4 258 – 4 323 – 4 489 – 17 175 – 4 212 – 4 451 – 4 368 – 4 489 – 17 520
7 680
8 236
8 369
8 675 32 960
7 598
8 228
7 973
8 117 31 916
– 2 989 – 3 240 – 3 168 – 3 464 – 12 861 – 2 741 – 3 067 – 2 944 – 3 246 – 11 998
– 2 169 – 2 062 – 2 239 – 2 502 – 8 972 – 2 041 – 2 190 – 2 224 – 2 584 – 9 039
– 483
– 566
– 510
– 577 – 2 136
– 564
– 582
– 456
– 592 – 2 194
445
480
424
620
1 969
777
239
530
381
1 927
– 562
– 568
– 519
– 682 – 2 331
– 578
– 535
– 610
– 621 – 2 344
1 922
2 280
2 357
2 070
8 629
2 451
2 093
2 269
1 455
8 268
Income from associated companies
215
215
262
416
1 108
127
203
217
156
703
Interest expense
– 180
– 192
– 197
– 208
– 777
– 185
– 180
– 174
– 168
– 707
Other financial income and expense
– 10
12
14
23
39
– 41
– 3
– 38
– 365
– 447
Income before taxes
1 947
2 315
2 436
2 301
8 999
2 352
2 113
2 274
1 078
7 817
Taxes
Net income
Attributable to:
– 282
– 336
– 353
– 325 – 1 296
– 341
– 307
– 329
– 142 – 1 119
1 665
1 979
2 083
1 976
7 703
2 011
1 806
1 945
936
6 698
Shareholders of Novartis AG
1 666
1 980
2 081
1 976
7 703
2 011
1 804
1 940
957
6 712
Non-controlling interests
– 1
– 1
2
0
0
0
2
5
– 21
Basic earnings per share (USD)
0.70
0.84
0.89
0.85
3.28
0.85
0.76
0.81
0.40
– 14
2.82
Net sales to third parties by segment
Innovative Medicines
7 692
8 275
8 302
8 756 33 025
7 729
8 387
8 173
8 273 32 562
Sandoz
Alcon
2 430
2 451
2 584
2 595 10 060
2 445
2 577
2 517
2 605 10 144
1 417
1 516
1 527
1 564
6 024
1 426
1 506
1 436
1 444
5 812
Net sales to third parties
11 539 12 242 12 413 12 915 49 109 11 600 12 470 12 126 12 322 48 518
Operating income by segment
Innovative Medicines
1 721
2 075
2 179
1 807
7 782
2 180
1 866
2 020
1 360
7 426
Sandoz
Alcon
Corporate
343
– 43
330
– 19
390
– 50
305
1 368
– 78
– 190
346
31
380
354
365
1 445
7
– 50
– 120
– 132
– 99
– 106
– 162
36
– 331
– 106
– 160
– 55
– 150
– 471
Operating income
1 922
2 280
2 357
2 070
8 629
2 451
2 093
2 269
1 455
8 268
Core operating income
3 010
3 235
3 382
3 223 12 850
3 261
3 332
3 381
3 013 12 987
Core net income
2 690
2 866
3 017
2 818 11 391
2 788
2 930
2 938
2 658 11 314
Core basic earnings per share (USD)
1.13
1.22
1.29
1.21
4.86
1.17
1.23
1.23
1.12
4.75
FINANCIAL REPORT
Summary of quarterly and Group financial data
Novartis Annual Report 2017 | 185
Summary of Group financial data 2013–2017
(USD millions unless indicated otherwise)
2017
2016
2015
2014
2013
Net sales to third parties from continuing operations
49 109
48 518
49 414
52 180
51 869
Change relative to preceding year
Innovative Medicines net sales
Change relative to preceding year
Sandoz net sales
Change relative to preceding year
Alcon net sales
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 AG1
As % of net income from continuing operations2
As % of net income2
Cash flows from operating activities from continuing operations
Change relative to preceding year
As % 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 & equipment3
Change relative to preceding year
As % of net sales
Depreciation of property, plant & equipment3
As % of net sales
Core Research & Development3
As % of net sales
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
1.2
– 1.8
– 5.3
0.6
1.5
33 025
32 562
33 345
34 828
34 953
1.4
– 2.3
– 4.3
– 0.4
1.4
10 060
10 144
10 070
10 736
10 528
– 0.8
6 024
0.7
– 6.2
2.0
1.2
5 812
5 999
6 616
6 388
3.6
– 3.1
– 9.3
3.6
2.9
8 629
8 268
8 977
11 089
10 983
4.4
17.6
11.6
9.4
– 7.9
17.0
10.9
9.0
– 19.0
18.2
12.1
10.5
1.0
21.3
15.3
13.8
– 4.6
21.2
15.3
13.4
7 703
6 698
7 028
10 727
9 309
15.0
15.7
10.3
– 4.7
13.8
8.8
– 34.5
14.2
9.5
15.2
20.6
14.8
10 766
– 447
7 703
6 698
17 794
10 280
%
10.3
8.8
24.1
14.1
6 702
6 495
6 475
6 643
87
87
97
97
92
36
62
65
– 2.3
17.9
13.0
– 17
9 292
12.9
6 810
74
74
12 621
11 475
12 085
13 898
12 617
10.0
25.7
– 5.0
23.7
– 13.0
24.5
10.2
26.6
– 8.6
24.3
12 621
11 475
11 879
13 897
13 174
10 428
9 455
9 259
10 934
10.3
21.2
10 428
1 696
2.1
19.5
9 455
1 862
– 8.9
– 21.3
3.5
3.8
– 15.3
18.7
14.8
21.0
9 029
10 762
2 367
2 624
– 9.8
4.8
– 9.6
5.0
9 521
– 15.4
18.4
9 945
2 903
18.1
5.6
1 520
1 489
1 470
1 586
1 554
3.1
3.1
3.0
3.0
8 313
8 402
8 738
8 723
%
16.9
17.3
17.7
16.7
3.0
8 885
17.1
7 611
21.8
Core Innovative Medicines Division Research & Development
7 049
7 112
7 502
7 432
As % of Innovative Medicines Division net sales
%
21.3
21.8
22.5
21.3
Total assets
Liquidity
Equity
Debt/equity ratio
Current ratio
Net operating assets
Change relative to preceding year
As % of net sales
Personnel costs3, 4
As % of net sales
133 079
130 124
131 556
125 387
126 254
9 485
7 777
5 447
13 862
9 222
74 227
74 891
77 122
70 844
74 472
0.38:1
1.21:1
0.32:1
0.28:1
0.29:1
1.12:1
0.96:1
1.39:1
0.24:1
1.16:1
93 274
90 916
93 606
77 393
83 268
%
%
2.6
– 2.9
20.9
– 7.1
3.0
189.9
187.4
189.4
148.3
160.5
13 932
13 681
13 540
14 569
13 760
%
28.4
28.2
27.4
27.9
26.5
Full-time equivalent associates at year-end3, 4
121 597
118 393
118 700
117 809
119 362
Net sales per full-time equivalent associate (average)4
USD
409 259
409 274
417 861
440 020
447 488
1 2017 dividend proposal for shareholder approval at the Annual General Meeting on March 2, 2018, based on an estimated number of shares outstanding on dividend payment date.
The dividend amount in USD for 2017 is calculated by converting into USD the proposed total gross dividend amount in CHF at the CHF-USD exchange rate of December 31, 2017.
2 Based on net income attributable to the shareholders of Novartis AG
3 Continuing operations
4 Own employees
186 | Novartis Annual Report 2017
Novartis Group
consolidated financial statements
Consolidated income statements
(For the years ended December 31, 2017, 2016 and 2015)
(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
Note
2017
2016
2015
3
49 109
48 518
49 414
3
49 109
48 518
49 440
26
1 026
918
947
– 17 175
– 17 520
– 17 404
32 960
31 916
32 983
– 12 861
– 11 998
– 11 772
– 8 972
– 9 039
– 8 935
– 2 136
– 2 194
– 2 475
1 969
1 927
2 049
– 2 331
– 2 344
– 2 873
3
4
5
5
8 629
1 108
– 777
39
8 268
8 977
703
– 707
– 447
266
– 655
– 454
8 134
Income before taxes from continuing operations
8 999
7 817
Taxes
Net income from continuing operations
Net income from discontinued operations
Net income
Attributable to:
Shareholders of Novartis AG
Non-controlling interests
6
– 1 296
– 1 119
– 1 106
7 703
6 698
7 028
29
10 766
7 703
6 698
17 794
7 703
6 712
17 783
0
– 14
11
Basic earnings per share (USD) from continuing operations
Basic earnings per share (USD) from discontinued operations
3.28
2.82
Total basic earnings per share (USD)
7
3.28
2.82
Diluted earnings per share (USD) from continuing operations
Diluted earnings per share (USD) from discontinued operations
3.25
2.80
Total diluted earnings per share (USD)
7
3.25
2.80
The accompanying Notes form an integral part of the consolidated financial statements.
2.92
4.48
7.40
2.88
4.41
7.29
FINaNcI al RepORT
Novartis Group consolidated financial statements
Novartis Annual Report 2017 | 187
Consolidated statements of comprehensive income
(For the years ended December 31, 2017, 2016 and 2015)
(USD millions)
Net income
Note
2017
2016
2015
7 703
6 698
17 794
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
Net investment hedge
Currency translation effects
Total of items to eventually recycle
8.1
8.1
8.1
38
12
50
– 37
– 237
– 113
15
– 98
28
20
48
671
– 48
8.2
2 210
– 2 391
– 1 662
1 986
– 1 818
– 1 662
Other comprehensive income never to be recycled into the consolidated income statement:
Actuarial gains/(losses) from defined benefit plans, net of taxes
8.3
851
– 515
– 147
Total comprehensive income
Attributable to:
Shareholders of Novartis AG
Continuing operations
Discontinued operations
Non-controlling interests
The accompanying Notes form an integral part of the consolidated financial statements.
10 540
4 365
15 985
10 538
4 382
15 977
10 538
4 382
5 238
10 739
2
– 17
8
188 | Novartis Annual Report 2017
Consolidated balance sheets
(At December 31, 2017 and 2016)
(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
Income tax 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
2017
2016
9
10
10
4
11
12
12
13
14
15
15
16
16 464
15 641
31 750
30 980
29 997
31 340
15 370
14 304
8 229
10 034
2 243
2 196
818
698
104 871
105 193
6 867
8 600
202
625
8 860
3 054
6 255
8 202
156
770
7 007
2 541
28 208
24 931
133 079
130 124
17
17
969
– 100
972
– 76
73 299
73 936
74 168
74 832
59
59
74 227
74 891
18
11
19
20
23 224
17 897
5 168
7 057
6 657
8 470
35 449
33 024
5 169
5 308
1 723
4 873
5 905
1 603
9 828
23 403
22 209
58 852
55 233
133 079
130 124
21
11 203
FINaNcI al RepORT
Novartis Group consolidated financial statements
Novartis Annual Report 2017 | 189
Consolidated statements of changes in equity
(For the years ended December 31, 2017, 2016 and 2015)
(USD millions)
Note
Share
capital
Treasury
shares
Issued share
capital and
reserves
attributable
Retained Total value
to Novartis
earnings adjustments shareholders
Total equity at January 1, 2015
1 001
– 103
72 433
– 2 565
70 766
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
17.1
17.2
17.2
17.2
17.4
17.3
8
8
17.1
17.2
17.2
17.2
Impact of change in ownership of consolidated entities 17.5
Fair value adjustments related to divestments
8
Total of other equity movements
Total equity at December 31, 2016
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
Changes in non-controlling interests
Total of other equity movements
Total equity at December 31, 2017
8
17.1
17.2
17.2
17.2
17.3
The accompanying Notes form an integral part of the consolidated financial statements.
Non-
controlling
interests
Total
equity
78
11
70 844
17 794
17 783
17 783
– 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
7 703
7 703
– 37
2 872
2 835
7 666
2 872
10 538
– 6 495
– 36
– 5 538
5
2
5
– 2
253
607
– 6 495
– 5 574
255
612
7 703
2 837
10 540
– 6 495
– 5 574
255
612
– 2
2
2
– 2
– 24 – 11 175
– 11 202
– 2 – 11 204
– 100
77 639
– 4 340
74 168
59
74 227
– 19
– 19
972
– 3
– 3
969
190 | Novartis Annual Report 2017
Consolidated cash flow statements
(For the years ended December 31, 2017, 2016 and 2015)
(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
22.1
2017
7 703
7 058
987
97
2016
6 698
8 437
899
43
2015
7 028
9 070
432
34
– 708
– 723
– 646
– 272
– 155
714
– 23
– 1 611
– 2 111
– 2 454
cash flows before working capital and provision changes from continuing operations
13 254
13 088
14 155
Payments out of provisions and other net cash movements in non-current liabilities
– 877
– 1 536
– 1 207
Change in net current assets and other operating cash flow items
22.2
244
– 77
– 863
cash flows from operating activities from continuing operations
12 621
11 475
12 085
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
– 188
12 621
11 475
11 897
– 1 696
– 1 862
– 2 367
92
161
237
– 1 050
– 1 017
– 1 138
640
847
– 468
– 247
247
– 149
621
– 264
166
– 82
1
– 765
– 16 507
– 530
622
– 595
262
330
– 42
1
29
– 784
– 580
549
22.3
cash flows used in investing activities from continuing operations
– 2 979
– 2 693
– 19 666
Cash flows used in/from investing activities from discontinued operations 1
22.4
– 140
– 748
8 882
Total cash flows used in 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.
22.5
22.5
22.5
– 3 119
– 3 441
– 10 784
– 6 495
– 6 475
– 6 643
– 5 490
– 1 109
– 6 071
252
214
4 933
1 935
1 581
4 596
– 188
– 1 696
– 3 086
– 755
1 816
0
10
– 6
7
451
0
– 4
– 7 733
– 5 314
– 9 176
84
– 387
– 286
1 853
7 007
8 860
2 333
– 8 349
4 674
13 023
7 007
4 674
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.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2017 | 191
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, develop-
ment, manufacturing and marketing of a broad range of
healthcare products led by innovative pharmaceuticals
and also including eye care products and cost-saving
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.
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.
192 | Novartis Annual Report 2017
Property, plant and equipment are assessed for
impairment whenever there is an indication that the
balance sheet carrying amount may not be recoverable
using cash flow projections for the useful life.
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 property, plant and equipment:
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
Useful life
20 to 40 years
7 to 20 years
5 to 10 years
3 to 7 years
Currently marketed products 5 to 20 years
“Cost of goods sold”
Marketing know-how
25 years
“Cost of goods sold”
Buildings
Machinery and other equipment
Machinery and equipment
Furniture and vehicles
Computer hardware
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 level of these groups of CGUs, 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 products.
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-
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
“Currently marketed products” category.
Impairment of goodwill and intangible
assets
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
measure 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:
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2017 | 193
• Amount and timing of projected future cash flows
• Long-term sales forecasts for periods of up to 25 years
• Actions of competitors (launch of competing products,
marketing initiatives, etc.)
• Sales erosion rates after the end of patent or other
intellectual property rights protection and timing of the
entry of generic competition
• 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
• Future tax rate
• Appropriate royalty rate for the Alcon Brand name
• Appropriate terminal growth rate
• Appropriate 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.
Impairment of associated companies
accounted for at equity
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
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
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 finan-
cial 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. The majority of non-quoted investments are val-
ued initially at fair value through the established purchase
price between a willing buyer and seller. Non-quoted
investments are subsequently adjusted based on values
derived from using discounted cash flow analysis or
other pricing models. These investment values are what
is known as “Level 3” in the fair value hierarchy.
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
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 that 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
held for long-term strategic purposes, are carried at
amortized cost, which reflects the time value of money
less any allowances for uncollectable amounts. For these
financial assets, impairments and exchange rate losses
are included in “Other expense” in the consolidated
income statement and exchange rate gains and interest
income using the effective interest rate method are
included in “Other income” in the consolidated income
statement.
194 | Novartis Annual Report 2017
Derivative financial instruments
Trade receivables
Derivative financial instruments are initially recognized
in the balance sheet at fair value and are re-measured
to their current fair value at the end of each subsequent
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 report-
ing 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 of various
types of business risks. To mitigate these risks, the Group
enters into certain derivative financial instruments. The
risk reduction is obtained because the derivative’s value
or cash flows are expected, wholly or partly, to offset
changes in the value or cash flows of the recognized
assets or liabilities. The overall strategy is aiming to mit-
igate the currency and interest exposure risk of positions
that are contractually agreed and to partially mitigate the
exposure risk of selected anticipated transactions.
Certain derivative financial instruments meet the
criteria for hedge accounting treatment. A prerequisite
for obtaining this accounting-hedge relationship is exten-
sive documentation on inception and proving on a regu-
lar basis that the economic hedge is effective for account-
ing purposes. Other derivative financial instruments do
not meet the criteria to qualify for hedge accounting.
Changes in the fair value of those derivative instruments
are recognized immediately in “Other financial income
and expense” in the consolidated income statement.
In addition, the Group has designated certain long-
term debt components as hedges of the translation risk
arising on certain net investments in foreign operations.
On consolidation, foreign currency differences arising
on long-term debt designated as net investment hedges
of a foreign operation are recognized in other compre-
hensive income and accumulated in currency translation
effects, to the extent that the hedge is effective. The for-
eign currency differences arising from hedge ineffective-
ness are recognized in the income statement in “Other
financial income and expense”.
When a hedged net investment is disposed of, the
proportionate portion of the cumulative amount recog-
nized in equity in relation to the hedged net investment
is transferred to the income statement as an adjustment
to the profit or loss on disposal.
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 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
difference between the trade receivable’s carrying
amount in the consolidated balance sheet and the esti-
mated net collectible amount. Significant financial diffi-
culties of a customer, such as probability of bankruptcy,
financial reorganization, default or delinquency in pay-
ments are considered indicators that recovery of the
trade receivable 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.
Provisions are recorded where a reliable estimate can
be made of the probable outcome of legal or other dis-
putes against the subsidiary.
Contingent consideration
In a business combination or divestment of a business,
it is necessary to recognize contingent future payments
to previous owners, representing contractually defined
potential amounts as a liability or asset. Usually for
Novartis, these are linked to milestone or royalty pay-
ments related to certain assets and are recognized as a
financial liability or financial asset at their fair value, which
is then re-measured at each subsequent reporting 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, are 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 income” or
“Other expense”, depending on its nature.
The effect of unwinding the discount over time is rec-
ognized for contingent liabilities in “Interest expense”
and for contingent assets in “other financial income and
expense” in the consolidated income statement.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2017 | 195
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,
risks and rewards for the products are transferred to the
customer; the price is determinable; and collectability is
reasonably assured. When contracts contain customer
acceptance provisions, sales are recognized upon the
satisfaction of acceptance criteria. If products are stock-
piled at the request of the customer, revenue is only rec-
ognized 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 install-
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 healthcare provid-
ers 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 indi-
vidual agreements. In cases where historical experience
and clinical data are not sufficient for a reliable estima-
tion of the outcome, revenue recognition is deferred until
such history is available.
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 product, we
generally grant customers a “shelf stock adjustment” for
their existing inventory for the involved 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.
When there is historical experience of Novartis agree-
ing to customer returns and Novartis can reasonably esti-
mate 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 expe-
rience 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 expe-
rience 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.
196 | Novartis Annual Report 2017
Other revenue
“Other revenue” includes royalty and profit sharing
income and revenue from activities such as manufactur-
ing services or other services rendered, to the extent
such revenue is not recorded under net sales.
Research & Development
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, such as contract
research and development organizations in compensa-
tion for subcontracted R&D, that is deemed to not 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
intangible asset, usually when marketing approval has
been achieved from a regulatory authority in a major mar-
ket.
Payments made to third parties 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 products.
Inventory produced ahead of regulatory approval is
fully provisioned 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.
Share-based compensation
Vested Novartis shares and American Depositary
Receipts (ADRs) that 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
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 adjustments for
assumptions related to their forfeiture during the vest-
ing period, is expensed on a straight-line basis over the
respective vesting period.
PSUs are subject to certain performance criteria
being achieved during the vesting period and require plan
participants to provide services during the vesting period.
PSUs granted under plans defined as “Long-Term Per-
formance Plans” are subject to performance criteria
based on Novartis internal performance metrics. The
expense is determined taking into account assumptions
concerning performance during the period against tar-
gets and expected forfeitures due to plan participants
not meeting their service conditions. These assumptions
are periodically adjusted. Any change in estimates for
past services is 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 that will finally vest. The
number of equity instruments that finally vest is deter-
mined at the vesting date.
PSUs granted under the Long-Term Relative Perfor-
mance Plan (LTRPP) are conditional on the provision of
services by the plan participant during the vesting period
as well as on the Total Shareholder Return (TSR) per-
formance of Novartis relative to a specific peer group of
companies over the vesting period. These performance
conditions are based on variables that 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” simulation model. The total fair value of
this grant is expensed on a straight-line basis over the
vesting period. Adjustments 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 PSUs are
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2017 | 197
forfeited, unless determined otherwise by the provision
of the plan rules or by the Compensation Committee of
the Novartis Board of Directors, for example, in connec-
tion with a reorganization or divestment.
Measuring the fair values of PSUs granted under the
LTRPP, requires estimates. The Monte Carlo simulation
used for determining the fair value of the PSUs related
to the LTRPP requires as input parameters the probabil-
ity of factors related to uncertain future events; the term
of the award; the grant price of underlying shares or
ADRs; expected volatilities; the expected correlation
matrix of the underlying equity instruments with those
of the peer group of companies and the risk-free inter-
est 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 that 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 the retained earnings are reinvested, with-
holding or other taxes on eventual distribution of a sub-
sidiary’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
estimates 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
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 discontinued opera-
tions 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 that are effective for the financial year begin-
ning on January 1, 2017, 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
IFRS 9 Financial Instruments will substantially change
the classification and measurement of financial
instruments. The new standard requires impairments to
be based on a forward-looking model, changes the
approach to hedging financial exposures and related
documentation, changes the recognition of certain fair
value changes and amends disclosures requirements.
The impairment of financial assets, including trade
and lease receivables, will be assessed using an expected
credit loss model rather than the current incurred loss
model. Given the nature of Novartis’ financial assets, the
Group does not expect a significant impact to our pro-
visions for doubtful accounts or impairments from this
change.
The new hedge accounting model introduced by the
standard requires hedge accounting relationships to be
based upon the Group’s own risk management strategy
and objectives, and to be discontinued only when the
relationships no longer qualify for hedge accounting.
Based on the impact of adoption assessment performed,
Novartis expects that the existing hedge relationship will
continue to be designated as such under the new hedge
accounting requirements.
The Group will implement the new standard on Jan-
uary 1, 2018 and will apply the modified retrospective
method, which requires the recognition of the cumula-
tive effect of initially applying IFRS 9, as at January 1,
2018, to retained earnings and not restate prior years.
The most significant impact to the Group, upon adop-
tion of IFRS 9, will be the treatment of the unrealized
gains and losses from changes in fair value on certain of
198 | Novartis Annual Report 2017
the Group’s financial instruments, which are classified
as available-for-sale marketable securities and financial
investments. The unrealized gains and losses (to the
extent of previous recognized unrealized gains), which
the Group currently recognizes in the consolidated state-
ment of other comprehensive income, will in the future
be recognized in the consolidated income statement.
This approach will be applied to equity securities where
the fair value through other comprehensive income irre-
vocable option will not be applied. If this accounting had
been applied prior to January 1, 2018, the adoption date,
the cumulative effect to be recorded as an increase to
retained earnings, as at January 1, 2018, is estimated at
USD 0.2 billion.
IFRS 15 ReVeNUe FROM cONTRacTS WITH cUSTOMeRS
IFRS 15 Revenue from contracts with customers amends
revenue recognition requirements and establishes prin-
ciples for reporting information about the nature, amount,
timing and uncertainty of revenue and cash flows aris-
ing from contracts with customers. The standard
replaces IAS 18 Revenue and IAS 11 Construction con-
tracts and related interpretations.
Results of our impact assessment:
• The Group’s “Net sales” are derived from the sale of
drug substances, vision care products, surgical equip-
ment, other products and services, where control
transfers to our customers and our performance obli-
gations are satisfied at the time of shipment to or
receipt of the products by the customer or when the
services are performed. We do not expect IFRS 15 to
significantly change the timing or amount of revenue
recognized under these arrangements.
• The Group’s “Other revenue” consists of royalty income
from the out-licensing of intellectual property (IP),
which is recognized as earned and from manufactur-
ing services and other services, where revenue is rec-
ognized when control transfers to the third party and
our performance obligations are satisfied. We do not
expect IFRS 15 to significantly change the timing or
amount of revenue recognized from these manufactur-
ing and other services arrangements, nor from these
royalty arrangements, as the standard’s royalty excep-
tion will apply for IP licenses.
“Other revenue” also includes revenue from profit
sharing arrangements with our collaboration partners.
Furthermore, the Group receives milestone payments
related to sale or out-licensing of IP. Novartis does not
expect IFRS 15 to significantly change the timing or
amount of revenue recognized under these arrange-
ments.
The Group will implement the new standard on January
1, 2018 and will apply the modified retrospective method,
which requires the recognition of the cumulative effect
of initially applying IFRS 15, as at January 1, 2018, to
retained earnings and not restate prior years. However,
since the results of the Group’s impact assessment indi-
cates that IFRS 15 is not expected to significantly change
the amount or timing of revenue recognition in 2017 or
prior periods, an insignificant cumulative adjustment to
increase retained earnings will be made.
IFRS 16 leaSeS
IFRS 16 Leases substantially changes the financial state-
ments as the majority of leases for which the company
is the lessee 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 on
January 1, 2019. The current undiscounted operating
lease commitments of USD 3.2 billion as of December
31, 2017, and disclosed in Note 27 provide, subject to the
provision of the standard, an indicator of the impact of
the implementation of IFRS 16 on the Group’s consoli-
dated balance sheet.
Upon adoption of the new standard, a portion of the
annual operating lease costs, which is currently fully rec-
ognized as a functional expense, will be recorded as
interest expense. In addition, the portion of the annual
lease payments recognized in the cash flow statement
as a reduction of the lease liability will be recognized as
an outflow from financing activities, which currently are
fully recognized as an outflow from operating activities.
Given the leases involved and assuming the current low
interest rate environment continues, the Group does not
currently expect these effects to be significant.
There are no other IFRS standards or interpretations not
yet effective that would be expected to have a material
impact on the Group.
2. Significant transactions
Significant transactions in 2017
INNOVaTIVe MeDIcINeS – acQUISITION OF ZIaRcO GROUp
lIMITeD
On January 20, 2017, Novartis acquired Ziarco Group
Limited (Ziarco), a privately held company in the United
Kingdom, focused on the development of novel treat-
ments in dermatology. This acquisition adds a once-daily
oral H4 receptor antagonist in development for atopic
dermatitis, commonly known as eczema, to complement
the Novartis dermatology portfolio and pipeline. The fair
value of the total purchase consideration was USD 420
million. The amount consisted of an initial cash payment
of USD 325 million and the net present value of the con-
tingent consideration of USD 95 million, due to Ziarco
shareholders, which they are eligible to receive upon the
achievement of specified development milestones. The
purchase price allocation resulted in net identifiable
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2017 | 199
assets of USD 395 million and goodwill of USD 25 mil-
lion. Results of operations since the date of acquisition
were not material.
INNOVaTIVe MeDIcINeS – acQUISITION OF eNcORe VISION, INc.
On January 20, 2017, Novartis acquired Encore Vision,
Inc. (Encore), a privately-held company in Fort Worth,
Texas, in the United States, focused on the development
of a novel treatment in presbyopia. The fair value of the
total purchase consideration was USD 456 million. The
amount consisted of an initial cash payment of USD 366
million and the net present value of the contingent con-
sideration of USD 90 million, due to Encore sharehold-
ers, which they are eligible to receive upon the achieve-
ment of specified development and commercialization
milestones. The purchase price allocation resulted in net
identifiable assets of USD 389 million and goodwill of
USD 67 million. Results of operations since the date of
acquisition were not material.
Significant transaction entered into in 2017 and
closed in January 2018
INNOVaTIVe MeDIcINeS – acQUISITION OF aDVaNceD
acceleRaTOR applIcaTIONS, S.a.
On October 30, 2017, Novartis entered into a binding
memorandum of understanding with Advanced Acceler-
ator Applications S.A., (AAA), a NASDAQ-listed company
headquartered in Saint-Genis-Pouilly, France, under
which Novartis agreed to commence a tender offer for
100% of the share capital of AAA subject to certain con-
ditions. Novartis commenced the tender offer on Decem-
ber 7, 2017, to purchase all of the outstanding ordinary
shares for a price of USD 41 per share and USD 82 per
American Depositary Share (ADS), each representing
two ordinary shares of AAA, which expired on January
19, 2018. The offer values AAAs equity at USD 3.9 bil-
lion, on a fully diluted basis. The transaction to acquire
AAA is being funded mainly through external short- and
long-term debt.
As of the expiration of the tender offer, approximately
97% of the then outstanding fully diluted ordinary shares,
including ordinary shares represented by ADSs, were
validly tendered. On January 22, 2018, Novartis accepted
and paid USD 3.9 billion for the ordinary shares, includ-
ing ordinary shares represented by ADSs, tendered in
the offer.
On January 22, 2018 Novartis also commenced a
subsequent offering period that will expire on January
31, 2018, unless extended.
AAA is a radiopharmaceutical company that devel-
ops, produces and commercializes molecular nuclear
medicines, including Lutathera® (lutetium (177Lu) oxodo-
treotide), a first-in-class RLT product for neuroendocrine
tumors (NETs) and a portfolio of diagnostic products.
Radiopharmaceuticals, such as Lutathera®, are unique
medicinal formulations containing radioisotopes, which
are used clinically for both diagnosis and therapy.
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 contin-
gent consideration of USD 92 million due to the Tran-
scend shareholders, which they are eligible to receive
upon the achievement of specified development and
commercialization milestones. The purchase price allo-
cation resulted in net identifiable assets of USD 294 mil-
lion and goodwill of USD 38 million. The 2016 results of
operations since the date of acquisition were not mate-
rial.
INNOVaTIVe MeDIcINeS – acQUISITION OF RepRIXYS
pHaRMaceUTIcalS cORpORaTION
On November 18, 2016, Novartis acquired Reprixys Phar-
maceuticals Corporation (Reprixys), a privately held,
US-based company specializing in the development of
therapeutics in certain hematologic and inflammatory
disorders, 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-measure-
ment 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 Reprixys shareholders, which they are eli-
gible to receive upon the 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. The
2016 results of operations since the date of acquisition
were not material.
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
consideration at the acquisition date is contingent on
certain development milestones. The fair value of this
potentially 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
200 | Novartis Annual Report 2017
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
material.
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.
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
United States and Australia based, privately held devel-
opment stage company, focused on developing a periph-
eral approach to treat neuropathic pain. The transaction
closed on July 24, 2015, and the fair value of the total
purchase consideration was USD 312 million. The amount
consisted of an initial cash payment of USD 196 million
and the net present value of the contingent consider-
ation of USD 116 million due to previous Spinifex share-
holders, which they are eligible to receive upon achieve-
ment of specified development and commercialization
milestones. The purchase price allocation resulted in net
identifiable assets of USD 263 million and goodwill of
USD 49 million. 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’
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2017 | 201
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.
3. Segmentation of key figures 2017, 2016 and 2015
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.
Innovative Medicines researches, develops, manu-
factures, distributes and sells patented prescription
medicines. The Innovative Medicines Division is orga-
nized into two global business units: Novartis Oncology
business unit, which consists of the global business fran-
chises Oncology and Novartis Pharmaceuticals business
unit, which consists of the global business franchises
Ophthalmology, Neuroscience, Immunology and Derma-
tology, Respiratory, Cardio-Metabolic and Established
Medicines.
Sandoz develops, manufactures and markets finished
dosage form medicines as well as intermediary products
including active pharmaceutical ingredients. Sandoz is
organized globally in three franchises: Retail Generics,
Anti Infectives, and Biopharmaceuticals. In Retail Gener-
ics, Sandoz develops, manufactures and markets active
ingredients and finished dosage forms of pharmaceuti-
cals to third parties. Retail Generics includes the areas
of cardiovascular, central nervous system, dermatology,
gastrointestinal and hormonal therapies, metabolism,
oncology, ophthalmics, pain, and respiratory, as well as
finished dosage form anti infectives sold to third parties.
In Anti Infectives, Sandoz manufactures and supplies
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, including biosimi-
lars, and provides biotechnology 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
franchises as follows: In Surgical, Alcon develops, man-
ufactures, distributes and sells ophthalmic surgical
equipment, instruments, disposable products and intra-
ocular lenses. In Vision Care, Alcon develops, manufac-
tures, distributes and sells contact lenses and lens care
products.
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 products of the Alcon Division and prod-
ucts within the Ophthalmology business franchise of the
Innovative Medicines Division.
202 | Novartis Annual Report 2017
Our divisions are supported by the Novartis Institutes for
BioMedical Research, Global Drug Development,
Novartis Technical Operations and Novartis Business
Services organizations.
• The Novartis Institutes for BioMedical Research (NIBR)
conducts research activities of the Innovative Medicines
Division and also collaborates with Sandoz.
• Global Drug Development organization was estab-
lished in July 2016 and oversees all drug development
activities for our Innovative Medicines Division and the
biosimilars portfolio of our Sandoz Division.
• Novartis Technical Operations organization was estab-
lished in July 2016, to centralize management of our
manufacturing operations across our Innovative
Medicines and Sandoz Divisions.
• Novartis Business Services (NBS) was established in
January 2015 as a shared services organization and
delivers business support services across the Group,
such as information technology, real estate and facil-
ity services, procurement, product lifecycle services,
human resources and financial reporting and account-
ing operations.
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. 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 managed
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 that are considered to approximate
arm’s length transactions. The Executive Committee of
Novartis evaluates segmental performance and allo-
cates resources among the segments based on a num-
ber of measures including net sales, operating income
and net operating assets. Segment net operating assets
consist primarily of property, plant and equipment, intan-
gible 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 2017 | 203
Segmentation – Consolidated income statements
Innovative Medicines
Sandoz
Alcon
Corporate
(including eliminations)
Group
(USD millions)
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
Net sales to third parties
33 025 32 562 10 060 10 144
6 024
5 812
49 109 48 518
Sales to other segments
668
624
118
104
3
– 789
– 728
Net sales
Other revenues
Cost of goods sold
Gross profit
Marketing & Sales
33 693 33 186 10 178 10 248
6 027
5 812
– 789
– 728 49 109 48 518
898
815
37
37
3
4
– 9 007 – 9 331 – 5 800 – 5 971 – 3 231 – 3 092
25 584 24 670
4 415
4 314
2 799
2 724
– 9 089 – 8 435 – 1 811 – 1 681 – 1 961 – 1 882
88
863
162
62
1 026
918
874 – 17 175 – 17 520
208 32 960 31 916
– 12 861 – 11 998
– 8 972 – 9 039
Research & Development
– 7 630 – 7 709
– 774
– 814
– 568
– 516
General & Administration
– 986
– 978
– 315
– 300
– 383
– 410
– 452
– 506 – 2 136 – 2 194
Other income
Other expense
Operating income
1 027
1 091
204
185
47
48
691
603
1 969
1 927
– 1 124 – 1 213
– 351
– 259
– 124
– 96
– 732
– 776 – 2 331 – 2 344
7 782
7 426
1 368
1 445
– 190
– 132
– 331
– 471
8 629
8 268
Income from associated companies
– 1
23
6
1 086
697
1 108
703
Interest expense
Other financial income and expense
Income before taxes
Taxes
Net income
Attributable to:
Shareholders of Novartis AG
Non-controlling interests
Included in net income are:
Interest income
Depreciation of property,
plant & equipment
– 777
– 707
39
– 447
8 999
7 817
– 1 296 – 1 119
7 703
6 698
7 703
6 712
0
– 14
110
43
– 916
– 883
– 270
– 260
– 217
– 229
– 117
– 117 – 1 520 – 1 489
Amortization of intangible assets
– 2 291 – 2 470
– 447
– 450
– 942
– 929
– 10
– 12 – 3 690 – 3 861
Impairment charges on property,
plant & equipment, net
Impairment charges on intangible
assets, net
Impairment charges and fair value
gains on financial assets, net
– 84
– 93
– 73
– 2
– 5
– 2
– 157
– 102
– 591
– 522
– 61
– 65
– 57
– 4
– 709
– 591
– 42
– 55
– 29
– 185
– 77
– 256
– 132
Additions to restructuring provisions
– 122
– 236
– 61
– 46
– 8
– 36
– 3
– 25
– 194
– 343
Equity-based compensation of
Novartis equity plans
– 593
– 582
– 52
– 47
– 71
– 53
– 208
– 164
– 924
– 846
204 | Novartis Annual Report 2017
Innovative Medicines
Sandoz
Alcon
Corporate
(including eliminations)
Group
(USD millions)
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
Net sales to third parties from
continuing operations
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
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
– 77
– 25
– 72
– 132
– 104
– 49
– 343
– 399
– 55
– 32
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2017 | 205
Segmentation – Consolidated balance sheets
(USD millions)
Total assets
Total liabilities
Total equity
Net debt
Innovative Medicines
Sandoz
Alcon
Corporate
(including eliminations)
Group
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
54 075 51 911 18 231 17 611 22 014 22 970 38 759 37 632 133 079 130 124
– 11 457 – 10 007 – 3 459 – 3 168 – 1 893 – 2 520 – 42 043 – 39 538 – 58 852 – 55 233
74 227 74 891
19 047 16 025
93 274 90 916
Net operating assets
42 618 41 904 14 772 14 443 20 121 20 450
Included in assets and liabilities are:
Total property, plant & equipment
10 857 10 410
2 525
2 374
2 403
2 163
679
694 16 464 15 641
Additions to property,
plant & equipment 1
877
996
326
316
431
396
94
127
1 728
1 835
Total goodwill and intangible assets
31 571 31 630 10 993 10 774 16 176 16 914
3 007
3 002 61 747 62 320
Additions to goodwill and
intangible assets 1
Total investment in associated
companies
984
865
64
45
82
63
16
5
1 146
978
41
16
7
18
15 322 14 270 15 370 14 304
Additions to investment in associated
companies
6
4
40
37
46
41
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
1 Excluding impact of business combinations
9 485
7 777
9 485
7 777
28 532 23 802 28 532 23 802
6 891
8 260
6 891
8 260
The following table shows countries that accounted for more than 5% of at least one of the respective Group totals,
as well as regional information for net sales for the years ended December 31, 2017, 2016 and 2015, and for selected
non-current assets for the years ended December 31, 2017 and 2016:
2017
%
2016
%
2015
%
2017
%
2016
Net sales1
Total of selected non-current assets2
United States
16 935
34
17 117
35
18 079
37
28 476
836
2
830
2
774
2
43 920
(USD millions)
country
Switzerland
United Kingdom
Germany
France
Japan
Other
Group
Region
Europe
Americas
1 160
3 690
2 490
3 177
20 821
49 109
17 492
20 899
Asia/Africa/Australasia
10 718
47
30
9
3
44 413
28 484
6 892
2 733
199
145
2
8
5
6
1 182
3 634
2 390
3 267
2
7
5
7
1 277
3 262
2 269
3 163
3
7
5
6
7 957
3 128
284
148
43
20 098
42
20 590
40
9 668
11
9 399
100
48 518
100
49 414
100
93 581
100
92 265
36
42
22
17 079
20 998
10 441
35
43
22
16 472
22 414
10 528
33
45
22
61 699
29 113
2 769
66
31
3
59 879
29 831
2 555
%
48
31
7
3
11
100
65
32
3
Group
49 109
100
48 518
100
49 414
100
93 581
100
92 265
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
The Group’s largest, second-largest and third-largest
customers account for approximately 17%, 12% and 7%
of net sales, respectively (2016: 16%, 12% and 6% respec-
tively; 2015: 14%, 11% and 5% respectively). All segments
had sales to these customers in 2017, 2016 and 2015. 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 and amounted
to 14%, 9% and 5%, respectively, of the trade receivables
at December 31, 2017 (2016: 14%, 9% and 6% respec-
tively).
206 | Novartis Annual Report 2017
Innovative Medicines net sales by business franchise
2017
USD
millions
Oncology
Change
(2016
to 2017)
Change
2015
(2015
USD to 2016)
USD % millions USD %
2016
USD
millions
Gleevec/Glivec
1 943
3 323
– 42 4 658
– 29
Respiratory
2017
USD
millions
Change
(2016
to 2017)
Change
2015
(2015
USD to 2016)
USD % millions USD %
2016
USD
millions
12 274 12 790
– 4 13 304
– 4
Total cardio-Metabolic
524
184
185
cardio-Metabolic
Entresto
Other
507
170
198
17
14
21
21
0
21
nm
nm
nm
Tasigna
Sandostatin
1 841
1 739
6 1 632
1 612
1 646
– 2 1 630
Afinitor/Votubia
1 525
1 516
1 1 607
Exjade/Jadenu
1 059
956
672
635
729
581
0
11
30
37
11
34
nm
917
453
402
565
410
0
873
867
808
777
76
893
993
– 10 1 030
7
1
– 6
4
nm
nm
nm
42
nm
– 4
Tafinlar + Mekinist
Promacta/Revolade
Votrient
Jakavi
Kisqali
Other
Total Oncology
business unit
Ophthalmology
Lucentis
1 888
1 835
3 2 060
– 11
Travoprost Group
Systane Group
589
400
Topical Olopatadine Group 284
619
377
335
– 5
631
6
380
– 2
– 1
– 15
457
– 27
Other
2 207
2 297
– 4 2 395
Total Ophthalmology
5 368
5 463
– 2 5 923
– 4
– 8
Immunology and Dermatology
Cosentyx
2 071
1 128
84
261
nm
Neoral/Sandimmun(e)
Zortress/Certican
Ilaris
Myfortic
Other
488
414
402
378
288
515
398
283
383
308
– 5
570
– 10
4
335
42
236
19
20
– 1
441
– 13
– 6
294
5
Total Immunology
and Dermatology
4 041
3 015
34 2 137
41
Neuroscience
Gilenya
Other
3 185
3 109
2 2 776
12
102
124
– 18
141
– 12
Total Neuroscience
3 287
3 233
2 2 917
11
Ultibro Breezhaler
Seebri Breezhaler
Onbrez Breezhaler
411
151
112
Subtotal cOpD1 portfolio 674
Xolair 2
Other
920
23
363
149
143
655
835
13
260
1
150
40
– 1
– 22
166
– 14
3
576
10
755
14
11
31
– 26
37
– 16
Total Respiratory
1 617
1 521
6 1 368
11
established Medicines
Galvus
Exforge
1 233
1 193
3 1 140
5
960
926
4 1 047
– 12
Diovan/Co-Diovan
957
1 073
– 11 1 284
– 16
Voltaren/Cataflam
Exelon/Exelon Patch
Ritalin/Focalin
Other
Total established
Medicines
465
381
236
525
444
282
– 11
558
– 6
– 14
728
– 39
– 16
365
– 23
1 682
1 913
– 12 2 553
– 25
5 914
6 356
– 7 7 675
– 17
Total pharmaceutical
business unit
20 751 19 772
5 20 041
– 1
Total division
net sales
33 025 32 562
1 33 345
– 2
1 Chronic obstructive pulmonary disease
2 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 2017, 2016 and 2015.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2017 | 207
4. associated companies
(USD millions)
Roche Holding AG, Switzerland
GlaxoSmithKline Consumer
Healthcare Holdings Ltd., UK
Others
associated companies
related to continuing operations
Net income statement effect
Other comprehensive income effect
Total comprehensive income effect
2017
456
629
23
2016
464
2015
343
2017
108
2016
– 39
2015
– 149
234
– 79
– 145
710
– 4
5
2
2017
564
484
23
2016
425
2015
194
944
– 83
5
2
1 108
703
266
– 37
671
– 153
1 071
1 374
113
Novartis has significant investments in Roche Holding AG,
Basel (Roche) and in GlaxoSmithKline Consumer Health-
care Holdings Ltd, Brentford, Middlesex, UK as well as
certain other smaller investments that are accounted for
as associated companies.
A purchase price allocation was performed on the basis
of publicly available information at the time of acquisition
of the investment. The December 31, 2017 balance sheet
value allocation is as follows:
(USD millions)
Balance sheet value
(USD millions)
December 31, December 31,
2016
2017
Novartis share of Roche’s estimated net assets
Novartis share of re-appraised intangible assets
Roche Holding AG, Switzerland
8 121
7 644
Implicit Novartis goodwill
GlaxoSmithKline Consumer
Healthcare Holdings Ltd., UK
Others
Total
Roche Holding AG
7 020
6 448
229
212
15 370
14 304
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,
2017
2 412
673
2 915
6 000
2 121
8 121
The Group’s holding in Roche voting shares was 33.3%
at December 31, 2017, 2016 and 2015. This investment
represents approximately 6.3% of Roche’s total out-
standing voting and non-voting equity instruments at
December 31, 2017, 2016 and 2015.
Since full-year 2017 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 2018 consolidated financial
statements when available.
The following tables show summarized financial infor-
mation for Roche, including current values of fair value
adjustments made at the time of the acquisition of the
shares, for the year ended December 31, 2016 and for
the six months ended June 30, 2017 (since full-year 2017
data is not yet available):
(CHF billions)
Current assets
Non-current
assets
Current Non-current
liabilities
liabilities
December 31, 2016
June 30, 2017
28.7
26.7
61.4
56.9
22.6
20.6
27.8
26.0
(CHF billions)
Total
comprehen- comprehen-
Revenue Net income sive income sive income
Other
December 31, 2016
June 30, 2017
50.6
26.3
7.5
4.4
0.7
0.2
8.2
4.6
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 2017, dividends received from Roche in relation to
the distribution of its 2016 net income amounted to
USD 438 million (2016: USD 433 million in relation to the
distribution of its 2015 net income).
The consolidated income statement effects from
applying Novartis accounting principles for this invest-
ment in 2017, 2016 and 2015 are as follows:
(USD millions)
2017
2016
2015
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 (2016: USD 42
million; 2015: USD 41 million)
Net income effect
669
– 67
678
– 68
650
– 157
– 146
– 146
456
464
– 150
343
The publicly quoted market value of the Novartis inter-
est in Roche (SIX symbol: RO) at December 31, 2017,
was USD 13.4 billion (2016: USD 12.4 billion).
208 | Novartis Annual Report 2017
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, 2017, 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 directors. Furthermore, Novartis has customary
minority rights and also exit rights at a pre-defined, mar-
ket-based pricing mechanism.
The December 31, 2017 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,
2017
1 505
3 852
1 763
7 120
– 100
7 020
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.
At acquisition date, Novartis has valued the contribu-
tion of 63.5% of its OTC Division in exchange for 36.5%
of the GSK Consumer Healthcare business at fair value.
The retained interest in the OTC Division business con-
tributed was accounted for at net book value at the time
of contribution.
The following tables show summarized financial infor-
mation for GSK Consumer Healthcare, including current
values of fair value adjustments made at the time of
acquisition, for the year ended December 31, 2016, and
for the nine months ended September 30, 2017 (interim
unaudited), since full-year 2017 data is not yet available:
(GBP billions)
Current assets
Non-current
assets
Current Non-current
liabilities
liabilities
December 31, 2016
September 30, 2017
4.0
3.3
21.1
20.6
3.1
2.6
2.1
2.0
(GBP billions)
Total
comprehen- comprehen-
Revenue Net income sive income sive income
Other
December 31, 2016
September 30, 2017
6.5
5.3
0.6
0.6
1.6
– 0.4
2.2
0.2
Since full-year 2017 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 2018 con-
solidated financial statements when available.
In 2017, dividends received from GSK Consumer
Healthcare amounted to USD 544 million (2016: USD 463
million).
The consolidated income statement effects from
applying Novartis accounting principles for this invest-
ment in 2017, 2016 and 2015 are as follows:
(USD millions)
2017
2016
2015
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 1 million
(2016: USD 2 million;
2015: USD 18 million)
Net income effect
589
47
268
– 22
– 17
– 7
629
– 12
234
– 62
– 79
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2017 | 209
5. Interest expense
and other financial income and expense
Interest expense
Other financial income and expense
(USD millions)
Interest expense
2017
2016
2015
(USD millions)
– 758
– 709
– 669
Interest income
(Expense)/ income arising from
discounting long-term liabilities
– 19
2
14
Total interest expense
– 777
– 707
– 655
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
2016
2015
2017
110
1
– 1
43
1
– 1
12
– 25
7
– 20
33
1
– 8
1
– 132
– 23
– 72
– 254
Currency result, net
– 58
– 477
Total other financial income
and expense
39
– 447
– 454
6. Taxes
Income before taxes
(USD millions)
Switzerland
Foreign
Income before taxes
from continuing operations
Income before taxes
from discontinued operations
2017
5 289
3 710
2016
3 110
4 707
2015
5 765
2 369
8 999
7 817
8 134
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:
(As a percentage)
12 479
Applicable tax rate
2017
2016
2015
14.5 13.2 12.4
Total income before taxes
8 999
7 817
20 613
Effect of disallowed expenditures
3.4
3.5
3.5
Current and deferred income tax expense
Effect of utilization of tax losses
brought forward from prior periods
– 0.1 – 0.2 – 0.2
Effect of income taxed at reduced rates
– 0.2 – 0.2 – 0.3
Effect of tax credits and allowances
– 2.2 – 2.8 – 2.7
Effect of release of
contingent consideration liability
Effect of tax rate change
on current and deferred
tax assets and liabilities 1
Effect of write-off of deferred tax assets
Effect of write down and reversal of
write-down of investments in subsidiaries
– 1.2
0.0
0.0
0.7
0.0
0.2 – 0.5
0.5
0.0
– 1.1 – 1.0 – 0.9
Effect of tax benefits expiring in 2017
– 0.8 – 0.5 – 0.4
2017
2016
– 462
– 709
2015
– 317
– 1 594
– 1 418
– 1 333
– 2 056
– 2 127
– 1 650
– 298
1 058
765
243
– 68
612
760
1 008
544
Effect of non-deductible losses in Venezuela
– 1 296
– 1 119
– 1 106
Effect of other items 2
Effect of prior year items
0.0
1.2
0.2
1.3
0.2
0.1
1.2
1.0
0.5
(USD millions)
Switzerland
Foreign
current income tax expense
from continuing operations
Switzerland
Foreign
Deferred tax income
from continuing operations
Income tax expense
from continuing operations
Income tax expense
from discontinued operations
Total income tax expense
– 1 296
– 1 119
– 2 819
– 1 713
effective tax rate for continuing operations 14.4 14.3 13.6
Effective tax rate for discontinued operations
13.7
effective tax rate
14.4 14.3 13.7
1 Included in 2017 is a 0.7% impact related to the revaluation of the deferred tax assets
and liabities and a portion of current tax payables. This revaluation resulted from the
US tax reform legislation enacted on December 22, 2017, refer to Note 11 for additional
disclosures.
2 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%).
210 | Novartis Annual Report 2017
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 7 million in 2017, and by USD 18 mil-
lion and USD 15 million in 2016 and 2015, respectively.
7. earnings per share
Net income attributable to shareholders of Novartis aG (USD millions)
– Continuing operations
– Discontinued operations
– Total
Number of shares (in millions)
2017
2016
2015
7 703
6 712
7 025
10 758
7 703
6 712
17 783
Weighted average number of shares outstanding used in basic earnings per share
2 346
2 378
2 403
Adjustment for vesting of restricted shares, restricted share units and dilutive shares from options
25
22
35
Weighted average number of shares in diluted earnings per share
2 371
2 400
2 438
Basic earnings per share (USD)
– Continuing operations
– Discontinued operations
– Total
Diluted earnings per share (USD)
– Continuing operations
– Discontinued operations
– Total
3.28
2.82
3.28
2.82
3.25
2.80
3.25
2.80
2.92
4.48
7.40
2.88
4.41
7.29
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 2017, 2016, or 2015, as all options were
dilutive in all years.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2017 | 211
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, 2015
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 adjustments on financial instruments
Net investment hedge
Net actuarial gains from defined benefit plans
Currency translation effects
Total value adjustments in 2017
Value adjustments at December 31, 2017
Fair value
Fair value
Actuarial
adjustments adjustments on gains/(losses)
from defined
benefit plans
on marketable deferred cash
flow hedges
securities
Net
investment
hedge
Cumulative
currency
translation
effects
Total value
adjustments
– 38
– 5 366
2 406
– 2 565
– 18
– 5 413
747
– 4 223
20
– 147
28
20
– 147
100
433
28
461
– 113
15
– 514
– 113
15
– 514
348
38
– 3
12
12
– 5 915
– 237
851
38
386
12
9
851
– 5 064
– 237
– 237
48
– 147
– 1 659
– 1 659
– 1 659
– 1 758
100
– 98
– 514
– 2 389
– 2 389
– 2 389
– 3 001
12
– 1 642
– 7 212
50
– 237
851
2 208
2 872
2 208
2 208
566
– 4 340
1 Net actuarial gains of USD 10 million in 2015 were attributable to discontinued operations up to the respective divestment dates
2 Currency translation losses of USD 29 million in 2015 were attributable to discontinued operations up to the respective divestment dates
8.1) The 2017, 2016 and 2015 changes in the fair value of financial instruments were as follows:
(USD millions)
Fair value adjustments at January 1, 2017
Changes in fair value:
– Available-for-sale marketable securities
– Available-for-sale financial investments
Realized net gains transferred to the consolidated income statement:
– 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 1
Fair value adjustments during the year
Fair value adjustments at December 31, 2017
Fair value
Fair value
adjustments adjustments on
on marketable deferred cash
flow hedges
securities
348
– 3
11
47
– 109
102
– 13
38
386
13
– 1
12
9
Total
345
11
47
– 109
13
102
– 14
50
395
1 Included in 2017 is a USD 18 million impact related to the revaluation of deferred tax liabilities on available-for-sale financial investments held in the US that were previously
recognized through other comprehensive income. This revaluation resulted from the US tax reform legislation enacted on December 22, 2017, refer to Note 11 for additional
disclosures.
212 | Novartis Annual Report 2017
(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
(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
8.2) In 2015, cumulative currency translation losses of
USD 10 million were recycled through the income state-
ment as a result of the divestments of subsidiaries. No
currency translation losses or gains were recycled
through the income statement in 2017 and 2016.
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 1
Total after tax
Attributable to:
Shareholders of Novartis AG
Non-controlling interests
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
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
Total
443
1
– 87
– 1
– 154
16
131
– 4
– 98
345
Total
395
– 130
80
– 8
– 1
– 103
21
194
– 5
48
443
2017
2016
1 367
– 667
76
– 592
12
140
2015
– 252
168
– 63
851
– 515
– 147
851
– 514
– 147
– 1
1 Included in 2017 is a USD -272 million impact related to the revaluation of deferred tax assets on US post-employment benefits that were previously recognized through other
comprehensive income. This revaluation resulted from the US tax reform legislation enacted on December 22, 2017, refer to Note 11 for additional disclosures.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2017 | 213
9. property, plant & equipment
The following table summarizes the movements of property, plant and equipment during 2017:
(USD millions)
Cost
January 1, 2017
Reclassifications 1
Additions
Disposals and derecognitions 2
Currency translation effects
December 31, 2017
Accumulated depreciation
January 1, 2017
Depreciation charge
Accumulated depreciation on disposals and derecognitions 2
Impairment charge
Reversal of impairment charge
Currency translation effects
December 31, 2017
Net book value at December 31, 2017
Net book value of property, plant & equipment under finance lease contracts
commitments for purchases of property, plant & equipment
capitalized borrowing costs
Land
Construction
in progress
Buildings
Machinery
& other
equipment
Total
687
13 113
2 680
14 816
31 296
5
13
– 23
38
508
104
– 324
663
– 1 617
1 104
1 186
425
1 728
– 71
190
– 593
– 1 011
1 106
1 997
720
14 064
2 368
16 858
34 010
– 40
– 5 436
– 15
– 10 164
– 15 655
– 3
6
– 510
275
– 25
– 3
– 287
– 1 007
– 1 520
534
– 106
30
849
– 189
32
– 772
– 1 063
34
– 58
2
– 1
– 40
– 5 983
– 38
– 11 485
– 17 546
680
8 081
2 330
5 373
16 464
78
318
9
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.
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
Net book value of property, plant & equipment under finance lease contracts
commitments for purchases of property, plant & equipment
capitalized borrowing costs
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
81
223
9
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.
214 | Novartis Annual Report 2017
10. Goodwill and intangible assets
The following table summarizes the movements of goodwill and intangible assets in 2017:
(USD millions)
Cost
January 1, 2017
Goodwill
Intangible Assets other than Goodwill
Acquired
research &
Alcon
Total development brand name Technologies
Currently
marketed Marketing
know-how
products
Other
intangible
assets
Total
31 381
5 150
2 980
6 548
33 007
5 960
1 492
55 137
Impact of business combinations
94
1 223
Reclassifications 1
Additions
Disposals and derecognitions 2
Currency translation effects
– 389
697
– 353
704
134
175
282
– 328
969
5
– 1
86
1 223
1 146
214
162
– 64
– 746
48
1 237
December 31, 2017
32 179
6 462
2 980
6 638
34 105
5 960
1 852
57 997
Accumulated amortization
January 1, 2017
Reclassifications 1
Amortization charge
Accumulated impairments on disposals
and derecognitions2
Impairment charge
– 401
– 886
– 3 637 – 16 863
– 1 430
– 981 – 23 797
6
352
– 615
– 6
– 577
– 2 571
– 238
– 304
– 3 690
317
– 92
61
– 2
– 37
730
– 709
– 534
Currency translation effects
– 28
– 27
– 54
– 416
December 31, 2017
– 429
– 1 170
– 4 268 – 19 631
– 1 668
– 1 263 – 28 000
Net book value at December 31, 2017
31 750
5 292
2 980
2 370
14 474
4 292
589
29 997
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 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 1
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.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2017 | 215
The following table summarizes the allocation of the net book values of goodwill and intangible assets by report-
ing segment at December 31, 2017:
(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
15 237
4 368
8 210
8 295
625
291
9
11 604
539
1 589
353
16 334
30
2 783
1 822
1 281
4 292
195
7 881
8
8
2 980
11
2 999
Net book value at December 31, 2017
31 750
5 292
2 980
2 370
14 474
4 292
589
29 997
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
7.0
2.0
7.0
3.0
7.0
2.6
7.0
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.
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.
The following table shows the intangible asset
impairment charges for 2017 and 2016:
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 this long-term inflation rate, due to
(USD millions)
Innovative Medicines
Sandoz
Alcon
Total
2017
– 591
– 61
– 57
2016
– 522
– 65
– 4
– 709
– 591
216 | Novartis Annual Report 2017
11. 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, 2017
224
1 331
1 839
4 160
146
2 597
10 297
Gross deferred tax liabilities at January 1, 2017
– 629
– 4 019
– 358
– 511
– 1 403
– 6 920
Net deferred tax balance at January 1, 2017
– 405
– 2 688
1 481
3 649
146
1 194
3 377
at January 1, 2017
Credited/(charged) to income
Charged to equity
Charged to other comprehensive income
Impact of business combinations
– 405
– 2 688
1 481
3 649
– 30
1 279
– 90
– 304
– 592
– 322
Other movements
– 41
33
37
– 14
Net deferred tax balance at December 31, 2017
– 476
– 1 698
836
3 331
146
– 49
5
– 14
88
1 194
3 377
– 46
– 101
– 69
2
760
– 101
– 661
– 317
3
980
3 061
Gross deferred tax assets at December 31, 2017
137
1 287
1 090
3 786
97
1 983
8 380
Gross deferred tax liabilities at December 31, 2017
– 613
– 2 985
– 254
– 455
– 9
– 1 003
– 5 319
Net deferred tax balance at December 31, 2017
– 476
– 1 698
836
3 331
88
980
3 061
After offsetting the following amount of deferred tax assets and liabilities within the same tax jurisdiction the balance amounts to:
Deferred tax assets at December 31, 2017
Deferred tax liabilities at December 31, 2017
Net deferred tax balance at December 31, 2017
151
8 229
– 5 168
3 061
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 the following amount 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
263
10 034
– 6 657
3 377
The following table presents deferred tax assets and
deferred tax liabilities, which are expected to have an
impact on current taxes payable after more than twelve
months:
(USD billions)
2017
2016
Expected to have an impact on current tax
payable after more than 12 months
– Deferred tax assets
– Deferred tax liabilities
3.5
4.4
4.8
5.9
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2017 | 217
For unremitted earnings retained by consolidated enti-
ties for reinvestment, no provision 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 stat-
utes currently in effect.
(USD billions)
2017
2016
Unremitted earnings that have been retained
by consolidated entities for reinvestment
66
63
Temporary differences on which no deferred tax has
been provided as they are permanent in nature related
to:
(USD billions)
Investments in subsidiaries
Goodwill from acquisitions
2017
3
– 29
2016
2
– 28
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
(USD millions)
One year
Two years
Three years
Four years
Five years
More than five years
Total
Not capitalized
Capitalized
2017 total
37
64
87
26
67
654
935
3
4
5
25
16
40
68
92
51
83
1 671
1 724
2 325
2 659
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
(USD millions)
2017
2016
2015
Tax losses carried forward
that expired
1
19
13
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.
On December 22, 2017, the US enacted tax reform leg-
islation (Tax Cuts and Jobs Act), which among other pro-
visions, reduced the US corporate tax rate from 35% to
21%, effective January 1, 2018. This required a revalua-
tion of the deferred tax assets and liabilities and a por-
tion of current tax payables to the newly enacted tax
rates at the date of enactment.
The following table shows the impact on the revalu-
ation of deferred assets and liabilities and current income
tax liabilities:
(USD millions)
Deferred tax asset
and liability revaluation
Items previously recognized
in consolidated income statement
Items previously recognized
in other comprehensive income 1
Items previously recognized
in retained earnings 2
Total revaluation of deferred
tax assets and liabilities
Total revaluation of current
tax payables
Total revaluation of deferred
tax assets and liabilities and
current income tax liabilities
Income
statement
Equity
Total
– 24
– 24
– 254 – 254
– 71
– 71
– 24 – 325 – 349
– 37
– 37
– 61 – 325 – 386
1 Related to post-employment benefits and available for sale financial investments.
2 Related to equity based compensation plans.
The enacted US tax reform legislation includes a provi-
sion that requires the US parent company’s foreign sub-
sidiaries’ unremitted earnings to be subject to an imme-
diate toll tax on the qualifying amount of unremitted
earnings (the deemed repatriated earnings). Previously,
these earnings were taxable upon distribution to the US
parent company. The toll tax amount owed is payable,
without interest, in installments over an eight year period
through 2024. Certain of the Group’s US subsidiaries
are the parent company of non-US domiciled compa-
nies, and as a result, USD 70 million of deferred tax lia-
bilities related to these entities’ unremitted earnings, the
majority of which were recognized in the prior year, were
reclassified to current income tax liabilities.
218 | Novartis Annual Report 2017
12. Financial and other non-current assets
Financial assets
(USD millions)
Available-for-sale long-term
financial investments
Other non-current assets
2017
2016
(USD millions)
1 275
1 096
Deferred compensation plans
Prepaid post-employment benefit plans
Long-term receivables from customers
Minimum lease payments
from finance lease agreements
Contingent consideration receivables 1
197
122
394
Long-term loans, advances and security deposits 255
231
147
586
136
Total financial assets
2 243
2 196
1 Note 28 provides additional disclosures related to contingent considerations.
Other non-current assets
Total other non-current assets
2017
484
133
201
818
2016
451
47
200
698
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”.
2017
2016
(USD millions)
Total
future
payments
Unearned
finance
income
Present
value
Provision
Not later than one year 1
83
Between one and five years
180
Later than five years
Total
31
294
– 7
– 14
– 2
– 23
76
166
29
271
– 3
– 59
– 14
– 76
Net
book
value
73
107
15
195
Total
future
payments
Unearned
finance
income
Present
value
Provision
91
182
63
336
– 5
– 16
– 4
– 25
86
166
59
311
– 2
– 37
– 41
– 80
Net
book
value
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).
13. Inventories
(USD millions)
Raw material, consumables
Work in progress
Finished products
Total inventories
2017
841
2 957
3 069
6 867
2016
705
2 700
2 850
6 255
The following table shows the recognized amount of
inventory provisions and reversals of inventory provisions:
(USD millions)
2017
2016
Inventory provisions
– 470
– 283
Reversals of inventory provisions
189
67
2015
– 356
148
The following table shows the amount of inventory rec-
ognized as an expense in “Cost of goods sold” in the
consolidated income statements:
(USD billions)
2017
2016
2015
Cost of goods sold
– 10.3
– 10.3
– 10.5
The reversals mainly result from the release of products
initially requiring additional quality control inspections
and from the reassessment of inventory values manu-
factured prior to regulatory approval but for which
approval was subsequently received.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2017 | 219
14. Trade receivables
(USD millions)
Total gross trade receivables
Provisions for doubtful trade receivables
Total trade receivables, net
2017
8 790
– 190
8 600
2016
8 364
– 162
8 202
The following table summarizes the movement in the provision for doubtful trade receivables:
(USD millions)
January 1
Impact of divestments
2017
2016
– 162
– 142
2015
– 156
12
Provisions for doubtful trade receivables charged to the consolidated income statement
– 119
– 76
– 68
Utilization provisions for doubtful trade receivables
Reversal of provisions for doubtful trade receivables
Currency translation effects
December 31
12
76
– 9
17
37
2
39
32
11
– 190
– 162
– 142
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:
(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
2017
2016
7 758
7 386
279
230
137
137
249
262
223
185
145
163
Provisions for doubtful trade receivables
Total trade receivables, net
– 190
8 600
– 162
8 202
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, particularly in Greece,
Italy, Portugal, Spain, Brazil, Russia, Saudi Arabia and
Turkey, and evaluates trade receivables in these coun-
tries for potential collection risks. The majority of the
outstanding trade receivables from these closely moni-
tored countries are due directly from local governments
or from government-funded entities except for Russia,
Brazil and Turkey, which are due from private entities.
Deteriorating credit and economic conditions as well as
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-evalu-
ate the collectability of these trade receivables in future
periods.
The following table shows the gross trade receiv-
ables balance from these closely monitored countries at
December 31, 2017 and 2016, the amounts that are past
due for more than one year and the related provisions
that have been recorded:
(USD millions)
Total balance of gross trade
receivables from closely
monitored countries
Past due for more than one year
Provisions
2017
2016
1 733
1 717
124
95
82
63
At December 31, 2017 amounts past due for more than
one year are not significant in any of these countries on
a standalone basis.
Total trade receivables include amounts denomi-
nated in the following major currencies:
(USD millions)
US dollar (USD)
Euro (EUR)
Japanese yen (JPY)
Chinese yuan (CNY)
Russian ruble (RUB)
Brazilian real (BRL)
British pound (GBP)
Australian dollar (AUD)
Swiss franc (CHF)
Canadian dollar (CAD)
Other currencies
Total trade receivables, net
2017
3 451
1 533
2016
3 432
1 366
600
312
268
237
208
165
127
73
567
264
347
222
160
147
135
97
1 626
8 600
1 465
8 202
220 | Novartis Annual Report 2017
15. 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
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
The following table provides a breakdown of debt securities by currency:
(USD millions)
US dollar (USD)
Euro (EUR)
Japanese yen (JPY)
Total debt securities
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
16. Other current assets
(USD millions)
VAT receivable
Withholding tax recoverable
Prepaid expenses
– Third parties
– Associated companies
Receivables from associated companies
Contingent consideration receivable 1
Other receivables and current assets
Total other current assets
1 Note 28 provides additional disclosures related to contingent consideration.
2017
328
34
362
106
125
31
1
625
2017
303
14
11
328
2016
306
31
337
94
108
230
1
770
2016
284
12
10
306
2017
2 970
5 890
8 860
2016
1 912
5 095
7 007
2017
717
93
2016
521
282
753
692
3
8
450
1 030
3 054
5
7
1 034
2 541
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2017 | 221
17. equity
The following table shows the movement in the share capital:
(USD millions)
Share capital
Treasury shares
Outstanding share capital
Jan 1, 2015
Movement
in year
Dec 31, 2015
Movement
in year
Dec 31, 2016
Movement
in year
Dec 31, 2017
1 001
– 103
898
– 10
2
– 8
991
– 101
890
– 19
25
6
972
– 76
896
– 3
– 24
– 27
969
– 100
869
The following table shows the movement in the shares:
2017
2016
2015
Number of outstanding shares
(in millions)
Note
Total
Novartis
shares
Total
Total
treasury outstanding
shares
shares
Total
Novartis
shares
Total
Total
treasury outstanding
shares
shares
Total
Novartis
shares
Total
Total
treasury outstanding
shares
shares
Balance at beginning of year
2 627.1
– 253.0 2 374.1 2 677.0
– 303.1 2 373.9 2 706.2
– 307.6 2 398.6
– 10.3
10.3
– 49.9
49.9
– 29.2
29.2
Shares canceled for capital
reduction 1
Shares acquired to be held in
Group Treasury 2
Shares acquired to be
canceled 3
Other share purchases 4
Exercise of options
and employee transactions 5 17.6
Equity-based compensation 5
– 66.2
– 66.2
– 3.8
– 3.8
– 10.3
– 10.3
– 2.6
– 2.6
4.6
8.8
4.6
8.8
4.1
9.0
– 9.6
– 9.6
– 49.9
– 49.9
– 4.1
– 4.1
27.0
11.9
27.0
11.9
– 29.2
4.5
– 24.7
4.1
9.0
0.2
Total movements
– 10.3
– 46.3
– 56.6
– 49.9
50.1
Balance at end of year
2 616.8
– 299.3 2 317.5 2 627.1
– 253.0 2 374.1 2 677.0
– 303.1 2 373.9
1 Novartis reduced its share capital by cancelling shares which were repurchased on the SIX Swiss Exchange second trading line during previous years.
2 Shares repurchased on the SIX Swiss Exchange first trading line
3 For 2017 and 2016, shares repurchased on the SIX Swiss Exchange second trading line under the CHF 10 billion share buyback authority approved at the 2016 Annual General
Meeting (AGM). For 2015, shares repurchased on the SIX Swiss Exchange second trading line under the CHF 10 billion share buyback authority approved at the 2008 Annual
General Meeting (AGM).
4 Shares acquired from employees, which were previously granted to them under the respective programs
5 Shares delivered as a result of options being exercised and physical share deliveries related to equity-based participation plans
17.1) The amount available for distribution as a dividend
to shareholders is based on the available distributable
retained earnings of Novartis AG determined in accor-
dance with the legal provisions of the Swiss Code of
Obligations.
Dividend per share (in CHF)
Total dividend payment
(in USD billion)
2017
2.75
2016
2.70
2015
2.60
6.5
6.5
6.6
222 | Novartis Annual Report 2017
17.2) The following table summarizes the treasury shares movements:
2017
2016
Number of
outstanding
Number of
outstanding
2015
Number of
outstanding
Note
shares Equity impact
USDm
(in millions)
shares Equity impact
USDm
(in millions)
shares Equity impact
USDm
(in millions)
Shares acquired to be held in Group Treasury 1
Shares acquired to be canceled 2
Other share purchases 3
Purchase of treasury shares
Exercise of options and employee transactions 4
17.6
Equity-based compensation 5, 6
Total
– 66.2
– 5 270
– 10.3
– 3.8
– 304
– 2.6
– 70.0
– 5 574
– 12.9
4.6
8.8
255
612
– 56.6
– 4 707
4.1
9.0
0.2
– 784
– 208
– 992
214
664
– 9.6
– 897
– 49.9
– 4 805
– 4.1
– 417
– 63.6
– 6 119
27.0
11.9
1 592
815
– 114
– 24.7
– 3 712
1 Shares repurchased on the SIX Swiss Exchange first trading line
2 For 2017 and 2016, shares repurchased on the SIX Swiss Exchange second trading line under the CHF 10 billion share buyback authority approved at the 2016 Annual General
Meeting (AGM). For 2015, shares repurchased on the SIX Swiss Exchange second trading line under the CHF 10 billion share buyback authority approved at the 2008 Annual
General Meeting (AGM).
3 Shares acquired from employees, which were previously granted to them under the respective programs
4 Shares delivered as a result of options being exercised related to equity-based participation plans and the delivery of treasury shares. The average share price of the shares
delivered was significantly below market price reflecting the strike price of the options exercised.
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 addition, tax benefits arising from tax deductible amounts
exceeding the expense recognized in the income statement are credited to equity.
6 Included in 2017 is a USD 71 million impact related to the revaluation of deferred tax assets on equity based compensation that were previously recognized through retained
earnings. This revaluation resulted from the US tax reform legislation enacted on December 22, 2017, refer to Note 11 for additional disclosures.
17.3) Changes in non-controlling interests represent the
impact on the non-controlling interest of transactions
with minority shareholders such as change in ownership
percentage, dividend payments, and other equity trans-
actions.
17.4) In 2017, Novartis entered into an irrevocable, non-dis-
cretionary arrangement with a bank to repurchase
Novartis shares on the second trading line under its up-to
USD 5 billion share buyback, as well as to mitigate dilu-
tion from equity-based participation plans. The commit-
ment under this arrangement is the expected purchases
by the bank under such trading plan over a rolling 90-day
period. As of December 31, 2017, this trading plan com-
mitment was fully executed and expired, and as a con-
sequence, there is no contingent liability related to this
plan recognized.
In 2014, Novartis entered into a similar irrevocable,
non-discretionary arrangement with a bank to repur-
chase Novartis shares. The commitment under this
arrangement reflected the expected purchases by the
bank under such trading plan over a rolling 90-day
period. In 2015, this trading plan was fully executed and
expired, resulting in a decrease of USD 658 million in the
repurchase obligation. As a consequence, there is no
contingent liability related to this plan as of December
31, 2015 and December 31, 2016.
17.5) The impact of change in ownership of consolidated
entities represents 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 percentage.
17.6) At December 31, 2017, the market maker held 12 mil-
lion 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 62.17 and they have contractual
lives of 10 years, with remaining lives up to six years.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2017 | 223
18. 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
1 Average interest rate 0.3% (2016: 0.4%)
2017
2016
22 957
17 285
539
87
708
82
23 583
18 075
– 359
– 178
23 224
17 897
Financial debts, including current financial debts, con-
tain only general default covenants. The Group is in com-
pliance with these covenants.
The percentage of fixed-rate financial debt to total
financial debt was 82% at December 31, 2017, and 76%
at December 31, 2016.
The average interest rate on total financial debt in
2017 was 2.6% (2016: 2.8%).
The following table provides a breakdown of straight bonds:
Nominal
Currency amount
Issuance
year
Maturity
year
Issuer
2016
(USD
Issue price millions) millions)
2017
(USD
USD
USD
USD
USD
USD
USD
EUR
EUR
CHF
CHF
CHF
USD
USD
EUR
EUR
USD
USD
USD
EUR
EUR
3 000
1 000
1 500
500
2 150
1 850
600
600
500
550
325
1 750
1 250
1 250
500
1 000
1 000
1 000
1 250
600
2009
2010
2012
2012
2014
2014
2014
2014
2015
2015
2015
2015
2015
2016
2016
2017
2017
2017
2017
2017
2019 Novartis Securities Investment Ltd., Hamilton, Bermuda
99.822% 2 997 2 995
2020 Novartis Capital Corporation, New York, United States
99.237%
997
996
2022 Novartis Capital Corporation, New York, United States
99.225% 1 491 1 490
2042 Novartis Capital Corporation, New York, United States
98.325%
489
489
2024 Novartis Capital Corporation, New York, United States
99.287% 2 134 2 132
2044 Novartis Capital Corporation, New York, United States
99.196% 1 824 1 823
2021 Novartis Finance S.A., Luxembourg, Luxembourg
2026 Novartis Finance S.A., Luxembourg, Luxembourg
2025 Novartis AG, Basel, Switzerland
2029 Novartis AG, Basel, Switzerland
2035 Novartis AG, Basel, Switzerland
99.134%
99.697%
100.640%
100.502%
100.479%
713
714
513
564
333
625
627
491
539
318
2025 Novartis Capital Corporation, New York, United States
99.010% 1 730 1 728
2045 Novartis Capital Corporation, New York, United States
98.029% 1 218 1 217
2023 Novartis Finance S.A., Luxembourg, Luxembourg
99.127% 1 480 1 299
2028 Novartis Finance S.A., Luxembourg, Luxembourg
98.480%
2020 Novartis Capital Corporation, New York, United States
99.609%
2022 Novartis Capital Corporation, New York, United States
99.449%
2027 Novartis Capital Corporation, New York, United States
99.109%
516
588
996
993
988
2021 Novartis Finance S.A., Luxembourg, Luxembourg
99.133% 1 480
2027 Novartis Finance S.A., Luxembourg, Luxembourg
99.874%
715
Coupon
5.125%
4.400%
2.400%
3.700%
3.400%
4.400%
0.750%
1.625%
0.250%
0.625%
1.050%
3.000%
4.000%
0.125%
0.625%
1.800%
2.400%
3.100%
0.000%
1.125%
Total straight bonds
22 957 17 285
The following tables provide a breakdown of total non-current financial debt, including current portion by maturity
and currency:
Breakdown by maturity:
Breakdown by currency:
(USD millions)
2017
2018
2019
2020
2021
2022
After 2022
Total
2017
359
3 173
1 997
2 194
2 485
2016
178
345
(USD millions)
US dollar (USD)
Euro (EUR)
3 168
Japanese yen (JPY)
1 000
Swiss franc (CHF)
628
Total
2 442
13 375
10 314
23 583
18 075
2017
2016
15 945
12 952
5 695
3 092
533
683
1 410
1 348
23 583
18 075
224 | Novartis Annual Report 2017
The following table shows the comparison of balance
sheet and fair value of total non-current financial debt,
including current portion:
The following table shows the pledged assets:
(USD millions)
2017
2016
(USD millions)
2016
Balance sheet Fair values Balance sheet
2017
2017
2016
Fair values
Total net book value of property,
plant & equipment pledged as
collateral for non-current financial debts
84
94
Straight bonds
22 957
23 835
17 285
17 943
Others
Total
626
626
790
790
23 583
24 461
18 075
18 733
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.
19. provisions and other non-current liabilities
(USD millions)
Accrued liability for employee benefits:
Defined benefit pension plans 1
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
1 Note 24 provides additional disclosures related to post-employment benefits.
2 Note 28 provides additional disclosures related to contingent consideration.
2017
2016
3 157
4 490
625
953
706
230
809
577
545
1 005
708
264
840
618
7 057
8 470
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 following table shows the movements in the envi-
ronmental liability provisions:
(USD millions)
January 1
Cash payments
Releases
Additions
Currency translation effects
December 31
Less current provision
Non-current environmental
remediation provisions
at December 31
2017
773
– 46
– 153
154
33
761
– 55
2016
871
– 75
1
– 24
773
– 65
2015
923
– 52
– 5
6
– 1
871
– 80
706
708
791
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2017 | 225
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.
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 as well as the iden-
tity and financial position of such parties in light of the
joint and several nature of the liability.
The expected timing of the related cash outflows as
of December 31, 2017, 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
164
241
315
41
761
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-
ters. Potential cash outflows reflected in a provision
might be fully or partially off-set by insurance in certain
circumstances.
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
more than 1 000 individual product liability cases and
certain 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 27 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 2017.
Investigations and related litigations
SOUTHeRN DISTRIcT OF NeW YORK (S.D.N.Y.) MaRKeTING
pRacTIceS INVeSTIGaTION aND lITIGaTION
In 2013, the US government filed a civil complaint in inter-
vention to an individual qui tam action against Novartis
Pharmaceuticals Corporation (NPC) in the United States
District Court (USDC) for the S.D.N.Y. The complaint, as
subsequently amended, asserts federal False Claims Act
(FCA) and common law claims with respect to speaker
programs and other promotional activities for certain
NPC cardiovascular medications (Lotrel, Starlix and
Valturna) allegedly serving as mechanisms to provide
kickbacks to healthcare professionals (HCPs). It seeks
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. Also in 2013,
New York State filed a civil complaint in intervention
asserting similar claims. Neither government complaint
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 municipalities. NPC vigor-
226 | Novartis Annual Report 2017
ously contests the S.D.N.Y., New York State and individ-
ual claims, both as to alleged liability and amount of dam-
ages 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, Nevanac,
Omnipred, Econopred; surgical equipment). ALI is coop-
erating with this investigation.
S.D.N.Y. GILENYA MaRKeTING pRacTIceS INVeSTIGaTION
In 2013, NPC received a civil investigative demand from
the United States Attorney’s Office (USAO) for the
S.D.N.Y. requesting the production of documents and
information relating to marketing practices for Gilenya,
including the remuneration of healthcare providers in
connection therewith. In 2017, S.D.N.Y. and New York
State declined to intervene in claims raised by an indi-
vidual relator, which continue to be vigorously contested.
GOVeRNMeNT GeNeRIc pRIcING aNTITRUST
INVeSTIGaTIONS, aNTITRUST claSS acTIONS
In 2016 and 2017, Sandoz Inc. received subpoenas and
interrogatories from the Antitrust Division of the US
Department of Justice (DoJ) and from the Attorney Gen-
eral of the State of Connecticut requesting documents
related to the marketing and pricing of generic pharma-
ceutical products sold by Sandoz Inc. and its subsidiar-
ies, including Fougera Pharmaceuticals, Inc. (Fougera),
and related communications with competitors. Sandoz
Inc. is cooperating with these investigations, which it
believes to be part of a broader inquiry into industry prac-
tice.
Since the third quarter of 2016, Sandoz Inc. and Foug-
era have been sued alongside other generic pharmaceu-
tical companies in more than 20 consolidated complaints
by proposed classes of direct and indirect purchasers,
and Attorneys General for 45 states, the District of
Columbia and Puerto Rico have sought leave to file a
complaint, alleging that defendants, including Sandoz,
engaged in anti-competitive conduct with regard to the
sales of various generic drugs and asserting violations
of federal and state antitrust laws as well as consumer
protection laws. Lek Pharmaceuticals d.d., Novartis AG
and Novartis International AG were dismissed from the
proceedings. The cases have been consolidated for pre-
trial purposes in the USDC for the Eastern District of
Pennsylvania (E.D. Pa.) and the claims are being vigor-
ously contested.
DISTRIcT OF MaSSacHUSeTTS (D. MaSS.) cHaRITaBle
FOUNDaTION INVeSTIGaTION
In 2016 and 2017, NPC received subpoenas from the
USAO for the D. Mass. requesting documents related to
NPC’s support of 501(c)(3) organizations that provide
co-payment assistance to Medicare patients who are
prescribed Novartis medicines, including the respective
accounting and tax treatment, as well as related to pric-
ing strategies for Gleevec, Tasigna, Zometa, and Gilenya.
The requests are focused on potential violations of fed-
eral health care offenses, including the Anti-Kickback
Statute, and FCA. NPC is cooperating with this investi-
gation, which it believes to be part of a broader inquiry
into industry practices.
aSIa/RUSSIa INVeSTIGaTION
In 2017, Novartis Group companies, as well as present
and former senior executives of Alcon, received docu-
ment requests and subpoenas from the DoJ and the US
Securities and Exchange Commission (SEC) requesting
information concerning Alcon’s business practices in
Asia and Russia and related accounting treatment, both
before and after Alcon became part of the Novartis
Group. Novartis is cooperating with this investigation.
LUCENTIS/aVaSTIN® MaTTeRS
In connection with an investigation into whether Novartis
Farma S.p.A., Novartis AG, F. Hoffmann-La Roche AG,
Genentech Inc. and Roche S.p.A. colluded to artificially
preserve the market positions of Avastin® and Lucentis,
in 2014 the Italian Competition Authority imposed a fine
equivalent to USD 125 million on Novartis AG and Novartis
Farma S.p.A. Novartis paid the fine, subject to the right
to later claim recoupment, and is appealing before the
Consiglio di Stato. In 2014 and 2015, the Italian Ministry
of Health and the Lombardia region sent letters with pay-
ment requests for a total equivalent of approximately
USD 1.5 billion in damages from Novartis and Roche enti-
ties based on the above allegations. In 2014, the French
Competition Authority opened an investigation against
Novartis Groupe France with respect to the French mar-
ket for anti-vascular endothelial growth factor (VEGF)
products indicated for the treatment of wet age-related
macular degeneration (AMD). Novartis continues to vig-
orously contest all claims in Italy and France. Also,
Novartis is challenging policies and regulations allowing
off-label/unlicensed use and reimbursement for eco-
nomic reasons in various countries, including in Italy and
the UK.
JapaN INVeSTIGaTION
In 2015, a trial started against a former Novartis Pharma
K.K. (NPKK) employee, and also NPKK under the dual
liability concept in Japanese law, over allegations 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 valsar-
tan. The charges against NPKK are subject to a maxi-
mum total fine of JPY 4 million. In 2017, the Tokyo Dis-
trict Court issued a not-guilty ruling for both the former
NPKK employee and NPKK. An appeal by the Tokyo Dis-
trict Public Prosecutor Office remains pending.
SOUTH KORea INVeSTIGaTION
In 2016, the Seoul Western District Prosecutor initiated
a criminal investigation into, among other things, allega-
tions that Novartis Korea utilized medical journals to pro-
vide inappropriate economic benefits to HCPs. A crimi-
nal trial is ongoing concerning allegations that Novartis
Korea utilized medical journals to provide inappropriate
economic benefits to HCPs. In addition, other authorities
in South Korea, including the Korea Fair Trade Commis-
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2017 | 227
sion, the Ministry of Food and Drug Safety and the Min-
istry of Health and Welfare conducted investigations into
Novartis Korea. Those investigations have led to total
fines of approximately USD 53 million as well as sales
and reimbursement suspensions on Novartis Korea
products in 2017.
calculate reimbursements to healthcare providers. 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 Sandoz remains a defendant
in an individual action in Pennsylvania. The putative class
action in Pennsylvania was dismissed in 2017. The claims
are being vigorously contested.
GReece INVeSTIGaTION
Novartis is investigating allegations of potentially inap-
propriate economic benefits in Greece to HCPs and oth-
ers. Novartis Group companies in Greece are providing
information to the Greek authorities related to these alle-
gations. Novartis is also responding to a subpoena and
document requests from the SEC and DoJ that it received
in 2016 and 2017 in connection with such allegations and
is cooperating with their investigation.
Antitrust class actions
cONTacT leNSeS
Since the first quarter of 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 competition 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 Judi-
cial Panel on Multidistrict Litigation and the claims are
being vigorously contested.
GLEEVEC
In 2015 and 2016, Novartis Group companies were sued
in putative antitrust class actions in D. Mass. alleging
delayed generic entry of Gleevec and seeking damages
on behalf of direct and indirect purchasers of Gleevec.
The motion to dismiss those actions was granted and
plaintiffs have appealed. A similar class action was filed
in 2018 in E.D. Pa. on behalf of direct purchasers of
Gleevec. The claims are being vigorously contested.
eNOXapaRIN
In 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 and unfair business conduct
with regard to sales of enoxaparin, and the same allega-
tions were made by Amphastar in a lawsuit filed in fed-
eral court in California and subsequently moved to fed-
eral court in Mass. (Sandoz, Momenta Pharmaceuticals
and Amphastar are currently engaged in patent litigation
concerning enoxaparin). 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
RECLAST/ACLASTA pRODUcT lIaBIlITY lITIGaTION
NPC is a defendant in more than 20 US product liability
actions involving Reclast and alleging atypical femur
fracture injuries, most of which are in New Jersey state
or federal court and in California state court coordinated
with claims against other bisphosphonate manufactur-
ers. The Canadian putative class action brought against
numerous bisphosphonate manufacturers, including
NPC, Novartis Pharmaceuticals Canada Inc. and Novartis
International AG, in Quebec was discontinued in 2017.
The claims are being vigorously contested.
TaXOTeRe® (DOceTaXel) pRODUcT lIaBIlITY lITIG aTION
Sandoz is a defendant in more than 1 000 US product
liability actions involving Taxotere® (docetaxel), an oncol-
ogy product, many of which have been transferred to
Multidistrict Litigation in the Eastern District of Louisi-
ana. The complaints allege that Sanofi, as innovator, and
several 505(b)(2) NDA holders (including Sandoz) failed
to warn of the risk of permanent alopecia/hair loss. The
claims are being vigorously contested.
aMIODaRONe pRODUcT lIaBIlITY lITIGaTION
Sandoz entities are named in more than 10 individual and
multi-plaintiff US product liability cases involving
amiodarone, a cardiac drug indicated to treat life-threat-
ening arrhythmias that have not responded to other treat-
ment. The complaints allege failure to warn, off-label pro-
motion and failure to include medication guides to
pharmacies. All claims are being vigorously contested.
ORIel lITIGaTION
In 2013, Shareholder Representative Services LLC filed
a complaint in New York State Court against Sandoz Inc.,
two affiliates and two former officers of Sandoz AG
asserting various common law and statutory contract,
fraud and negligent misrepresentation claims arising 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
Two putative consumer fraud class actions remain ongo-
ing against Alcon and Sandoz in New Jersey and at the
US Court of Appeals for the First Circuit after having
been initially dismissed at the trial court level. They claim
that Alcon’s and Sandoz’s eye drop products for glau-
coma were unfairly designed so that the drop dosage is
more than necessary and exceeds the capacity of the
eye, leading to wastage and higher costs to patient con-
sumers. The claims are being vigorously contested.
228 | Novartis Annual Report 2017
IP Matters
MIVS@ plaTFORM paTeNT INFRINGeMeNT lITIGaTION
Johns Hopkins University filed a patent infringement law-
suit against Alcon alleging that the use of certain Alcon
surgical products, principally by third parties, infringes a
patent directed to certain methods of ocular surgery, and
a trial is scheduled for February 2018. The claims are
being vigorously contested.
Concluded legal matters
NeW YORK STaTe pRIcING pOlIcY INVeSTIGaTION
In 2014, ALI received a civil subpoena from the New York
State attorney general relating to an investigation into a
unilateral pricing policy program. Novartis considers this
matter concluded.
LUCENTIS/aVaSTIN® MaTTeR IN FRaNce
Novartis’ appeals against a temporary recommendation
of use and reimbursement of off-label Avastin® for neo-
vascular AMD by hospital ophthalmologists, in force
since September 2015, as well as against the decree on
which the recommendation is based, were rejected by
the Supreme Court in 2016 and 2017.
SOlODYN® aNTITRUST claSS acTIONS
Since the third quarter of 2013, seventeen putative class
action complaints and three other complaints had been
filed against manufacturers of the brand drug Solodyn®
and its generic equivalent, including Sandoz Inc. The
cases had been consolidated and transferred for pretrial
purposes to the federal district court in Mass. The plain-
tiffs purported to represent direct and indirect purchas-
ers of Solodyn® branded products and asserted viola-
tions of federal and state antitrust laws, including
allegations in connection with separate settlements by
Medicis with each of the other defendants, including San-
doz Inc., of patent litigation relating to Solodyn®. In 2017,
all cases were resolved through settlement, the payment
of which was not material to Novartis.
Summary of product liability, governmental
investigations and other legal matters provision
movements
(USD millions)
January 1
Cash payments
Releases of provisions
Additions to provisions
Currency translation effects
December 31
2017
395
– 69
– 70
93
2
351
2016
1 194
– 811
– 239
243
8
395
Less current portion
– 121
– 131
2015
849
– 256
– 223
832
– 8
1 194
– 743
Non-current product
liabilities, governmental
investigations and other
legal matters provisions
at December 31
230
264
451
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.
20. current financial debt
and derivative financial instruments
(USD millions)
Interest-bearing accounts of associates
payable on demand 1
Bank and other financial debt 2
Commercial paper
Current portion of non-current financial debt
Fair value of derivative financial instruments
2017
2016
1 822
1 601
692
836
2 328
3 174
359
107
178
116
Total current financial debt and derivative
financial instruments
5 308
5 905
1 Weighted average interest rate 0.5% (2016: 0.5%)
2 Weighted average interest rate 7.0% (2016: 6.7%)
The consolidated balance sheet amounts of current
financial debt, other than the current portion of non-
current financial debt, approximate the estimated fair
value due to the short-term nature of these instruments.
Details on commercial papers are provided in Note 28
– Liquidity risk.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2017 | 229
21. 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
Total provisions and other current liabilities
1 Note 19 provides additional disclosures related to legal provisions.
2 Note 28 provides additional disclosures related to contingent considerations.
2017
660
153
977
586
2016
547
222
880
550
4 672
2 327
4 183
1 993
55
305
121
261
44
1 042
65
287
131
199
49
722
11 203
9 828
Provisions are based upon management’s best estimate
and adjusted for actual experience. Such adjustments
to the historic estimates have not been material.
Provisions for deductions from
revenue
The following table shows the movement of the provi-
sions for deductions from revenue:
(USD millions)
January 1
Impact of business combinations
2017
2016
4 183
3 790
2015
3 533
3
Additions
17 997
16 622
15 603
Payments/utilizations
– 17 452
– 16 189
– 15 218
Changes in offset against
gross trade receivables
Currency translation effects
– 252
196
10
– 50
December 31
4 672
4 183
50
– 181
3 790
Restructuring provisions movements
(USD millions)
January 1
Additions
Cash payments
Releases
Transfers
Currency translation effects
December 31
2017
222
194
– 200
– 64
– 7
8
153
2016
260
343
– 260
– 66
– 76
21
222
2015
333
399
– 435
– 36
– 1
260
In 2017, additions to provisions of USD 194 million were
mainly related to the following reorganizations:
• The Innovative Medicines Division’s Pharmaceuticals
business unit adjusted a regional promotional model
which led to a restructuring of the sales force. It also
streamlined the above country operating model to facil-
itate an even higher external competition oriented
focus. Furthermore, the development organization
streamlined its activities to create efficiencies.
• The Alcon Division continued initiatives to realign its
operations to focus on the Surgical and Vision Care
business after the Ophthalmic Pharmaceutical busi-
ness transfer to the Innovative Medicines Division.
• The Sandoz Division launched initiatives to focus
resources to gain efficiencies.
• Group-wide initiatives to streamline Novartis Technical
Operations in the Innovative Medicines and Sandoz
Divisions were launched.
In 2016, additions to provisions of USD 343 million were
mainly related to the following reorganizations:
• The Innovative Medicines Division’s Pharmaceuticals
business unit realigned its operations to improve its
operating agility, to focus resources on key growth driv-
ers. Furthermore, research realigned and focused its
operations resulting in redundancies from the consol-
idation of certain research teams and the outsourcing
of certain activities to qualified third party vendors.
• The Alcon Division launched several initiatives to
improve its efficiencies resulting in redundancies, as it
realigned its operations to focus on its Surgical and
Vision Care business franchises after the transfer of
its Ophthalmic Pharmaceuticals business to Innovative
Medicines division.
• The Sandoz Division launched an initiative to reallocate
resources to priority, high growth and higher profitabil-
ity countries.
• Various group-wide initiatives to simplify organizational
structure, including the consolidation of manufacturing
sites and support services.
In 2015, additions to provisions of USD 399 million were
mainly related to the following reorganizations:
230 | Novartis Annual Report 2017
• The Innovative Medicines Division implemented a
restructuring program targeted at efficiency gains in
the business franchises, other than in Oncology. It also
initiated initiatives related to the integration of the
oncology business acquired from GSK.
• The Alcon Division extended its initiative started in the
prior year to realize productivity opportunities.
• Various group-wide initiatives to simplify the organiza-
tional structure, mainly related to the manufacturing
footprint and support services.
22. Details to the consolidated cash flow statements
22.1) 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 and other adjustments on 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
In 2015, the Group acquired property, plant and equip-
ment of USD 85 million through finance lease contracts.
2017
2016
2015
1 296
1 119
1 106
1 677
4 399
256
1 591
4 452
132
– 1 108
– 703
– 1 043
– 935
683
160
738
7 058
671
956
1 154
8 437
1 550
3 921
104
– 266
– 869
773
1 642
1 109
9 070
22.2) 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
Increase/(Decrease) in trade payables
Change in other net current assets and other operating cash flow items
Total
2017
– 247
– 204
58
637
244
2016
– 235
– 229
– 587
974
– 77
2015
– 482
– 513
378
– 246
– 863
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2017 | 231
22.3) 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.
2017
2017
acquisitions Divestments
2016
2016
Acquisitions Divestments
2015
2015
Acquisitions Divestments
(USD millions)
Property, plant & equipment
Currently marketed products
(Acquired)/divested research & development
– 1 223
Technologies
Other intangible assets
Financial and other assets including deferred tax assets
– 8
Inventories
Trade receivables and other current assets
Cash and cash equivalents
Current and non-current financial debts
– 20
Trade payables and other liabilities including deferred tax liabilities
326
Net identifiable assets (acquired) or divested
Currency translation effects
Acquired/(divested) liquidity
Fair value of previously held equity interests
– 925
20
25
1
3
34
– 451
– 690
– 39
– 4
– 1
– 1
– 12 970
– 730
– 15
– 555
– 3
– 25
– 15
48
372
– 814
212
– 14 086
1 000
646
13
113
86
40
893
529
311
– 601
– 841
2 189
98
1
64
25
– 479
Subtotal
– 905
48
– 749
– 14 061
1 808
Refinancing of intercompany financial debt, net
Goodwill
Divestment gain
– 94
– 56
– 2 438
Taxes paid and other portfolio transformation related cash flows
– 140
– 748
Receivables and payables contingent consideration, net 1
Other payments and deferred consideration, net
206
– 36
– 3
84
– 44
578
1 042
7 401
– 1 337
– 8
– 519
– 49
– 829
– 95
– 765
– 748
– 16 507
8 924
Deferred portion of sales price 2
Net cash flows
Of which:
Net cash flows used in/from discontinued operations
– 140
– 748
8 924
Net cash flows used in/from continuing operations
– 829
45
– 765
– 16 507
1 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.
2 Divestments include USD 49 million proceeds for the divestment of the Animal Health business received in 2014.
Notes 2 and 23 provide further information regarding
acquisitions and divestments of businesses. All acquisi-
tions were for cash.
22.4) 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 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
2017
2016
– 140
– 140
– 140
– 748
– 748
– 748
2015
– 188
– 41
1
– 2
8 924
8 882
8 694
1 2017 includes payments related to the 2015 portfolio transformation transaction. 2016 includes mainly payments for capital gains taxes and other payments related to the 2015
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, related to the 2015 portfolio transformation transaction. See Note 2 for a description of the 2015 porfolio transformation transaction.
232 | Novartis Annual Report 2017
22.5) Reconciliation of liabilities arising from financing activities
(USD millions)
January 1, 2017
Increase in non-current financial debts
Repayment of non-current financial debts
Change in current financial debts
Changes in fair values and other changes
Amortization of bonds discount
Currency translation effects
Current portion of non-current financial debt
December 31, 2017
23. 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
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
Net assets recognized as a result of business combinations
Current
financial
debts and
derivative
financial
instruments
Non-current
financial
debts
Total
17 897
5 905
23 802
4 933
– 1
– 6
16
744
– 359
– 187
– 755
– 140
126
359
4 933
– 188
– 755
– 146
16
870
23 224
5 308
28 532
2017
1 223
8
20
2016
451
690
39
4
1
1
2015
12 970
730
15
555
3
25
– 326
– 372
– 212
925
– 20
94
999
814
14 086
– 1
56
– 25
2 438
869
16 499
Note 2 details significant acquisition of businesses,
which were Ziarco and Encore in 2017, were Transcend
and Reprixys in 2016, and were the GSK Oncology prod-
ucts, Spinifex and Admune in 2015. The goodwill arising
out of these acquisitions is attributable to buyer-specific
synergies, the assembled workforce and the accounting
for deferred tax liabilities on the acquired assets. No
goodwill from 2017 is tax-deductible. Goodwill of USD 18
million from 2016 and of USD 2.4 billion from 2015 is tax
deductible.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2017 | 233
24. 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 94% 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 United States 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, that, for the principal plans, con-
sists 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 September 2017, the pension regulations in Swit-
zerland were amended, which resulted in a change in
accounting from defined benefit to defined contribution
for a component of the Swiss pension plans. This change
resulted in a reduction to the defined benefit pension
plans liability and in a corresponding net pre-tax gain of
USD 225 million (CHF 216 million).
The United States pension plans represent the sec-
ond 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 (Restoration Plans) are unfunded. Employer
contributions are required for Qualified Plans whenever
the statutory funding ratio falls below a certain level. Fur-
thermore, associates in the United States are covered
under other post-employment benefit plans and post-re-
tirement medical plans.
234 | Novartis Annual Report 2017
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, 2017 and 2016:
(USD millions)
Benefit obligation at January 1
Current service cost
Interest cost
Past service costs and settlements
Administrative expenses
Remeasurement losses 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
2017
2016
2017
2016
23 614
23 402
1 158
1 132
422
330
– 1 226
27
11
– 26
47
437
390
– 73
29
1 299
– 7
117
1 138
– 896
– 1 300
– 1 250
207
– 34
207
– 41
34
44
– 10
32
– 9
– 87
5
– 51
– 1
35
48
46
– 26
– 33
7
– 51
23 210
23 614
1 115
1 158
19 225
19 536
236
1 429
909
579
207
– 995
293
742
– 757
542
207
– 77
153
5
12
172
6
– 1
43
27
– 1 300
– 1 250
– 51
– 51
– 15
– 11
20 275
19 225
162
153
– 2 935
– 4 389
– 953
– 1 005
– 54
– 30
– 5
– 89
– 50
– 4
– 54
Net liability in the balance sheet at December 31
– 3 024
– 4 443
– 953
– 1 005
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
2017
2016
2017
– 4 443
– 3 916
– 1 005
– 422
– 99
– 27
231
1 397
– 229
579
19
– 30
– 437
– 101
– 29
– 4
– 667
139
542
30
– 34
– 39
10
76
– 5
43
1
2016
– 960
– 35
– 42
12
– 7
27
– 3 024
– 4 443
– 953
– 1 005
133
47
– 3 157
– 4 490
– 953
– 1 005
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2017 | 235
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
14 606
3 788
4 816
23 210
15 436
3 783
4 395
23 614
2017
2016
Thereof unfunded
By type of member
Active
Deferred pensioners
Pensioners
728
499
1 227
739
497
1 236
5 627
796
1 646
8 069
6 426
1 258
1 646
2 904
891
831
1 460
8 777
1 515
2 346
8 979
1 734
1 524
12 237
9 010
2 061
1 420
12 491
Fair value of plan assets at December 31
14 445
2 400
3 430
20 275
13 958
2 282
2 985
19 225
Funded status
– 161
– 1 388
– 1 386
– 2 935
– 1 478
– 1 501
– 1 410
– 4 389
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 in years
Current average life expectancy
for a 65-year-old female in years
Pension plans
Other post-employment
benefit plans
2017
2016
2015
2017
2016
2015
1.5%
0.5%
2.8%
0.6%
22
24
1.4%
0.4%
2.2%
0.5%
22
24
1.8%
0.4%
2.9%
0.8%
21
24
3.7%
4.2%
4.4%
21
23
21
23
21
23
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 2017 year-end
defined benefit pension obligation
236 | Novartis Annual Report 2017
(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
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
2017
2016
2015
6.5% 7.0% 7.5%
4.5% 5.0% 5.0%
2025 2022 2022
The following table shows the weighted average plan
asset allocation of funded defined benefit pension plans
at December 31, 2017 and 2016:
Pension plans
– 753
803
840
533
– 138
56
– 54
49
– 50
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 as per the below table:
Investment in shares of Novartis AG
Number of shares (in millions)
Market Value (in USD billions)
December 31, December 31,
2016
2017
11.0
0.9
11.0
0.8
The weighted average duration of the defined benefit
obligation is 14.6 years (2016: 14.5 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, 2017, were as follows:
(as a percentage)
Equity securities
Debt securities
Real estate
Alternative investments
Cash and other investments
Total
Long-term Long-term
target
minimum maximum
target
15
20
5
0
0
40
60
20
20
15
2017
2016
31
35
15
15
4
31
35
15
15
4
100
100
2018
2019
2020
2021
2022
2023–2027
(USD millions)
Pension plans
Novartis Group contributions
2018 (estimated)
expected future benefit payments
Other post-
employment
benefit plans
62
63
65
67
68
69
344
395
1 226
1 166
1 163
1 147
1 133
5 534
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-
Defined contribution plans
In many subsidiaries, associates are covered by defined
contribution plans. Contributions charged to the 2017
consolidated income statement for the defined contri-
bution plans were:
(USD millions)
2017
2016
2015
Contributions for defined contribution plans
continuing operations
406
338
359
Contributions for defined contribution plans
discontinued operations
1
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2017 | 237
25. equity-based participation plans for associates
The expense related to all equity-based participation
plans and the liabilities arising from equity-based pay-
ment transactions were as follows:
(USD millions)
2017
2016
2015
Expense related to equity-based
participation plans
of which continuing operations
924
924
of which discontinued operations
Liabilities arising from equity-based
payment transactions
261
846
846
199
968
903
65
209
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
(RSs) or Restricted Share Units (RSUs) that are granted
in January of the year following the performance period,
deferred and restricted for three years. In 2016, this was
extended to Novartis Top Leaders (NTLs). The Annual
Incentive payout for the NTLs is 70% in cash and 30%
in Novartis RSs or RSUs. Each RS is entitled to voting
rights and payment of dividends 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 in certain countries 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.
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 operates three share savings plans, and asso-
ciates may only participate in one of the share savings
plans in any given year:
• In Switzerland, Employee Share Ownership Plan
(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, participants will receive one matching share
for every two invested shares. Associates eligible for
the equity plan “Select” are not eligible to receive ESOP
matching shares starting with the 2017 performance
period onwards.
• In the United Kingdom, associates can invest up to 10%
of their monthly salary in shares (up to a maximum of
GBP 150) and may also be invited to invest their net
Annual Incentive in shares. Two invested shares are
matched with one share with a holding period of three
years. Starting with the 2017 performance period
onwards, United Kingdom associates can only invest
a maximum of 50% of their Annual Incentive in shares
and this option is no longer offered to associates who
are eligible for the equity plan “Select”.
• The Leveraged Share Savings Plan (LSSP) was avail-
able to key executives for performance periods prior
to 2016. At the participant’s election, the Annual Incen-
tive was awarded partly or entirely in shares. The
elected number of shares 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
United States both the LSSP award and the corre-
sponding match are cash settled.
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 the share savings plans.
Novartis equity plan “Select”
The equity plan “Select” is a global equity incentive plan
under which eligible associates may annually be awarded
a grant subject to a three year vesting period. No awards
are granted for performance ratings below a certain
threshold. Executive Committee members are not eligi-
ble for participation in the equity plan “Select” effective
from the performance period 2014, and the NTLs are not
eligible to participate effective from the performance
period 2016.
The equity plan “Select” currently allows participants
in Switzerland to choose the form of their equity com-
pensation in RSs or 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 tenth anniver-
sary from the grant date. Each tradable share option enti-
tles the holder to purchase after vesting (and before the
tenth 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.
The following table summarizes information about
ADR options outstanding at December 31, 2017:
Range of exercise prices (USD)
2017
2016
Weighted
average
Weighted
average
Options exercise Options exercise
(millions) price (USD) (millions) price (USD)
9.5
59.4
11.7
59.9
– 2.1
59.2
– 2.2
61.8
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)
1.8
2.1
8.0
8.4
20.3
1.0
2.0
3.5
5.0
3.7
46.4
53.7
58.0
66.1
59.9
238 | Novartis Annual Report 2017
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.
Options outstanding
at January 1
Sold or exercised
Forfeited or expired
Outstanding at December 31
7.4
59.5
9.5
59.4
exercisable at December 31
7.4
59.5
9.5
59.4
All share options were granted at an exercise price that
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 or exercise was USD 80.1.
The following table summarizes information about
share options outstanding at December 31, 2017:
Options outstanding
Number
outstanding
(millions)
Average
remaining
contractual
life (years)
Weighted
average
exercise
price (USD)
0.7
1.1
2.7
2.9
7.4
1.0
2.0
3.3
5.0
3.6
46.7
54.6
57.6
66.1
59.5
Range of exercise prices (USD)
45–49
50–54
55–59
65–70
Total
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:
2017
2016
Weighted
ADR average
options exercise
Weighted
ADR average
options exercise
(millions) price (USD) (millions) price (USD)
25.9
59.9
31.9
60.2
– 5.6
59.9
– 6.0
61.7
Options outstanding
at January 1
Sold or exercised
Forfeited or expired
Outstanding at December 31
20.3
59.9
25.9
59.9
exercisable at December 31
20.3
59.9
25.9
59.9
All ADR options were granted at an exercise price that
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 79.9.
Long-Term Performance Plan
The Long-Term Performance Plan (LTPP) is an equity plan
for the Novartis Group CEO, the other Executive Commit-
tee members and the NTLs. For the 2017 grant, the target
incentive is 200% of base compensation for the Novartis
Group CEO and ranges from 150% to 170% for other Exec-
utive Committee members. For the NTLs, the target incen-
tive range is from 20% to 160% of base compensation.
The awards of the LTPP are based on three-year per-
formance objectives focused on financial and innovation
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 Directors.
The innovation measure is based on a 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. The weighting of this measure is 25%. At the
end of the performance period, the Research & Devel-
opment Committee assists the Board of Directors and
the Compensation Committee in evaluating performance
against the innovation targets at the end of the cycle.
Under the LTPP, participants are granted a target
number of Performance Share Units (PSUs) at the begin-
ning of every performance period, which are converted
into unrestricted Novartis shares after the performance
period. Payout is between 0% and 200% of target. PSUs
granted under the LTPP do not carry voting rights, but
do carry dividend equivalents that are paid in shares at
the end of the performance period.
Long-Term Relative Performance Plan
The Long-Term Relative Performance Plan (LTRPP) is an
equity plan for the Novartis Group CEO, other ECN mem-
bers and NTLs. For the 2017 grant, the target incentive is
125% of base compensation for the Novartis Group CEO
and ranges from 60% to 80% for other Executive Com-
mittee members. For the NTLs, the target incentive range
is from 10% to 40% of base compensation. The LTRPP is
based on the ranking of Novartis’ Total Shareholder Return
(TSR) relative to a global healthcare peer group of 12 com-
panies until 2016, and 15 companies from 2017, over roll-
ing three-year performance periods. TSR in USD is calcu-
lated as price change of the Novartis share plus the
dividend plus the re-investment return of the dividend
amount, all translated to USD at the respective exchange
rate, over the three-year performance period. The calcu-
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2017 | 239
lation is based on Bloomberg standard published TSR
data, which is publicly available. The position in the peer
group determines the payout range based on a payout
matrix. Under the LTRPP, participants are also granted a
target number of PSUs at the beginning of every perfor-
mance period, which are converted into unrestricted
Novartis shares after the performance period. Payout is
between 0% and 200% of target. PSUs under the LTRPP
do not carry voting rights, but do carry dividend equivalents
that are paid in shares at the end of the performance
period.
Other share awards
Selected associates, excluding the Executive Commit-
tee members, may exceptionally receive Special Share
Awards of RSs or RSUs. These Special Share Awards
provide an opportunity to reward outstanding achieve-
ments or exceptional performance, and aim to retain key
contributors. They are based on a formal internal selec-
tion process, through which the individual performance
of each candidate is thoroughly assessed at several man-
agement levels. Special Share Awards have a minimum
three-year vesting period. In exceptional circumstances,
Special Share Awards may be awarded to attract spe-
cial 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, associates at different levels in the orga-
nization were awarded RSs and RSUs in 2017.
In addition, in 2017, Board members received
unrestricted shares as part of their regular compensation.
Summary of non-vested share movements
The table below provides a summary of non-vested share movements (RSs, RSUs and PSUs) for all plans:
Non-vested shares at January 1
21.0
89.5
1 880
20.1
87.1
1 751
2017
2016
Weighted
Number
average fair
of shares value at grant
in millions
Fair value at
grant date in
date in USD USD millions
Weighted
average fair
Number
of shares value at grant
in millions
Fair value at
grant date in
date in USD USD millions
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
1.3
4.5
4.5
2.0
1.4
0.4
1.3
– 10.7
– 1.8
23.9
69.3
69.4
64.1
65.3
71.5
47.7
67.8
78.2
80.7
80.6
90
312
288
131
100
19
88
0.1
4.4
4.8
1.6
1.2
0.3
0.7
– 837
– 145
1 926
– 10.4
– 1.8
21.0
73.8
78.1
72.4
74.4
79.2
58.5
65.8
68.8
73.1
89.5
7
344
348
119
95
18
46
– 716
– 132
1 880
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 con-
version 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.
Both options and SSAR expire on their tenth anniver-
sary. The last grant was made in 2009.
The following table shows the activity associated with
the converted Novartis share options and SSARs during
2017 and 2016:
Weighted
Weighted
Number average Number of average
of options exercise
SSARs exercise
(millions) price (USD) (millions) price (USD)
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
0.1
36.0
1.4
35.9
– 0.6
39.8
0.1
33.7
0.8
33.0
0.1
33.7
0.8
33.0
Outstanding at
January 1, 2016
Exercised
Outstanding at
December 31, 2016
exercisable at
December 31, 2016
Outstanding at
January 1, 2017
Exercised
Outstanding at
December 31, 2017
exercisable at
December 31, 2017
240 | Novartis Annual Report 2017
26. Transactions with related parties
Genentech/Roche
Novartis has two agreements with Genentech, Inc.,
United States, a subsidiary of Roche Holding AG which
is indirectly included in the consolidated financial state-
ments using equity accounting since Novartis holds
33.3% of the outstanding 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 2017,
Lucentis sales of USD 1.9 billion (2016: USD 1.8 billion,
2015: USD 2.1 billion) were 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 US. Genentech/Roche and Novartis
share the resulting profits from sales in the United States,
Europe and other countries, according to agreed prof-
it-sharing percentages. In 2017, Novartis recognized total
sales of Xolair of USD 920 million (2016: USD 835 mil-
lion, 2015: USD 755 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 33 million in 2017
(2016: USD 217 million, 2015: USD 309 million).
Furthermore, Novartis has several patent license,
supply and distribution agreements with Roche.
Executive Officers and Non-Executive Directors Compensation
During 2017, there were 11 Executive Committee
members (“Executive Officers”), including those who
stepped down during the year (14 members in 2016 and
11 members in 2015 also including those who stepped
down).
The total compensation for members of the Execu-
tive Committee and the 13 Non-Executive Directors (13
in 2016, 12 in 2015 including those who stepped down
during the year) using the Group’s accounting policies
for equity-based compensation and pension benefits
was as follows:
(USD millions)
Cash and other compensation
Post-employment benefits
Equity-based compensation
Total
Executive Officers
Non-Executive Directors
Total
2017
18.4
2.0
49.9
70.3
2016
20.8
2.2
46.2
69.2
2015
17.1
1.9
52.9
71.9
2017
4.0
2016
4.0
2015
4.7
4.8
8.8
4.6
8.6
4.4
9.1
2017
22.4
2.0
54.7
79.1
2016
24.8
2.2
50.8
77.8
2015
21.8
1.9
57.3
81.0
During 2017, there was an increase in the IFRS compen-
sation expense for Executive Officers, mainly due to the
pro-rata accelerated vesting of equity-based compen-
sation, required by IFRS, for an ECN member who
stepped down on December 31, 2017. This was partially
offset by the reduction in the number of Executive Offi-
cers compared to 2016. The increase in the IFRS com-
pensation expense for Non-Executive Directors was due
to one additional Non-Executive Director appointed at
the 2017 Annual General Meeting.
During 2016, there was a decrease in the IFRS com-
pensation expense for Executive Officers compared to
2015. This was mainly due to lower equity-based com-
pensation 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.
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 on Board and Executive compensa-
tion required by the Swiss Code of Obligations and in
accordance with the Swiss Ordinance against Excessive
Compensation in Stock Exchange Listed Companies are
shown in the Compensation Report.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2017 | 241
Transactions with former members of the Board of
Directors
During 2017, 2016 and 2015, the following payments (or
waivers of claims) were made to former Board members
or to “persons closely” linked to them:
Currency
2017
2016
2015
Prof. Dr. Brody
CHF
Prof. Dr. Zinkernagel CHF
0
0
25 000
100 000
50 000
200 000
Dr. Krauer
Dr. Vasella
CHF
CHF
USD
60 000
60 000
60 000
26 279
0
0
0
250 000
250 000
Prof. Dr. William R. Brody and Prof. Dr. Rolf M. Zinkernagel,
who stepped down from the Board of Directors at the
2014 AGM, received in 2016 and 2015, delegated Board
membership fees for their work on the Boards of the
Novartis Institute for Tropical Diseases (Prof. Dr.
Zinkernagel) and the Genomics Institute of the Novartis
Research Foundation (Prof. Dr. Brody and Prof. Dr.
Zinkernagel). No payments were made in 2017, as their
respective mandates ended in 2016.
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.
In 2017, Dr. Daniel Vasella, Honorary Chairman, was
paid CHF 26 279 for reimbursable costs under his agree-
ment with the company. In 2016, Dr. Daniel Vasella
received the contractual minimum compensation under
an agreement which became effective on November 1,
2013 and ended in 2016. Under this agreement, Dr.
Vasella was compensated at a rate of USD 25 000 per
day, with an annual guaranteed minimum fee of
USD 250 000. This amount was in line with compensa-
tion practices at other large companies when retired
Chairmen or CEOs were retained in consulting agree-
ments after leaving the board of directors.
In 2014, Dr. Vasella exercised an option to acquire, at
a future date, real estate in Risch, Zug, Switzerland. The
real estate transaction closed in 2015 and Dr. Vasella
acquired the Group assets from a consolidated entity for
an arm’s length transaction price determined on the basis
of two independent external assessments.
Transactions with an Executive Officer prior to the
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 Executive Committee of Novartis with
effect from March 1, 2016. In 2015, a Novartis 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 determined based on the most
recent round of financing of this entity.
The above disclosures related to Dr. Vasella and
Dr. Bradner are made on a voluntary basis.
27. commitments and contingencies
Leasing commitments
The Group has entered into various fixed-term opera-
tional leases, mainly for cars and real estate. As of
December 31, 2017, the Group’s commitments with
respect to these leases, including estimated payment
dates, were as follows:
(USD millions)
2018
2019
2020
2021
2022
Thereafter
Total
expense of current year
2017
309
224
161
131
123
2 221
3 169
337
Research & Development and other
intangible asset purchase
commitments
The Group has entered into long-term research and
development agreements with various institutions which
provide for potential milestone payments by Novartis that
may be capitalized. As of December 31, 2017 the Group’s
commitments to make payments under those agree-
ments and other agreements to purchase intangible
assets, and their estimated timing, were as follows:
(USD millions)
2018
2019
2020
2021
2022
Thereafter
Total
Other
Research & intangible asset
Development
purchase
commitments commitments
130
780
671
864
801
353
837
Total
910
671
864
801
353
837
4 306
130
4 436
242 | Novartis Annual Report 2017
Other commitments
The Group has entered into various purchase commit-
ments 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 that could affect our
business, 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 United States and other countries, and
may lead to (or arise from) litigation. These factors have
contributed 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 settle-
ments have involved and may continue to involve, in cur-
rent government investigations and proceedings, large
cash payments, sometimes in the hundreds of millions
of dollars or more, including the potential repayment of
amounts allegedly obtained improperly and other pen-
alties, including treble damages. In addition, settlements
of government healthcare fraud cases often require
companies to enter into corporate integrity agreements,
which are intended to regulate company behavior for a
period of years. Our affiliate Novartis Pharmaceuticals
Corporation is a party to such an agreement, which will
expire in 2020. Also, matters underlying governmental
investigations 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 19 contains additional information on these mat-
ters.
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 19 contains additional information on environ-
mental liabilities.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2017 | 243
28. 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
Fund investments
Total available-for-sale marketable securities
Available-for-sale long-term financial investments
Equity securities
Fund investments
Note
15
2017 1
2016 1
8 860
7 007
15
15
12
12
328
34
362
1 109
166
306
31
337
989
107
Total available-for-sale long-term financial investments
1 275
1 096
Total financial assets – measured at fair value through other comprehensive income
1 637
1 433
Financial assets – measured at amortized costs
Trade receivables, income tax receivables, and other current assets
(excluding contingent consideration receivables and pre-payments)
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
Contingent consideration receivables
14/16
10 650
10 202
15
15
12
1
125
574
1
108
514
11 350
10 825
15
12/16
216
31
844
188
230
586
Total financial assets – measured at fair value through the consolidated income statement
1 091
1 004
Total financial assets
22 938
20 269
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
Financial liabilities – measured at fair value through the consolidated income statement
Contingent consideration (see Note 19/21) and other financial liabilities
Derivative financial instruments
Total financial liabilities – measured at fair value through the consolidated income statement
Total financial liabilities
1 Except for straight bonds (see Note 18), the carrying amount is a reasonable approximation of fair value.
20
20
20
20
18
18
18
18
1 822
1 601
692
836
2 328
3 174
359
5 201
178
5 789
22 957
17 285
539
87
708
82
– 359
– 178
23 224
17 897
5 169
4 873
33 594
28 559
20
924
107
1 031
1 018
116
1 134
34 625
29 693
244 | Novartis Annual Report 2017
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, 2017 and 2016. 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, 2017 and 2016.
(USD millions)
currency-related instruments
Contract or underlying
principal amount
Positive fair values
Negative fair values
2017
2016
2017
2016
2017
2016
Forward foreign exchange rate contracts
8 410
8 220
Total derivative financial instruments included in
marketable securities and in current financial debts
8 410
8 220
31
31
230
– 107
– 116
230
– 107
– 116
The following table shows by currency contract or underlying principal amount the derivative financial instruments
at December 31, 2017 and 2016:
(USD millions)
currency-related instruments
Forward foreign exchange rate contracts
Total derivative financial instruments
(USD millions)
currency-related instruments
Forward foreign exchange rate contracts
Total derivative financial instruments
EUR
2017
USD
Other
Total
2 768
2 768
4 361
4 361
1 281
1 281
8 410
8 410
EUR
USD
JPY
Other
Total
2016
3 623
3 623
3 427
3 427
43
43
1 127
1 127
8 220
8 220
Derivative financial instruments effective for hedge
accounting purposes
At the end of 2017 and 2016, 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.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2017 | 245
(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
contingent consideration receivables short-term
Financial liabilities
Contingent consideration payables
Other financial liabilities
Derivative financial instruments
Total financial liabilities at fair value
(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
The analysis above includes all financial instruments
including those measured at amortized cost or at cost.
Total
328
34
362
125
31
1
519
1 109
166
394
574
2 243
216
450
– 852
– 72
– 107
– 1 031
Total
306
31
337
108
230
1
676
989
107
586
Level 1
Level 2
2017
Valued at
Level 3 amortized cost
125
1
126
574
574
303
34
337
337
672
672
28
25
25
31
56
– 107
– 107
437
166
394
997
188
450
– 852
– 72
– 924
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
– 116
– 116
– 1 018
108
1
109
514
514
514
2 196
188
– 889
– 129
– 116
– 1 134
246 | Novartis Annual Report 2017
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
2017
Available-
for-sale Contingent Contingent
financial consideration consideration
payables
receivables
investments
Other
financial
liabilities
188
107
476
586
– 889
– 129
45
– 34
37
– 19
– 29
188
32
278
362
– 45
– 40
113
– 52
– 47
437
45
28
– 18
4
166
– 193
– 37
– 238
– 20
106
94
844
– 852
– 72
Total of fair value gains and losses recognized
in the consolidated income statement for assets
and liabilities held at December 31, 2017
11
0
– 13
278
169
– 37
(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
During 2017, there were several individually non-signifi-
cant transfers of available-for-sale financial investments
from Level 3 to Level 1 for USD 73 million (2016: USD 75
million) mainly due to Initial Public Offerings of the
invested companies.
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
available-for-sale financial investments by 10% positively
or negatively, this would change the amounts recorded
in the 2017 consolidated statement of comprehensive
income by USD 79 million.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2017 | 247
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 inputs used
are, among others, 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. The significance and usage of
these inputs to each contingent consideration may vary
due to differences in the timing and triggering events for
payments or in the nature of the asset related to the con-
tingent consideration.
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 consider-
ation payables, other financial liabilities and contingent
consideration receivables, this would change the
amounts recorded in the 2017 consolidated income
statement by USD 333 million and USD 322 million,
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 US dollar as its reporting currency.
As a result, the Group is exposed to foreign currency
exchange movements, primarily in European, Japanese
and emerging market currencies. Fluctuations in the
exchange rates between the US dollar and other curren-
cies can have a significant effect on both the Group’s
results of operations, including reported sales and earn-
ings, as well as on the reported value of our assets, lia-
bilities and cash flows. This, in turn, may significantly
affect the comparability 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 that 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 foreign exchange
losses (USD 0.3 billion) occurred in Venezuela in 2016.
The net outstanding intercompany payable balance of
Venezuela subsidiaries was not significant at December
31, 2017 and at December 31, 2016, due to reserves
against the intercompany balances.
The Group manages its global currency exposure by
engaging in hedging transactions where management
deems appropriate. Novartis may enter into various con-
tracts that reflect the changes in the value of foreign cur-
rency exchange rates to preserve the value of assets,
commitments and anticipated transactions. Novartis also
uses forward contracts and foreign currency option con-
tracts 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 has designated a certain portion of its long-
term euro-denominated straight bonds as hedges of the
translation risk arising on certain of these net invest-
ments in foreign operations with euro functional cur-
rency. As of December 31, 2017, long-term financial debt
with a carrying amount of EUR 1.8 billion (USD 2.2 billion)
has been designated as a hedge instrument. During 2017,
USD 237 million of unrealized loss was recognized in
other comprehensive income and accumulated in cur-
rency translation effects in relation with this net invest-
ment hedge. The hedge remained effective since incep-
tion, and no amount was recognized in the consolidated
income statement in 2017. During 2016 and 2015, the
Group did not apply net investment hedge accounting.
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.
248 | Novartis Annual Report 2017
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
financial 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 that 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 country
and customer credit risk, assigns individual credit limits,
and takes actions to mitigate credit risk where appropri-
ate.
The Group’s largest customer accounted for approx-
imately 17% of net sales, and the second-largest and
third-largest customers accounted for 12% and 7% of
net sales, respectively (2016: 16%, 12% and 6%, respec-
tively; 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 and amounted
to 14%, 9% and 5%, respectively, of the Group’s trade
receivables at December 31, 2017 (2016: 14%, 9% and
6%, respectively). There is no other significant concen-
tration of customer 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
settlement risk for different instruments. Issuer risk is
reduced by only buying securities that 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 20.2%, 15.0% and 12.7%,
respectively (2016: 16.5%, 6.9% and 6.7%, 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 United States 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 2.3 billion
under these three programs were outstanding as per
December 31, 2017 (2016: USD 3.2 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 United States commercial
paper programs. It matures in September 2020 and was
undrawn as per December 31, 2017 and December 31,
2016.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2017 | 249
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, 2017 and December 31, 2016:
2017
(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
71
72
105
181
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
58
106
Total
487
106
32
8 860
9 485
7
4 260
4 338
19
4 600
4 691
6
111
181
164
– 9 849
– 13 375
– 23 224
– 9 893
– 13 519
– 23 412
– 9 849
– 13 375
– 23 224
– 4 576
– 4 576
– 31
– 4 607
– 169
– 169
– 48
– 217
– 456
– 456
– 28
– 484
– 5 201
– 5 201
– 107
– 5 308
Net debt
– 269
4 474
– 373
– 9 668
– 13 211
– 19 047
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
The consolidated balance sheet amounts of financial lia-
bilities included in the above analysis are not materially
different to the contractual amounts due on maturity. The
positive and negative fair values on derivative financial
instruments represent the net contractual amounts to
be exchanged at maturity.
250 | Novartis Annual Report 2017
The Group’s contractual undiscounted potential cash flows from derivative financial instruments to be settled on a
gross basis are as follows:
2017
(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
– 953
– 972
– 2 824
– 4 749
Potential inflows in various currencies – from financial derivative assets
928
948
2 778
4 654
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
Other contractual liabilities that are not part of management’s monitoring of the net debt or liquidity consist of the
following items:
(USD millions)
2017
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
– 113
– 507
– 1 765
– 3 859
– 6 244
Trade payables
– 5 169
– 5 169
(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
Capital risk management
Value at risk
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 maturities 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 0.38:1 at December
31, 2017, compared to 0.32:1 at the beginning of the year.
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. The VAR computation includes
all financial assets and financial liabilities as set forth in
the table on page 243, except trade receivables, income
tax receivables and other current assets, contingent
considerations, finance lease obligations, long-term
loans and receivables from customers and finance lease,
advances and security deposits and trade payables.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2017 | 251
The VAR computation is a risk analysis tool designed to
statistically estimate the potential ten-day loss from
adverse movements in foreign currency exchange rates,
equity prices and interest rates under normal market
conditions. The computation does not purport to repre-
sent 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 indicative of future
movements in such market rates or are representative
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 that are monitored
by Group Treasury. For these calculations, the Group
uses the six-month period with the worst performance
observed over the past twenty years in each category.
For 2017 and 2016, 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
2017
7
2016
6
7
6
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 rating of the Group.
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 interrelationships between movements in inter-
est rates, stock markets and various currencies. These
inter-relationships are determined by observing interest
rate, stock market movements and forward foreign cur-
rency rate movements over a sixty-day period for the
calculation of VAR amounts.
The estimated potential ten-day loss in the fair value
of the Group’s foreign currency positions (including for-
eign exchange translation risk), the estimated potential
ten-day loss of its equity holdings, and the estimated
potential ten-day loss in fair value of its interest rate sen-
sitive instruments (primarily financial debt and invest-
ments 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
2017
498
184
27
242
2016
541
222
26
328
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
521
2017
High
560
Low
466
277
352
184
28
35
21
282
338
219
(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
252 | Novartis Annual Report 2017
29. Discontinued operations
Discontinued operations consolidated income statement segmentation
(USD millions)
Net sales to third parties of discontinued operations
Sales to continuing segments
Net sales of discontinued operations
Other revenues
Cost of goods sold
Gross profit of discontinued operations
Marketing & Sales
Research & Development
General & Administration
Other income
Other expense
Operating income of discontinued operations
Income from associated companies
Income before taxes of discontinued operations
Taxes
Net income of discontinued operations
1 Consumer Health is the aggregation of the former OTC and Animal Health divisions.
The following are included in net income from discontinued operations:
(USD millions)
Impairment charges on property, plant & equipment, net
Additions to restructuring provisions
Equity-based compensation of Novartis equity plans
2015
Vaccines
Consumer
Health1
Corporate
(including
eliminations)
Total
discontinued
operations
145
18
163
18
456
1
457
5
– 192
– 184
– 11
– 57
– 151
– 26
278
– 187
– 30
– 32
601
19
620
23
– 376
267
– 244
– 181
– 58
2 870
10 558
– 8
13 420
– 57
– 14
– 656
– 727
2 568
10 573
– 664
12 477
2
2
12 479
– 1 713
10 766
2015
83
– 1
– 65
30. events subsequent to the December 31, 2017
consolidated balance sheet date
Significant transaction closed in January 2018
For significant transaction entered into in 2017 and
closed in 2018, see Note 2.
Dividend proposal for 2017 and approval of the
Group’s 2017 consolidated financial statements
On January 23, 2018, the Novartis AG Board of Direc-
tors proposed the acceptance of the 2017 consolidated
financial statements of the Novartis Group for approval
by the Annual General Meeting on March 2, 2018. Fur-
thermore, also on January 23, 2018, the Board proposed
a dividend of CHF 2.80 per share to be approved at the
Annual General Meeting on March 2, 2018. If approved,
total dividend payments would amount to approximately
USD 6.7 billion (2016: USD 6.5 billion) using the CHF/
USD December 31, 2017 exchange rate.
FINaNcI al RepORT
Notes to the Novartis Group consolidated financial statements
Novartis Annual Report 2017 | 253
31. 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. It includes all subsidiaries and associated companies with Total assets or
Net sales to third parties in excess of USD 25 million. The equity interest percentage shown in the table also rep-
resents the share in voting rights in those entities, except where explicitly noted.
As at December 31, 2017
algeria
Société par actions SANDOZ, Algiers
argentina
Novartis Argentina S.A., Buenos Aires
Alcon Laboratorios S.A., Buenos Aires
Share
capital
Equity
1 interest
As at December 31, 2017
DZD
650.0 m 100%
ARS
ARS
906.1 m 100%
83.9 m 100%
France
Novartis Groupe France S.A., Rueil-Malmaison
Novartis Pharma S.A.S., Rueil-Malmaison
Sandoz S.A.S., Levallois-Perret
Laboratoires Alcon S.A.S., Rueil-Malmaison
australia
Novartis Australia Pty Ltd, North Ryde, NSW
AUD
Novartis Pharmaceuticals Australia Pty Ltd, North Ryde, NSW AUD
AUD
Sandoz Pty Ltd, North Ryde, NSW
AUD
Alcon Laboratories (Australia) Pty Ltd, Frenchs Forest, NSW
2
100%
3.8 m 100%
11.6 m 100%
2.6 m 100%
austria
Novartis Austria GmbH, Vienna
Novartis Pharma 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
N.V. Sandoz S.A., Vilvoorde
S.A. Alcon-Couvreur N.V., Puurs
N.V. Alcon S.A., Vilvoorde
Bermuda
Novartis Investment Ltd., Hamilton
Novartis Securities Investment Ltd., Hamilton
Novartis Finance Services Ltd., Hamilton
Novartis B2 Ltd., Hamilton
Novartis B3 Ltd., Hamilton
Triangle International Reinsurance Limited, Hamilton
Trinity River Insurance Co Ltd., Hamilton
EUR
EUR
EUR
EUR
1.0 m 100%
1.1 m 100%
32.7 m 100%
1.0 m 100%
BDT
162.5 m
60%
EUR
EUR
EUR
EUR 141 856
7.1 m 100%
19.2 m 100%
110.6 m 100%
100%
USD 12 000
CHF 30 000
CHF 20 000
USD 12 000
USD 106 400
CHF
USD 370 000
100%
100%
100%
100%
100%
1.0 m 100%
100%
Brazil
Novartis Biociências S.A., São Paulo
Sandoz do Brasil Indústria Farmacêutica Ltda., Cambé, PR
BRL
BRL
265.0 m 100%
190.0 m 100%
canada
Novartis Pharmaceuticals Canada Inc., Dorval, Quebec
Sandoz Canada Inc., Boucherville, Quebec
Alcon Canada Inc., Mississauga, Ontario
CIBA Vision Canada Inc., Mississauga, Ontario
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
Sandoz (China) Pharmaceutical Co., Ltd., Zhongshan
Alcon Hong Kong Limited, Hong Kong
Alcon (China) Ophthalmic Product Co., Ltd., Beijing
colombia
Novartis de Colombia S.A., Santafé de Bogotá
Laboratorios Alcon de Colombia S.A., Santafé de Bogotá
croatia
Sandoz d.o.o. farmaceutska industrija, Zagreb
czech Republic
Novartis s.r.o., Prague
Sandoz s.r.o., Prague
Alcon Pharmaceuticals (Czech Republic) s.r.o., Prague
Denmark
Novartis Healthcare A/S, Copenhagen
Sandoz A/S, Copenhagen
Alcon Nordic 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
CAD
CAD
CAD
2 500
CAD 82 886
13.0 m 100%
80.8 m 100%
100%
100%
CLP
CLP
USD
HKD
2.0 bn 100%
2.0 bn 100%
30.0 m 100%
100%
200
USD
USD
USD
USD
HKD 77 000
USD
320.0 m 100%
103.4 m 100%
3.2 m 100%
36.5 m 100%
100%
60.0 m 100%
COP
COP
7.9 bn 100%
20.9 m 100%
HRK
25.6 m 100%
CZK
CZK
CZK
DKK
DKK
DKK
51.5 m 100%
44.7 m 100%
31.0 m 100%
14.0 m 100%
12.0 m 100%
0.5 m 100%
Germany
Novartis Deutschland GmbH, Wehr
Novartis Business Services GmbH, Wehr
Novartis Pharma GmbH, Nuremberg
Novartis Pharma Produktions GmbH, Wehr
Sandoz International GmbH, Holzkirchen
1 A Pharma GmbH, Oberhaching
HEXAL AG, Holzkirchen
Salutas Pharma GmbH, Barleben
Aeropharm GmbH, Rudolstadt
Alcon Pharma GmbH, Freiburg im Breisgau
CIBA Vision GmbH, Grosswallstadt
WaveLight GmbH, Erlangen
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
Sandoz Private Limited, Mumbai
Alcon Laboratories (India) Private Limited, Bangalore
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
Sandoz S.p.A., Origgio
Sandoz Industrial Products S.p.A., Rovereto
Alcon Italia S.p.A., Milan
Japan
Novartis Holding Japan K.K., Tokyo
Novartis Pharma K.K., Tokyo
Ciba-Geigy Japan Limited, Tokyo
Sandoz K.K., Tokyo
Alcon Japan Ltd., 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
Mexico
Novartis Farmacéutica, S.A. de C.V., Mexico City
Sandoz, S.A. de C.V., Mexico City
Alcon Laboratorios, S.A. de C.V., Mexico City
USD
4.0 m 100%
Morocco
Novartis Pharma Maroc SA, Casablanca
EGP
EGP 250 000
193.8 m 99.77%
100%
EUR 459 000
100%
Netherlands
Novartis Netherlands B.V., Arnhem
Novartis Pharma B.V., Arnhem
Sandoz B.V., Almere
Alcon Nederland B.V., Arnhem
New Zealand
Novartis New Zealand Ltd, Auckland
Share
capital
Equity
1 interest
EUR
EUR
EUR
EUR
103.0 m 100%
43.4 m 100%
5.4 m 100%
12.9 m 100%
EUR
EUR 25 000
EUR
EUR
EUR 100 000
EUR 26 000
EUR
EUR
EUR 26 000
EUR 512 000
EUR
EUR
155.5 m 100%
100%
25.6 m 100%
2.0 m 100%
100%
100%
93.7 m 100%
42.1 m 100%
100%
100%
15.4 m 100%
6.6 m 100%
CHF
130.0 m 100%
EUR
23.4 m 100%
EUR
5.7 m 100%
HUF
HUF
545.6 m 100%
883.0 m 100%
INR
INR
INR
INR
IDR
IDR
140.7 m 73.4%
60.0 m 100%
32.0 m 100%
1.1 bn 100%
7.7 bn 100%
11.9 bn 100%
EUR 25 000
EUR
EUR 541 251
100%
2.0 m 100%
100%
ILS
1 000
ILS 752 545
100%
100%
EUR
EUR
EUR
EUR
JPY
JPY
JPY
JPY
JPY
18.2 m 100%
1.7 m 100%
2.6 m 100%
3.7 m 100%
10.0 m 100%
6.0 bn 100%
8.5 m 100%
100.0 m 100%
500.0 m 100%
USD
USD 100 000
100.0 m 100%
100%
MYR
MYR
MYR
MXN
MXN
MXN
3.3 m 100%
1.0 m 100%
10.0 m 100%
205.0 m 100%
468.2 m 100%
5.9 m 100%
MAD
80.0 m 100%
EUR
EUR
EUR 907 560
EUR 18 151
1.4 m 100%
4.5 m 100%
100%
100%
NZD 820 000
100%
254 | Novartis Annual Report 2017
As at December 31, 2017
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
Sandoz Philippines Corporation, Manila
poland
Novartis Poland Sp. z o.o., Warszawa
Sandoz Polska Sp. z o.o., Warszawa
Lek S.A., Strykow
Alcon Polska Sp. z o.o., Warszawa
portugal
Novartis Portugal SGPS Lda., Porto Salvo
Novartis Farma – Produtos Farmacêuticos S.A., Porto Salvo
Sandoz Farmacêutica Lda., Porto Salvo
Alcon Portugal-Produtos e
Equipamentos Oftalmológicos Lda., Porto Salvo
Romania
Novartis Pharma Services Romania S.R.L., Bucharest
Sandoz S.R.L., Targu-Mures
Alcon Romania S.R.L., Bucharest
Russian Federation
Novartis Pharma LLC, Moscow
Novartis Neva LLC, St. Petersburg
ZAO Sandoz, Moscow
Alcon Farmacevtika LLC, Moscow
Saudi arabia
Saudi Pharmaceutical Distribution Co. Ltd., Riyadh
Singapore
Novartis (Singapore) Pte Ltd., Singapore
Novartis Singapore Pharmaceutical
Manufacturing Pte Ltd, Singapore
Novartis Asia Pacific Pharmaceuticals Pte Ltd, Singapore
Novartis Institute for Tropical Diseases Pte Ltd, Singapore
Alcon Pte Ltd, Singapore
Alcon Singapore Manufacturing Pte Ltd, Singapore
CIBA Vision Asian Manufacturing and
Logistics Pte Ltd., Singapore
Slovakia
Novartis Slovakia s.r.o., Bratislava
Slovenia
Lek Pharmaceuticals d.d., Ljubjana
Sandoz Pharmaceuticals d.d., Ljubjana
South africa
Novartis South Africa (Pty) Ltd, Midrand
Sandoz South Africa (Pty) Ltd, Kempton Park
Alcon Laboratories (South Africa) (Pty) Ltd., Midrand
South Korea
Novartis Korea Ltd., Seoul
Sandoz Korea Ltd., Seoul
Alcon Korea Ltd., Seoul
Spain
Novartis Farmacéutica S.A., Barcelona
Sandoz Farmacéutica S.A., Madrid
Sandoz Industrial Products
S.A., Les Franqueses del Vallés / Barcelona
Alcon Cusi S.A., Barcelona
Abadia Retuerta S.A., Sardón de Duero/Valladolid
Sweden
Novartis Sverige AB, Täby / Stockholm
Switzerland
Novartis International AG, Basel
Novartis Holding AG, Basel
Novartis International Pharmaceutical Investment AG, Basel
Novartis Bioventures AG, Basel
Novartis Forschungsstiftung, Basel
Novartis Stiftung für Kaderausbildung, Basel
Novartis Mitarbeiterbeteiligungsstiftung, Basel
Novartis Stiftung für Mensch und Umwelt, Basel
Stiftung der Novartis AG für Erziehung,
Ausbildung und Bildung, Basel
Novartis Pharma AG, Basel
Novartis International Pharmaceutical AG, Basel
Novartis Pharma Services AG, Basel
Novartis Pharma Schweizerhalle AG, Muttenz
Novartis Pharma Stein AG, Stein
Novartis Pharma Schweiz AG, Risch
Sandoz AG, Basel
Sandoz Pharmaceuticals AG, Risch
Alcon Switzerland SA, Risch
Alcon Pharmaceuticals Ltd., Fribourg
Roche Holding AG, Basel
Share
capital
Equity
1 interest
NOK
1.5 m 100%
PKR
3.9 bn 99.99%
USD 10 000
1 000
PAB
100%
100%
PHP
PHP
298.8 m 100%
30.0 m 100%
PLN
PLN
PLN
PLN 750 000
44.2 m 100%
25.6 m 100%
11.4 m 100%
100%
EUR 500 000
EUR
EUR 499 900
100%
2.4 m 100%
100%
EUR
4.5 m 100%
RON
RON
RON
RUB
RUB
RUB
RUB
3.0 m 100%
105.2 m 100%
10.8 m 100%
20.0 m 100%
1.3 bn 100%
57.4 m 100%
44.1 m 100%
SAR
26.8 m
75%
SGD 100 000
100%
SGD
SGD
SGD
2 004
SGD 164 000
SGD 101 000
45.0 m 100%
39.0 m 100%
100%
100%
100%
SGD
1.0 m 100%
EUR
2.0 m 100%
EUR
EUR
48.4 m 100%
1.5 m 100%
ZAR
ZAR
ZAR 201 820
86.3 m 100%
3.0 m 100%
100%
KRW
KRW
KRW
24.5 bn 98.55%
17.8 bn 100%
33.8 bn 100%
EUR
EUR 270 450
63.0 m 100%
100%
EUR
EUR
EUR
9.3 m 100%
11.6 m 100%
6.0 m 100%
As at December 31, 2017
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
Farmanova Saglik Hizmetleri Ltd. Sti., Istanbul
Sandoz Ilaç Sanayi ve Ticaret A.S., Istanbul
Sandoz Syntek Ilaç Hammaddeleri
Sanayi ve Ticaret A.S., Istanbul
Sandoz Grup Saglik Ürünleri
Ilaçlari Sanayi ve Ticaret A.S., Gebze – Kocaeli
Alcon Laboratuvarlari Ticaret A.S., Istanbul
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
Ziarco Group Limited, Frimley/Camberley
Sandoz Limited, Frimley/Camberley
Alcon Eye Care UK Limited, Frimley/Camberley
Glaxosmithkline Consumer Healthcare
Holdings Limited, Brentford, Middlesex
Share
capital
Equity
1 interest
TWD
170.0 m 100%
THB
THB
302.0 m 100%
228.1 m 100%
TRY
TRY
TRY
98.0 m 100%
6.7 m 100%
165.2 m 99.99%
TRY
46.0 m 100%
TRY
TRY
50.0 m 100%
25.2 m 100%
AED
7.0 m 100%
GBP
GBP
GBP
GBP
GBP
GBP 550 000
25.5 m 100%
5.4 m 100%
250.0 m 100%
100%
3 904
2.0 m 100%
100%
GBP 100 000
36.5%
1 000
1
1
--
72.2 m 100%
100%
100%
100%
100%
5.2 m 100%
USD
USD
USD
USD
--
USD
United States of america
Novartis Corporation, East Hanover, NJ
Novartis Finance Corporation, New York, NY
Novartis Capital Corporation, New York, NY
Novartis Services, Inc., East Hanover, NJ
Novartis US Foundation, New York, NY
Novartis Pharmaceuticals Corporation, East Hanover, NJ
Novartis Institutes for BioMedical
USD
Research, Inc., Cambridge, MA
USD
Corthera, Inc., San Mateo, CA
USD
CoStim Pharmaceuticals Inc., Cambridge, MA
USD
Encore Vision, Inc., New York, NY
USD
Navigate BioPharma Services, Inc., Wilmington, NC
USD
Reprixys Pharmaceuticals Corporation, Oklahoma City, OK
Spinifex Pharmaceuticals, Inc., Wilmington, NC
USD
Novartis Institute for Functional Genomics, Inc., San Diego, CA USD
Sandoz Inc., Princeton, NJ
Fougera Pharmaceuticals Inc., Melville, NY
Eon Labs, Inc., Princeton, NJ
Alcon Laboratories, Inc., Fort Worth, TX
Alcon Refractivehorizons, LLC, Fort Worth, TX
Alcon Research, Ltd., Fort Worth, TX
Alcon Lensx, Inc., Aliso Viejo, CA
Alcon Laboratories Holding Corporation, Fort Worth, TX
Novartis Vaccines and Diagnostics, Inc., Cambridge, MA
ClarVista Medical, Inc., Aliso Viejo, CA
Transcend Medical, Inc., Menlo Park, CA
1
1
1
1
100
1
1
1 000
USD 25 000
1
USD
1
USD
1 000
USD
10
USD
12.5
USD
1
USD
10
USD
3
USD
1
USD
1
USD
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Venezuela
Novartis de Venezuela, S.A., Caracas
Alcon Pharmaceutical, C.A., Caracas
VEF
VEF
1.4 m 100%
5.5 m 100%
In addition, the Group is represented by subsidiaries and associated companies in the
following countries: Bosnia/Herzegovina, Bulgaria, Dominican Republic, Guatemala,
Kenya, Latvia, the Former Yugoslav Republic of Macedonia, Nigeria, Peru, Puerto Rico,
Ukraine and Uruguay
1 Share capital may not reflect the taxable share capital and does not include any
paid-in surplus
2 Approximately 33% of voting shares; approximately 6% of total net income and equity
SEK
5.0 m 100%
attributable to Novartis
m = million; bn = billion
CHF
CHF
CHF 100 000
CHF 100 000
--
--
--
--
10.0 m 100%
100.2 m 100%
100%
100%
100%
100%
100%
100%
--
--
--
--
--
--
CHF
CHF 100 000
CHF
CHF
CHF 251 000
CHF
CHF
CHF 100 000
CHF 100 000
CHF 200 000
CHF
100%
350.0 m 100%
100%
20.0 m 100%
18.9 m 100%
100%
5.0 m 100%
5.0 m 100%
100%
100%
100%
33/6
160.0 m
2
FINaNcI al RepORT
Report of Novartis management on internal control over financial reporting
Novartis Annual Report 2017 | 255
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, 2017. In making this assessment, it used
the criteria established in Internal Control – Integrated
Framework(2013) issued by the Committee of Sponsor-
ing Organizations of the Treadway Commission (COSO).
Based on its assessment, management has concluded
that, as of December 31, 2017, the Novartis Group’s inter-
nal 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 256 and 261 respec-
tively.
Joseph Jimenez
Chief Executive Officer
Harry Kirsch
Chief Financial Officer
Basel, January 23, 2018
256 | Novartis Annual Report 2017
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 subsidiaries (the “Group”), which
comprise the consolidated income statements, consol-
idated statements of comprehensive income, consoli-
dated balance sheets, consolidated statements of
changes in equity, and consolidated cash flow state-
ments, and notes to the consolidated financial state-
ments (pages 186 to 254), including a summary of sig-
nificant accounting policies, for the year ended
December 31, 2017.
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, 2017 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,
International Standards on Auditing (ISAs) and Swiss
Auditing Standards. 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 slightly less than 5% of income before taxes
from continuing operations.
• We conducted full scope audit work at the Group’s
three operating divisions and at 14 reporting entities,
including reporting entities of the Corporate Division,
in seven countries.
• In addition, full scope audit work on account balances
was performed on 21 reporting entities in 14 countries.
• Our audit scope addressed 69% of the Group’s net
sales and 86% of Group’s total assets.
As key audit matters, the following areas of focus have
been identified:
• Carrying value of Alcon goodwill
• Carrying value of intangible assets other than goodwill
• Governmental investigations and litigation
• Rebates, discounts, and sales 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 areas where subjective judgments were made, such
as significant accounting estimates that involved making
assumptions and consideration of 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.
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 14 reporting enti-
ties that, in our view, required an audit of their complete
financial information due to their size or risk characteris-
tics. We worked very closely with and received full scope
reporting from the divisional audit teams for Innovative
Medicines, Alcon and Sandoz, each being a global busi-
ness with headquarters based in Switzerland, the United
States of America and Germany, respectively. We also
received full scope reporting from reporting entity audit
teams for the full scope audit work performed on account
balances, carried out at 21 reporting entities, to obtain
appropriate coverage of material balances. None of the
reporting entities excluded from our Group audit scope
individually contributed more than 5% to net sales or total
assets. Audit procedures were also performed by the
Group audit team over the Group’s Corporate segment,
certain group functions (including accounting for associ-
ated companies, taxation, treasury, certain employee ben-
efits, government investigations and litigation) and Group
consolidation.
In order to exercise the appropriate direction and
supervision over the work of the divisional and reporting
entity audit teams, the Group audit team made several
site visits, reviewed audit working papers, participated
in meetings between the divisional and reporting entity
audit teams and attended selected meetings between
divisional management and divisional audit teams. In
addition, we hosted a planning workshop in May 2017 for
audit partners and managers responsible for divisional
and reporting entities.
FINaNcI al RepORT
Report of the statutory auditor on the consolidated financial statements of Novartis aG
Novartis Annual Report 2017 | 257
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-
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 judgment, we determined
certain quantitative thresholds for materiality, including
the overall group materiality for the consolidated finan-
cial statements as a whole as set out 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.
Key Audit Matters
Overall group materiality
USD 400 million.
How we determined it
Slightly less than 5% of income before taxes from con-
tinuing operations.
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 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 alcon goodwill
The Group has goodwill of USD 31.8 billion at December
31, 2017, of which USD 8.3 billion relates to Alcon.
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 per-
formance of the business in prior years, which lead the
group to initiate a turnaround plan, followed by the on-go-
ing strategic review.
Refer to Note 1 Significant accounting policies (pages
191 to 198) and Note 10 Goodwill and intangible assets
(pages 214 to 215).
We assessed and tested the design and operating effec-
tiveness of the Group’s controls over the assessment of
the carrying value of Alcon goodwill and concluded that
these operate effectively.
We tested, with the support of our valuation special-
ists, the carrying value of the goodwill allocated to Alcon
as at December 31, 2017 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 2017. We also
challenged management to substantiate its key assump-
tions in the cash flow projections during the forecast
period and its intention and ability to execute their stra-
tegic 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 10 Goodwill and intan-
gible assets (pages 214 to 215) of the annual report.
As a result of our procedures, as discussed with the Audit
and Compliance Committee, we determined that the
conclusions reached by management with regard to the
carrying value of Alcon goodwill were reasonable and
supportable.
258 | Novartis Annual Report 2017
Key audit matter
How our audit addressed the key audit matter
carrying value of intangible assets other than goodwill
The Group has intangible assets other than goodwill
totaling USD 30.0 billion at December 31, 2017, 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 709 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
judgments and estimates such as scientific success, rev-
enue growth, the success of new product launches, profit
margins and discount rates.
The carrying value assessments of the following
intangible asset includes the most significant risk and
highest level of judgment:
• 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 judgments both as to the prob-
ability 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
191 to 198) and Note 10 Goodwill and intangible assets
(pages 214 to 215).
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 certain 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.
We assessed the indefinite life designation of the
Alcon brand name asset considering the performance
of the business in prior years, by challenging manage-
ment on their ability to execute 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
2017. For intangible assets other than goodwill where
management determined that no impairment was
required, we found that the assessments made by man-
agement were based upon reasonable assumptions,
consistently applied.
Key audit matter
How our audit addressed the key audit matter
Governmental investigations and litigation
The pharmaceutical 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 19 Provisions and other non-current liabilities.
We specifically assessed the investigations and
related litigation in the US given their significance and
the inherent uncertainty of outcomes.
Refer to Note 1 Significant accounting policies (pages
191 to 198) and Note 19 Provisions and other non-current
liabilities (pages 224 to 228).
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 litigation in the
US, read the respective court filings and minutes of
Board of Directors and management meetings and
inquired with management, internal and external legal
counsel.
We concluded that the judgments made by manage-
ment were in accordance with the accounting policies
described in Note 1.
FINaNcI al RepORT
Report of the statutory auditor on the consolidated financial statements of Novartis aG
Novartis Annual Report 2017 | 259
Key audit matter
How our audit addressed the key audit matter
Rebates, discounts and sales returns
The Group distributes its products in many cases through
wholesale distributors, and in many cases the ultimate
net selling prices are determined based on the contrac-
tual arrangements that the Group has with the ultimate
patient’s insurer or other payment program.
The initial revenue recognition, which is 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 volumes by sales channel. Additionally, the dis-
pensing of the product to the patient and the final deter-
mination of the selling price may be several months later.
We focused our testing on the valuation and accu-
racy of the accruals for both rebates and discounts
together with sales returns recognized at the year end
because, specifically for US Medicaid and Medicare or
similar programs, the estimation processes involve large
volumes of data, require significant judgment and can
contain risks of management bias.
The provision reported as of December 31, 2017 for
revenue deductions related to rebates, discounts, allow-
ances and sales returns amounted to USD 4.7 billion.
Refer to Note 21 Provisions and other current liabili-
ties (pages 229 and 230).
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 expectations and the accruals and we found the judg-
ments made by management to be reasonable.
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 and our auditor’s
reports thereon.
Our opinion on the consolidated financial statements
does not cover the other information in the annual report
and we do not express any form of assurance conclu-
sion 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 IFRS and the pro-
visions 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.
260 | Novartis Annual Report 2017
As part of an audit in accordance with Swiss law, ISAs
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 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 mis-
statement resulting from fraud is higher than for one
resulting 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.
• Evaluate the appropriateness of accounting policies
used and the reasonableness of accounting estimates
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 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 dis-
closures in the consolidated 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 Group
to cease to continue as a going concern.
• Evaluate the overall presentation, structure and con-
tent of the consolidated financial statements, including
the disclosures, and whether the consolidated finan-
cial statements represent the underlying transactions
and events in a manner that achieves fair presentation.
• Obtain sufficient appropriate audit evidence regarding
the financial information of the entities or business
activities within the Group to express an opinion on the
consolidated financial statements. We are responsible
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 mostly
through the Audit and Compliance Committee regard-
ing, among other matters, the planned scope and timing
of the audit and significant audit findings, including any
significant deficiencies in internal control that we iden-
tify during our audit.
We also provide the Board of Directors with a state-
ment that we have complied with relevant ethical require-
ments 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 safeguards.
From the matters communicated with the Board of
Directors, 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 audi-
tor’s report unless law or regulation precludes public dis-
closure about the matter or when, in extremely rare cir-
cumstances, we determine that a matter should not be
communicated in our report because the adverse con-
sequences 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 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
Martin Kennard
Audit expert
Auditor in charge
Stephen Johnson
Global relationship
partner
Basel, January 23, 2018
The report set out on pages 256 to 260 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 261.
FINaNcI al RepORT
Report of Independent Registered public accounting Firm
Novartis Annual Report 2017 | 261
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
of Novartis AG, Basel
Opinions on the Financial Statements and Internal
control over Financial Reporting
We have audited the accompanying consolidated bal-
ance sheets of Novartis AG and its consolidated subsid-
iaries (Group or Company) as of December 31, 2017 and
December 31, 2016, and the related consolidated income
statements, consolidated statements of comprehensive
income, consolidated statements of changes in equity,
and consolidated cash flow statements for each of the
three years in the period ended December 31, 2017,
including the related notes (collectively referred to as the
“consolidated financial statements”). We also have
audited the Company’s internal control over financial
reporting as of December 31, 2017, based on criteria
established in Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organi-
zations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of the Company as of December
31, 2017 and December 31, 2016, and the results of its
operations and its cash flows for each of the three years
in the period ended December 31, 2017 in conformity
with International Financial Reporting Standards (IFRS)
as issued by the International Accounting Standards
Board. Also in our opinion, the Company maintained, in
all material respects, effective internal control over finan-
cial reporting as of December 31, 2017, based on criteria
established in Internal Control – Integrated Framework
(2013) issued by the COSO.
Basis for Opinions
The Novartis’ Board of Directors and management of the
Group are responsible for these consolidated financial
statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effec-
tiveness of internal control over financial reporting,
included in the “Report of Novartis Management on Inter-
nal Control Over Financial Reporting” in item 15(b) of this
Form 20-F. Our responsibility is to express opinions on
the Company’s consolidated financial statements and
on the Company’s internal control over financial report-
ing based on our audits. We are a public accounting firm
registered with the Public Company Accounting Over-
sight Board (United States) (“PCAOB”) and are required
to be independent with respect to the Company in accor-
dance with the U.S. federal securities laws and the appli-
cable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the stan-
dards of the PCAOB. Those standards require that we
plan and perform the audits to obtain reasonable assur-
ance about whether the consolidated financial state-
ments are free of material misstatement, whether due to
error or fraud, and whether effective internal control over
financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements
included performing procedures to assess the risks of
material misstatement of the consolidated financial
statements, whether due to error or fraud, and perform-
ing procedures that respond to those risks. Such pro-
cedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consoli-
dated financial statements. Our audits also included
evaluating the accounting principles used and significant
estimates made by management, as well as evaluating
the overall presentation of the consolidated financial
statements. Our audit of internal control over financial
reporting included obtaining an understanding of inter-
nal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evalu-
ating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also
included performing such other procedures as we con-
sidered necessary in the circumstances. We believe that
our audits provide a reasonable basis for our opinions.
Definition and limitations of Internal control over
Financial Reporting
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
Martin Kennard
Audit expert
Auditor in charge
Stephen Johnson
Global relationship
partner
Basel, January 23, 2018
PwC has served as the Company’s auditor since 1996.
PwC or its predecessors audited certain of the Compa-
ny’s predecessor entities since at least 1940.
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.
262 | Novartis Annual Report 2017
Financial statements of Novartis AG
Income statements
(For the years ended December 31, 2017 and 2016)
(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 taxes
Direct taxes
Net income of the year
The accompanying Notes form an integral part of these financial statements.
Note
2017
7 633
1 588
274
5
2016
7 291
1 445
495
11
9 500
9 242
3
– 1 141
– 1 140
– 23
– 2
– 26
– 4
– 1 166
– 1 170
8 334
8 072
449
– 180
8 603
– 176
8 427
440
– 194
8 318
– 177
8 141
4
4
FINaNcI al RepORt
Financial statements of Novartis aG
Novartis Annual Report 2017 | 263
Balance sheets
(At December 31, 2017 and 2016)
(CHF millions)
assets
current assets
Cash and cash equivalents
Receivables
Group subsidiaries
Third parties
total current assets
Non-current assets
Financial assets
Group subsidiaries
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
2017
2016
60
3
1 897
4 163
6
24
1 963
4 190
14 965
14 978
5
12 398
12 630
0
0
3
14 366
15 507
41 729
43 115
43 692
47 305
36
84
186
16
322
48
8
185
19
260
6
1 378
1 378
488
502
1 866
1 880
7
1 308
1 314
198
320
3 005
3 325
198
320
3 417
3 737
8
9
30 178
30 527
3 281
8 427
2 040
8 141
11 708
10 181
41 886
40 708
8
– 5 213
– 792
41 504
45 165
43 692
47 305
264 | Novartis Annual Report 2017
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
Obligations (SCO).
Novartis AG is presenting consolidated financial
statements according to IFRS. As a result, these financial
statements and notes do not include additional disclo-
sures, cash flow statements or a management report.
2. accounting policies
Financial income and expenses
Investments
Current assets and current liabilities denominated in
foreign currencies are converted at year-end exchange
rates. Realized exchange gains and losses, and all
unreali zed 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 accounting
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
maturity 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.
FINaNcI al RepORt
Notes to the financial statements of Novartis aG
Novartis Annual Report 2017 | 265
3. Goodwill and other intangible asset movements
2017
2016
22 350
22 350
– 6 843
– 5 703
– 1 141
– 1 140
– 7 984
– 6 843
14 366
15 507
11
– 11
11
– 11
14 366
15 507
(CHF millions)
Goodwill
Gross cost 1
Accumulated amortization
January 1
Amortization charges
December 31
Net book value at December 31
Other intangible assets
Cost 1
Accumulated amortization 1
Net book value at December 31
Goodwill and other intangible assets
Net book value at December 31
1 There was no change during 2017 and 2016.
4. Financial income and expenses
(CHF millions)
Interest
Foreign exchange
Others
total
2017
2016
Income
Expenses
Income
Expenses
449
– 111
440
– 134
– 68
– 1
– 58
– 2
449
– 180
440
– 194
5. Investments
The principal direct and indirect subsidiaries and other
holdings of Novartis AG are shown in Note 31 to the
Group’s consolidated financial statements.
266 | Novartis Annual Report 2017
6. Bonds
Straight bonds
Coupon
0.250%
0.625%
1.050%
Nominal
Currency amount
Issuance
year
Maturity
year
Issuer
CHF
CHF
CHF
500
550
325
2015
2015
2015
2025 Novartis AG, Basel, Switzerland
2029 Novartis AG, Basel, Switzerland
2035 Novartis AG, Basel, Switzerland
total straight bonds
Breakdowns by maturity
(CHF millions)
After 2022
total
2016
(CHF
Issue price millions) millions)
2017
(cHF
100.640%
100.502%
100.479%
501
551
326
502
551
325
1 378 1 378
2017
1 378
1 378
2016
1 378
1 378
comparison of balance sheet and fair value
(CHF millions)
Straight bonds
total
2017
Balance sheet
2017
2016
Fair values Balance sheet
2016
Fair values
1 378
1 378
1 408
1 408
1 378
1 378
1 407
1 407
7. Share capital
January 1
2 627 114 820
1 313.6
2 676 993 000
Number of shares canceled/capital reduced during the period
– 10 270 000
– 5.2
– 49 878 180
December 31
2 616 844 820
1 308.4
2 627 114 820
2017
Number
of shares
Share capital
CHF millions
2016
Number
of shares
Share capital
CHF millions
1 338.5
– 24.9
1 313.6
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 1 313.6
million at December 31, 2016, to CHF 1 308.4 million at
December 31, 2017, due to a share capital reduction as
a result of the cancellation of 10.3 million repurchased
shares with a nominal value of CHF 5.2 million. The
cancellation was approved at the Annual General Meeting
of February 28, 2017, and became effective on May 9,
2017. During 2016, 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 cancellation was approved at the Annual
General Meeting of February 23, 2016, and became
effective on April 28, 2016.
FINaNcI al RepORt
Notes to the financial statements of Novartis aG
Novartis Annual Report 2017 | 267
8. Reserve for treasury shares
treasury shares held by subsidiaries 1
January 1
Number of shares purchased/sold; reserves transferred
December 31
1 Excluding foundations
2017
2016
Reserve for
treasury shares
held by subsidiaries
CHF millions
Number
of shares
Reserve for
treasury shares
held by subsidiaries
CHF millions
Number
of shares
56 847 803
– 6 341 428
50 506 375
3 417
– 412
3 005
65 176 383
– 8 328 580
56 847 803
4 009
– 592
3 417
2017
2016
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
Number of shares purchased/canceled; reserves transferred
December 31
61 577 458
55 950 000
792
101 185 638
4 421
– 39 608 180
117 527 458
5 213
61 577 458
4 676
– 3 884
792
total treasury shares 1
January 1
Total number of shares purchased/sold or canceled;
reserves transferred
December 31
1 Excluding foundations
2017
Number of
shares
Total reserve for
treasury shares
CHF millions
2016
Number
of shares
Total reserve for
treasury shares
CHF millions
118 425 261
4 209
166 362 021
8 685
49 608 572
168 033 833
4 009
– 47 936 760
8 218
118 425 261
– 4 476
4 209
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 2017 totaled 70.6
million (2016: 12.9 million), with an average purchase
price of CHF 78 (2016: CHF 75). Treasury share sales
totaled 1.8 million (2016: 4.1 million), with an average sale
price of CHF 61 (2016: CHF 56), and share-based
compensation transactions totaled 9.0 million shares
(2016: 8.8 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, 2017,
treasury shares held by Novartis AG and its subsidiaries
totaled 168 033 833. As per the dividend payment date,
Novartis AG and its subsidiaries are expected to hold
156 515 091 shares. These shares are non- dividend-
bearing shares. It should be noted that within the Novartis
Group’s IFRS consolidated financial statements, some
Novartis entities are included in the consolidation scope
– mainly foundations, which do not qualify as subsi diaries
in the sense of Article 659b SCO.
268 | Novartis Annual Report 2017
9. Free reserves
(CHF millions)
January 1
Reduction due to cancellation of treasury shares (CHF 767 million / CHF 4 651 million of repurchased shares
less their nominal value of CHF 5 million / CHF 25 million)
Transfer from reserve for treasury shares
December 31
2017
2016
30 527
34 560
– 761
– 4 626
412
593
30 178
30 527
10. contingent liabilities
(CHF millions)
Dec 31, 2017 Dec 31, 2016
Guarantees in favor of subsidiaries to cover capital and interest of bonds, credit facilities and commercial paper programs –
total maximum amount CHF 43 195 million (2016: CHF 39 369 million)
23 512
19 708
Other guarantees in favor of subsidiaries, associated companies and others –
total maximum amount CHF 4 010 million (2016: CHF 4 155 million)
total contingent liabilities
1 592
2 253
25 104
21 961
Novartis AG is part of the Swiss Novartis value added
tax (VAT) group and is therefore jointly liable for existing
and future VAT claims from the Swiss Federal Tax
Administration.
11. Registration, voting restrictions
and major shareholders
The company’s Articles of Incorporation state that no
person 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
and being entitled to voting rights on all of their shares,
excluding treasury shares held by Novartis AG and its
subsidiaries are as follows:
Novartis Foundation for Employee
Participation, Basel
Emasan AG, Basel
UBS Fund Management
(Switzerland) AG, Basel
% Holding of
share capital
Dec 31, 2017
% Holding of
share capital
Dec 31, 2016
2.5
3.4
2.0
2.6
3.4
2.1
Furthermore, there are the following other significant
share holders:
Shareholders registered as nominees:
Chase Nominees Ltd., London
Nortrust Nominees Ltd., London
Bank of New York Mellon, New York
through Bank of New York Mellon, Everett
through Bank of New York Mellon,
SA/NV, Brussels
2017
2016
7.8%
3.8%
4.3%
2.0%
8.5%
3.9%
4.4%
1.8%
2.3%
2.6%
Shareholder acting as american Depositary Share (aDS) depositary:
JPMorgan Chase Bank, N.A., New York
12.3%
12.0%
The following shareholder is disclosed through a notifi-
cation filed with Novartis AG, but not registered as of
December 31, 2017 in the Novartis Share Register:
• Norges Bank (Central Bank of Norway), Oslo, holds
2.1% (2016: 2.0%).
The following shareholder is disclosed through a notifi-
cation filed with Novartis AG and the SIX Swiss Exchange,
but registered with less than 2% of the share capital as
of December 31, 2017 in the Novartis Share Register:
• BlackRock, Inc., New York, holds between 3% and 5%.
FINaNcI al RepORt
Notes to the financial statements of Novartis aG
Novartis Annual Report 2017 | 269
12. 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 their interests are aligned with those of
shareholders. Board members are prohibited from hedg-
ing or pledging their ownership positions in Novartis
shares that are part of their guideline share ownership
requirement, and are required to hold these shares for
12 months after retiring from the Board of Directors. As
at December 31, 2017, all current and former members
of the Board of Directors who were required to meet the
minimum share ownership requirements did so.
Shares, ADRs and share options owned by Board
members
As at December 31, 2017, no member of the Board of
Directors, either individually or together with “persons
closely linked”1 to them, owned 1% or more of the out-
standing shares (or ADRs) of Novartis. As at the same
date, no member of the Board of Directors held any share
options to purchase Novartis shares.
The total number of vested Novartis shares and ADRs
owned by members of the Board of Directors and
“ persons closely linked”1 to them as at December 31,
2017 is shown in the table below.
Shares and ADRs owned by Board members1
Number of shares 1,2
at
At
December 31, December 31,
2016
2017
Joerg Reinhardt
Enrico Vanni
Nancy Andrews
Dimitri Azar
518 310
497 762
20 101
17 853
4 042
2 308
13 094
11 217
Ton Buechner (from February 24, 2016)
4 428
1 398
Srikant Datar
37 239
34 998
Elizabeth Doherty (from February 24, 2016)
2 761
839
Ann Fudge
Pierre Landolt 3
15 457
17 530
61 029
58 061
Frans van Houten (from February 28, 2017)
978
NA
Andreas von Planta
Charles L. Sawyers
William T. Winters
total
130 634
127 740
7 763
12 397
6 029
9 257
828 233
784 992
NA – Not applicable.
1 Includes holdings of “persons closely linked” to Board members (see definition in this
Note 12)
2 Each share provides entitlement to one vote.
3 According to Pierre Landolt, the Sandoz Family Foundation is the economic
beneficiary of the shares
Share ownership requirements for Executive
Committee members
Executive Committee members are required to own at
least a minimum multiple of their annual base salary in
Novartis shares or Restricted Share Units (RSUs) 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 company’s compensation plans.
However, unvested matching shares granted under the
Leveraged Share Savings Plan (LSSP), the Employee
Share Owner ship Plan (ESOP), and any unvested Per-
formance Share Units (PSUs) are excluded. The deter-
mination also includes other shares as well as vested
options of Novartis shares or ADRs that are owned
directly or indirectly by “persons closely linked”1 to an
Executive Committee member. The Compensation Com-
mittee reviews compliance with the share ownership
guideline on an annual basis.
As at December 31, 2017, 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
As at December 31, 2017, no member of the Executive
Committee, either individually or together with “persons
closely linked”1 to them, owned 1% or more of the out-
standing shares (or ADRs) of Novartis. As at the same
date, no member of the Executive Committee held any
share options to purchase Novartis shares, with the
exception of André Wyss who held 373 000.
The following table shows the total number of shares,
ADRs, and other equity rights owned by Executive
Committee members and “persons closely linked”1 to
them as at December 31, 2017.
1 “Persons closely linked” are (i) their spouse, (ii) their children below age 18, (iii) any legal
entities that they own or otherwise control, and (iv) any legal or natural person who is acting
as their fiduciary.
270 | Novartis Annual Report 2017
Shares, aDRs and other equity rights owned by executive committee members1
Vested
shares
and ADRs
Unvested
shares
total at
and other December 31,
2017
equity rights 2
Vested
shares
and ADRs
Unvested
shares
Total at
and other December 31,
2016
equity rights 2
Joseph Jimenez (CEO)
287 699
288 378
576 077
347 278
273 930
621 208
Steven Baert
F. Michael Ball
James Bradner
Felix R. Ehrat
Richard Francis
Paul Hudson
Harry Kirsch
Vasant Narasimhan
Bruno Strigini
André Wyss
total
10 955
55 125
66 080
11 111
50 827
61 938
0
0
109 222
109 222
47 364
47 364
0
0
49 081
49 081
14 479
14 479
189 940
123 255
313 195
137 290
122 196
259 486
35 117
57 758
92 875
22 424
49 550
71 974
6 616
36 193
42 809
0
24 027
24 027
64 769
95 378
160 147
47 437
108 686
156 123
16 279
85 726
102 005
7 271
79 703
86 974
27 871
78 774
106 645
4 310
92 383
96 693
51 183
63 240
114 423
61 475
92 875
154 350
690 429 1 040 413 1 730 842
638 596
957 737 1 596 333
NA – Not applicable.
1 Includes holdings of “persons closely linked” to Executive Committee members (see definition in this Note 12)
2 Includes restricted shares, RSUs and target number of PSUs. Matching shares under the ESOP 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.
FINaNcI al RepORt
appropriation of available earnings of Novartis aG as per balance sheet and declaration of dividend
Novartis Annual Report 2017 | 271
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 2.80 (2016: CHF 2.75) on 2 460 329 729
(2016: 2 518 535 601) dividend-bearing shares1 with a nominal value of CHF 0.50 each
total available earnings after appopriation
Dividend waived for additional treasury shares held by the Company
Balance to be carried forward
2017
2016
3 281 006 904 2 039 915 695
8 427 115 178 8 140 581 612
11 708 122 082 10 180 497 307
– 6 888 923 241 – 6 925 972 903
4 819 198 841 3 254 524 404
26 482 500
4 819 198 841 3 281 006 904
1 No dividend will be declared on treasury shares held by Novartis AG, and certain other treasury shares held by other Group companies.
Assuming that this proposal by the Board of Directors is
approved by the Annual General Meeting of share-
holders, payment of the dividend will be made as from
March 8, 2018. The last trading day with entitlement to
receive the dividend is March 5, 2018. As from March 6,
2018 the shares will be traded ex-dividend.
272 | Novartis Annual Report 2017
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, 2017, income statement and notes
to the financial statements (pages 262 to 270) for the
year then ended, including a summary of significant
accounting policies.
In our opinion, the accompanying financial statements
as at December 31, 2017 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 finan-
cial 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
requirements.
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 areas where
subjective judgments were made, such as significant
accounting estimates that involved making assumptions
and consideration of future events that are inherently
uncertain. As in all of our audits, we also addressed the
risk of management override of internal controls, includ-
ing 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,
individually 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 judgment, we determined
certain quantitative thresholds for materiality, including
the overall materiality for the financial statements as a
whole as set out 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,
both individually and in aggregate, on the financial state-
ments as a whole.
• Overall materiality: CHF 400 million.
• How we determined it: Slightly less than 5% of income
before taxes.
• 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 entity 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 CHF 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 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 key audit matters to com-
municate in our 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 appli cable,
matters related to going concern and using the going
concern basis of accounting unless the Board of
Directors either intends to liquidate the entity or to cease
operations, or has no realistic alternative but to do so.
FINaNcI al RepORt
Report of the statutory auditor on the financial statements of Novartis aG
Novartis Annual Report 2017 | 273
We also provide the Board of Directors with a state-
ment that we have complied with relevant ethical require-
ments 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 safeguards.
From the matters communicated with the Board of
Directors, we determine those matters that were of most
significance in the audit of the 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 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 communication.
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
Martin Kennard
Audit expert
Auditor in charge
Stephen Johnson
Global relationship
partner
Basel, January 23, 2018
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 Stan-
dards will always detect a material misstatement 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 influ-
ence the economic decisions of users taken on the basis
of these financial statements.
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 responsive
to those risks, and obtain audit evidence that is suffi-
cient and appropriate to provide a basis for our opin-
ion. The risk of not detecting a material misstatement
resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery,
intentional omissions, misrepresentations, or the over-
ride 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 pur-
pose of expressing an opinion on the effectiveness of
the entity’s internal control.
• Evaluate the appropriateness of accounting policies
used and the reasonableness of accounting estimates
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 con-
ditions 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 dis-
closures in the financial statements or, if such disclo-
sures are inadequate, to modify our opinion. Our con-
clusions are based on the audit evidence obtained up
to the date of our auditor’s report. However, future
events or conditions may cause the entity to cease to
continue as a going concern.
We communicate with the Board of Directors, mostly
through the Audit and Compliance Committee regard-
ing, 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.
274 | Novartis Annual Report 2017
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 2017.
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,
following the intricacies and obstacles of the
conflict 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
contest; 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 Univer si-
ty’s Nieman Fellowship for journalists. She is
currently based in Washington, D.C.
Photo At the age of 89,
Katina Karoutsou is not
considered particularly old on
the Greek island of Ikaria,
where around a third of all
residents live into their 90s.
Researchers believe this is
due to constant physical
activity, a mostly vegetarian
diet, avoidance of smoking,
and high levels of family and
social integration.
Other infOrmatiOn
Other information
Novartis Annual Report 2017 | 275
276 | Novartis Annual Report 2017
Key dates for 2018
Contact
information
forward-looking
statements
Anticipated reporting dates
Annual General Meeting
march 2, 2018
First quarter 2018 results
april 19, 2018
Meet Novartis Management
investor event in Basel
may 15-16, 2018
For further information regarding
Novartis, please contact Novartis
International AG CH-4002 Basel,
Switzerland.
General information
Tel: +41 61 324 11 11
Fax: +41 61 324 80 01
Second quarter and first half 2018 results
July 18, 2018
Investor relations
Third quarter and first nine months
2018 results
October 18, 2018
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/annualreport2017
www.novartis.com/
order2017annualreport
These materials contain forward-looking statements that
can be identified by terminology such as such as “potential,”
“expected,” “will,” “planned,” “pipeline,” “outlook,” or similar
expressions, or by express or implied discussions regarding
potential new products, potential new indications for existing
products, or regarding potential future revenues from any
such products; or regarding the potential outcome of the
strategic review being undertaken to maximize shareholder
value of the Alcon Division; or regarding the potential financial
or other impact of the significant acquisitions and reorganiza-
tions of recent years; or regarding the potential impact of the
share buyback plan; or regarding potential future sales or
earnings of the Novartis Group or any of its divisions or
potential shareholder returns; or by discussions of strategy,
plans, expectations or intentions. You should not place undue
reliance on these statements. Such forward looking state -
ments are based on our current beliefs and expectations
regarding future events, and are subject to significant known
and unknown risks and uncertainties. Should one or more of
these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary
materially from those set forth in the forward looking
statements. There can be no guarantee that any new products
will be approved for sale in any market, or that any new
indications will be approved for any existing products in any
market, or that any approvals which are obtained will be
obtained at any particular time, or that any such products will
achieve any particular revenue levels. Nor can there be any
guarantee that the strategic review being undertaken to
maximize shareholder value of the Alcon Division will reach
any particular results, or at any particular time, or that the
result of the strategic review will in fact maximize shareholder
value. Neither can there be any guarantee that Novartis will
be able to realize any of the potential strategic benefits,
synergies or opportunities as a result of the significant
acquisitions and reorganizations of recent years. Neither can
there be any guarantee that shareholders will achieve any
particular level of shareholder returns. Nor can there be
any guarantee that the Group, or any of its divisions, will be
commercially successful in the future, or achieve any
particular credit rating or financial results. In particular, our
expectations could be affected by, among other things:
global trends toward health care cost containment, including
government, payor and general public pricing and reimburse-
ment pressures and requirements for increased pricing
transparency; regulatory actions or delays or government
regulation generally; the potential that the strategic benefits,
synergies or opportunities expected from the significant
acquisitions and reorganizations of recent years may not
be realized or may take longer to realize than expected;
the inherent uncertainties involved in predicting shareholder
returns; the uncertainties inherent in the research and
development of new healthcare products, including clinical
trial results and additional analysis of existing clinical data;
our ability to obtain or maintain proprietary intellectual
property protection, including the ultimate extent of the
impact on Novartis of the loss of patent protection and
exclusivity on key products which commenced in prior years
and will continue this year; safety, quality or manufacturing
issues; uncertainties regarding actual or potential legal
proceedings, including, among others, actual or potential
product liability litigation, litigation and investigations
regarding sales and marketing practices, intellectual
property disputes and government investigations generally;
uncertainties involved in the development or adoption of
potentially transformational technologies and business
models; general political and economic conditions, including
uncertainties regarding the effects of ongoing instability in
various parts of the world; uncertainties regarding future
global exchange rates; uncertainties regarding future demand
for our products; and uncertainties regarding potential signifi-
cant breaches of data security or data privacy, or disruptions
of our information technology systems; and other risks and
factors referred to in Novartis AG’s current Form 20-F on
file with the US Securities and Exchange Commission.
Novartis is providing the information in these materials as
of this date and does not undertake any obligation to update
any foward-looking statements as a result of new information,
future events or otherwise.
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: Justin Hession, Zürich, Switzerland
Printer: Birkhäuser+GBC AG, Reinach, Switzerland
© Novartis AG, 2018
Photo on the right
Adiarra Traore undergoes a health check at the Bougoula-Hameau clinic in Mali,
West Africa, as part of a clinical trial to assess an experimental medicine for malaria
called KAF156 being developed by Novartis and several partner organizations.
Photo back cover
In the West African state of Mali, Dr. Bakary Fofana and his colleagues check on
progress in a clinical trial of a promising new treatment for malaria known as
KAF156. The compound is being developed by Novartis and a number of partner
organizations in response to early indications that malaria parasites in some parts
of the world are becoming resistant to established medicines.