Annual Report
2018
Annual Report
2018
Table of contents
Table of contents
*
Item 4.
Introduction and use of certain terms .................................................................................................................................................................4
Forward-looking statements ...................................................................................................................................................................................5
PART I
7
Item 1.
Identity of Directors, Senior Management and Advisers ...................................................................................................7
Item 2. Offer Statistics and Expected Timetable ...................................................................................................................................8
Key Information ........................................................................................................................................................................................9
Item 3.
3.A Selected financial data .........................................................................................................................................................................9
3.B Capitalization and indebtedness ..................................................................................................................................................10
3.C Reasons for the offer and use of proceeds ...........................................................................................................................10
3.D Risk factors ............................................................................................................................................................................................. 11
Information on the Company ..........................................................................................................................................................24
4.A History and development of Novartis ........................................................................................................................................24
4.B Business overview ...............................................................................................................................................................................29
Innovative Medicines ..........................................................................................................................................................................32
Sandoz ...................................................................................................................................................................................................... 63
Alcon ...........................................................................................................................................................................................................68
4.C Organizational structure ................................................................................................................................................................... 74
4.D Property, plants and equipment ................................................................................................................................................... 74
Item 4A. Unresolved Staff Comments ..........................................................................................................................................................78
*
Item 5. Operating and Financial Review and Prospects ..................................................................................................................79
5.A Operating results..................................................................................................................................................................................79
5.B Liquidity and capital resources ..................................................................................................................................................122
5.C Research and development, patents and licenses ..........................................................................................................132
5.D Trend information ..............................................................................................................................................................................132
5.E Off-balance sheet arrangements .............................................................................................................................................132
5.F Tabular disclosure of contractual obligations ....................................................................................................................133
Item 6. Directors, Senior Management and Employees ...............................................................................................................134
6.A Directors and senior management ..........................................................................................................................................134
6.B Compensation ....................................................................................................................................................................................135
6.C Board practices.................................................................................................................................................................................. 172
6.D Employees ............................................................................................................................................................................................201
6.E Share ownership................................................................................................................................................................................201
Item 7. Major Shareholders and Related Party Transactions ....................................................................................................202
7.A Major shareholders ..........................................................................................................................................................................202
7.B Related party transactions ...........................................................................................................................................................203
Interests of experts and counsel ..............................................................................................................................................203
7.C
Financial Information .......................................................................................................................................................................204
8.A Consolidated statements and other financial information ...........................................................................................204
8.B Significant changes .........................................................................................................................................................................205
The Offer and Listing ......................................................................................................................................................................206
9.A Offer and listing details ..................................................................................................................................................................206
9.B Plan of distribution ............................................................................................................................................................................206
9.C Markets ...................................................................................................................................................................................................206
9.D Selling shareholders ........................................................................................................................................................................206
9.E Dilution ....................................................................................................................................................................................................206
9.F Expenses of the issue ....................................................................................................................................................................206
Item 10. Additional Information .....................................................................................................................................................................207
10.A Share capital ........................................................................................................................................................................................207
10.B Memorandum and articles of association ............................................................................................................................207
10.C Material contracts .............................................................................................................................................................................210
10.D Exchange controls............................................................................................................................................................................ 211
10.E Taxation .................................................................................................................................................................................................. 211
Item 8.
Item 9.
* “Item 5. Operating and Financial Review and Prospects” together with the sections on compounds in development and key development projects of our divisions (see “Item 4.
Information on the Company—Item 4.B Business overview”) constitute the Operating and Financial Review (“Lagebericht”), as defined by the Swiss Code of Obligations.
2
Table of contents
10.F Dividends and paying agents ...................................................................................................................................................... 214
10.G Statement by experts ..................................................................................................................................................................... 214
10.H Documents on display ....................................................................................................................................................................215
10.I Subsidiary information ....................................................................................................................................................................215
Item 11. Quantitative and Qualitative Disclosures About Market Risk ....................................................................................216
Item 12. Description of Securities Other Than Equity Securities............................................................................................... 217
12.A Debt securities ................................................................................................................................................................................... 217
12.B Warrants and rights.......................................................................................................................................................................... 217
12.C Other securities ................................................................................................................................................................................. 217
12.D American Depositary Shares ...................................................................................................................................................... 217
PART II
219
Item 13. Defaults, Dividend Arrearages and Delinquencies ..........................................................................................................219
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds .............................................220
Item 15. Controls and Procedures ..............................................................................................................................................................221
Item 16A. Audit Committee Financial Expert ...........................................................................................................................................222
Item 16B. Code of Ethics ....................................................................................................................................................................................223
Item 16C. Principal Accountant Fees and Services ..............................................................................................................................224
Item 16D. Exemptions from the Listing Standards for Audit Committees ................................................................................225
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers .............................................................226
Item 16F. Change in Registrant’s Certifying Accountant ..................................................................................................................227
Item 16G. Corporate Governance ..................................................................................................................................................................228
Item 16H. Mine Safety Disclosure ..................................................................................................................................................................229
PART III
230
Item 17. Financial Statements.......................................................................................................................................................................230
Item 18. Financial Statements.......................................................................................................................................................................231
Item 19. Exhibits ...................................................................................................................................................................................................232
3
Introduction and use of certain terms
Introduction and use of certain terms
Novartis AG and its consolidated affiliates publish consolidated financial statements expressed in US dollars. Our
consolidated financial statements responsive to Item 18 of this Annual Report on Form 20-F (Annual Report) are
prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International
Accounting Standards Board (IASB). “Item 5. Operating and Financial Review and Prospects,” together with the
sections on products in development and key development projects of our businesses (see “Item 4. Information on
the Company—Item 4.B. Business overview”), constitute the Operating and Financial Review (“Lagebericht”), as
defined by the Swiss Code of Obligations.
Unless the context requires otherwise, the words “we,” “our,” “us,” “Novartis,” “Group,” “Company,” and similar
words or phrases in this Annual Report refer to Novartis AG and its consolidated affiliates. However, each Group
company is legally separate from all other Group companies and manages its business independently through its
respective board of directors or similar supervisory body or other top local management body, if applicable. Each
executive identified in this Annual Report reports directly to other executives of the Group company that employs
the executive, or to that Group company’s board of directors.
In this Annual Report, references to “US dollars,” “USD” or “$” are to the lawful currency of the United States of
America, and references to “CHF” are to Swiss francs; references to the “United States” or to “US” are to the United
States of America, references to the “European Union” or to “EU” are to the European Union and its 28 member
states, references to “Latin America” are to Central and South America, including the Caribbean, and references
to “Australasia” are to Australia, New Zealand, Melanesia, Micronesia and Polynesia, unless the context otherwise
requires; references to the “EC” are to the European Commission; references to “associates” are to employees of
our affiliates; references to the “SEC” are to the US Securities and Exchange Commission; references to the “FDA”
are to the US Food and Drug Administration, references to “EMA” are to the European Medicines Agency, an agency
of the EU, and references to the “CHMP” are to the Committee for Medicinal Products for Human Use of the EMA;
references to “ADR” or “ADRs” are to Novartis American Depositary Receipts, and references to “ADS” or “ADSs”
are to Novartis American Depositary Shares; references to the “NYSE” are to the New York Stock Exchange, and
references to “SIX” are to the SIX Swiss Exchange; references to “ECN” are to the Executive Committee of Novartis;
references to “GSK” are to GlaxoSmithKline plc, references to “AAA” are to Advanced Accelerator Applications
S.A., references to “AveXis” are to AveXis, Inc., and references to “Endocyte” are to Endocyte, Inc.
All product names appearing in italics are trademarks owned by or licensed to Group companies. Product names
identified by a “®” or a “™” are trademarks that are not owned by or licensed to Group companies and are the prop-
erty of their respective owners.
4
Forward-looking statements
Forward-looking statements
This Annual Report contains certain forward-looking statements within the meaning of Section 27A of the Securi-
ties Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the United States Private Securities
Litigation Reform Act of 1995, each as amended from time to time. Other written materials filed with or furnished
to the SEC by Novartis, as well as other written and oral statements made to the public, may also contain for-
ward-looking statements. Forward-looking statements can be identified by words such as “potential,” “expected,”
“will,” “planned,” “pipeline,” “outlook,” or similar terms, or by express or implied discussions regarding potential new
products, potential new indications for existing products, or regarding potential future revenues from any such prod-
ucts; or regarding the potential outcome, or financial or other impact on Novartis, of the proposed spin-off of our
Alcon Division, or of the proposed divestiture of certain portions of our Sandoz Division business in the US; or
regarding the potential impact of the share buyback plan; or regarding potential future sales or earnings of the
Group or any of its divisions or potential shareholder returns; or regarding potential future credit ratings of the
Group; or by discussions of strategy, plans, expectations or intentions. Such forward-looking statements are based
on the current beliefs and expectations of management regarding future events, and are subject to significant
known and unknown risks and uncertainties. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary materially from those set forth in the
forward-looking statements. You should not place undue reliance on these statements.
In particular, our expectations could be affected by, among other things:
• Global trends toward healthcare cost containment, including ongoing government, payer and general public pric-
ing and reimbursement pressures and requirements for increased pricing transparency;
• Regulatory actions or delays or government regulation generally, including potential regulatory actions or delays
with respect to the proposed transactions or the development of the products described in this Annual Report;
• The potential that the strategic benefits, synergies or opportunities expected from the proposed transactions
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 that 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 litiga-
tion with respect to the proposed transactions, 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;
• Our performance on environmental, social and governance measures;
• General political, economic and trade conditions, including uncertainties regarding the effects of ongoing insta-
bility in various parts of the world;
• Uncertainties regarding future global exchange rates;
• Uncertainties regarding future demand for our products; and
• Uncertainties regarding potential significant breaches of data security or data privacy, or disruptions of our infor-
mation technology systems.
5
Forward-looking statements
Some of these factors are discussed in more detail in this Annual Report, including under “Item 3. Key Information—
Item 3.D. Risk factors,” “Item 4. Information on the Company,” and “Item 5. Operating and Financial Review and
Prospects.” Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those described in this Annual Report as anticipated, believed,
estimated or expected. We provide the information in this Annual Report as of the date of its filing. We do not intend,
and do not assume any obligation, to update any information or forward-looking statements set out in this Annual
Report as a result of new information, future events or otherwise.
6
Item 1. Identity of Directors, Senior Management and Advisers
PART I
Item 1. Identity of Directors,
Senior Management and Advisers
Not applicable.
7
Item 2. Offer Statistics and Expected Timetable
Item 2. Offer Statistics and Expected
Timetable
Not applicable.
8
Item 3. Key Information
Item 3. Key Information
3.A Selected financial data
The selected financial information set out below has
been extracted from our consolidated financial state-
ments prepared in accordance with IFRS as issued by
the IASB. Our consolidated financial statements for the
years ended December 31, 2018, 2017 and 2016, are
included in “Item 18. Financial Statements” in this
Form 20-F.
All financial data should be read in conjunction with
“Item 5. Operating and Financial Review and Prospects.”
All financial data presented in this Form 20-F are quali-
fied in their entirety by reference to the consolidated
financial statements and their notes.
(USD millions, except per share information)
INCOME STATEMENT DATA
Year ended December 31,
2018
2017
2016
2015
2014
Net sales to third parties from continuing operations
51 900
49 109
48 518
49 414
52 180
Operating income from continuing operations
Income from associated companies
Interest expense
Other financial income and expense
8 169
6 438
– 957
185
8 629
1 108
– 777
39
Income before taxes from continuing operations
13 835
8 999
8 268
8 977
11 089
703
– 707
– 447
7 817
266
– 655
– 454
1 918
– 704
– 31
8 134
12 272
Taxes
Net income from continuing operations
Net income/(loss) from discontinued operations1
Group net income
Attributable to:
Shareholders of Novartis AG
Non-controlling interests
Basic earnings per share (USD)
Continuing operations
Discontinued operations
Total
Diluted earnings per share (USD)
Continuing operations
Discontinued operations
Total
Cash dividends2
Cash dividends per share in CHF3
Personnel cost4, 5
– 1 221
– 1 296
– 1 119
– 1 106
– 1 545
12 614
7 703
6 698
7 028
10 727
10 766
– 447
12 614
7 703
6 698
17 794
10 280
12 611
7 703
6 712
17 783
10 210
3
0
– 14
11
70
5.44
3.28
2.82
5.44
3.28
2.82
5.38
3.25
2.80
5.38
3.25
2.80
2.92
4.48
7.40
2.88
4.41
7.29
6 966
6 495
6 475
6 643
2.85
2.80
2.75
2.70
4.39
– 0.18
4.21
4.31
– 0.18
4.13
6 810
2.60
15 651
13 932
13 681
13 540
14 569
Full-time equivalent associates at year-end5
125 161
121 597
118 393
118 700
117 809
1 In 2015, Novartis completed a series of portfolio transformation transactions, including the divestments of its Animal Health and Vaccines business. In addition, a combined
consumer healthcare business was created through the combination of the Novartis OTC and GlaxoSmithKline (GSK) Consumer Healthcare businesses. On March 2, 2015 a new
entity, GlaxoSmithKline Consumer Healthcare Holdings Ltd. (GSK Consumer Healthcare) was formed via contribution of businesses from both Novartis and GSK. Novartis had a
36.5% interest in the newly created entity. To reflect these transactions, Novartis reported the Group’s financial results for 2015 and 2014 as “continuing operations” and
“discontinued operations”, as required by IFRS.
2 Cash dividends represent cash payments in the applicable year that generally relates to earnings of the previous year.
3 Cash dividends per share represent dividends proposed that relate to earnings of the current year. Dividends for 2014 through 2017 were approved at the respective AGMs and
dividends for 2018 will be proposed to the Annual General Meeting on February 28, 2019 for approval.
4 Personnel cost include wages, salaries, allowances, commissions and bonuses to staff, overtime, awards, holiday pay, severance payments and social welfare expenses.
5 Own employees
9
Item 3. Key Information
(USD millions)
BALANCE SHEET DATA
Cash, cash equivalents and marketable securities & derivative
financial instruments
Inventories
Other current assets
Non-current assets
Assets of disposal group held for sale1
Assets related to discontinued operations2
Total assets
Trade accounts payable
Other current liabilities
Non-current liabilities
Liabilities of disposal group held for sale1
Liabilities related to discontinued operations2
Total liabilities
Issued share capital and reserves attributable to shareholders
of Novartis AG
Non-controlling interests
Total equity
Total liabilities and equity
Net assets
Outstanding share capital
Total outstanding shares (millions)
Year ended December 31,
2018
2017
2016
2015
2014
15 964
6 956
9 485
6 867
7 777
6 255
5 447
13 862
6 226
6 093
11 836
11 856
10 899
11 172
10 805
110 000
104 871
105 193
108 711
87 826
807
6 801
145 563
133 079
130 124
131 556
125 387
5 556
5 169
4 873
5 668
5 419
24 000
18 234
17 336
18 040
19 136
37 264
35 449
33 024
30 726
27 570
51
66 871
58 852
55 233
54 434
54 543
2 418
78 614
74 168
74 832
77 046
70 766
78
59
59
76
78
78 692
74 227
74 891
77 122
70 844
145 563
133 079
130 124
131 556
125 387
78 692
74 227
74 891
77 122
70 844
875
869
896
890
898
2 311
2 317
2 374
2 374
2 399
1 The disposal group held for sale relate to the assets and liabilities of the pending divestment of the Sandoz US dermatology business and generic US oral solids portfolio to
Aurobindo Pharma USA Inc., as announced on September 6, 2018 (see “item 18. Financial Statements – Note 2 Significant pending transactions).
2 A description of discontined operations can be found in footnote 1 of the table above.
Cash dividends per share
Cash dividends are translated into US dollars at the Bloomberg Market System Rate on the payment date. Because
we pay dividends in Swiss francs, exchange rate fluctuations will affect the US dollar amounts received by holders
of ADRs.
Year earned
2014
2015
2016
2017
2018 1
Month and
year paid
Total dividend Total dividend
per share
(USD)
per share
(CHF)
March 2015
March 2016
March 2017
March 2018
March 2019
2.60
2.70
2.75
2.80
2.85
2.67
2.70
2.72
2.94
2.89 2
1 Dividend to be proposed at the Annual General Meeting on February 28, 2019 and to be distributed March 6, 2019
2 Translated into US dollars at the December 31, 2018 rate of USD 1.014 to the Swiss franc. This translation is an example only, and should not be construed as a representation that
the Swiss franc amount represents, or has been or could be converted into US dollars at that or any other rate.
3.B Capitalization and indebtedness
Not applicable.
3.C Reasons for the offer and use of proceeds
Not applicable.
10
Item 3. Key Information
3.D Risk factors
Our businesses face significant risks and uncertainties.
You should carefully consider all of the information set
forth in this Annual Report and in other documents we
file with or furnish to the SEC, including the Form 20-F
filed with the SEC by our subsidiary Alcon Inc. in con-
nection with our planned spin-off of the Alcon business,
as well as the following risk factors, before deciding to
invest in or to maintain an investment in any Novartis
securities. Our business, as well as our financial condi-
tion or results of operations, could be materially adversely
affected by any of these risks, as well as other risks and
uncertainties not currently known to us or not currently
considered material.
Risks facing our business
Our products face losses of intellectual property
protection.
Major products of our Innovative Medicines Division, as
well as certain products of our Sandoz and Alcon Divi-
sions, are protected by patent and other intellectual
property rights, which provide us with exclusive rights to
market the products, and give us an opportunity to
recoup our investments in research and development.
However, the strength and duration of those intellectual
property rights can vary significantly from product to
product and country to country, and they may be suc-
cessfully challenged by third parties or governmental
authorities. Loss of market exclusivity for one or more
important products has had, and can be expected to
continue to have, a material adverse effect on our results
of operations.
The introduction of generic competition for a pat-
ented branded medicine typically results in a significant
and rapid reduction in net sales and operating income
for the branded product because generic manufactur-
ers typically offer their unpatented versions at sharply
lower prices. Such competition can occur after success-
ful challenges to intellectual property rights or the reg-
ular expiration of the term of the patent or other intellec-
tual property rights. Such competition can also result
from the entry of generic versions of another medicine
in the same therapeutic class as one of our drugs or in
another competing therapeutic class, from a Declaration
of Public Interest or the compulsory licensing of our
drugs by governments, or from a general weakening of
intellectual property laws in certain countries around the
world. In addition, generic manufacturers sometimes
take an aggressive approach to challenging intellectual
property rights, including conducting so-called “launches
at risk” of products that are still under legal challenge for
infringement, before final resolution of legal proceed-
ings.
We also rely in all aspects of our businesses on unpat-
ented proprietary technology, know how, trade secrets
and other confidential information, which we seek to pro-
tect through various measures, including confidentiality
agreements with licensees, employees, third-party col-
laborators, and consultants who may have access to
such information. If these agreements are breached or
our other protective measures should fail, then our con-
tractual or other remedies may not be adequate to cover
our losses.
Some of our best-selling products have begun or are
about to face significant competition due to the end of
market exclusivity resulting from the expiry of patent or
other intellectual property protection.
• Our former top-selling products Gleevec/Glivec, Diovan
and Exforge all face continued and increasing generic
competition in major markets.
• Patent protection for the marketed forms of our
Sandostatin products has expired. Generic versions of
Sandostatin SC are available in the US, the EU and
Japan. While there is currently no generic competition
in the US, the EU or Japan for Sandostatin LAR, the
long-acting version of Sandostatin that represents the
majority of our Sandostatin sales, such generic com-
petition may arise in the future.
• Intellectual property protecting a number of additional
major products is either being challenged or will expire
at various times in the coming years, raising the possi-
bility of generic competition. Among these products
that may begin to face generic competition in one or
more major markets during the next three years are
Gilenya, our everolimus products (Afinitor/Votubia and
Zortress/Certican), Exjade and Jadenu, and Lucentis.
For more information on the patent and generic compe-
tition status of our Innovative Medicines Division’s prod-
ucts, see “Item 4. Information on the Company—Item 4.B
Business overview—Innovative Medicines—Intellectual
property.”
In 2019, we expect a potentially significant impact on
our net sales from products that have already lost intel-
lectual property protection, as well as products that will
lose protection during the year. Because we typically
have substantially reduced marketing and research and
development expenses related to products that are in
their final years of exclusivity, the initial loss of intellec-
tual property protection for a product during the year
could also have an impact on our 2019 operating income
in an amount corresponding to a significant portion of
the product’s lost sales. The magnitude of the impact of
generic competition on our income could depend on a
number of factors, including the time of year at which
the generic competitor is launched; the ease or difficulty
of manufacturing a competitor product and obtaining
regulatory approval to market it; the number of generic
competitor products approved, including whether, in the
US, a single competitor is granted an exclusive market-
ing period; whether an authorized generic is launched;
the geographies in which generic competitor products
are approved, including the strength of the market for
generic pharmaceutical products in such geographies
the comparative profitability of branded
and
11
Item 3. Key Information
pharmaceutical products in such geographies; and our
ability to successfully develop and launch profitable new
products to replace the income lost to generic compe-
tition. See also “—Our research and development efforts
may not succeed,” below, with respect to the develop-
ment and launch of new products.
Clearly, with respect to major products for which the
patent terms are expiring, the loss of exclusivity of these
products could have a material adverse effect on our
business, financial condition, or results of operations. In
addition, should we unexpectedly lose exclusivity on
additional products as a result of patent litigation or other
reasons, this could also have a material adverse effect
on our business, financial condition, or results of opera-
tions, both due to the loss of revenue and earnings, and
the difficulties in planning for such losses.
Our financial performance depends on the
commercial success of key products.
Our financial performance, including our ability to replace
revenue and income lost to generic and other competi-
tion and to grow our business, depends heavily on the
commercial success of our products. If any of our major
products were to become subject to problems such as
changes in prescription growth rates, unexpected side
effects, loss of intellectual property protection, supply
chain issues or other product shortages, regulatory pro-
ceedings, changes in labeling, publicity affecting doctor
or patient confidence in the product, material product
liability litigation, or pressure from new or existing com-
petitive products, the adverse impact on our revenue and
profit could be significant. In addition, our revenue and
profit could be significantly impacted by the timing and
rate of commercial acceptance of key new products.
See also “—Our business is affected by pressures on
pricing and reimbursement for our products,” below, with
regard to the impact of pricing and reimbursement issues
on the commercial success of our products.
All of our businesses face intense competition from
new products and technological advances from compet-
itors, and physicians, patients and third-party payers may
choose our competitors’ products instead of ours if they
perceive them to be safer, more effective, easier to
administer, less expensive, more convenient or more
cost-effective. Products that compete with ours are
launched from time to time. We cannot predict with accu-
racy the timing of the introduction of such competitive
products or their possible effect on our sales. However,
products significantly competitive to our major products
– including Cosentyx, Lucentis, Gilenya, Sandostatin,
Tasigna, Afinitor, Kisqali and Kymriah – are on the mar-
ket, and others are in development. In addition, numer-
ous companies from around the world are seeking to
enter the healthcare field to take advantage of their
expertise in digital and other new technologies.
See “—We may fail to develop or take advantage of
transformational technologies and business models,”
below.
Such competitive products could significantly affect
the revenue from our products and our results of oper-
ations. This impact could also be compounded to the
extent such competition results in us making significant
additional investments in marketing and sales, or in
research and development.
For example, our US Sandoz business has suffered
significant declines in sales and profits in recent years
due, at least in part, to increased competition in its prod-
uct segments. There can be no certainty that Sandoz US
sales will recover in the coming years. In any event, such
competition and the costs of our efforts to improve the
business’s performance, as well as other factors, can be
expected to affect the business, financial condition, or
results of operations of this organization, at least in the
near term. In addition, despite the devotion of significant
resources to our efforts to improve the performance of
Sandoz US, those efforts may ultimately prove insuffi-
cient. Should our efforts fail to accomplish their goals,
or fail to do so in a timely manner, it could have a mate-
rial adverse impact on our business, financial condition,
or results of operations beyond the near term, as well.
See also “—Our research and development efforts
may not succeed,” and “—Competition and failure to suc-
cessfully develop biosimilars and other differentiated
products may impact the success of our Sandoz Divi-
sion,” below.
Our research and development efforts may not
succeed.
We engage in extensive and costly research and devel-
opment activities, both through our own dedicated
resources and through collaborations with third parties,
in an effort to identify and successfully and cost-effec-
tively develop new products that address unmet and
changing medical needs, are accepted by patients and
physicians, are reimbursed by payers, and are commer-
cially successful. Our ability to continue to maintain and
grow our business; to replace sales lost due to compe-
tition, entry of generics or other reasons; and to bring to
market products and medical advances that take advan-
tage of new and potentially disruptive technologies,
depends in significant part upon the success of these
efforts. However, developing new healthcare products
and bringing them to market is a highly costly, lengthy
and uncertain process. In spite of our significant invest-
ments, there can be no guarantee that our research and
development activities will produce commercially suc-
cessful new products that will enable us to replace rev-
enue and income lost to generic and other competition
and to grow our business. See also “—We may not suc-
cessfully achieve our goals in transactions or reorgani-
zations,” below, with regard to our efforts to reorganize
our Innovative Medicines product development organi-
zation.
Using the products of our Innovative Medicines Divi-
sion as an example, the research and development pro-
cess for a new product can take up to 15 years, or even
longer, from discovery to commercial product launch –
and with limited available intellectual property protec-
tions, the longer it takes to develop a product, the less
time there may be for us to recoup our research and
development costs. New products must undergo inten-
sive preclinical and clinical testing, and must be approved
by means of highly complex, lengthy and expensive
approval processes that can vary from country to coun-
try.
During each stage, there is a substantial risk that we
will encounter serious obstacles that will further delay
us and add substantial expense, that we will develop a
12
Item 3. Key Information
product with limited potential for commercial success,
or that we will be forced to abandon a product in which
we have invested substantial amounts of time and money.
These risks may include failure of the product candidate
in preclinical studies, difficulty enrolling patients in clin-
ical trials, clinical trial holds or other delays in complet-
ing clinical trials, insufficient clinical trial data to support
the safety or efficacy of the product candidate or to dif-
ferentiate our product candidate from competitors,
delays in completing formulation and other testing and
work necessary to support an application for regulatory
approval, adverse reactions to the product candidate or
other safety concerns, an inability to manufacture suffi-
cient quantities of the product candidate for develop-
ment or commercialization activities in a timely and
cost-effective manner, and failure to obtain, or delays in
obtaining, the required regulatory approvals for the prod-
uct candidate or the facilities in which it is manufactured.
In addition, following the “Brexit” vote in the UK, the
EU decided to move the headquarters of the EU’s health
authority, the EMA, from the UK to the Netherlands by
March 2019. It is expected that a significant percentage
of the current employees of the EMA will decide not to
make the move to the Netherlands. This raises the pos-
sibility that new drug approvals in the EU could be delayed
as a result.
Further, in recent years, in order to achieve approv-
als of new products and new indications, governmental
authorities around the world have increasingly required
more clinical trial data than they had in the past, the inclu-
sion of significantly higher numbers of patients in clini-
cal trials, and more detailed analyses of the trials. In addi-
tion, in order for a product to be reimbursed and to be
commercially successful, payers and prescribers have
increasingly required additional data that differentiates
the product from other drugs on the market. As a result,
despite significant efforts by health authorities such as
the FDA to accelerate the development of new drugs,
the already lengthy and expensive process of obtaining
regulatory approvals and reimbursement for pharmaceu-
tical products has in many cases become even more
challenging.
Similarly, the post-approval regulatory burden has
also increased. Approved drugs are subject to various
requirements such as risk evaluation and mitigation strat-
egies (REMS), risk management plans, comparative
effectiveness studies, health technology assessments,
and requirements to conduct post-approval Phase IV
clinical trials to gather additional safety and other data
on products. These requirements have the effect of mak-
ing the maintenance of regulatory approvals for our prod-
ucts increasingly expensive, and further heightening the
risk of recalls, product withdrawals, loss of market share,
and loss of revenue and profitability.
There is also the risk that we may fail to identify sig-
nificant new product candidates for development or
potentially disruptive new technologies, and so may fail
to take advantage of a potential new wave of innovation.
Our Alcon Division faces similar challenges in bring-
ing new products to market, including both the products
and components that have been developed in house, as
well as those that have been acquired from third parties.
Alcon’s Surgical and Vision Care products face medical
device development and approval processes that are
often similarly as difficult as those faced by our Innovative
Medicines Division. For example, in 2017 the EU pub-
lished a new EU Medical Devices Regulation, which has
introduced substantial changes to the requirements for
medical device manufacturers bringing new products to
the EU market, including with respect to clinical devel-
opment, labeling, technical documentation and quality
management systems. The regulation has a three-year
implementation period. Further, the FDA is also pursuing
various efforts to modernize its regulation of devices,
including potential changes to existing regulatory
approval pathways that could impact our device approval
efforts. Alcon has taken steps to increase its innovation
power and the success of its research and development
efforts. But these efforts are costly and require exten-
sive efforts over time. There can be no certainty that
Alcon will be successful in these efforts, in either the
short term or the long term, and if Alcon is not success-
ful, there could be a material adverse effect on the suc-
cess of the Alcon Division.
In addition, our Sandoz Division has made, and
expects to continue to make, significant investments in
the development of biotechnology-based, “biologic”
medicines intended for sale as bioequivalent or “biosim-
ilar” versions of currently marketed biotechnology prod-
ucts, as well as other differentiated, “difficult-to-make”
generic products. While the development of such prod-
ucts typically is significantly less costly and complex than
the development of the equivalent originator medicines,
it is nonetheless often significantly more costly and com-
plex than that for non-differentiated generic products.
In addition, many countries do not yet have fully devel-
oped legislative or regulatory pathways to facilitate the
development of biosimilars and permit biosimilars to be
sold in a manner in which the biosimilar product would
be readily substitutable for the originator product. Fur-
ther delays in the development and completion of such
regulatory pathways, or any significant impediments that
may ultimately be built into such pathways, or any other
significant difficulties that may arise in the development
or marketing of biosimilars or other differentiated prod-
ucts, could put at risk the significant investments that
Sandoz has made, and will continue to make, in the devel-
opment of differentiated products in general, and in its
Biopharmaceuticals business in particular. Sandoz also
achieves significant revenue opportunities when it
secures and maintains exclusivity periods granted for
generic products in certain markets – particularly the
180-day exclusivity period granted in the US by the Hatch
Waxman Act for first-to-file generics. Failure to obtain
and maintain such exclusivity periods or to successfully
develop and market biosimilars and differentiated generic
products could have a material adverse effect on the
success of the Sandoz Division and the Group as a whole.
See also “—Competition and failure to successfully
develop biosimilars and other differentiated products
may impact the success of our Sandoz Division,” below.
Further, in all of our divisions, our research and devel-
opment activities must be conducted in an ethical and
compliant manner. Among other things, we must be con-
cerned with patient safety, data privacy, Good Clinical
Practices requirements, data integrity requirements, the
fair treatment of patients in developing countries, and
animal welfare requirements. Should we fail to properly
13
Item 3. Key Information
manage such issues, we risk injury to third parties, dam-
age to our reputation, negative financial consequences
as a result of potential claims for damages, sanctions
and fines, and the potential that our investments in
research and development activities could have no ben-
efit to the Group.
If we are unable to maintain a flow of successful,
cost-effective new products and new indications for
existing products that will sustain and grow our business,
cover our substantial research and development costs
and the decline in sales of older products that become
subject to generic or other competition, and take advan-
tage of technological and medical advances, then this
could have a material adverse effect on our business,
financial condition, or results of operations.
For a further description of the approval processes
that must be followed to market our products, see the
sections headed “Regulation” included in the descrip-
tions of our operating divisions under “Item 4. Informa-
tion on the Company—Item 4.B Business overview.”
Our business is affected by pressures on pricing
and reimbursement for our products.
Our businesses are operating in an ever more challeng-
ing environment, with significant pressures on the pric-
ing of our products and on our ability to obtain and main-
tain satisfactory rates of reimbursement for our products
by governments, insurers and other payers. The growth
of overall healthcare costs as a percentage of gross
domestic product in many countries means that govern-
ments and payers are under intense pressure to control
healthcare spending even more tightly than in the past.
These pressures are particularly strong given the
increasing demand for healthcare resulting from the
aging of the global population and associated increases
in noncommunicable diseases, and the resulting impact
on healthcare budgets. These pressures are further
compounded by significant controversies and intense
political debate and publicity about prices for
pharmaceuticals that some consider excessive, includ-
ing government regulatory efforts, funding restrictions,
legislative proposals, policy interpretations, investiga-
tions and legal proceedings regarding pharmaceutical
pricing practices.
See also “—Ongoing consolidation among our dis-
tributors and retailers is increasing both the purchasing
leverage of key customers and the concentration of
credit risk,” below, with regard to the impact of the con-
solidation among our customers on our pricing; “—Our
products face losses of intellectual property protection,”
above, with regard to the impact of the loss or risk of loss
of intellectual property protections on our pricing; and
“—Political and economic instability may impact our
results,” below, with regard to the impact of economic
conditions on our pricing.
As a result, in addition to ongoing public and political
pressures to limit the prices we charge for our products,
we face numerous cost-containment measures imposed
by governments and other payers, including govern-
ment-imposed industrywide price reductions, mandatory
pricing systems, reference pricing systems, payers lim-
iting access to treatments based on cost-benefit
analyses, imports of drugs from lower-cost countries to
higher-cost countries, shifting of the payment burden to
patients through higher co-payments, limiting physicians’
ability to choose among competing medicines, manda-
tory substitution of generic drugs for the patented equiv-
alent, growing pressure on physicians to reduce the pre-
scribing of patented prescription medicines, increasing
pressure on intellectual property protections, and
requirements for increased transparency on pricing. For
more information on such price controls, see “Item 4.
Information on the Company—Item 4.B Business over-
view—Innovative Medicines—Price controls.”
We expect these challenges to continue and to
increase in 2019 and following years as political pres-
sures mount, and healthcare payers around the globe,
including government-controlled health authorities,
insurance companies and managed care organizations,
step up initiatives to reduce the overall cost of health-
care, restrict access to higher-priced new medicines,
increase the use of generics and impose overall price
cuts. These factors may materially affect our ability to
achieve an acceptable return on our investments in the
research and development of our products, may impact
our ability to invest in the research and development of
new products, and could have a material adverse impact
on our business, financial condition, or results of opera-
tions, as well as on our reputation.
We could be impacted by new laws and regulations,
and by failures to comply with law, legal
proceedings and government investigations.
We are obligated to comply with the laws of all of the
countries around the world in which we operate and sell
products with respect to an extremely wide and grow-
ing range of activities. Such legal requirements can vary
from country to country, and new requirements may be
imposed on us from time to time as a result of changing
government and public expectations regarding the
healthcare industry, and acceptable corporate behavior
generally.
For example, we are faced with increasing pressures,
including new laws and regulations from around the
world, to be more transparent with respect to how we
do business, including with respect to our interactions
with healthcare professionals and organizations. These
laws and regulations include requirements that we dis-
close payments or other transfers of value made to
healthcare professionals and organizations, as well as
information relating to the prices for our products. Such
measures, including any additional such measures that
may be put in place, could have a material adverse impact
on our business, financial condition, or results of opera-
tions.
In addition, companies and executives in our indus-
try continue to face significant government investiga-
tions, legal proceedings and law enforcement activities,
both in the US and in countries around the world. Increas-
ingly, such activities can involve criminal proceedings,
and can retroactively challenge practices previously con-
sidered to be legal. A number of our subsidiaries across
each of our divisions are, or may in the future be, subject
to various investigations and legal proceedings,
14
Item 3. Key Information
including proceedings regarding sales and marketing
practices, pricing, corruption, trade regulation and
embargo legislation, product liability, commercial dis-
putes, employment and wrongful discharge, antitrust
matters, securities, insider trading, occupational health
and safety, environmental matters, tax, cybersecurity,
data privacy and intellectual property.
Our Sandoz Division may from time to time seek
approval to market a generic version of a product before
the expiration of patents claimed by the marketer of the
patented product. We do this in cases where we believe
that the relevant patents are invalid or unenforceable, or
would not be infringed by our generic product. As a result,
affiliates of our Sandoz Division frequently face patent
litigation, and in certain circumstances, we may elect to
market a generic product even though patent infringe-
ment actions are still pending. Should we elect to pro-
ceed in this manner and conduct a “launch at risk,” we
could face substantial damages if the final court deci-
sion is adverse to us.
For information on significant legal matters pending
against us, see “Item 18. Financial Statements—Note 19.
Provisions and other non-current liabilities” and “Item 18.
Financial Statements—Note 27. Commitments and con-
tingencies.” See also “—Our reliance on outsourcing key
business functions to third parties heightens the risks
faced by our businesses,” below.
To help us in our efforts to comply with the many
requirements that impact us, we have a significant global
ethics and compliance program in place, and we devote
substantial time and resources to efforts to ensure that
our business is conducted in a lawful and publicly accept-
able manner. Nonetheless, despite our efforts, any actual
or alleged failure to comply with law or with heightened
public expectations could lead to substantial liabilities
that may not be covered by insurance, or to other signif-
icant losses, and could affect our business, financial
position and reputation.
Such proceedings are inherently unpredictable, and
large judgments sometimes occur. As a consequence,
we may in the future incur judgments that could involve
large cash payments, including the potential repayment
of amounts allegedly obtained improperly, and other pen-
alties, including treble damages. In addition, such legal
proceedings and investigations, even if meritless, may
affect our reputation, may create a risk of potential exclu-
sion from government reimbursement programs in the
US and other countries, and may lead to civil litigation.
As a result, having taken into account all relevant factors,
we have in the past and may again in the future enter into
major settlements of such claims without bringing them
to final legal adjudication by courts or other such bod-
ies, despite having potentially significant defenses
against them, in order to limit the risks they pose to our
business and reputation. Such settlements may require
us to pay significant sums of money and to enter into
corporate integrity or similar agreements, which are
intended to regulate company behavior for extended
periods.
Any such judgments or settlements, and any accru-
als that we may take with respect to potential judgments
or settlements, could have a material adverse impact on
our business, financial condition, or results of operations,
as well as on our reputation.
The manufacture of our products is highly
regulated and complex.
The manufacture of our products is complex and heav-
ily regulated by governmental health authorities around
the world, including the FDA. Whether our products and
the related raw materials are manufactured at our own
dedicated manufacturing facilities or by third parties, we
must ensure that all manufacturing processes comply
with our own quality standards, as well as with current
Good Manufacturing Practices (cGMP) and other appli-
cable regulations.
The technically complex manufacturing processes
required to manufacture many of our products increase
the risk of production failures and product recalls, and
can increase the cost of producing our goods. Many of
our products require a supply of highly specialized raw
materials. For some of our products and raw materials,
we may rely on a single source of supply. In addition, we
manufacture and sell a number of sterile products, bio-
logic products and products involving advanced therapy
platforms, such as CAR-T therapies, gene therapy and
radioligand therapy products, all of which are particu-
larly complex and involve highly specialized manufactur-
ing technologies. As a result, even slight deviations at
any point in their production process or in material used
may lead to production failures or recalls. For example,
for our new CAR-T therapy product Kymriah, manufac-
turing-related issues have impacted the product’s sales.
In sum, because the production process for some of our
products is complex and sensitive, the cost of produc-
tion of these products can be high, and the chance of
production failures, lengthy supply interruptions, prod-
uct recalls or voluntary market withdrawals is increased.
In addition, due to the inherent complexities of our
production processes, we are required to plan our pro-
duction activities well in advance. If we should suffer from
raw material shortages, or if we should underestimate
market demand for a product, or should fail to accurately
predict when the product would be approved for sale,
then we may not be able to produce sufficient product
to meet demand. Alternatively, if we overestimate the
quantity or timing of product to be produced, then we
may be required to dispose of excess product, which
would result not only in the loss of the product but also
in the resources spent to produce it.
These complex production processes are also heav-
ily regulated by health authorities around the world. And
in recent years, these health authorities have substan-
tially intensified their scrutiny of manufacturers’ compli-
ance with such requirements. Any significant failure by
us or our third-party suppliers to comply with these
requirements, or with the health authorities’ expecta-
tions, may cause us to shut down the production facili-
ties or production lines and recall previously shipped
products. Alternatively, we may be forced to do so by a
government health authority, or could be prevented from
importing our products from one country to another. In
addition, health authorities have in some cases imposed
significant penalties for such failures to comply with
cGMP. A failure to comply fully with cGMP could also
lead to a delay in the approval of new products to be
manufactured at the impacted site.
Further, because our products are intended to pro-
mote the health of patients, for some of our products, a
15
Item 3. Key Information
supply disruption or other production issue could endan-
ger our reputation and subject us to lawsuits or to alle-
gations that the public health, or the health of individu-
als, has been harmed.
In sum, complex production processes and compli-
ance with regulatory requirements can increase our cost
of producing our products, and any significant disruption
in the supply of our products could impact patient health
and our sales, which could have a material adverse effect
on our business, financial condition, or results of opera-
tions, as well as our reputation.
See also “—We may not successfully achieve our
goals in transactions or reorganizations,” below, with
regard to our efforts to reorganize our product manufac-
turing organization, and “—Climate change, extreme
weather events, earthquakes and other natural disasters
could adversely affect our business,” below.
We devote substantial time and resources to meet-
ing these challenges. However, there can be no guaran-
tee as to the success of our efforts, or that we or our
third-party suppliers will not face significant manufac-
turing issues, or that we will successfully manage such
issues when they arise. Such issues could lead to shut-
downs, to product shortages, or to our being entirely
unable to supply products to patients for an extended
period of time. Such shortages or shutdowns have led
to, and could continue to lead to, significant losses of
sales revenue and to potential third-party litigation.
We may not successfully achieve our goals in
transactions or reorganizations.
As part of our strategy, from time to time we acquire and
divest products or entire businesses in order to expand
or complement our existing businesses, or to enable us
to focus more sharply on our strategic businesses. For
example, we recently completed the acquisitions of
AveXis, Inc., a gene therapy company, and Endocyte, Inc.,
a radioligand therapy company, as well as the divestment
of our stake in the GSK consumer healthcare joint ven-
ture. We also announced plans to spin off our Alcon Divi-
sion and to divest the Sandoz US dermatology business
and US oral solids portfolio.
Despite expending significant efforts and resources
in this area, we cannot ensure that we will identify prod-
ucts or businesses that are suitable for acquisition. In
addition, acquisition activities can be thwarted by gov-
ernmental regulation, including market concentration
limitations, political interference, overtures from compet-
itors for the targeted assets, potentially increasing prices
demanded by sellers, and other issues. Once an acqui-
sition is agreed upon with a third party, we may not be
able to complete the acquisition in the expected form or
within the expected timeframe, or at all, due to a failure
to obtain required regulatory approvals or a failure to
achieve contractual or other required closing conditions.
Further, after an acquisition, efforts to develop and mar-
ket acquired products or to integrate the acquired busi-
ness may not meet expectations, or may otherwise not
be successful, as a result of difficulties in retaining key
personnel, customers and suppliers; difference in cor-
porate culture, standards, controls, processes and pol-
icies; the price at which we acquired the business; or
other reasons. Acquisitions and divestments can also
divert management’s attention from our existing
businesses, and could result in the existing businesses
failing to achieve expected results, or in liabilities being
incurred that were not known at the time of acquisition,
or the creation of tax or accounting issues.
Similarly, we cannot ensure that we will be able to
successfully divest or spin off businesses or other assets
that we have identified for this purpose. Neither can we
ensure that we will correctly select businesses or assets
as candidates for divestment or spin-off, that we will be
able to successfully complete any planned divestments
or spin-offs, or that any completed divestment or spin-
off will achieve the expected strategic benefits, syner-
gies or opportunities, or that the divestment or spin-off
will ultimately maximize shareholder value.
In addition, as part of our strategy, from time to time
we reassess the optimal organization of our business,
such as our ongoing efforts to centralize and optimize
our manufacturing and business services organizations,
in order to better align our organization with the capa-
bilities and expertise required for competitive advantage.
But the expected benefits of such reorganizations may
never be fully realized or may take longer to realize than
expected. There can be no certainty that the businesses
and functions involved will be successfully integrated into
the new organizations or that key personnel will be
retained. Disruption from the reorganizations may make
it more difficult to maintain relationships with customers,
employees or suppliers; could result in shortfalls in pro-
gram oversight; and may result in the Group not achiev-
ing the expected productivity and financial benefits.
Both with respect to the transactions and reorgani-
zations previously announced, and to potential future
transactions and reorganizations, if we fail to success-
fully address these risks, or to devote adequate resources
to them, we may fail to achieve our strategic objectives,
including our growth strategy, or otherwise may not real-
ize the intended benefits of the acquisition, divestiture,
spin-off or reorganization.
Significant breaches of information security and
the use of electronic communications technologies
could adversely affect our business and expose
people’s personal information.
We are heavily dependent on critical, complex and inter-
dependent information technology systems, including
internet-based systems, to support our business pro-
cesses. In addition, we rely on internet and social media
tools and mobile technologies as a means of communi-
cations and to gather information, which can include peo-
ple’s personal data. We also increasingly seek to develop
technology-based products such as mobile applications
and other digital health products that go “beyond the pill”
to improve patient welfare in a variety of ways, which
could also result in us collecting personal information
about individual patients and others.
The size, age and complexity of our information tech-
nology systems make them potentially vulnerable to
external and internal security threats; outages; malicious
intrusions and attacks; cybercrimes, including state-spon-
sored cybercrimes; malware; misplaced or lost data; pro-
gramming or human errors; or other similar events.
Although we have devoted and continue to devote sig-
nificant resources and management attention to cyber-
information management and business
security,
16
Item 3. Key Information
continuity efforts, like many companies, we have expe-
rienced certain of these events and expect to continue
to experience them in the future, as the external and
internal information security threat continues to grow.
We believe that the information security incidents we
have experienced to date have yet to result 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
future outages, security incidents or other breaches in
our systems from having a material adverse effect on our
business, financial condition, results of operations, or
reputation.
A significant information security or other such event
could negatively impact important business processes,
such as the conduct of scientific research and clinical
trials, the submission of the results of such efforts to
health authorities in support of requests for product
approvals, the functioning of our manufacturing and sup-
ply chain processes, our compliance with legal obliga-
tions, communication between employees and with third
parties, and other key business activities. Information
technology issues could also lead to the compromise of
trade secrets or other intellectual property that could be
sold and used by competitors to accelerate the devel-
opment or manufacturing of competing products; to the
compromise of personal financial and health information
that could be misused for fraud and identity theft; and to
the compromise of information technology security data
such as usernames, passwords and encryption keys, as
well as security strategies and information about net-
work infrastructure, which could allow unauthorized par-
ties to gain access to additional information on our sys-
tems. In addition, malfunctions in software or medical
devices that make significant use of information technol-
ogy, including our Alcon surgical equipment, could lead
to a risk of direct harm to patients.
In addition, our routine business operations increas-
ingly involve our gathering personal information (includ-
ing sensitive personal information) about patients, ven-
dors, customers, employees, collaborators and others,
through the use of information technologies such as the
internet, social media, mobile technologies and technol-
ogy-based medical devices. Breaches of our systems or
those of our third-party contractors, or other failures to
protect such information, could expose such people’s
personal data to unauthorized persons. Any event involv-
ing the substantial loss of personal data could give rise
to significant liability, reputational harm, damaged rela-
tionships with business partners, and potentially sub-
stantial monetary penalties under laws enacted or being
enacted around the world. Such events could also lead
to restrictions on our ability to transfer personal data
across country borders.
We also use internet, social media and mobile tools
as a means to communicate with the public, including
about our products or about the diseases our products
are intended to treat. However, such uses create risks,
such as potential violations of rules regulating the pro-
motion of prescription medicines and the potential loss
of trade secrets or other intellectual property. In addi-
tion, there continues to be significant uncertainties as to
the rules that apply to such communications, and as to
the interpretations that health authorities will apply in this
context to the rules that do exist. As a result, despite our
efforts to comply with applicable rules, there is a signif-
icant risk that our use of internet, social media and mobile
technologies for such purposes may cause us to none-
theless be found in violation of them.
Our dependence upon information technology,
including any breaches of data security, technology dis-
ruptions, privacy violations, or other impacts from the
use of interconnected technologies, could give rise to
the loss of trade secrets or other intellectual property,
to the public exposure of personal information, and to
interruptions to our operations, and could result in
enforcement actions or liability, including potential gov-
ernment fines, claims for damages, and shareholders’
litigation. Any significant events of this type could require
us to expend significant resources beyond those we
already invest to remediate any damage, to further mod-
ify or enhance our protective measures, and to enable
the continuity of our business, and could have a material
adverse effect on our business, financial condition,
results of operations, and reputation.
We may fail to develop or take advantage of
transformational technologies and business models.
Rapid progress in medical and digital technologies and
in the development of sometimes radical new business
models is substantially transforming numerous industries
around the world, creating new businesses and new
opportunities for revenue and profit, while sometimes
quickly rendering established businesses uncompetitive
or obsolete. Such transformations, both positive and
negative, may impact the healthcare industry, and numer-
ous companies from the digital technology and other
industries are seeking to enter the healthcare field.
To take advantage of these opportunities, Novartis
has embarked upon a digital transformation strategy,
with the goal of making Novartis an industry leader in
leveraging advanced analytics and other new technolo-
gies. As part of this effort, we have created a new role of
Chief Digital Officer, reporting directly to the CEO,
charged with creating and executing a Companywide
digital strategy, to be led by the Executive Committee of
Novartis.
In order to reach our goal, we expect to invest sub-
stantial resources into efforts to improve the way we use
data in drug discovery and development; to improve the
ways we engage with patients, doctors and other stake-
holders; and to automate business processes. With our
commitment to using innovative science and digital tech-
nologies to help create transformative treatments for
patients, together with our expertise and the extensive
data we have and continue to amass, we believe that we
have an opportunity to transform our business model
using digital technologies.
There is no guarantee that our efforts toward a digi-
tal transformation will succeed, or that we will success-
fully transform our business model, or that we will be able
to do so at any particular cost or any particular time. In
order to succeed, we will be required to encourage a cul-
tural change among our employees, attract and retain
employees with appropriate skills and mindset, and suc-
cessfully innovate across a variety of technology fields.
At the same time, other companies with specialized
expertise or business models are entering the
17
Item 3. Key Information
healthcare field, from research and development to phar-
maceutical distribution, potentially disrupting our rela-
tionships with patients, healthcare professionals, cus-
tomers, distributors and suppliers, with unknown
potential consequences for us. For example, companies
such as Amazon, which acquired PillPack; IBM, with its
Watson project; Alphabet, with its subsidiaries Verily and
Calico; and Amazon, Berkshire Hathaway and JPMor-
gan, with their healthcare joint venture, as well as other
established technology companies and specialized
startup organizations, are aggressively seeking to move
forward in this field. In addition, we face new competi-
tors from different regions of the world, including China,
which is moving aggressively to expand its role in the
sciences and in many industries. Such new competitors
may successfully impact our share of the healthcare
value chain, or even develop products or technologies
that could make our products uncompetitive or obsolete.
In an effort to maintain and advance our position as
a leader in healthcare and related technology, we have
made significant efforts to develop and to collaborate
with other organizations in the development of advanced
therapy platforms, including CAR-T therapy, developed
in collaboration with the University of Pennsylvania; gene
therapy, through our acquisition of AveXis and the licens-
ing of Luxturna outside the US from Spark Therapeutics;
and radioligand therapy, through our acquisitions of
Advanced Accelerator Applications and Endocyte, Inc.
If we should fail in our efforts at a digital transforma-
tion of our Company, or in bringing advanced therapy
platforms to market, then there is a risk that we may fail
to create the innovative new products, tools or tech-
niques that the new medical and digital technologies may
make possible, 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. Any such events could have a mate-
rial adverse effect on our business, financial condition,
or results of operations.
Environmental, social and governance matters may
impact our business and reputation.
Increasingly, in addition to the importance of their finan-
cial performance, companies are being judged by their
performance on a variety of environmental, social and
governance (ESG) matters, which are considered to con-
tribute to the long-term sustainability of companies’ per-
formance.
A variety of organizations measure the performance
of companies on such ESG topics, and the results of
these assessments are widely publicized, including, for
example, MSCI, Sustainalytics, the Dow Jones Sustain-
ability Index and, in the healthcare industry, the Access
to Medicine Index. In addition, investment in funds that
specialize in companies that perform well in such assess-
ments are increasingly popular, and major institutional
investors, such as BlackRock, have publicly emphasized
the importance of such ESG measures to their
investment decisions. Topics taken into account in such
assessments include the company’s efforts and impacts
on climate change and human rights, ethics and compli-
ance with law, and the role of the company’s board of
directors in supervising various sustainability issues. In
addition to the topics typically considered in such
assessments, in our healthcare industry, issues of the
public’s ability to access our medicines are of particular
importance.
We actively manage a broad range of such ESG mat-
ters, taking into consideration their expected impact on
the sustainability of our business over time, and on the
potential impact of our business on society. For a descrip-
tion of our activities on such topics, see “Item 4. Infor-
mation on the Company—Item 4.B Business overview—
Overview—Corporate responsibility.” However, in a
rapidly changing world, there can be no certainty that
we will manage such issues successfully, or that we will
successfully meet society’s expectations as to our
proper role. Any failure or perceived failure by us in this
regard could have a material adverse effect on our rep-
utation and on our business, financial condition, or results
of operations, including the sustainability of our business
over time.
See also “—Our reliance on outsourcing key business
functions to third parties heightens the risks faced by
our businesses,” and “—Climate change, extreme
weather events, earthquakes and other natural disasters
could adversely affect our business,” below.
Intangible assets and goodwill on our books may
lead to significant impairment charges.
We carry a significant amount of goodwill and other
intangible assets on our consolidated balance sheet, pri-
marily due to acquisitions, including, in particular, sub-
stantial goodwill and other intangible assets obtained as
a result of our acquisitions of Alcon and of certain
oncology assets from GSK. As a result, we may incur
significant impairment charges in the future if the fair
value of the intangible assets and the groupings of
cash-generating units containing goodwill would be less
than their carrying value on the Group’s consolidated
balance sheet at any point in time.
We regularly review for impairment our long-lived
intangible and tangible assets, including identifiable
intangible assets, investments in associated companies,
and goodwill. Goodwill, intangible assets with an indefi-
nite useful life, acquired research projects not ready for
use, and acquired development projects not yet ready
for use are subject to impairment review at least annu-
ally. Other long-lived assets are reviewed for impairment
when there is an indication that an impairment may have
occurred. Impairment testing under IFRS may lead to
impairment charges in the future. Any significant impair-
ment charges could have a material adverse effect on
our results of operations and financial condition. In 2018,
for example, we recorded intangible asset impairment
charges of USD 1.2 billion.
For a detailed discussion of how we determine
whether an impairment has occurred, what factors could
result in an impairment, and the impact of impairment
charges on our results of operations, see “Item 5. Oper-
ating and Financial Review and Prospects—Item 5.A
Operating results—Critical accounting policies and
18
Item 3. Key Information
estimates—Impairment of goodwill, intangible assets and
property, plant and equipment” and “Item 18. Financial
Statements—Note 1. Significant accounting policies” and
“Item 18. Financial Statements—Note 10. Goodwill and
intangible assets.”
Political and economic instability may impact our
results.
Unpredictable political conditions currently exist in var-
ious parts of the world, including a backlash in certain
areas against free trade, anti-immigrant sentiment, social
unrest, fears of terrorism, and the risk of direct conflicts
between nations. In the US, the presidential administra-
tion’s imposition of tariffs and opposition to free-trade
agreements could have a negative impact on interna-
tional trade. Similarly, there is a risk that barriers to free
trade and the free movement of people may rise in
Europe as a result of the UK’s “Brexit” efforts and the
rise of nationalist, separatist and populist sentiment in
various countries, sometimes exacerbated by large-
scale migration flows. Furthermore, significant conflicts
continue in parts of the Middle East, including conflicts
involving Saudi Arabia and Iran, and with respect to
places such as Russia, Ukraine and North Korea. Collec-
tively, such difficult conditions could, among other things,
disturb the international flow of goods and increase the
costs and difficulties of international transactions.
In addition, local economic conditions may adversely
affect the ability of payers, as well as our distributors,
customers, suppliers and service providers, to pay for
our products, or otherwise to buy necessary inventory
or raw materials, and to perform their obligations under
agreements with us. Although we make efforts to moni-
tor these third parties’ financial condition and their liquid-
ity, our ability to do so is limited, and some of them may
become unable to pay their bills in a timely manner, or
may even become insolvent, which could negatively
impact our business or results of operations. These risks
may be elevated with respect to our interactions with fis-
cally challenged government payers, or with third parties
with substantial exposure to such payers. See also “—
Our reliance on outsourcing key business functions to
third parties heightens the risks faced by our busi-
nesses,” below.
Financial market issues may also result in a lower
return on our financial investments, and a lower value on
some of our assets. Alternatively, inflation could accel-
erate, which could lead to higher interest rates, increas-
ing our costs of raising capital. Uncertainties around
future central bank and other economic policies in the
US and EU, as well as high debt levels in certain other
countries, could also impact world trade. Sudden
increases in economic, currency or financial market vol-
atility in different countries have also impacted, and may
continue to unpredictably impact, our business or results
of operations, including the conversion of our operating
results into our reporting currency, the US dollar, as well
as the value of our investments in our pension plans.
For further information on such risks, see “—Foreign
exchange fluctuations may adversely affect our earnings
and the value of some of our assets,” and “—Any inaccu-
racy in the assumptions and estimates used to calculate
our pension plan obligations could substantially increase
our pension-related expenses,” below. See also “—Our
business is affected by pressures on pricing and reim-
bursement for our products,” above, and “Item 5. Oper-
ating and Financial Review and Prospects—Item 5.B
Liquidity and capital resources—Effects of currency fluc-
tuations.”
There is also a risk that countries facing local finan-
cial 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.
See also “Item 5. Operating and Financial Review and
Prospects—Item 5.B Liquidity and capital resources—
Condensed consolidated balance sheets,” and “Item 18.
Financial Statements—Note 14. Trade receivables” and
“Item 18. Financial Statements—Note 28. Financial instru-
ments—additional disclosures.”
Similarly, increased scrutiny of corporate taxes and
executive pay may lead to significant business disrup-
tions or other adverse business conditions, and may
interfere with our ability to attract and retain qualified
personnel. See “—Changes in tax laws or their applica-
tion could adversely affect our results of operations” and
“—An inability to attract and retain qualified personnel
could adversely affect our business,” below.
To the extent that economic and financial conditions
directly affect consumers, then our Innovative Medicines
and Sandoz Divisions may be impacted. Given the
requirements in certain countries that patients directly
pay an increasingly large contribution toward their own
healthcare costs, there is a risk that consumers may cut
back on prescription drugs to help cope with rising costs.
In addition, the elective surgical and contact lens busi-
nesses of our Alcon Division may be particularly sensi-
tive to declines in consumer spending.
At the same time, significant changes and potential
future volatility in the financial markets, in the consumer
and business environment, in the competitive landscape,
and in the global political and security landscape make
it increasingly difficult for us to predict our revenues and
earnings into the future. As a result, any revenue or earn-
ings guidance or outlook that we have given or might give
may be overtaken by events, or may otherwise turn out
to be inaccurate. Though we endeavor to give reason-
able estimates of future revenues and earnings at the
time we give such guidance, based on then-current
knowledge and conditions, there is a significant risk that
such guidance or outlook will turn out to be, or to have
been, incorrect.
Separately and collectively, such factors may have a
material adverse effect on our revenues, results of oper-
ations, financial condition and, if circumstances worsen,
our ability to raise capital at reasonable rates.
Our indebtedness could adversely affect our
operations.
As of December 31, 2018, we had USD 22.5 billion of
non-current financial debt and USD 9.7 billion of current
19
Item 3. Key Information
financial debt. Our current and long-term debt requires
us to dedicate a portion of our cash flow to service inter-
est and principal payments and, if interest rates rise, this
amount may increase. As a result, our existing debt may
limit our ability to use our cash flow to fund capital expen-
ditures, to engage in transactions, or to meet other cap-
ital needs, or otherwise may place us at a competitive
disadvantage relative to competitors that have less debt.
Our debt could also limit our flexibility to plan for and
react to changes in our business or industry, and increase
our vulnerability to general adverse economic and indus-
try conditions, including changes in interest rates or a
downturn in our business or the economy. We may also
have difficulty refinancing our existing debt or incurring
new debt on terms that we would consider to be com-
mercially reasonable, if at all.
Our reliance on outsourcing key business functions
to third parties heightens the risks faced by our
businesses.
We outsource the performance of certain key business
functions to third parties, and invest a significant amount
of effort and resources into doing so. Such outsourced
functions can include research and development collab-
orations, manufacturing operations, warehousing and
distribution activities, certain finance functions, market-
ing activities, data management and others. We may par-
ticularly rely on third parties in developing countries,
including for the sales, marketing and distribution of our
products, and to obtain the intermediate and raw mate-
rials used in the manufacture of our products.
Our reliance on outsourcing and third parties for the
research and development or manufacturing of our prod-
ucts may reduce the potential profitability of such prod-
ucts.
In addition, governments and the public are increas-
ingly placing pressure on major corporations, including
Novartis, to take responsibility for compliance with
human rights and appropriate environmental practices,
as well as other actions, of their third-party contractors
around the world. Examples of this include the Conflict
Minerals rule in the US, and the UK Modern Slavery Act.
We place strict contractual requirements on such
contractors to comply with law and with our high stan-
dards. We also expend significant resources on efforts
to screen out inappropriate contractors, to monitor the
activities of those we have retained, and to seek their
compliance with the law and with our expectations.
Nonetheless, many of these companies have limited
resources, and, in particular, do not have internal com-
pliance resources comparable to those within our orga-
nization.
Ultimately, if the third parties fail to meet their obliga-
tions to us, we may lose our investment in the collabora-
tions and fail to receive the expected benefits. In addi-
tion, should any of these third parties fail to comply with
the law or should they act inappropriately in the course
of their performance of services for us, there is a risk
that we could be held responsible for their acts, that our
reputation may suffer, and that penalties may be imposed
upon us. Any such failures by third parties could have a
material adverse effect on our business, financial condi-
tion, results of operations, or reputation.
Competition and failure to successfully develop
biosimilars and other differentiated products may
impact the success of our Sandoz Division.
Our Sandoz Division faces intense competition from
companies that market patented pharmaceutical prod-
ucts, which sometimes take aggressive steps to delay
the introduction of generic and biosimilar medicines, to
limit the availability of exclusivity periods or to reduce
their value. At the same time, Sandoz faces strong com-
petition from other generic and biosimilar pharmaceuti-
cal companies, which aggressively compete for market
share, including through significant price competition.
Such competitive actions by other patented, generic and
biosimilar pharmaceutical manufacturers may increase
the costs and risks associated with our efforts to intro-
duce and market such products, may delay the introduc-
tion or marketing of such products, and may further limit
the prices at which we are able to sell these products
and impact our results of operations. In particular, in the
US in recent years, industrywide price competition
among generic pharmaceutical companies and consol-
idation of buyers have significantly hurt Sandoz sales.
Expecting these trends to continue, we agreed to sell
the Sandoz US dermatology business and generic US
oral solids portfolio to Aurobindo Pharma USA Inc.
In addition, Sandoz has invested heavily in the devel-
opment of biosimilar drugs and other differentiated prod-
ucts, with the expectation that such products offer the
potential for higher profitability than less complex prod-
ucts. Sandoz has invested in the development of such
products despite the fact that their development is more
difficult and expensive than the development of standard
generic drugs, and despite the fact that regulations con-
cerning the approval, marketing and sale of biosimilars
in certain countries, including in the US, are still under
development or not entirely clear. If Sandoz should fail
in its efforts to develop and market biosimilars or other
such differentiated products, or if the developing biosim-
ilars regulations do not ultimately favor the development
and sale of such products, or if we are unable to sell our
biosimilar products for a sufficient price, then this could
have an adverse effect on the success of our Sandoz
Division, and we may fail to achieve expected returns on
the investments by Sandoz in the development of bio-
similars and other differentiated products.
See also “—Our research and development efforts
may not succeed” above, with regard to the risks involved
in our efforts to develop biosimilars and differentiated
generic products and to obtain exclusivity periods; and
“—Ongoing consolidation among our distributors and
retailers is increasing both the purchasing leverage of
key customers and the concentration of credit risk,”
below, with respect to the impact of such consolidation
on our pricing.
Any inaccuracy in the assumptions and estimates
used to calculate our pension plan and other
post-employment obligations could substantially
increase our pension-related expenses.
We sponsor pension and other post-employment bene-
fit plans in various forms. These plans cover a significant
portion of our current and former associates. While most
of our plans are now defined contribution plans, certain
of our associates remain participants in defined benefits
20
Item 3. Key Information
plans. For these defined benefits plans, we are required
to make significant assumptions and estimates about
future events in calculating the present value of expected
future plan expenses and liabilities. These include
assumptions used to determine the discount rates we
apply to estimated future liabilities and rates of future
compensation increases. Assumptions and estimates
used by Novartis may differ materially from the actual
results we experience in the future, due to changing mar-
ket and economic conditions, higher or lower withdrawal
rates, or longer or shorter life spans of participants,
among other variables. For example, in 2018, a decrease
in the interest rate we apply in determining the present
value of expected future defined benefit obligations of
one-quarter of 1% would have increased our year-end
defined benefit pension obligation for plans in Switzer-
land, the US, the UK, Germany and Japan, which repre-
sent 94% of the Group total defined benefit pension obli-
gation, by USD 0.8 billion. Any differences between our
assumptions and estimates and our actual experience
could require us to make additional contributions to our
pension funds. Further, additional employer contribu-
tions might be required if plan funding falls below the lev-
els required by local rules. Either such event could have
a material effect on our results of operations and finan-
cial condition.
For more information on obligations under retirement
and other post-employment benefit plans and underly-
ing actuarial assumptions, see “Item 5. Operating and
Financial Review and Prospects—Item 5.A Operating
results—Critical accounting policies and estimates—
Retirement and other post-employment benefit plans”
and “Item 18. Financial Statements—Note 24. Post-em-
ployment benefits for associates.” See also “—Political
and economic instability may have a material adverse
effect on our results,” above.
Changes in tax laws or their application could
adversely affect our financial results.
Our multinational operations are taxed under the laws
of the countries and other jurisdictions in which we oper-
ate. However, the integrated 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 potential dis-
putes relating to the prices our subsidiaries charge one
another for intercompany transactions, known as trans-
fer pricing. The majority of the jurisdictions in which we
operate have double tax treaties with other foreign juris-
dictions, 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 EU also adopted a new Directive on
Administrative Cooperation (DAC6) in 2018, which seeks
additional reporting. In addition, the European Commis-
sion 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.
Switzerland is in the process of considering the
implementation of corporate tax reform, which could
become effective as early as the first quarter of 2019.
However, the outcome of these efforts remains subject
to change and could be enacted in a materially different
form from what is currently proposed, or could be admin-
istered or implemented in a manner different from our
expectations. There is also a risk that the EU may not be
satisfied with the outcome of Switzerland’s tax reform
efforts, and take steps to seek further changes. Accord-
ingly, there can be no assurance that Swiss corporate
tax reform will not adversely affect our business or finan-
cial condition.
In addition, in the US, the Tax Cuts and Jobs Act,
enacted at the end of 2017, included substantial changes
to the US taxation of individuals and businesses. Although
the law substantially decreased tax rates applicable to
corporations in the US, 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.
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.
Counterfeit versions of our products could harm
our patients and reputation.
Our industry continues to be challenged by the vulnera-
bility of distribution channels to illegal counterfeiting and
the presence of counterfeit products in a growing num-
ber of markets and over the internet. Counterfeit prod-
ucts are frequently unsafe or ineffective, and can poten-
tially be life-threatening. To distributors and patients,
counterfeit products may be visually indistinguishable
from the authentic version. Reports of product
21
Item 3. Key Information
ineffectiveness or adverse reactions to counterfeit
drugs, or increased levels of counterfeiting could affect
patient confidence in our authentic products, and could
harm our business or lead to litigation. In addition, it is
possible that a lack of efficacy or adverse events caused
by unsafe counterfeit products could mistakenly be
attributed to the authentic product. If a product of ours
was the subject of counterfeits, we could incur substan-
tial reputational and financial harm.
Foreign exchange fluctuations may adversely
affect our earnings and the value of some of our
assets.
Changes in exchange rates between the US dollar, our
reporting currency, and other currencies can result in
significant increases or decreases in our reported sales,
costs and earnings as expressed in US dollars, and in
the reported value of our assets, liabilities and cash flows.
In addition to ordinary market risk, there is a risk that
countries could take affirmative steps that could signifi-
cantly impact the value of their currencies. Such steps
could include “quantitative easing” measures and poten-
tial withdrawals by countries from 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 cur-
rency. Such exchange controls could limit our ability to
distribute retained earnings from our local affiliates, or
to pay intercompany payables due from those countries.
See “—Political and economic instability may have a
material adverse effect on our results,” below.
Despite measures undertaken to reduce or hedge
against foreign currency exchange risks, because a sig-
nificant portion of our earnings and expenditures are in
currencies other than the US dollar, including expendi-
tures in Swiss francs that are significantly higher than
our revenue in Swiss francs, any such exchange rate vol-
atility may negatively and materially impact our results
of operations and financial condition, and may impact
the reported value of our net sales, earnings, assets and
liabilities. In addition, the timing and extent of such vola-
tility can be difficult to predict. Further, depending on the
movements of particular foreign exchange rates, we may
be materially adversely affected at a time when the same
currency movements are benefiting some of our com-
petitors.
For more information on the effects of currency fluc-
tuations on our consolidated financial statements and
on how we manage currency risk, see “Item 5. Operat-
ing and Financial Review and Prospects—Item 5.B Liquid-
ity and capital resources—Effects of currency fluctua-
tions,” “Item 11. Quantitative and Qualitative Disclosures
About Market Risk,” and “Item 18. Financial Statements—
Note 28. Financial instruments—additional disclosures.”
Ongoing consolidation among our distributors and
retailers is increasing both the purchasing leverage
of key customers and the concentration of credit
risk.
Increasingly, a significant portion of our global sales is
made to a relatively small number of drug wholesalers,
retail chains and other purchasing organizations. For
example, our three most important customers globally
are all in the US, and accounted for approximately 16%,
13% and 7%, respectively, of Group net sales in 2018.
The largest trade receivables outstanding were for these
three customers, amounting to 12%, 10% and 6%, respec-
tively, of the Group’s trade receivables at December 31,
2018. The trend has been toward further consolidation
among distributors and retailers, both in the US and inter-
nationally. As a result, we may be affected by fluctuations
in the buying patterns of such customers, and these cus-
tomers are gaining additional purchasing leverage,
increasing the pricing pressures facing our businesses.
These pressures can particularly impact our Sandoz Divi-
sion, the generic products of which can often be obtained
from numerous competitors. Moreover, we are exposed
to a concentration of credit risk as a result of this con-
centration among our customers. If one or more of our
major customers experienced financial difficulties, the
effect on us would be substantially greater than in the
past, and could include a substantial loss of sales and
an inability to collect amounts owed to us. Such events
could have a material adverse effect on our business,
financial condition, or results of operations.
An inability to attract and retain qualified personnel
could adversely affect our business.
We highly depend upon skilled personnel in key parts of
our organization, and we invest heavily in recruiting, train-
ing and retaining qualified individuals, including signifi-
cant efforts to enhance the diversity of our workforce.
The loss of the service of key members of our organiza-
tion – including senior members of our scientific and
management teams, high-quality researchers and devel-
opment specialists, and skilled personnel in developing
countries – could delay or prevent the achievement of
major business objectives.
Our future growth will demand talented associates
and leaders, yet the market for talent has become
increasingly competitive. In particular, Emerging Growth
Markets are expected to continue to be an important
source of growth, but in many of these countries there
is a limited pool of executives with the training and inter-
national experience needed to work successfully in a
global organization like Novartis.
In addition, shifting demographic trends are expected
to result in fewer students, fewer graduates and fewer
people entering the workforce in the Western world in
the next 10 years. Moreover, many members of younger
generations around the world have changing expecta-
tions toward careers, engagement and the integration
of work in their overall lifestyles.
The supply of talent for certain key functional and
leadership positions is decreasing, and a talent gap is
visible for some professions and geographies – engi-
neers in Germany, for example. Recruitment is increas-
ingly regional or global in specialized fields such as clin-
ical development, biosciences, chemistry and information
technology. In addition, the geographic mobility of talent
is expected to decrease in the future, with talented indi-
viduals in developed and developing countries anticipat-
ing ample career opportunities closer to home than in
the past. This decrease in mobility may be worsened by
anti-immigrant sentiments in many countries, and laws
discouraging immigration. See “—Political and economic
instability may impact our results,” above.
22
Item 3. Key Information
In addition, our ability to hire qualified personnel also
depends on the flexibility to reward superior perfor-
mance and to pay competitive compensation. Laws and
regulations on executive compensation, including legis-
lation in our home country, Switzerland, may restrict our
ability to attract, motivate and retain the required level of
qualified personnel.
We face intense competition for an increasingly lim-
ited pool of qualified individuals from numerous pharma-
ceutical and biotechnology companies, universities, gov-
ernmental entities, other research institutions, other
companies seeking to enter the healthcare space, and
companies in other industries. As a result, despite sig-
nificant efforts on our part, we may be unable to attract
and retain qualified individuals in sufficient numbers,
which could have an adverse effect on our business,
financial condition, or results of operations.
Environmental liabilities may adversely impact our
financial results.
The environmental laws of various jurisdictions impose
actual and potential obligations on us to remediate con-
taminated sites, in some cases over many years. While
we have set aside substantial provisions for worldwide
environmental liabilities, there is no guarantee that addi-
tional costs will not be incurred beyond the amounts for
which we have provided in the Group consolidated finan-
cial statements. If environmental contamination related
to our facilities or products adversely impacts third par-
ties, if we fail to properly manage the safety of our facil-
ities and the environmental risks, or if we are required to
further increase our provisions for environmental liabili-
ties in the future, this could have a material adverse effect
on our business, financial condition, results of opera-
tions, and reputation.
See also “Item 4. Information on the Company—
Item 4.D Property, plants and equipment—Environmen-
tal matters” and “Item 18. Financial Statements—Note 19.
Provisions and other non-current liabilities.”
Climate change, extreme weather events,
earthquakes and other natural disasters could
adversely affect our business.
In recent years, extreme weather events and changing
weather patterns such as storms, flooding, droughts and
temperature changes have become more common. As
a result, we are potentially exposed to varying natural
disaster or extreme weather risks such as hurricanes,
tornadoes, droughts or floods, or other events that may
result from the impact of climate change on the environ-
ment, such as sea level rise. For example, some of our
production facilities that depend on the availability of sig-
nificant water supplies are located in areas where water
is increasingly scarce. Other facilities are located in
places that, because of increasingly violent weather
events, sea level rise, or both, are increasingly at risk of
substantial flooding. As a result, we could experience
increased production or other costs, business interrup-
tions, destruction of facilities, and loss of life, all of which
could have a material adverse effect on our business,
financial condition, or results of operations.
In addition, our corporate headquarters, the head-
quarters of our Innovative Medicines Division, and
certain of our major Innovative Medicines Division pro-
duction and research facilities are located near earth-
quake fault lines in Basel, Switzerland. Other major facil-
ities are located near major earthquake fault lines in
various locations around the world. In the event of a major
earthquake, we could experience business interruptions,
destruction of facilities, and loss of life, all of which could
have a material adverse effect on our business, financial
condition, or results of operations.
Risks related to our ADRs
The price of our ADRs and the US dollar value of any
dividends may be negatively affected by fluctuations
in the US dollar/Swiss franc exchange rate.
Our American Depositary Shares (ADSs), each repre-
senting one Novartis share and evidenced by American
Depositary Receipts (ADRs), trade on the NYSE in US
dollars. Since the shares underlying the ADRs are listed
in Switzerland on the SIX Swiss Exchange (SIX) and
trade in Swiss francs, the value of the ADRs may be
affected by fluctuations in the US dollar/Swiss franc
exchange rate. In addition, since dividends that we may
declare will be denominated in Swiss francs, exchange
rate fluctuations will affect the US dollar equivalent of
dividends received by holders of ADRs. If the value of
the Swiss franc decreases against the US dollar, the
price at which our ADRs trade may – and the value of the
US dollar equivalent of any dividend will – decrease
accordingly.
Holders of ADRs may not be able to exercise pre-
emptive rights attached to shares underlying ADRs.
Under Swiss law, shareholders have pre-emptive rights
to subscribe for issuances of new shares on a pro rata
basis. Shareholders may waive their pre-emptive rights
in respect of any offering at a general meeting of share-
holders. Pre-emptive rights, if not previously waived, are
transferable during the subscription period relating to a
particular offering of shares and may be quoted on the
SIX. US holders of ADRs may not be able to exercise the
pre-emptive rights attached to the shares underlying
their ADRs unless a registration statement under the US
Securities Act of 1933 is effective with respect to such
rights and the related shares, or an exemption from this
registration requirement is available. In deciding whether
to file such a registration statement, we would evaluate
the related costs and potential liabilities, as well as the
benefits of enabling the exercise by ADR holders of the
pre-emptive rights associated with the shares underly-
ing their ADRs. We cannot guarantee that a registration
statement would be filed, or, if filed, that it would be
declared effective. If pre-emptive rights could not be
exercised by an ADR holder, JPMorgan Chase Bank,
N.A., as depositary, would, if possible, sell the holder’s
pre-emptive rights and distribute the net proceeds of the
sale to the holder. If the depositary determines, in its dis-
cretion, that the rights could not be sold, the depositary
might allow such rights to lapse. In either case, the inter-
est of ADR holders in Novartis would be diluted and, if
the depositary allowed rights to lapse, holders of ADRs
would not realize any value from the pre-emptive rights.
23
Item 4. Information on the Company
Item 4. Information on the Company
4.A History and development of Novartis
Novartis AG
Novartis AG was incorporated on February 29, 1996,
under the laws of Switzerland as a stock corporation
(Aktiengesellschaft) with an indefinite duration. On
December 20, 1996, our predecessor companies,
Ciba-Geigy AG and Sandoz AG, merged into this new
entity, creating Novartis. We are domiciled in and gov-
erned by the laws of Switzerland. Our registered office
is located at the following address:
Novartis AG
Lichtstrasse 35
CH-4056 Basel, Switzerland
Telephone: 011-41-61-324-1111
Web: www.novartis.com
Novartis is a multinational group of companies special-
izing in the research, development, manufacturing and
marketing of a broad range of healthcare products led
by innovative pharmaceuticals and also including
high-quality generic pharmaceuticals and eye care prod-
ucts. Novartis AG, our Swiss holding company, owns,
directly or indirectly, all of our significant operating com-
panies. For a list of our significant operating subsidiar-
ies, see “Item 18. Financial Statements—Note 31. Princi-
pal Group subsidiaries and associated companies.”
The SEC maintains an internet site at http://www.sec.
gov that contains reports, information statements, and
other information regarding issuers that file electroni-
cally with the SEC.
Important corporate developments 2016‑2018
2018
December
Novartis announces that on December 21, 2018, it completed the previously-announced acquisition of Endocyte,
a US-based biopharmaceutical company focused on developing targeted therapeutics for cancer treatment, in a
transaction valued at approximately USD 2.1 billion.
Novartis announces that on December 19, 2018, it completed the acquisition of Tear Film Innovations, Inc., a pri-
vately-held company and manufacturer of the iLux Device, a therapeutic device used to treat meibomian gland dys-
function (MGD), a leading cause of dry eye.
Novartis announces the appointment of Susanne Schaffert, Ph.D., as CEO Novartis Oncology and a member of
the Executive Committee of Novartis (ECN), effective January 1, 2019. Dr. Schaffert succeeds Liz Barrett, who
stepped down effective December 31, 2018.
Novartis announces an offer to acquire CellforCure from LFB. CellforCure, a French company, is one of the first
and largest contract development and manufacturing organizations producing cell and gene therapies in Europe.
The transaction is subject to usual and customary closing conditions, including employee consultation process and
necessary regulatory approvals.
November
Novartis announces that Alcon had filed an initial Form 20-F registration statement with the US Securities and
Exchange Commission (SEC) in relation to the previously announced intention of Novartis to spin off the Alcon Divi-
sion as an independent, publicly traded company. We expect to make an application to list the shares in Alcon on
SIX and the NYSE under the ticker symbol “ALC.” Completion of the planned spin-off is subject to general market
conditions, receipt of necessary authorizations, tax rulings and opinions, and shareholder approval at the 2019
Novartis annual shareholder meeting. If approvals are secured and conditions are met, the spin-off is expected to
be completed in the first half of 2019.
October
Novartis announces that it has entered into a clinical development agreement with Pfizer that will include a study
combining tropifexor and one or more Pfizer compounds for the treatment of nonalcoholic steatohepatitis (NASH).
Novartis announces that it has entered into a licensing and equity agreement with Boston Pharmaceuticals for
the development of three novel anti-infective drug candidates that are part of the Novartis Infectious Diseases port-
folio, which have the potential to address the need for new agents to treat antibiotic-resistant Gram-negative infec-
tions. Under the terms of the agreement, Boston Pharmaceuticals acquired worldwide rights to two complemen-
tary candidates targeting carbapenem-resistant enterobacteriaceae (CRE) and one candidate targeting
Pseudomonas infections.
24
Item 4. Information on the Company
September
Novartis announces it has agreed to sell selected portions of its Sandoz US portfolio, specifically the Sandoz US
dermatology business and generic US oral solids portfolio, to Aurobindo Pharma USA Inc., for USD 0.9 billion in
cash plus USD 0.1 billion in potential earn-outs. This transaction is expected to close in 2019, subject to the com-
pletion of customary closing conditions.
Novartis announces that it plans to continue the transformation of its manufacturing network and services busi-
nesses, including a planned workforce reduction in Switzerland over a four-year period. Novartis also plans to con-
tinue the ongoing transfer of transactional activities to the five global service centers within Novartis Business Ser-
vices, and to begin to transfer managerial service capabilities to these service centers.
August
Novartis announces the appointment of Dr. Klaus Moosmayer as Chief Ethics, Risk and Compliance Officer and a
member of the ECN, reporting to the CEO of Novartis, effective December 1, 2018.
July
Novartis announces that it has signed a renewed Memorandum of Understanding with the World Health Organiza-
tion to extend its agreement for the donation of Egaten (triclabendazole) for the treatment of liver fluke (fasciolia-
sis) until 2022.
Novartis announces that it has entered into an exclusive in-license agreement with Galapagos NV and MorphoSys
AG for an investigational biologic compound, MOR106, a novel antibody directed against IL-17C. This transaction
became effective on September 10, 2018, upon the expiration of the applicable waiting period under the Hart-Scott-
Rodino Antitrust Improvements Act of 1976.
June
Novartis announces its intention to seek shareholder approval for a 100% spin-off of its Alcon Division into a stand-
alone public company. In addition to shareholder approval, completion of the proposed Alcon spin-off remains sub-
ject to certain conditions precedent, such as no material adverse events, receipt of necessary authorizations as
well as tax rulings and opinions.
Novartis announces that it will initiate a share buyback of up to USD 5 billion to be executed by the end of 2019.
Novartis announces the completion on June 1, 2018, of its previously announced divestment to GlaxoSmithKline
PLC of its 36.5% stake in GSK Consumer Healthcare Holdings Ltd. for a payment of USD 13.0 billion in cash. The
divestment brings to an end Novartis participation in its consumer healthcare joint venture with GSK, which was
formed in 2015 as part of the Novartis portfolio transformation.
May
Novartis announces that Shannon Thyme Klinger, previously Chief Ethics, Risk and Compliance Officer, was
appointed Group General Counsel effective June 1, 2018, and will continue as a member of the ECN, following the
decision by Felix R. Ehrat to retire from the Company.
Novartis announces that Robert Weltevreden will be appointed as Head of Novartis Business Services (NBS)
and a member of the ECN, reporting to the CEO of Novartis, effective June 1, 2018.
Novartis announces the completion of its previously announced cash tender offer to purchase all the outstand-
ing shares of common stock of AveXis, Inc., a US-based clinical stage gene therapy company. The lead AveXis
product candidate, AVXS-101, has the potential to be the first-ever one-time gene replacement therapy for spinal
muscular atrophy. This acquisition was completed on May 15, 2018.
April
Novartis announces the appointment of John Tsai, M.D., as Head of Global Drug Development (GDD) and Chief
Medical Officer of Novartis, and a member of the ECN, reporting to the CEO of Novartis, effective May 1, 2018. Dr.
Tsai succeeds Dr. Narasimhan, who became CEO of Novartis on February 1, 2018. Dr. Robert Kowalski, who led
GDD ad interim from February 1, 2018, will resume his responsibilities as Head of Global Regulatory Affairs for GDD.
Novartis announces that its Sandoz Division has entered into a collaboration with Pear Therapeutics to com-
mercialize and continue development of novel prescription digital therapeutics, including reSET for patients with
substance use disorder and reSET-O for patients with opioid use disorder who are currently receiving buprenor-
phine. Novartis announced the commercial launch of reSET for patients with substance use disorder in November
2018 and announced FDA clearance of reSET-O for patients with opioid use disorder in December 2018 and launch
in January 2019.
Novartis announces a five-year commitment to the fight against malaria in conjunction with the 7th Multilateral
Initiative on Malaria Conference and the Malaria Summit of the Commonwealth Heads of Government meeting. As
part of its commitment, Novartis will invest more than USD 100 million over the next five years to advance research
and development of next-generation treatments to combat emerging resistance to artemisinin and other currently
used antimalarials. The Company will also implement an equitable pricing strategy to maximize patient access in
malaria-endemic countries when these new treatments become available.
25
Item 4. Information on the Company
March
Novartis announces that it has entered into a collaboration and licensing agreement with the Wyss Institute for
Biologically Inspired Engineering at Harvard University and the Dana-Farber Cancer Institute to develop biomate-
rial systems for its portfolio of immuno-oncology therapies.
Novartis announces that Bertrand Bodson, Chief Digital Officer; Steffen Lang, Global Head Novartis Technical
Operations; and Shannon Klinger, Chief Ethics, Risk and Compliance Officer, have been appointed to the ECN effec-
tive as of April 1, 2018. André Wyss, President Novartis Operations, has decided to step down from the ECN on
April 1, 2018, to pursue his career outside of Novartis.
Novartis announces an additional strategic alliance with Science 37 to design and initiate up to 10 new clinical
trials over the next three years, which are intended to blend virtual and traditional clinical trial models, with increas-
ing degrees of decentralization toward a mostly “site-less” model.
Novartis announces a collaboration with Pear Therapeutics to develop novel prescription digital therapeutics,
software applications designed to effectively treat disease and improve clinical outcomes for patients, for schizo-
phrenia and multiple sclerosis.
February
Novartis announces an alliance with the Bill & Melinda Gates Foundation to advance development of Novartis drug
candidate KDU731 for the treatment of cryptosporidiosis.
Novartis completes euro (EUR) denominated bond offerings totaling EUR 2.25 billion.
January
Novartis announces on January 22, 2018, that it had successfully completed its previously announced tender offer
for all of the then-outstanding ordinary shares, including ordinary shares represented by American Depositary
Shares (ADSs), of AAA. As of the expiration of the offer on January 19, 2018, approximately 97% of the then-out-
standing fully diluted ordinary shares, including ordinary shares represented by ADSs, were validly tendered. In
addition, on January 22, 2018, Novartis commenced a subsequent offering period that expired as scheduled on
January 31, 2018. As of the expiration of the subsequent offering period, an additional 1.8% of the outstanding
shares were validly tendered, resulting in an increase in Novartis ownership in AAA to 98.7% of all outstanding ordi-
nary shares, including ordinary shares represented by ADSs. AAA is a radiopharmaceutical company headquar-
tered in Saint Genis-Pouilly, France, that develops, produces and commercializes molecular nuclear medicines –
including Lutathera (USAN: lutetium Lu 177 dotatate/INN: lutetium (177Lu) oxodotreotide), a first-in-class radioligand
therapy product for neuroendocrine tumors – and diagnostic products.
Novartis announces a licensing agreement and a manufacturing and supply agreement with Spark Therapeu-
tics to develop, register and commercialize in markets outside the US voretigene neparvovec, a gene therapy
approved as Luxturna in the EU in November 2018 for the treatment of patients with vision loss due to a genetic
biallelic mutation of the RPE65 (retinal pigment epithelial 65kDa protein) gene and who have enough viable retinal
cells.
Novartis announces a global collaboration between Sandoz and Biocon Ltd. to develop, manufacture and com-
mercialize multiple biosimilars in immunology and oncology.
Novartis announces that Elizabeth (Liz) Barrett has been appointed CEO Novartis Oncology and a member of
the ECN, effective February 1, 2018.
2017
December
Novartis announces that Bruno Strigini, CEO Novartis Oncology, has decided to retire from Novartis for personal
reasons.
November
Novartis announces an expanded collaboration with Amgen and the Banner Alzheimer’s Institute to collaborate on
a new Generation Study 2 to assess whether investigational BACE1 inhibitor CNP520 can prevent or delay the
symptoms of Alzheimer’s disease in a high-risk population.
October
Novartis announces that it has made significant progress in its ongoing strategic review of the Alcon Division and
has examined all options, ranging from retaining the business to a capital markets solution (e.g., an IPO or a spin-
off). As part of this, we updated Alcon’s strategic plan, which confirms that it has the potential to grow sales at or
above market while delivering profitability at least in line with the industry.
Novartis announces that its over-the-counter ophthalmic products and certain surgical diagnostic products will
transfer from the Innovative Medicines Division to the Alcon Division effective January 1, 2018.
September
Novartis announces a collaboration with UC Berkeley to establish the Novartis-Berkeley Center for Proteomics and
Chemistry Technologies.
26
Item 4. Information on the Company
Novartis announces that, effective February 1, 2018, Vasant (Vas) Narasimhan, M.D., will succeed Joseph Jimenez
as CEO of Novartis, who had indicated his desire to retire after eight years as CEO. Robert Kowalski, Pharm.D.,
Head of Global Regulatory Affairs, will assume ad-interim leadership of our Global Drug Development organization,
effective February 1, 2018.
August
Novartis announces that, effective January 1, 2018, Bertrand Bodson has been appointed to the new role of Chief
Digital Officer, reporting to the CEO of Novartis. Mr. Bodson is responsible for creating and executing a company-
wide digital strategy. As part of this strategy, we plan to improve the ways we use data in drug discovery and devel-
opment, engage with patients, doctors and other stakeholders, as well as to automate business processes.
June
Novartis announces that it has entered into a clinical research collaboration in which Bristol-Myers Squibb is to
investigate the safety, tolerability and efficacy of Mekinist (trametinib) in combination with Opdivo® (nivolumab) and
Opdivo® + Yervoy® (ipilimumab) regimen as a potential treatment option for metastatic colorectal cancer in patients
with microsatellite stable tumors where the tumors are proficient in mismatch repair (MSS mCRC pMMR).
Novartis announces a collaboration with IBM Watson Health to explore development of a cognitive solution that
uses real-world data and advanced analytical techniques with the aim to provide better insights on the expected
outcomes of breast cancer treatment options.
May
Novartis announces the launch of Better Hearts Better Cities, an innovative initiative to address the high rates of
high blood pressure in low-income urban communities.
April
Novartis announces an expanded collaboration agreement with Amgen to co-commercialize erenumab (AMG 334)
in the US, currently being investigated for the prevention of migraine. This agreement builds on the previously
announced 2015 global collaboration between Novartis and Amgen.
Novartis announces that it has entered into a clinical trial agreement with Allergan plc to conduct a Phase IIb
study involving the combination of a Novartis FXR agonist and Allergan’s cenicriviroc for the treatment of nonalco-
holic steatohepatitis (NASH).
Novartis announces that it has exercised an option to in-license ECF843, a recombinant form of human lubri-
cin from Lubris, LLC, for ophthalmic indications worldwide (outside Europe). This transaction closed and Novartis
received its exclusive license on April 21, 2017.
March
Novartis completes euro-denominated bond offerings in an amount equivalent to approximately USD 2 billion.
February
Novartis completes a USD 3 billion bond offering under its SEC Registration Statement on Form F-3.
January
Novartis announces that it is considering options for the Alcon Division. The review will explore all options, ranging
from retaining all or part of the business to separation via a capital markets transaction (e.g., IPO or spin-off), in
order to determine how to best maximize value for our shareholders.
Novartis announces that it is initiating a share buyback of up to USD 5.0 billion in 2017 under existing share-
holder authority.
Novartis announces that it has entered into a collaboration and option agreement with Ionis Pharmaceuticals, Inc.
(Ionis), and its affiliate Akcea Therapeutics, Inc. (Akcea), to license two investigational treatments with the poten-
tial to significantly reduce cardiovascular risk in patients suffering from high levels of lipoproteins known as Lp(a)
and ApoCIII. In addition, Novartis entered into a stock purchase agreement with Ionis and Akcea. This transaction
was completed on February 14, 2017.
2016
December
Novartis announces that it has entered into a definitive agreement for the acquisition of Encore Vision, Inc., a pri-
vately held company focused on the development of UNR844 (formerly EV06), an investigational, first-in-class,
potentially disease-modifying topical treatment for presbyopia. This acquisition was completed on January 20,
2017.
Novartis announces the signing of an exclusive option, collaboration and license agreement with Conatus
Pharmaceuticals Inc., for the global rights to emricasan, an investigational, first-in-class, oral, pan-caspase inhibi-
tor for the treatment of nonalcoholic steatohepatitis (NASH) with advanced fibrosis and cirrhosis of the liver. Novartis
27
Item 4. Information on the Company
exercised the option on May 4, 2017. Novartis obtained an exclusive, worldwide license to develop and commer-
cialize products containing emricasan on July 5, 2017.
Novartis announces that it has entered into a definitive agreement for the acquisition of Ziarco Group Limited,
a privately held company focused on the development of novel treatments in dermatology, including ZPL389 (adri-
forant), a once-daily oral H4 receptor antagonist in development for atopic dermatitis. This acquisition was com-
pleted on January 20, 2017.
November
Novartis announces that it has acquired Reprixys Pharmaceuticals Corporation and SEG101 (crizanlizumab) for
reduction of pain crises in sickle cell disease.
September
Novartis completes two euro-denominated bond offerings totaling EUR 1.75 billion.
June
Novartis announces that it has entered into a collaboration and licensing agreement with Xencor for the develop-
ment of bispecific antibodies for treating cancer.
Novartis announces that it will further expand its longstanding partnership with Medicines for Malaria Venture.
Novartis will lead the development of antimalarial compound KAF156 (ganaplacide) with scientific and financial
support from Medicines for Malaria Venture in collaboration with the Bill & Melinda Gates Foundation.
May
Novartis announces changes to focus its Pharmaceuticals Division by creating two business units: Novartis
Pharmaceuticals and Novartis Oncology. These business units form the Innovative Medicines Division of Novartis.
The CEO of each business unit reports directly to the CEO of Novartis, and both joined the ECN effective July 1,
2016.
February
Shareholders authorize the Novartis Board of Directors to execute share buybacks within the framework of a sev-
enth share repurchase program that will allow Novartis to repurchase shares for cancellation up to a maximum of
CHF 10 billion.
Novartis announces that it has entered into an agreement to acquire Transcend Medical, Inc., a privately held,
US-based company focused on developing minimally invasive surgical devices to treat glaucoma, such as the
CyPass Micro-Stent. This acquisition was completed on March 23, 2016.
Novartis announces that it has acquired from Pfizer the rights for the development and commercialization of
PF-06438179 (biosimilar infliximab) in the European Economic Area.
January
Novartis announces leadership changes effective February 1, 2016. Mike Ball has been appointed Division Head
and CEO Alcon, succeeding Jeff George; Dr. Vas Narasimhan has been appointed Global Head Drug Development
and Chief Medical Officer, a new position in the ECN; and André Wyss has been appointed President, Novartis
Operations.
Novartis announces that it is taking a number of steps to further build on its strategy, including focusing the
Alcon Division on its Surgical and Vision Care franchises and strengthening the ophthalmic medicines business by
transferring Alcon’s Ophthalmic Pharmaceuticals products to the Innovative Medicines Division, and by shifting
selected mature, non-promoted pharmaceutical products from the Innovative Medicines Division into the Sandoz
Division, which changes were operationally completed as of April 1, 2016; and by centralizing manufacturing oper-
ations across divisions within a single technical operations unit; increasing Group-wide coordination of drug devel-
opment by establishing a single Global Head of Drug Development and centralizing certain common functions such
as the Chief Medical Office, which changes were operationally completed as of July 1, 2016.
Novartis announces a collaboration and licensing agreement with Surface Oncology, which gives Novartis access
to four preclinical programs in immuno-oncology.
For information on our principal expenditures on property, plants and equipment, see “Item 4. Information on
the Company—Item 4.D Property, plants and equipment.” For information on our significant expenditures in research
and development, see the sections headed “Research and Development” included in the descriptions of our
Innovative Medicines Division and Alcon Division, and the section headed “Development and Registration” included
in the description of our Sandoz Division under “Item 4. Information on the Company—Item 4.B Business overview.”
For information on other principal capital expenditures and divestitures, see “Item 5. Operating and Financial Review
and Prospects—Item 5.A Operating results—Factors affecting comparability of year-on-year results of operations.”
28
Item 4. Information on the Company
4.B Business overview
Overview
As a leading global medicines company, we use innovative
science and digital technologies to create transforma-
tive treatments in areas of great medical need. In our
quest to find new medicines, we consistently rank among
the world’s top companies investing in research and
development. Novartis products reach more than 800
million people globally and we are finding innovative ways
to expand access to our latest treatments. Our purpose
is to reimagine medicine 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 focus Novartis
as a leading medicines company powered by advanced
therapy platforms and data science.
In 2018, Novartis achieved net sales of USD 51.9 bil-
lion, while net income amounted to USD 12.6 billion.
Headquartered in Basel, Switzerland, our Group compa-
nies employed 125,000 full-time equivalent associates
as of December 31, 2018. Our products are sold in
approximately 155 countries around the world.
The Group comprises three global operating divi-
sions:
• Innovative Medicines: innovative patent-protected pre-
scription medicines
• Sandoz: generic pharmaceuticals and biosimilars
• Alcon: surgical and vision care products
In June 2018, we announced that we plan to spin off
Alcon into a separately-traded standalone company. As
two distinct publicly traded companies, we believe
Novartis and Alcon will be better positioned to capital-
ize on significant growth opportunities and focus
resources on their respective businesses and strategic
priorities.
Our divisions are supported by the following cross-di-
visional organizational units: the Novartis Institutes for
BioMedical Research, Global Drug Development,
Novartis Technical Operations and Novartis Business
Services. The financial results of these organizational
units are included in the results of the divisions for which
their work is performed. As part of the planned spin-off
of Alcon, efforts are being undertaken to prepare for the
separation of Alcon from Novartis and to enable Alcon
to operate as a standalone public company. As part of
these efforts, Alcon has formed, and will continue to form,
its own support functions, including its own service orga-
nization.
The Novartis Institutes for BioMedical Research
(NIBR) is the innovation engine of Novartis, which con-
ducts drug discovery research and early clinical devel-
opment trials for our Innovative Medicines Division and
also collaborates with our Sandoz Division. Approxi-
mately 6 000 full-time equivalent scientists and associ-
ates at NIBR are working to discover new medicines for
various diseases at sites located in the US, Switzerland
and China. For more information about NIBR, see “—
Innovative Medicines—Research and development—
Research program” below.
Our Global Drug Development (GDD) organization
oversees all drug development activities for our Innovative
Medicines Division and the biosimilars portfolio of our
Sandoz Division. The development of products for the
Surgical and Vision Care franchises within our Alcon Divi-
sion and of small-molecule generics for our Sandoz Divi-
sion is not included in GDD. GDD works collaboratively
with NIBR, Innovative Medicines and Sandoz to execute
our overall pipeline strategy and takes an enterprise
approach to pipeline portfolio management. GDD incor-
porates centralized global functions such as Regulatory
Affairs and Global Development Operations, as well as
Global Development units aligned with our business fran-
chises. GDD includes approximately 11 000 full-time
equivalent associates worldwide.
Novartis Technical Operations (NTO) was estab-
lished to centralize management of our manufacturing
operations and supply chain across our Innovative
Medicines and Sandoz Divisions, with a goal of further
improving efficiency. Manufacturing for Alcon’s Surgical
and Vision Care franchises continues to be managed by
our Alcon Division. NTO is expected to optimize capac-
ity planning and adherence to quality standards, and to
lower costs through simplification, standardization and
external spend optimization. Centralization is also
expected to improve our ability to develop next-genera-
tion technologies, implement continuous manufacturing
and share best practices across divisions. NTO includes
approximately 25 200 full-time equivalent associates
and 64 manufacturing sites across our Innovative
Medicines and Sandoz Divisions.
Novartis Business Services (NBS), our shared ser-
vices organization, delivers integrated solutions to all
Novartis divisions and units worldwide. NBS seeks to
drive efficiency and effectiveness across Novartis by
simplifying and standardizing services across six service
domains: human resources, real estate and facility ser-
vices, procurement, information technology, commercial
and medical support activities, and financial reporting
and accounting operations. NBS has approximately
10 500 full-time equivalent associates in more than 30
countries. NBS works to leverage the full scale of Novartis
to create value across the Company and to free up
resources to invest in innovation and our product pipe-
line. NBS continues to transfer the delivery of selected
services to its five Global Service Centers in Dublin, Ire-
land; Hyderabad, India; Kuala Lumpur, Malaysia; Mexico
City, Mexico; and Prague, Czech Republic.
As of January 1, 2019, Novartis Internal Audit, Busi-
ness Practices Office and Global Security were com-
bined into one function called Novartis Business Assur-
ance & Advisory (NBAA).
29
Item 4. Information on the Company
Innovative Medicines Division
Our Innovative Medicines Division researches, develops,
manufactures, distributes and sells patented prescrip-
tion medicines to enhance health outcomes for patients
and healthcare providers. Innovative Medicines is orga-
nized into two global business units: Novartis Oncology
and Novartis Pharmaceuticals. Novartis Pharmaceuticals
consists of the global business franchises Ophthalmol-
ogy; Neuroscience; Immunology, Hepatology and Der-
matology; Respiratory; Cardio-Metabolic; and Estab-
lished Medicines.
Sandoz Division
Our Sandoz Division develops, manufactures, distributes
and sells prescription medicines as well as pharmaceu-
tical active substances that are not protected by valid
and enforceable third-party patents. Sandoz is organized
globally into three franchises: Retail Generics, Anti-In-
fectives and Biopharmaceuticals. In Retail Generics,
Sandoz develops, manufactures and markets active
ingredients and finished dosage forms of pharmaceuticals
to third parties. Retail Generics includes the areas of car-
diovascular, central nervous system, dermatology, gas-
trointestinal 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 Biopharmaceu-
ticals, Sandoz develops, manufactures and markets pro-
tein- or other biotechnology-based products, including
biosimilars, and provides biotechnology manufacturing
services to other companies.
Alcon Division
Our Alcon Division, a global leader in eye care, re-
searches, develops, manufactures, distributes and sells
eye care products. Alcon is organized into two global
business franchises: Surgical and Vision Care. Surgical
researches, develops, manufactures, distributes and
sells ophthalmic products for cataract surgery, vitreo-
retinal surgery, refractive laser surgery and glaucoma
surgery. The Surgical portfolio also includes implant-
ables, consumables and surgical equipment required
for these procedures and supports the end-to-end pro-
cedure needs of the ophthalmic surgeon. Vision Care
researches, develops, manufactures, distributes and
sells daily disposable, reusable, and color-enhancing
contact lenses and a comprehensive portfolio of ocular
health products, including products for dry eye, contact
lens care and ocular allergies, as well as ocular vitamins
and redness relievers. Alcon also provides services,
training, education and technical support for both the
Surgical and Vision Care businesses.
Effective January 1, 2018, we transferred our over the
counter ophthalmic products and certain surgical diag-
nostic products (2017 sales of USD 747 million) from the
Innovative Medicines Division to the Alcon Division. Our
prescription Ophthalmic medicines business remains
with the Innovative Medicines Division. In compliance
with IFRS, beginning with our first-quarter 2018 results,
Novartis updated its segment financial information to
reflect this transfer, both for the current and prior years,
to aid comparability of year on year results.
Corporate activities
We separately report the results of Corporate activities.
The financial results of our Corporate activities 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 and certain expenses related to post-employment
benefits, environmental remediation liabilities, charita-
ble activities, donations and sponsorships.
Corporate responsibility
We are taking steps to continue to build trust with key
stakeholders and society. We aim to hold ourselves to
the highest ethical standards, be part of the solution on
pricing and access to medicines, help tackle global
health challenges, and be a responsible citizen wherever
we operate.
Holding ourselves to the highest ethical standards
We continue to embed a principles based approach to
compliance through the new Professional Practices Pol-
icy (P3), which in 2018 replaced separate divisional com-
pliance policies. We believe this approach will help
ensure that employees act in the best interest of patients,
physicians and Novartis.
Since 2016, we have adjusted the ratio of fixed to vari-
able total compensation for our sales force to help
ensure that the target variable component is a maximum
of 35% of total compensation, on a country average
basis. To receive any form of variable compensation,
each employee, including the sales force, must perform
to a minimum standard with regard to our Values and
Behaviors, which include acting with integrity. For our
sales force, in particular, 20% of target variable pay is
based on demonstration of our Values and Behaviors.
We are in the process of implementing these standards
in every country in which Novartis operates. Ultimately,
no sales representative will receive the variable compen-
sation unless he or she meets expectations with respect
to Values and Behaviors. In 2018, we assessed the roll-
out of the new incentive system with positive results.
Across divisions, there was a 54% reduction in the num-
ber of reported complaints of fraud or professional prac-
tices in the sales force in 2018 compared to 2017.
Despite this progress, we are still facing questions
about our business practices. Following the issue with
Essential Consultants, when our political consultancy
practices came into question, we took steps to improve
oversight and help prevent similar matters in the future.
We have strengthened the relevant contracting and due
diligence processes to help ensure more ownership and
30
Item 4. Information on the Company
transparency at a senior management level. For exam-
ple, before Novartis engages political consultants, we
will secure an independent due diligence report from an
external partner.
In addition, we continue to strengthen our Integrity &
Compliance (I&C) function. In 2018, we combined our
risk management and compliance functions in a single
organization to help enable more effective risk manage-
ment and mitigation efforts. We created the role of Chief
Ethics, Risk and Compliance Officer to head the com-
bined organization, and we elevated this role to the Exec-
utive Committee of Novartis (ECN).
To help monitor and enforce our integrity standards,
we added more than 100 people to the I&C function in
recent years. The expanded team has increased the
number of country visits to share learnings from across
the organization, reaching about 220 in 2018. We also
harmonized our I&C risk assessment and monitoring pro-
cess and control activities into a single, continuous pro-
cess supported by an online tool.
We continue to evolve our reporting and data analyt-
ics to provide centralized and aggregated data across
the risk functions to identify trends and help improve risk
mitigation. For instance, in the last two years, we have
seen a positive trend in generally effective internal com-
pliance audits. At the same time, our whistleblower
hotline continues to receive reports of suspected cases
where employees may have failed to follow our ethical
guidelines. However, the proportion of substantiated alle-
gations related to ethics and compliance matters remains
stable. We believe these are indications that our efforts
are starting to pay off. We also started to employ data
analytics for better monitoring and risk prevention. For
example, in the US and China, the team leverages big
data to monitor various aspects of engagement with
healthcare professionals.
Being part of the solution on pricing and access
Our medications reach more than 800 million people
worldwide every year, but billions more still lack access
to essential medicines and healthcare. We are making a
fundamental shift in the way we do business and are
reimagining how to expand access to critical healthcare
innovations.
We launched the Novartis Access Principles, embark-
ing on a journey to systematically integrate access strat-
egies into how we research, develop and deliver our new
medicines globally. These strategies include adopting
innovative pricing and access models, refocusing
research and development based on society’s health-
care needs, and supporting approaches to streng then
healthcare systems. We made significant progress in set-
ting up our internal systems and training our internal
teams on our new business standards. The ECN reviewed
plans for key brands in launch phase to assess access
strategies targeting underserved populations. For exam-
ple, Aimovig, our innovative medicine for the treatment
of migraine, is supported by programs designed to help
accelerate access both before and after reimbursement,
as well as to speed up introduction and access in low-
and middle-income countries (LMICs). We are also co-
creating employer-based access schemes in selected
markets, including Russia and Mexico.
We aim to price our medicines responsibly, based on
the value they deliver to patients, healthcare systems
and society. In the US we recently implemented guide-
lines for limiting average net price increases across our
portfolio to the healthcare inflation rate, and we publish
average price increases annually in the Novartis in Soci-
ety US report.
In addition, we take local affordability into account
when pricing our medicines. In LMICs, for instance, we
introduced more affordable local brands of many
innovative therapies, such as our heart failure treatment
Entresto, to help speed up and improve access where
there is inadequate healthcare coverage or reimburse-
ment. Through our continued efforts and an impactful
access strategy, the number of patients reached with
Entresto in LMICs grew two-and-a-half-fold in the last
12 months. Overall, we have launched more than 60 local
brands across more than 30 developing markets, reach-
ing more than 220 000 additional patients to date. In
addition, we are now able to reduce the time lag between
availability of medicines in higher- and lower-income
countries. For example, the first Entresto local brand was
launched within 12 months of the launch in the European
Union. We plan to further expand these strategies.
Through our Novartis Social Business (NSB) group,
we continue to pursue unique social business models,
such as the Novartis Access and Healthy Family pro-
grams, to help expand access to healthcare in lower-in-
come countries. Novartis Access, which offers a portfo-
lio of 15 medicines to governments, nongovernmental
organizations and other institutional customers for USD
1 per treatment, per month, delivered almost 2.3 million
monthly treatments to five countries in 2018, and Healthy
Family reached 7.8 million people with health education
initiatives. Since January, NSB has adapted its product
and price offering in six African and Asian countries,
expanding reach to patients across all income levels.
Novartis does not file or enforce patents in least
developed countries or low- income countries. In late
2018, we reviewed our approach to patent filing in LMICs
in an effort to better align it with the local socio-eco-
nomic circumstances that exist in many of these coun-
tries. As a result, effective 2019, we decided to stop fil-
ing patent applications in nine LMICs, where Novartis
had previously filed. In addition, in the remaining LMICs,
we will aim to restrict patent filings to those patent appli-
cations covering new molecules or new chemical enti-
ties.
Novartis is also a founding member of the Patent
Information Initiative for Medicines (Pat-INFORMED), a
unique public online resource launched in September
2018 that provides basic patent information for medicines
of participating companies, and that aims to help pro-
curement agencies around the world better understand
patent status to help inform procurement decisions. As
of December, Novartis has listed patent information
for all of our small- molecule medicines, which goes sig-
nificantly beyond Pat-INFORMED’s near-term goal of
capturing information for medicines in a more limited
number of disease areas.
We regularly review our early- and late-stage devel-
opment programs to identify further opportunities for
adapting our existing medicines to address unmet patient
needs in countries with a high disease burden. In 2018,
31
Item 4. Information on the Company
14 project proposals were endorsed to move forward.
They include the development of a child-friendly formu-
lation of hydroxyurea for treatment of sickle cell disease
in Africa; the use of Entresto in heart failure related to
Chagas disease; a project to identify potential differ-
ences in the pharmacokinetics of drugs in African
patients, where such data is lacking; and the creation of
a new Coartem formulation to treat infants below 5 kilo-
grams of body weight.
Tackling global health challenges
Novartis has a long history of helping tackle some of the
biggest global health challenges, particularly leprosy and
malaria.
The Novartis Foundation helped found the Global
Partnership for Zero Leprosy in 2018. It brings together
international organizations and national leprosy pro-
grams, with support from the World Health Organization,
to accelerate pro gress toward eliminating the disease.
The Novartis Foundation and Microsoft are partnering
to develop a proof-of-concept digital health tool, enabled
by artificial intelligence, and a Leprosy Intelligent Image
Atlas – in collaboration with local investigators from the
Oswaldo Cruz Foundation in Brazil – to aid in the early
detection of leprosy. The launch of the first public ver-
sion of the atlas is planned for 2019.
In April, we renewed our commitment to malaria elim-
ination, pledging USD 100 million to research and develop
next-generation antimalarials over the next five years. In
addition, we will help expand access to antimalarials for-
mulated for children, and we plan to implement programs
to strengthen healthcare systems in four sub-Saharan
countries.
We also launched efforts in other areas where we
believe we can have significant impact. In October, in
Latin America, we kicked off our partnership with the
World Heart Federation to develop a roadmap for
addressing Chagas disease, the second most common
cause of chronic heart failure in Latin America.
In Ghana, we kicked off a collaboration with the gov-
ernment and local partners to establish our commitment
to sickle cell disease (SCD) in Africa. This collaboration
aims to support the development of treatment guidelines;
strengthen the healthcare system by establishing centers
of excellence to advance newborn screening and train
scientists; accelerate registration and launch of hydroxy-
urea for the treatment of SCD; and integrate the needs
Innovative Medicines
of patients into our drug development strategy. We plan
to launch our commitment in 2019 and to also expand
our efforts to other countries in sub-Saharan Africa.
Being a responsible citizen
Building trust with society requires doing business
responsibly wherever we operate. This includes minimiz-
ing our environmental impact, managing risk in our sup-
ply chain, respecting human rights and being transpar-
ent.
We have adopted a more ambitious 2030 environ-
mental sustainability strategy, aiming for carbon neutral-
ity, plastic neutrality and water sustainability. We have
already taken steps to mitigate our exposure to environ-
mental risk, completing a series of comprehensive sup-
plier audits and taking relevant actions. For example, in
the Hyderabad area of India, we are severing ties with
six suppliers that failed to comply with our Supplier Code,
and we are working with nine suppliers to improve their
performance in critical areas such as operational effi-
ciency, waste management, and use of natural resources.
These suppliers share our values for environmental stew-
ardship and employee health and safety.
In October, our Third-Party Risk Management pro-
gram went live in Mexico. The program is to be rolled out
globally in 2019 in a phased regional approach, begin-
ning in the Americas (including the US) and followed by
Asia-Pacific and Europe later in the year.
After completing human rights impact assessments
in our own operations in Egypt, Turkey, China and Malay-
sia, we have established that we have strong policies and
solid processes to identify and manage potential human
rights risks. We have also identified common risk areas
that require additional follow up action in 2019. For exam-
ple, we need more regular and broader engagement and
consultation with external stakeholders at a local level –
including representatives from patient groups, local com-
munities, health authorities and third-party partners – to
gain a better understanding of issues; to help ensure that
formal grievance mechanisms and processes are in
place for communities living close to our manufacturing
operations; and, in some markets, to address risks asso-
ciated with our outsourced workforce.
For additional information, see “—Item 4.B Business
overview—Sandoz.”
Overview
Our Innovative Medicines Division is a world leader in
offering innovation-driven, patent-protected medicines
to patients and physicians. The Innovative Medicines
Division researches, develops, manufactures, distributes
and sells patented pharmaceuticals, and is composed of
two global business units: Novartis Oncology and
Novartis Pharmaceuticals.
The Novartis Oncology business unit is responsible
for the commercialization of products in the areas of
cancer and hematologic disorders. The Novartis
Pharmaceuticals business unit is organized into the fol-
lowing global business franchises responsible for the
commercialization of various products in their respec-
tive therapeutic areas: Ophthalmology; Neuroscience;
Immunology, Hepatology and Dermatology; Respiratory;
Cardio-Metabolic; and Established Medicines.
Following an internal reorganization announced on
January 27, 2016, 19 mature products were transferred
from our Innovative Medicines Division to the Retail
Generics franchise of our Sandoz Division, and the
32
Item 4. Information on the Company
Ophthalmic Pharmaceuticals products of Alcon were
transferred to our Innovative Medicines Division, effec-
tive as of January 1, 2018.
We subsequently transferred our over-the-counter
ophthalmic products and certain surgical diagnostic
products (2017 sales of USD 747 million) from the
Innovative Medicines Division to the Alcon Division, effec-
tive January 1, 2018. Our prescription Ophthalmic
medicines business remains with the Innovative
Medicines Division. In compliance with IFRS, beginning
with our first-quarter 2018 results, Novartis updated its
segment financial information to reflect this transfer, both
for the current and prior years, to aid comparability of
year-on-year results.
The Innovative Medicines Division is the largest con-
tributor among the divisions of Novartis and reported
consolidated net sales of USD 34.9 billion in 2018, which
represented 67% of the Group’s net sales.
The product portfolio of the Innovative Medicines
Division includes more than 60 key marketed products,
many of which are leaders in their respective therapeu-
tic areas.
Innovative Medicines Division
products
The following table and summaries describe certain key
marketed products in our Innovative Medicines Division.
While we typically seek to sell our marketed products
throughout the world, not all products and indications
are currently available in every country. In addition, a
product may be available under different brand names
depending on country and indication. Some of the prod-
ucts listed below have lost patent protection or are oth-
erwise subject to generic competition. Others are sub-
ject to patent challenges by potential generic competitors.
Please see “—Intellectual property” for general informa-
tion on intellectual property and regulatory data protec-
tion, and for further information on the status of patents
and exclusivity for Innovative Medicines Division prod-
ucts.
33
Selected marketed products
Novartis Oncology business unit
Business
franchise
Product
Common name
Oncology
Afinitor/Votubia and
Afinitor Disperz/Votubia
dispersible tablets
everolimus
Arzerra
ofatumumab
Item 4. Information on the Company
Indications (vary by country and/or formulation)
In combination with exemestane for postmenopausal women with advanced
hormone receptor-positive (HR+)/human epidermal growth factor receptor
2-negative (HER2-) breast cancer after failure of treatment with letrozole
or anastrozole, or after recurrence or progression following treatment with
a non-steroidal aromatase inhibitor
Advanced renal cell carcinoma after failure of treatment with VEGF-targeted
therapy, or after failure of treatment with sunitinib or sorafenib
Advanced neuroendocrine tumors of gastrointestinal, lung or pancreatic origin
Renal angiomyolipoma associated with tuberous sclerosis complex (TSC)
in patients not requiring immediate surgery Subependymal giant cell
astrocytoma associated with TSC in patients not requiring immediate surgery
Adjunctive treatment of patients aged 2 years and older with TSC-associated
partial-onset and refractory seizures
Treatment of patients with chronic lymphocytic leukemia (CLL) who are refractory
to fludarabine and alemtuzumab
In combination with an alkylator-based regimen for the treatment of patients
with CLL who have not received prior therapy and are not eligible for fludarabine-
based therapy
Maintenance/extended treatment for patients with CLL who are in complete
or partial response after at least two lines of induction therapy
In combination with fludarabine and cyclophosphamide for the treatment
of patients with relapsed CLL
Exjade and Jadenu
deferasirox
Chronic iron overload due to blood transfusions
and non-transfusion-dependent thalassemia
Farydak
panobinostat
Relapsed and/or refractory multiple myeloma, in combination with bortezomib
and dexamethasone, after at least two prior regimens including bortezomib
and an immunomodulatory agent
Femara
letrozole
Gleevec/Glivec
imatinib
mesylate/
imatinib
Jakavi
ruxolitinib
Kisqali
ribociclib
Kymriah
tisagenlecleucel
HR+ early breast cancer in postmenopausal women
following surgery (upfront adjuvant therapy)
Early breast cancer in postmenopausal women following standard
tamoxifen therapy (extended adjuvant therapy)
Advanced breast cancer in postmenopausal women
(both as first- and second-line therapies)
Certain forms of Philadelphia chromosome-positive
chronic myeloid leukemia
Certain forms of KIT-positive gastrointestinal stromal tumors
Certain forms of acute lymphoblastic leukemia
Dermatofibrosarcoma protuberans
Hypereosinophilic syndrome
Aggressive systemic mastocytosis
Myelodysplastic/myeloproliferative diseases
Disease-related splenomegaly or symptoms in adult patients with
primary myelofibrosis (also known as chronic idiopathic myelofibrosis),
post-polycythemia vera myelofibrosis or post-essential thrombocythemia
myelofibrosis
Polycythemia vera in adult patients who are resistant to or intolerant
of hydroxyurea
In combination with an aromatase inhibitor as initial endocrine-based
therapy for the treatment of pre-, peri- or postmenopausal women
with HR+/HER2- locally advanced or metastatic breast cancer
In combination with fulvestrant as first- or second-line therapy
for the treatment of postmenopausal women with HR+/HER2-
advanced or metastatic breast cancer
Children and young adults with relapsed or refractory B-cell
acute lymphoblastic leukemia
Adult patients with relapsed or refractory diffuse large B-cell
lymphoma
Lutathera
USAN: lutetium
Lu 177 dotatate/
INN: lutetium
(177Lu)
oxodotreotide
Treatment of somatostatin receptor-positive gastroenteropancreatic
neuroendocrine tumors (GEP-NETs) in adults
Treatment of unresectable or metastatic, progressive,
well-differentiated (G1 and G2), somatostatin receptor-positive
GEP-NETs in adults
Promacta/Revolade
eltrombopag
Thrombocytopenia in adult and pediatric patients 1 year and older with chronic
immune (idiopathic) thrombocytopenia who have had an insufficient response to
corticosteroids or immunoglobulins
Thrombocytopenia in patients with chronic hepatitis C to allow initiation
and maintenance of interferon-based therapy
As first-line therapy in patients with severe aplastic anemia, and as
second-line therapy in patients with severe aplastic anemia who
have had an insufficient response to immunosuppressive therapy
34
Formulation
Tablet
Dispersible tablet
for oral suspension
Intravenous infusion
Dispersible tablet
for oral suspension
Oral film-coated tablet
Granules
Capsule
Tablet
Tablet
Capsule
Tablet
Tablet
Suspension for
intravenous infusion
Dispersion for
intravenous infusion
Solution for
intravenous infusion
Film-coated tablet
Item 4. Information on the Company
Business
franchise
Product
Rydapt
Common name
Indications (vary by country and/or formulation)
midostaurin
In combination with standard cytarabine and daunorubicin induction and
cytarabine consolidation chemotherapy for the treatment of adult patients
with newly diagnosed acute myeloid leukemia (AML) who are FLT3
mutation-positive, as detected by an FDA-approved test (Rydapt is not
indicated as a single-agent induction therapy for the treatment of patients
with AML)
For the treatment of adult patients with aggressive systemic mastocytosis,
systemic mastocytosis with associated hematological neoplasm,
or mast cell leukemia
Formulation
Capsule
Sandostatin LAR
and Sandostatin SC
octreotide
acetate
Acromegaly
Symptom control for certain forms of neuroendocrine tumors
Treatment of advanced neuroendocrine tumors of the midgut or of unknown
primary origin
Vial
Ampoule/pre-filled
syringe
Signifor
and Signifor LAR
pasireotide
Cushing’s disease
Acromegaly
Tafinlar + Mekinist
dabrafenib +
trametinib
Tasigna
nilotinib
Tykerb/Tyverb
lapatinib
Unresectable or metastatic melanoma with BRAF V600E or V600K mutations,
as detected by a validated test
Adjuvant treatment of patients with stage III melanoma with a BRAF V600
mutation, following complete resection
Locally advanced or metastatic anaplastic thyroid cancer with a BRAF V600E
mutation and no satisfactory locoregional treatment options
Metastatic non-small cell lung cancer with a BRAF V600E mutation, as detected
by a validated test
Certain forms of chronic myeloid leukemia in adult and pediatric
patients resistant or intolerant to prior treatment, including Gleevec/Glivec
First-line chronic myeloid leukemia in adult and pediatric patients
In combination with capecitabine for the treatment of patients with human
epidermal growth factor receptor 2-positive (HER2+) advanced or metastatic
breast cancer who have progressed on prior trastuzumab therapy
In combination with an aromatase inhibitor (specifically letrozole in the US) for the
treatment of patients with hormone-sensitive metastatic breast cancer
In combination with trastuzumab for patients with hormone receptor-negative
(HR-) metastatic disease that has progressed on prior trastuzumab therapy/
therapies plus chemotherapy
In combination with paclitaxel for first-line treatment of patients with HER2+
metastatic breast cancer for whom trastuzumab is not appropriate
Solution for
subcutaneous injection
in ampoule
Powder and solvent for
suspension for IM
injection
Capsule (Tafinlar)
Tablet (Mekinist)
Capsule
Tablet
Votrient
pazopanib
Advanced renal cell carcinoma
Certain types of advanced soft tissue sarcoma after prior chemotherapy
Tablet
Zometa
zoledronic acid
Skeletal-related events from bone metastases
Hypercalcemia of malignancy
Zykadia
ceritinib
Advanced or metastatic non-small cell lung cancer that is anaplastic lymphoma
kinase-positive
Vial/4 mg
ready-to-use
Capsule
35
Item 4. Information on the Company
Novartis Pharmaceuticals business unit
Business
franchise
Common name
Product
Indications (vary by country and/or formulation)
Ophthalmology Azarga/Azorga
brinzolamide
and timolol
Decrease of intraocular pressure in adult patients with open-angle glaucoma or
ocular hypertension for whom monotherapy provides insufficient intraocular
pressure reduction
Formulation
Eye drops
Ciprodex
Duotrav
ciprofloxacin and
dexamethasone
Treatment of bacterial ear infections
Ear drops
travoprost
and timolol
Reduction of elevated intraocular pressure in patients with open-angle glaucoma
or ocular hypertension
Eye drops
Durezol
difluprednate
Treatment of inflammation and pain associated with ocular surgery
Treatment of endogenous anterior uveitis
Eye drops
Lucentis
ranibizumab
Luxturna
voretigene
neparvovec
Neovascular age-related macular degeneration
Visual impairment due to diabetic macular edema
Visual impairment due to macular edema secondary to central
retinal vein occlusion
Visual impairment due to macular edema secondary to branch
retinal vein occlusion
Visual impairment due to choroidal neovascularization secondary
to pathologic myopia
Visual impairment due to choroidal neovascularization secondary
to other pathologies
Treatment of adult and pediatric patients with vision loss
due to inherited retinal dystrophy caused by confirmed biallelic
RPE65 mutations and who have sufficient viable retinal cells
Pataday and Pazeo
olopatadine
Signs and symptoms of allergic conjunctivitis
Ocular itching associated with allergic conjunctivitis
Patanol
Simbrinza
olopatadine
Signs and symptoms of allergic conjunctivitis
brinzolamide
and brimonidine
tartrate
Decrease of elevated intraocular pressure in adult patients with open-angle
glaucoma or hypertension for whom monotherapy provides insufficient
intraocular pressure reduction
Intravitreal injection
Subretinal injection
Eye drops
Eye drops
Eye drops
Travatan, Travatan Z,
Travatan BAK-Free,
Izba
travoprost
Reduction of elevated intraocular pressure in patients with open-angle glaucoma
or ocular hypertension
Eye drops
Immunology, Cosentyx
Hepatology
and
Dermatology
secukinumab
Active ankylosing spondylitis
Active psoriatic arthritis
Moderate-to-severe plaque psoriasis
Pustular psoriasis
Ilaris
canakinumab
Cryopyrin-associated periodic syndromes
Tumor necrosis factor receptor-associated periodic syndrome
Hyperimmunoglobulin D syndrome/mevalonate kinase deficiency
Familial Mediterranean fever
Systemic juvenile idiopathic arthritis
Gouty arthritis
Adult-onset Still’s disease
Xolair
omalizumab
Chronic spontaneous urticaria/chronic idiopathic urticaria
See also “Respiratory”
Neuroscience Aimovig
erenumab
Preventive treatment of migraine
Extavia
interferon beta-1b Relapsing-remitting and/or relapsing forms of multiple sclerosis (MS)
in adult patients, and for patients who have had a single clinical event
suggestive of MS and are at high risk of developing clinically definite MS
Gilenya
fingolimod
Relapsing forms of MS
Respiratory
Onbrez Breezhaler
indacaterol
Chronic obstructive pulmonary disease
Seebri Breezhaler
Ultibro Breezhaler
glycopyrronium
bromide
indacaterol and
glycopyrronium
bromide
Chronic obstructive pulmonary disease
Chronic obstructive pulmonary disease
Xolair
omalizumab
Moderate to severe allergic asthma
See also “Immunology, Hepatology and Dermatology”
Auto-injector
Lyophilized,
pre-filled syringe
Solution for injection
Lyophilized powder for
reconstitution for
subcutaneous injection
Liquid formulation
in pre-filled syringe
Lyophilized powder
in vial
Subcutaneous injection
Subcutaneous injection
Capsule
Inhalation powder hard
capsules
Inhalation powder hard
capsules
Inhalation powder hard
capsules
Lyophilized powder
in vial
Liquid formulation in
pre-filled syringe
Cardio‑
Metabolic
Entresto
sacubitril/valsartan Symptomatic chronic heart failure with reduced ejection fraction
Tablet
in adults
36
Item 4. Information on the Company
Business
franchise
Established
Medicines
Product
Cibacen
Common name
Indications (vary by country and/or formulation)
benazepril
hydrochloride
Hypertension
Adjunct therapy in congestive heart failure
Progressive chronic renal insufficiency
Comtan
entacapone
Parkinson’s disease patients who experience end-of-dose motor
(or movement) fluctuations
Diovan
valsartan
Hypertension
Heart failure
Post-myocardial infarction
Diovan HCT/Co‑Diovan valsartan and
Hypertension
hydrochlorothiazide
Eucreas
vildagliptin
and metformin
Type 2 diabetes
Formulation
Tablet
Tablet
Tablet
Capsule
Oral solution
Tablet
Tablet
Exelon
rivastigmine
Mild-to-moderate Alzheimer’s disease dementia
Severe Alzheimer’s disease dementia
Dementia associated with Parkinson’s disease
Capsule
Oral solution
Transdermal patch
Exforge
Exforge HCT
valsartan and
amlodipine besylate
Hypertension
Hypertension
valsartan,
amlodipine
besylate and
hydrochlorothiazide
Focalin and Focalin XR dexmethylphenidate Attention deficit hyperactivity disorder
HCl and
dexmethylphenidate
extended release
Tablet
Tablet
Tablet
Capsule
Galvus
vildagliptin
Type 2 diabetes
Lescol and Lescol XL
fluvastatin sodium Hypercholesterolemia and mixed dyslipidemia in adults
Secondary prevention of major adverse cardiac events
Slowing the progression of atherosclerosis
Heterozygous familial hypercholesterolemia in children and adolescents
Tablet
Capsule (Lescol)
Tablet (Lescol XL)
Myfortic
mycophenolic acid Prophylaxis of organ rejection in patients receiving allogeneic renal transplants
(as mycophenolate
sodium)
Gastro-resistant tablet
Neoral/Sandimmune
cyclosporine,
USP Modified
Prevention of rejection following certain organ transplantation
Non-transplantation autoimmune conditions such as severe psoriasis and severe Oral solution
Intravenous
rheumatoid arthritis
(Sandimmune)
Capsule
Ritalin
Ritalin LA
methylphenidate HCl Attention deficit hyperactivity disorder and narcolepsy
methylphenidate
HCl-modified
release
Attention deficit hyperactivity disorder
Simulect
basiliximab
Prevention of acute organ rejection in de novo renal transplantation
Stalevo
carbidopa, levodopa Parkinson’s disease patients who experience end-of-dose motor
and entacapone
(or movement) fluctuations
Tegretol
carbamazepine
Epilepsy
Pain associated with trigeminal neuralgia
Acute mania and bipolar affective disorders
Alcohol withdrawal syndrome
Painful diabetic neuropathy
Diabetes insipidus centralis
Polyuria and polydipsia of neurohormonal origin
Trileptal
oxcarbazepine
Epilepsy
Tyzeka/Sebivo
telbivudine
Chronic hepatitis B
Voltaren/Cataflam
diclofenac sodium/
potassium/resinate/ Post-traumatic and postoperative pain, inflammation and swelling
free acid
Inflammatory and degenerative forms of rheumatism
Painful and/or inflammatory conditions in gynecology
Other painful and/or inflammatory conditions such as renal and biliary colic;
migraine attacks; and as adjuvant in severe ear, nose and throat infections
Post-traumatic inflammation of the tendons, ligaments, muscles and joints
Localized forms of soft-tissue and degenerative rheumatism
Zortress/Certican
everolimus
Prevention of organ rejection (heart, liver and kidney)
37
Tablet
Capsule
Vial for injection
or infusion
Tablet
Tablet
Chewable tablet
Oral suspension
Suppository
Tablet
Oral suspension
Tablet
Oral solution
Tablet
Capsule
Oral drops/
oral suspension
Ampoule for injection
Suppository
Gel
Powder for
oral solution
Transdermal patch
Tablet
Dispersible tablet
Item 4. Information on the Company
Key marketed products
Novartis Oncology business unit
Oncology
• Tasigna (nilotinib) is a signal transduction inhibitor of
the BCR-ABL tyrosine kinase. Since its launch in 2007,
Tasigna has been approved in more than 125 countries
to treat patients with Philadelphia chromosome-posi-
tive chronic myeloid leukemia (Ph+ CML) in the chronic
and/or accelerated phase who are resistant or intoler-
ant to existing treatment, including Gleevec/Glivec, and
to treat newly diagnosed patients in the chronic phase.
In June 2017, the European Commission (EC) approved
the inclusion of treatment-free remission data in the
summary of product characteristics for Tasigna. In
December 2017, the FDA also approved the inclusion
of treatment-free remission data in the US label for
Tasigna. In November 2017, the EC approved Tasigna
for the treatment of newly diagnosed pediatric patients
with Ph+ CML in the chronic phase (CP), and Ph+
CML-CP pediatric patients with resistance or intoler-
ance to prior therapy including imatinib. In March 2018,
the FDA approved Tasigna for this pediatric indication.
• Sandostatin SC (octreotide acetate for injection) and
Sandostatin LAR (octreotide acetate for injectable sus-
pension) are somatostatin analogs indicated for the
treatment of patients with acromegaly, a chronic dis-
ease caused by the over-secretion of growth hormone
in adults. Sandostatin is also indicated for the treatment
of patients with certain symptoms associated with car-
cinoid tumors and other types of gastrointestinal and
pancreatic neuroendocrine tumors. Additionally,
Sandostatin LAR is approved in more than 60 coun-
tries for the treatment of patients with advanced neu-
roendocrine tumors of the midgut or unknown primary
tumor location. Sandostatin SC was first launched in
1988 and is approved in more than 100 countries.
• Gleevec/Glivec (imatinib mesylate/imatinib) is a kinase
inhibitor approved as a targeted therapy for adult and
pediatric patients with Ph+ CML in the chronic phase.
It is also approved to treat patients with Ph+ CML in
the blast, accelerated or chronic phase after failure
with interferon; to treat patients with metastatic and/
or unresectable gastrointestinal stromal tumors (GIST)
that are KIT (CD117)-positive (KIT+); and as an adjuvant
treatment for certain adult patients following resection
of KIT+ GIST. First launched in 2001, Gleevec/Glivec is
approved in approximately 125 countries. It is approved
in more than 80 countries as a post-surgery therapy
for certain adult patients with KIT+ GIST. Additionally,
Gleevec/Glivec is approved in the US, the EU and Japan
to treat Ph+ acute lymphoblastic leukemia (a rapidly
progressive form of leukemia); in the US and EU to treat
dermatofibrosarcoma protuberans (a rare solid tumor),
hypereosinophilic syndrome, myelodysplastic/myelop-
roliferative diseases and other rare blood disorders;
and in the US (as Gleevec) to treat aggressive systemic
mastocytosis.
• Afinitor/Votubia (everolimus) is an oral inhibitor of the
mTOR pathway. Afinitor is approved in more than 120
countries, including the US, EU member states and
Japan, for patients with advanced renal cell carcinoma
whose disease has progressed during or after treat-
ment with vascular endothelial growth factor-targeted
therapy (in the EU), or after failure of treatment with
sunitinib or sorafenib (in the US). Additionally, Afinitor
is approved in more than 110 countries, including the
US, EU member states and Japan, for patients with pro-
gressive neuroendocrine tumors (NETs) of pancreatic
origin that are unresectable, locally advanced or met-
astatic; in more than 45 countries, including the US and
EU member states, for patients with progressive,
well-differentiated, nonfunctional NETs of gastrointes-
tinal or lung origin that are unresectable, locally
advanced or metastatic; and in 117 countries, in com-
bination with exemestane, for postmenopausal women
with advanced hormone receptor-positive (HR+)/
human epidermal growth factor receptor 2-negative
(HER2-) breast cancer after recurrence or progression
following treatment with a nonsteroidal aromatase
inhibitor (in the EU), or after failure of treatment with
letrozole or anastrozole (in the US). All oncology indi-
cations are approved under the trade name Afinitor, in
the tablet formulation. Everolimus, under the trade
name Afinitor in the US and Votubia in the EU, is also
approved in more than 100 countries to treat patients
with tuberous sclerosis complex (TSC) who have sub-
ependymal giant cell astrocytoma (SEGA) not requir-
ing immediate surgery, and in more than 95 countries
to treat patients with TSC who have renal angiomyoli-
poma not requiring immediate surgery. The dispersible
tablets for oral suspension formulation are approved
in more than 40 countries – including the US (under
the trade name Afinitor Disperz), EU member states
(under the trade name Votubia) and Japan (under the
trade name Afinitor) – for patients with TSC who have
SEGA. Dispersible tablets are also approved in more
than 30 countries – including EU member states (as
Votubia) and the US (as Afinitor Disperz) – as adjunc-
tive treatment for patients aged 2 years and older with
TSC-associated partial-onset seizures. Everolimus is
available under the trade names Zortress/Certican for
use in transplantation in the US and EU, respectively.
It is exclusively licensed to Abbott and sublicensed to
Boston Scientific for use in drug-eluting stents.
• Promacta/Revolade (eltrombopag) is a once-daily oral
thrombopoietin receptor agonist that works by stimu-
lating bone marrow cells to produce platelets. It is the
only approved once-daily oral thrombopoietin recep-
tor agonist, and is marketed under the brand name
Promacta in the US and Revolade in most countries
outside the US. It is approved in more than 90 coun-
tries for the treatment of thrombocytopenia in adult
patients with chronic immune (idiopathic) thrombocy-
topenia (ITP) who have had an inadequate response or
are intolerant to other treatments. In the US and EU,
Promacta/Revolade is approved for pediatric patients
1 year and older with chronic ITP who have had an insuf-
ficient response to other treatments. Promacta/
Revolade is also approved in more than 40 countries
for the treatment of thrombocytopenia in patients with
chronic hepatitis C to allow them to initiate and main-
tain interferon-based therapy. It is approved in the US
and Japan for aplastic anemia as first-line therapy, and
in 45 countries for the treatment of patients with severe
38
Item 4. Information on the Company
aplastic anemia (SAA) who are refractory to other
treatments (including in the EU for adults with acquired
SAA who were either refractory to prior immunosup-
pressive therapy or heavily pretreated and are unsuit-
able for hematopoietic stem cell transplant). Promacta/
Revolade is marketed under a collaboration agreement
between Ligand Pharmaceuticals, Inc. and Novartis.
• Tafinlar + Mekinist (dabrafenib + trametinib) is a com-
bination therapy approved for the treatment of patients
with unresectable or metastatic melanoma with a
BRAF V600 mutation; the adjuvant treatment of
patients with stage III melanoma with a BRAF V600
mutation; the treatment of patients with advanced non-
small cell lung cancer with a BRAF V600 mutation; and
the treatment of patients with locally advanced or met-
astatic anaplastic thyroid cancer with a BRAF V600
mutation. Usage in the adjuvant treatment of melanoma
was approved in the US, the EU, Japan and other coun-
tries worldwide in 2018, making Tafinlar + Mekinist the
first targeted therapy approved in this setting. The 2018
FDA approval of Tafinlar + Mekinist for the treatment
of anaplastic thyroid cancer represented the first
approval of any therapy in the US for this aggressive
form of thyroid cancer. Tafinlar and Mekinist are kinase
inhibitors of BRAF and MEK1/2, respectively, and are
also indicated as single agents to treat patients with
unresectable or metastatic melanoma with a BRAF
V600 mutation. Novartis has worldwide exclusive rights
to develop, manufacture and commercialize trametinib
granted by Japan Tobacco Inc.
• Exjade and Jadenu (deferasirox) is an oral iron chela-
tor approved for the treatment of chronic iron overload
due to blood transfusions in patients 2 years of age
and older, and of chronic iron overload in patients
10 years of age and older with non-transfusion-depen-
dent thalassemia. Exjade, a dispersible tablet for oral
suspension, was first approved in 2005 and is now
approved in more than 100 countries, including the US,
the EU and Japan. An oral film-coated tablet formula-
tion that can be swallowed or crushed is also approved
in countries including the US and Canada (under the
Jadenu or Exjade trade name, depending on the coun-
try). Additionally, the formulation has been developed
as granules and is approved in the US, the EU and
Japan.
• Jakavi (ruxolitinib) is an oral inhibitor of the JAK1 and
JAK2 tyrosine kinases. It is the first JAK inhibitor indi-
cated for the treatment of disease-related splenomeg-
aly or symptoms in adult patients with primary myelo-
fibrosis, post-polycythemia vera myelofibrosis or
post-essential thrombocythemia myelofibrosis, and for
the treatment of adult patients with polycythemia vera
who are resistant or intolerant to hydroxyurea. Jakavi
is currently approved in more than 100 countries for
patients with myelofibrosis, and in more than 75 coun-
tries – including EU member states and Japan – for
patients with polycythemia vera. Novartis licensed
ruxolitinib from Incyte Corporation for development
and commercialization in the indications of oncology,
hematology and Graft-versus-host disease outside the
US. Ruxolitinib, marketed in the US as Jakafi® by Incyte
Corporation, was approved by the FDA for the treat-
ment of patients with intermediate or high-risk myelo-
fibrosis, including primary myelofibrosis, post-polycy-
themia vera myelofibrosis and post-essential
thrombocythemia myelofibrosis. Jakafi® was also
approved by the FDA for the treatment of patients with
polycythemia vera who have had an inadequate
response or are intolerant to hydroxyurea.
• Votrient (pazopanib) is a small-molecule tyrosine
kinase inhibitor that targets a number of growth fac-
tors to limit new blood vessel and tumor growth and
cell survival. Votrient is approved in the US for the treat-
ment of patients with advanced renal cell carcinoma
(RCC), and in the EU for first-line treatment of adult
patients with advanced RCC and for patients who have
received prior cytokine therapy for advanced disease.
Votrient is also indicated for the treatment of patients
with advanced soft tissue sarcoma (STS) who have
received prior chemotherapy (efficacy in adipocytic
STS or gastrointestinal stromal tumors has not been
demonstrated), and in the EU for the treatment of adult
patients with selective subtypes of advanced STS who
have received prior chemotherapy for metastatic dis-
ease or who have progressed within 12 months after
(neo)adjuvant therapy. Votrient is approved in more
than 100 countries worldwide for advanced RCC and
in more than 90 countries for advanced STS.
• Kisqali (ribociclib) is a cyclin-dependent kinase inhibi-
tor, a class of drugs that helps slow the progression of
cancer by inhibiting two proteins called cyclin-depen-
dent kinase 4 and 6 (CDK4/6). It is indicated for the
treatment of postmenopausal women (and, in the US,
pre- or perimenopausal women) with HR+/HER2-
locally advanced or metastatic breast cancer as initial
endocrine-based therapy in combination with an aro-
matase inhibitor. In the US and the EU, Kisqali is also
indicated for use in combination with fulvestrant as
first- or second-line therapy in postmenopausal
women. Kisqali was originally approved in the US in
2017 and is now approved in more than 70 countries,
including EU member states. In 2017, the FDA also
approved the Kisqali Femara Co-Pack (ribociclib tab-
lets and letrozole tablets). Kisqali was developed by the
Novartis Institutes for BioMedical Research under a
research collaboration with Astex Pharmaceuticals.
• Kymriah (tisagenlecleucel) suspension for intravenous
infusion is a CD19-directed genetically modified autol-
ogous chimeric antigen receptor T-cell (CAR-T) ther-
apy. Kymriah received FDA approval in 2017 for the
treatment of patients up to 25 years of age with B-cell
precursor acute lymphoblastic leukemia (ALL) that is
refractory or in second or later relapse, and in May 2018
for the treatment of adult patients with relapsed or
refractory (r/r) large B-cell lymphoma, including diffuse
large B-cell lymphoma (DLBCL), high-grade B-cell lym-
phoma, and DLBCL arising from follicular lymphoma.
Kymriah is not indicated for the treatment of patients
with primary central nervous system lymphoma.
Kymriah is also approved in countries including EU
39
Item 4. Information on the Company
member states and Switzerland for the treatment of
children and young adults with r/r B-cell ALL, and adult
patients with r/r DLBCL.
• Lutathera (USAN: lutetium Lu 177 dotatate/INN: lute-
tium (177Lu) oxodotreotide) is a lutetium Lu 177-labeled
somatostatin analog peptide. It is a radioligand therapy
and comprises a targeting molecule that carries a
radioactive component. Lutathera has received orphan
drug designation from the FDA and the EMA. In the US,
Lutathera is approved for the treatment of somatosta-
tin receptor-positive gastroenteropancreatic neuroen-
docrine tumors (GEP-NETs), including foregut, midgut
and hindgut neuroendocrine tumors, in adults. In
Europe, it is approved for the treatment of unresect-
able or metastatic, progressive, well-differentiated (G1
and G2), somatostatin receptor-positive GEP-NETs in
adults.
Novartis Pharmaceuticals business unit
Ophthalmology
• Lucentis (ranibizumab) is a recombinant humanized
high-affinity antibody fragment that binds to vascular
endothelial growth factor A (VEGF-A), a key mediator
of intraocular neovascularization. Lucentis is an
anti-VEGF therapy specifically designed for the eye,
minimizing systemic exposure. It is approved for six
indications: neovascular (wet) age-related macular
degeneration (nAMD), visual impairment due to dia-
betic macular edema (DME), visual impairment due to
macular edema secondary to branch retinal vein occlu-
sion (BRVO), visual impairment due to macular edema
secondary to central retinal vein occlusion (CRVO),
visual impairment due to choroidal neovascularization
secondary to pathologic myopia (myopic CNV), and
visual impairment due to choroidal neovascularization
(CNV) secondary to other pathologies. Lucentis is avail-
able in more than 110 countries, and the Lucentis
pre-filled syringe has launched in 37 countries. Lucentis
is licensed from Genentech, and Novartis holds the
rights to commercialize the product outside the US.
Genentech holds the rights to commercialize Lucentis
in the US. For further information, see “Item 18. Finan-
cial Statements—Note 26. Transactions with related
parties—Genentech/Roche.”
• Travatan (travoprost), Travatan Z (travoprost) and
Duotrav (travoprost/timolol) are indicated for the
reduction of elevated intraocular pressure (IOP) in
patients with open-angle glaucoma or ocular hyper-
tension. Single-agent travoprost products (Travatan,
Travatan Z, Travatan BAK-Free and Izba) are prescribed
as first-line agents and are marketed in more than
110 countries, including the US and EU member states.
Duotrav is a fixed-dose combination solution of the
prostaglandin analog travoprost with the beta-blocker
timolol, and is approved as a second-line treatment in
adults for the reduction of IOP in patients with open-an-
gle glaucoma or ocular hypertension who are insuffi-
ciently responsive to topical beta-blockers or prosta-
glandin analogs. Duotrav is currently marketed in more
than 105 countries, including EU member states.
• Luxturna (voretigene neparvovec) is a one-time gene
therapy approved in the EU in November 2018 to treat
children and adults with vision loss caused by muta-
tions in both copies of the RPE65 gene and who have
sufficient viable retinal cells. In January 2018, Spark
Therapeutics entered into a licensing agreement and
a manufacturing and supply agreement with Novartis
covering development, registration and commercial-
ization rights to Luxturna in markets outside the US.
Upon the transfer of the EU marketing authorization
from Spark Therapeutics to Novartis, Novartis plans to
commercialize Luxturna in the EU/EEA, with Spark
Therapeutics as supplier of the gene therapy.
Immunology, Hepatology and Dermatology
• Cosentyx (secukinumab) is a fully human monoclonal
antibody that selectively inhibits circulating interleu-
kin-17A (IL-17A), a cytokine involved in the pathogene-
sis of psoriasis, ankylosing spondylitis and psoriatic
arthritis. Cosentyx is approved in more than 90 coun-
tries, including the US, EU member states and Japan,
for the treatment of moderate-to-severe plaque psori-
asis. It is approved in more than 80 countries, includ-
ing the US, EU member states and Japan, for the treat-
ment of adults with ankylosing spondylitis and psoriatic
arthritis. Cosentyx is also approved in Japan for the
treatment of pustular psoriasis and psoriasis vulgaris.
In 2017, a label update for Cosentyx was approved in
the EU based on data showing long-term superiority
over Stelara® (ustekinumab) in moderate-to-severe
plaque psoriasis, along with efficacy in the treatment
of moderate-to-severe scalp psoriasis – one of the
most difficult-to-treat forms of the disease. In 2018, the
FDA approved a label update for Cosentyx to include
moderate-to-severe scalp psoriasis, and new evidence
that Cosentyx inhibits progression of joint structural
damage in psoriatic arthritis.
• Xolair (omalizumab) is a recombinant, DNA-derived,
humanized IgG1 monoclonal antibody. Xolair is designed
to block IgE, which limits the release of mediators in
the early and late phases of the allergic cascade. It is
currently approved in more than 90 countries, includ-
ing the US, EU member states and Japan, as a treat-
ment for chronic spontaneous urticaria (CSU), also
known as chronic idiopathic urticaria (CIU). In the EU,
Xolair is indicated as add-on therapy for the treatment
of CSU in adults and adolescents 12 years of age and
older with inadequate response to H1 antihistamine
treatment. In the US, Xolair is approved to treat adults
and adolescents 12 years of age and older with CIU
who remain symptomatic despite H1 antihistamine
treatment. (See also Xolair in “Respiratory” below.) We
co-promote Xolair with Genentech in the US and share
a portion of operating income, but we do not record
any US sales. Novartis records all sales of Xolair out-
side the US. For further information, see “Item 18.
Financial Statements—Note 26. Transactions with
related parties—Genentech/Roche.”
• Ilaris (canakinumab) is a selective, high-affinity fully
human monoclonal antibody that inhibits interleukin-1
beta (IL-1 beta), a key cytokine in the inflammatory path-
way. Ilaris is approved in the US, EU member states and
40
Item 4. Information on the Company
Japan to treat systemic juvenile idiopathic arthritis and
various auto-inflammatory conditions, such as cryopy-
rin-associated periodic syndromes and other distinct
periodic fevers (also known as hereditary periodic
fevers). It is also approved in the EU for adult-onset
Still’s disease and the symptomatic treatment of refrac-
tory acute gouty arthritis. Ilaris is approved in one or
more indications in approximately 70 countries world-
wide.
Neuroscience
• Gilenya (fingolimod) is an oral disease-modifying ther-
apy approved to treat relapsing forms of multiple scle-
rosis (MS). It has a reversible lymphocyte redistribution
effect targeting both focal and diffuse central nervous
system damage caused by MS. In the US, Gilenya is
indicated for relapsing forms of MS in patients who are
10 years of age and older. In the EU, Gilenya is indicated
for adult patients who have high disease activity despite
treatment with at least one disease-modifying agent,
or who have rapidly evolving severe relapsing-remit-
ting MS. Additionally, it received European Commission
approval in November 2018 for the treatment of chil-
dren and adolescents with relapsing-remitting MS.
Results from the Phase IIIb ASSESS study, announced
in October 2018, showed that Gilenya 0.5 mg is supe-
rior in reducing relapses to glatiramer acetate in a con-
trolled, head-to-head trial. Treatment with Gilenya 0.5
mg resulted in a 40.7% relative reduction in the rate of
relapses over one year, compared to patients on glati-
ramer acetate 20 mg. Adults taking Gilenya 0.25 mg
achieved a numerical risk reduction in relapses com-
pared to the comparator, but did not reach statistical
significance. Gilenya is currently approved in more than
80 countries around the world. Gilenya is licensed from
Mitsubishi Tanabe Pharma Corporation.
• Aimovig (erenumab) is designed specifically to block
the calcitonin gene-related peptide receptor (CGRP-R),
which plays a critical role in migraine. It is the first FDA-
and EMA-approved CGRP-targeted therapy for the
prevention of migraine in adults. Aimovig received US
approval in May 2018 and EU approval in July 2018, and
is currently approved in 37 countries worldwide.
Aimovig is co-commercialized with Amgen in the US,
where Amgen records sales, and Novartis has exclu-
sive commercialization rights for all territories exclud-
ing the US and Japan.
Respiratory
• Xolair (omalizumab) is approved for the treatment of
moderate-to-severe, or severe, persistent allergic
asthma in children (age 6 and older) and adults. It has
been approved in more than 90 countries, including
the US since 2003, the EU since 2005, Japan since
2009, and China since 2018. Xolair is provided as lyo-
philized powder for resolution, and as liquid formula-
tion in a pre-filled syringe. In December 2018, the Euro-
pean Commission approved the Xolair pre-filled syringe
for self-administration across all indications. (See also
Xolair in “Immunology, Hepatology and Dermatology”
above.) We co-promote Xolair with Genentech in the
US and share a portion of operating income, but we do
not record any US sales. Novartis records all sales of
Xolair outside the US. For further information, see “Item
18. Financial Statements—Note 26. Transactions with
related parties—Genentech/Roche.”
Cardio‑Metabolic
• Entresto (sacubitril/valsartan) is a first-in-class angio-
tensin receptor/neprilysin inhibitor indicated for the
treatment of symptomatic chronic heart failure with
reduced ejection fraction (HFrEF). It acts to enhance
the protective neurohormonal systems of the heart
(neprilysin system) while simultaneously suppressing
the harmful system (the renin-angiotensin-aldosterone
system, or RAAS). Entresto was approved in the US
and in the EU in 2015. It is now approved in more than
100 countries and launched in more than 90 countries.
Both European Society of Cardiology heart failure
guidelines and US heart failure guidelines have given
a Class I recommendation, the strongest class of rec-
ommendation, for the use of sacubitril/valsartan in
patients with HFrEF.
Established Medicines
• Galvus (vildagliptin), an oral DPP-4 inhibitor, and
Eucreas, a single-pill combination of vildagliptin and
metformin, are indicated for the treatment of type 2
diabetes. The products were first approved in 2007.
Galvus is currently approved in more than 130 coun-
tries, including EU member states, Japan (as Equa),
Latin America and Asia-Pacific. Eucreas is currently
approved in more than 125 countries. It was the first
single-pill combination of a DPP-4 inhibitor and met-
formin approved in Japan (as EquMet) and Europe, and
is marketed as Galvus Met in most non-EU countries.
In the EU, Galvus received approval for expanded use
as a second-line monotherapy for type 2 diabetes
patients who cannot take metformin. The EU also
approved Galvus in combination with insulin, with or
without metformin, for type 2 diabetes when diet, exer-
cise and a stable dose of insulin do not result in glyce-
mic control, and in triple combination with metformin
and a sulphonylurea (SU) for type 2 diabetes when diet
and exercise plus dual therapy with vildagliptin and
metformin do not provide adequate glycemic control.
In 2017, Galvus was approved as an add-on to insulin
and an add-on to SU treatment. Galvus and Eucreas
are co-marketed by Merck KGaA as Jalra and Jalra M,
respectively, in some countries in Latin America.
• Diovan (valsartan), together with Diovan HCT/Co‑
Diovan (valsartan and hydrochlorothiazide), is an angio-
tensin II receptor blocker (ARB). Diovan is the only
agent in its class approved to treat all of the following:
patients with high blood pressure (including children 6
to 18 years old), high-risk heart attack survivors, and
patients with heart failure. Diovan first launched in 1996
and is available in more than 120 countries; Diovan HCT/
Co‑Diovan first launched in 1997 and is available in
more than 100 countries.
• Exforge (valsartan and amlodipine besylate) is a sin-
gle-pill combination of the ARB Diovan and the calcium
channel blocker amlodipine besylate. First approved
for the treatment of high blood pressure in Switzerland
in 2006, and in the US and EU in 2007, it is now
41
Item 4. Information on the Company
available in more than 100 countries. Exforge HCT (val-
sartan, amlodipine besylate and hydrochlorothiazide)
is a single pill combining three widely prescribed high
blood pressure treatments: an ARB, a calcium channel
blocker and a diuretic (hydrochlorothiazide). Exforge
HCT was approved in the EU and the US in 2009, and
is now available in more than 75 countries.
• Zortress/Certican (everolimus) is an oral inhibitor of the
mTOR pathway. Zortress/Certican is approved in coun-
tries including the US, EU member states and Japan
for the prevention of organ rejection in adult patients
at low to moderate immunological risk receiving an allo-
geneic kidney or liver transplant. Additionally, it is
approved in EU member states and Japan for adult
patients receiving a heart transplant. First approved in
July 2003, Zortress/Certican is now available in more
than 80 countries worldwide and is the only mTOR
inhibitor approved for liver and heart transplants.
• Neoral (cyclosporine, USP Modified) is an immunosup-
pressant to prevent organ rejection following a kidney,
liver or heart transplant. It is approved for use in lung
transplant in many countries outside the US. This
micro-emulsion formulation of cyclosporine is also indi-
cated for treating certain autoimmune disorders, such
as psoriasis and rheumatoid arthritis. First launched in
1995, Neoral is marketed in approximately 100 coun-
tries.
Compounds in development
The following table and paragraph summaries provide
an overview of the key Innovative Medicines Division proj-
ects currently in the Confirmatory Development stage
and may also describe certain projects in the Exploratory
Development stage. Projects include those seeking to
develop potential uses of new molecular entities as well
as potential additional indications or new formulations
for already marketed products. Changes to the selected
development projects table are highlighted in the table
below entitled “Projects added to and subtracted from
the development table since 2017.”
Compounds and new indications in development are
subject to required regulatory approvals and, in certain
instances, contractual limitations. These compounds
and indications are in various stages of development
throughout the world. It may not be possible to obtain
regulatory approval for any or all of the new compounds
and new indications referred to in this Form 20-F in any
country or in every country. See “—Regulation” for fur-
ther information on the approval process.
The year that each project entered the current phase
of development disclosed below reflects the year in
which the decision to enter the phase was made. This
may be different from the year in which the first patient
received the first treatment in the related clinical trial. A
reference to a project being in registration means that
an application has been filed with a health authority for
marketing approval.
42
Item 4. Information on the Company
Selected development projects
Project/
product
Common
name
Mechanism
of action
Potential indication/
disease area
Business
franchise
Formulation/
route of
administration
ABL001
asciminib
BCR-ABL inhibitor
Chronic myeloid leukemia, 3rd line
Oncology
Chronic myeloid leukemia, 1st line
Oncology
Oral
Oral
Year project
entered
current
Planned filing
development dates/current
phase
phase
2016
2017
2021/III
≥2023/I
ACZ885
canakinumab Anti-interleukin-1 beta 2nd line non-small cell lung cancer
Oncology
Subcutaneous injection 2017
2021/III
monoclonal antibody
1st line non-small cell lung cancer
Oncology
Subcutaneous injection 2017
Adjuvant non-small cell lung cancer
Oncology
Subcutaneous injection 2017
AVXS-101 onasemno- Survival motor neuron Spinal muscular atrophy type 1
(Zolgensma) gene abepar- (SMN) gene
vovec-xxxx
replacement therapy
(IV formulation)
Neuroscience
Intravenous infusion
2018
2021/III
2022/III
US/EU
registration
AVXS-201 TBD
Methyl-CpG binding
protein 2 (MECP2) gene
replacement therapy
Rett syndrome
Neuroscience
Intrathecal injection
2018
2022/I
Spinal muscular atrophy type 2/3
(IT formulation)
Neuroscience
Intrathecal injection
2016
2020/I
BAF312
(Mayzent)
siponimod
Sphingosine-1-
phosphate receptor
modulator
BYL719
alpelisib
PI3K-alpha inhibitor
Secondary progressive multiple sclerosis Neuroscience
Oral
2018
Hormone receptor-positive (HR+)/human Oncology
epidermal growth factor receptor
2-negative (HER2-) advanced breast
cancer (postmenopausal women),
2nd line (+ fulvestrant)
Oral
2018
US/EU
registration
US/EU
registration
CAD106
amilomotide Beta-amyloid-protein
therapy
Alzheimer’s disease
Neuroscience
Intramuscular injection 2009
≥2023/II/III
CFZ533
iscalimab
Blocking, non-depleting, Solid organ transplantation
anti-CD40 monoclonal
antibody
Sjögren’s syndrome
Immunology,
Hepatology and
Dermatology
Immunology,
Hepatology and
Dermatology
Intravenous infusion
2017
≥2023/II
Intravenous infusion
2018
≥2023/II
CNP520
TBD
BACE inhibitor
Alzheimer’s disease
Neuroscience
Oral
2016
≥2023/II/III
Cosentyx
secukinumab Anti-interleukin-17
Non-radiographic axial spondyloarthritis
monoclonal antibody
Psoriatic arthritis head-to-head study
versus Humira® (adalimumab)
Immunology,
Hepatology and
Dermatology
Immunology,
Hepatology and
Dermatology
Ankylosing spondylitis head-to-head study Immunology,
versus Sandoz biosimilar Hyrimoz
(adalimumab)
Hepatology and
Dermatology
Hidradenitis suppurativa
Immunology,
Hepatology and
Dermatology
Subcutaneous injection 2015
2019/III
Subcutaneous injection 2015
2020/III
Subcutaneous injection 2015
2022/III
Intravenous infusion
2017
2022/III
CSJ117
TBD
Anti-thymic stromal
lymphopoietin
monoclonal
antibody fragment
Severe asthma
Respiratory
Inhalation
2018
≥2023/II
ECF843
TBD
Boundary lubricant
Dry eye
Ophthalmology Eye drops
EMA401
olodanrigan Angiotensin II type 2
Peripheral neuropathic pain
Neuroscience
Oral
2017
2015
2022/II
≥2023/II
receptor antagonist
Entresto
valsartan and Angiotensin receptor/ Chronic heart failure with preserved
sacubitril
(as sodium
salt complex)
neprilysin inhibitor
ejection fraction
Cardio-Metabolic Oral
2012
2019/III
Post-acute myocardial infarction
Cardio-Metabolic Oral
HDM201
TBD
p53-HDM2 inhibitor
Acute myeloid lymphoma
INC280
capmatinib
c-MET inhibitor
Non-small cell lung cancer
Non-small cell lung cancer
(EGFR mutation)
Oncology
Oncology
Oncology
Jakavi
ruxolitinib
JAK1/2 inhibitor
Acute graft-versus-host disease
Oncology
Chronic graft-versus-host disease
Oncology
KAE609
cipargamin PfATP4 inhibitor
Malaria
Established
Medicines
Oral
Oral
Oral
Oral
Oral
Oral
2015
2017
2014
2016
2016
2016
2012
2020/III
≥2023/II
2019/II
2022/II
2020/III
2020/III
≥2023/II
43
Item 4. Information on the Company
Project/
product
Common
name
Mechanism
of action
Potential indication/
disease area
KAF156
ganaplacide
Imidazolopiperazines Malaria
derivative
Business
franchise
Established
Medicines
Formulation/
route of
administration
Year project
entered
current
Planned filing
development dates/current
phase
phase
Oral
2014
≥2023/II
Kisqali
ribociclib
CDK4/6 inhibitor
HR+/HER2- breast cancer (adjuvant)
Oncology
Oral
2018
≥2023/III
Kymriah
tisagen-
lecleucel
CD19-targeted chimeric Relapsed/refractory follicular lymphoma Oncology
antigen receptor T-cell
immunotherapy
Intravenous infusion
2017
2021/II
Chronic lymphocytic leukemia
Oncology
Intravenous infusion
2017
2022/II
Relapsed/refractory diffuse large B-cell Oncology
lymphoma in 1st relapse
Relapsed/refractory diffuse large B-cell Oncology
lymphoma (+ pembrolizumab)
Intravenous infusion
2018
2021/III
Intravenous infusion
2017
≥2023/I
LAM320
clofazimine Mycobacterial
Multidrug-resistant tuberculosis
DNA binding
Established
Medicines
Oral
2016
2021/III
LCI699
osilodrostat Cortisol synthesis
Cushing’s disease
Oncology
Oral
2018
EU registration
US 2019/III
LJC242
inhibitor
tropifexor,
FXR agonist and
cenicriviroc CCR2/5 inhibitor
(in fixed-dose
combination)
Nonalcoholic steatohepatitis
LJN452
tropifexor
FXR agonist
Nonalcoholic steatohepatitis
Immunology,
Hepatology and
Dermatology
Oral
Immunology,
Hepatology and
Dermatology
Oral
2017
≥2023/II
2015
≥2023/II
LMI070
branaplam
SMN2 RNA splicing
modulator
Spinal muscular atrophy
Neuroscience
Oral
2017
≥2023/II
LNP023
TBD
Factor B inhibitor
IgA nephropathy
Cardio-Metabolic Oral
Membranous nephropathy
Cardio-Metabolic Oral
LOU064
TBD
BTK inhibitor
Chronic spontaneous urticaria
Immunology,
Hepatology and
Dermatology
Oral
2018
2018
2017
≥2023/II
≥2023/II
≥2023/II
177Lu-
PSMA-617
TBD
Targeted DNA
destruction via
beta-particle
radiation
Metastatic castration-resistant
prostate cancer
Oncology
Intravenous infusion
2018
2020/III
Lucentis
ranibizumab Anti-VEGF monoclonal Retinopathy of prematurity
Ophthalmology
Intravitreal injection
2018
EU registration
antibody fragment
Diabetic retinopathy
Ophthalmology
Intravitreal injection
2018
EU registration
MOR106
TBD
Anti-interleukin-17C
monoclonal antibody
Atopic dermatitis
Immunology,
Hepatology and
Dermatology
Subcutaneous injection 2018
≥2023/II
OMB157
ofatumumab Anti-CD20 monoclonal Relapsing multiple sclerosis
Neuroscience
Subcutaneous injection 2015
2019/III
antibody
PDR001
spartalizumab Anti-PD-1 monoclonal Metastatic BRAF V600+
Oncology
Intravenous infusion
2017
2019/III
antibody
melanoma
(w/ Tafinlar + Mekinist)
Malignant melanoma (combo)
Oncology
Intravenous infusion
2017
2022/II
Promacta/ eltrombopag Thrombopoietin
receptor agonist
Revolade
Severe aplastic anemia, 1st line
Oncology
Oral
2018
US approved
EU registration
QAW039
fevipiprant
DP2 antagonist
(CRTH2 antagonist)
Asthma
Respiratory
Oral
2015
2020/III
QBW251
TBD
CFTR potentiator
Chronic obstructive pulmonary disease
Respiratory
Oral
2017
≥2023/II
QGE031
ligelizumab High-affinity anti-IgE
monoclonal antibody
Chronic spontaneous urticaria/
chronic idiopathic urticaria
Immunology,
Hepatology and
Dermatology
Subcutaneous injection 2017
2021/III
QMF149
indacaterol, Long-acting beta2-
mometasone adrenergic agonist and
furoate
(in fixed-dose
combination)
inhaled corticosteroid
Asthma
Respiratory
Inhalation
2015
2019/III
44
Item 4. Information on the Company
Project/
product
Common
name
Mechanism
of action
Potential indication/
disease area
Business
franchise
Formulation/
route of
administration
Year project
entered
current
Planned filing
development dates/current
phase
phase
Asthma
Respiratory
Inhalation
2015
2019/III
QVM149
indacaterol, Long-acting beta2-
mometasone adrenergic agonist,
furoate,
glyco-
pyrronium
bromide
(in fixed-dose
combination)
long-acting muscarinic
antagonist and inhaled
corticosteroid
RTH258
brolucizumab Anti-VEGF single-chain Neovascular age-related macular
Ophthalmology
Intravitreal injection
2014
2019/III
antibody fragment
degeneration
Diabetic macular edema
Ophthalmology
Intravitreal injection
2017
Retinal vein occlusion
Ophthalmology
Intravitreal injection
2018
Rydapt
midostaurin Signal transduction
Acute myeloid leukemia (FLT3 wild type) Oncology
Oral
2016
inhibitor
SEG101
crizanlizumab P-selectin inhibitor
Sickle cell disease
Oncology
Intravenous infusion
2016
Presbyopia
Ophthalmology Eye drops
2017
2020/III
2022/III
2022/III
2019/II
2022/II
UNR844
TBD
VAY736
lanalumab
Reduction of
disulfide bonds
Anti-BAFF (B-cell-
activating factor)
monoclonal antibody
Autoimmune hepatitis
Primary Sjögren’s syndrome
VAY785
emricasan
Pan-caspase inhibitor
Nonalcoholic steatohepatitis
VPM087
TBD
Interleukin-1 beta
neutralization
monoclonal antibody
Colorectal cancer, 1st line;
renal cell carcinoma, 1st line
Immunology,
Hepatology and
Dermatology
Immunology,
Hepatology and
Dermatology
Immunology,
Hepatology and
Dermatology
Subcutaneous injection 2016
≥2023/II
Subcutaneous injection 2015
≥2023/II
Oral
2017
≥2023/II
Oncology
Intravenous infusion
2018
≥2023/I
Xolair
omalizumab Anti-IgE monoclonal
Nasal polyps
Respiratory
Subcutaneous injection 2017
2019/III
antibody
ZPL389
adriforant
Histamine H4 receptor Atopic dermatitis
antagonist
Immunology,
Hepatology and
Dermatology
Oral
2017
2022/II
Key development projects
• ACZ885 (canakinumab) was first approved as Ilaris in
2009 for cryopyrin-associated periodic syndromes. In
2017, data from CANTOS, a Phase III study evaluating
quarterly injections of ACZ885 in people with a prior
heart attack and inflammatory atherosclerosis, was
presented at the European Society of Cardiology Con-
gress and published simultaneously in The New
England Journal of Medicine and The Lancet. A review
of a blinded, pre-planned lung cancer safety analysis
revealed a 77% reduction in lung cancer mortality and
a 67% reduction in lung cancer cases in patients
treated with 300 mg of ACZ885. As a result of these
findings, Novartis has initiated three Phase III studies
of ACZ885 in lung cancer, with data from primary anal-
yses expected to report out in 2021. We received a
complete response letter from the FDA in October
2018 regarding our supplemental Biologics License
Application for ACZ885 in cardiovascular risk reduc-
tion.
• AVXS-101
(onasemnogene abeparvovec-xxxx,
Zolgensma) is a gene replacement therapy candidate
designed to address the genetic root cause of spinal
muscular atrophy (SMA), a progressive neuromuscu-
lar disease and the leading cause of genetic mortality
in infants globally. In December 2018, we announced
that the FDA accepted the Biologics License Applica-
tion for Zolgensma for the treatment of SMA type 1, the
most severe form of the disease. Delivered as a single,
one-time infusion, Zolgensma works by replacing the
missing or defective SMN1 gene with a functional copy
that makes the SMN protein, thereby improving motor
neuron function and survival. The Biologics License
Application filing is supported by data from the Phase
I START trial, which demonstrated an increase in sur-
vival and improved achievement of developmental mile-
stones compared to the natural history of SMA type 1.
Zolgensma is currently being studied in a Phase III trial
in patients with SMA type 1 in the US (STR1VE) and in
Europe (STR1VE-EU), with a planned Phase III study in
the Asia-Pacific region (STR1VE-AP). Zolgensma is also
being studied in a Phase I trial in the US in patients with
SMA type 2 (STRONG), and in a Phase III multinational
trial in presymptomatic patients with SMA with two or
three copies of the SMN2 gene (SPR1NT). A trial in
pediatric patients with SMA types 1, 2 and 3 (REACH)
is planned for 2019. Patients from the START trial had
the option to voluntarily enroll in a long-term, 15-year
observational follow-up study. The brand name
Zolgensma has been provisionally approved by the FDA
for AVXS-101, but the product itself has not received
marketing authorization or Biologics License Applica-
tion approval from any regulatory authorities.
45
Item 4. Information on the Company
• BAF312 (siponimod, Mayzent) is an oral, second-gen-
eration sphingosine-1-phosphate (S1P) receptor mod-
ulator under development for the treatment of second-
ary progressive multiple sclerosis (SPMS). It binds
selectively to the S1P receptor subtypes 1 and 5, and
penetrates effectively to the central nervous system,
where it may impact central nervous system inflamma-
tion and repair mechanisms. Results from the EXPAND
Phase III study, evaluating efficacy and safety for SPMS,
demonstrated that Mayzent reduced three- and six-
month confirmed disability progression against pla-
cebo, with a safety profile similar to other S1P1 recep-
tor modulators. The full results from the Phase III
EXPAND study of oral, once-daily Mayzent in SPMS
were published in The Lancet in March 2018. Further
analyses from the EXPAND study presented in April
2018 at the American Academy of Neurology showed
that the efficacy of Mayzent on disability was largely
independent from relapse activity in SPMS. The anal-
yses also revealed positive data on cognitive decline.
In October 2018, we announced that both the FDA and
EMA had accepted our New Drug Application and Mar-
keting Authorization Application, respectively, for
review. Submissions are now also underway in Japan
and China. If approved, label content will be subject to
negotiation with regulatory authorities, but it is expected
to reflect the typical SPMS population studied in the
EXPAND trial. The brand name Mayzent has been pro-
visionally approved by the FDA and EMA for BAF312,
but the product itself has not been approved for sale
in any country.
• BYL719 (alpelisib) is an investigational, orally bioavail-
able, alpha-specific PI3K inhibitor. In breast cancer cell
lines harboring PIK3CA mutations, BYL719 has been
shown to potentially inhibit the PI3K pathway and have
antiproliferative effects. In addition, cancer cell lines
with PIK3CA mutations were more sensitive to BYL719
than those without the mutation across a broad range
of different cancers. At ESMO 2018, positive results
from the global Phase III SOLAR-1 trial evaluating
BYL719 in combination with fulvestrant were pre-
sented. In patients with PIK3CA-mutated HR+/HER2-
advanced breast cancer, BYL719 plus fulvestrant nearly
doubled median progression-free survival compared
to fulvestrant alone. Novartis is also conducting the
Phase II open-label BYLieve trial evaluating BYL719
plus fulvestrant or letrozole in patients with PIK3CA-
mutated HR+/HER2- advanced breast cancer who
have progressed on prior therapy. The study investi-
gates BYL719 in a broader patient population as com-
pared with SOLAR-1, including two cohorts exclusively
enrolling patients who have progressed on or after prior
CDK4/6 inhibitor therapies.
• Cosentyx (secukinumab) is a fully human monoclonal
antibody that selectively neutralizes interleukin-17A
(IL-17A). Cosentyx is in Phase III development in non-ra-
diographic axial spondyloarthritis. We expect results
from this trial in 2019. Cosentyx is also in a Phase III
head-to-head clinical trial in psoriatic arthritis against
Humira® (adalimumab), and a Phase III head-to-head
clinical trial in ankylosing spondylitis against the Sandoz
biosimilar Hyrimoz (adalimumab).
• Entresto (sacubitril/valsartan) is a first-in-class angio-
tensin receptor/neprilysin inhibitor approved and mar-
keted for the treatment of chronic heart failure with
reduced ejection fraction (HFrEF). Novartis is conduct-
ing multiple studies of Entresto as part of the FortiHFy
clinical program. FortiHFy includes studies to provide
reinforcing evidence in HFrEF, such as PIONEER-HF
and TRANSITION, which both read out in 2018 and
confirmed safety as well as superiority of Entresto ver-
sus enalapril, an angiotensin-converting enzyme inhib-
itor (ACE inhibitor), in the hospital setting in a wide
range of HFrEF patients hemodynamically stabilized
after an acute decompensated heart failure event. For-
tiHFy also includes studies to investigate Entresto use
in novel indications and expanded patient populations.
These include PARAGON-HF and PARALLAX-HF,
Phase III trials of Entresto in patients with chronic heart
failure with preserved ejection fraction (PARAGON-HF
enrollment is completed and results are expected in
2019, while PARALLAX-HF enrollment is ongoing and
results are expected in 2020); PARADISE-MI, a Phase
III trial for patients at high risk for heart failure after an
acute myocardial infarction (enrollment is ongoing and
results are expected in 2020); PARALLEL-HF, a Phase
III trial in Japan for patients with HFrEF (enrollment is
completed and results are expected in 2019); and PAN-
ORAMA-HF, a Phase III trial for pediatric patients with
heart failure (enrollment is ongoing and results are
expected in 2021).
• INC280 (capmatinib) is an investigational, oral and
selective MET inhibitor currently in a Phase II study in
adult patients with advanced non-small cell lung can-
cer harboring MET exon 14 skipping mutations, as well
as additional early-stage studies in combination with
other compounds. In October 2018, Novartis presented
preliminary results of the Phase II study at the Euro-
pean Society of Medical Oncology congress. INC280
is licensed by Novartis from Incyte Corporation. Under
the licensing agreement, Incyte granted Novartis exclu-
sive worldwide development and commercialization
rights to this MET inhibitor compound.
• KAF156 (ganaplacide) belongs to a novel class of anti-
malarial compounds called imidazolopiperazines. It has
the potential to clear malaria infection, including resis-
tant strains, and to block the transmission of the malaria
parasite. As demonstrated in a Phase IIa proof-of-con-
cept trial, the compound is fast-acting and potent
across multiple stages of the parasite’s lifecycle, rap-
idly clearing both Plasmodium falciparum and Plasmo-
dium vivax parasites. In August 2017, Novartis began a
Phase IIb study to test multiple dosing combinations
and dosing schedules of KAF156 and lumefantrine,
including the feasibility of a single dose therapy in
adults, adolescents and children.
• Kisqali (ribociclib) is a selective cyclin-dependent
kinase inhibitor that inhibits two proteins called
cyclin-dependent kinase 4 and 6 (CDK4/6). Novartis
is continuing to assess Kisqali through the MONA-
LEESA clinical trial program, which includes MONA-
LEESA-2, MONALEESA-3 and MONALEESA-7, as well
as the NataLEE adjuvant trial. These trials are
46
Item 4. Information on the Company
evaluating Kisqali in multiple endocrine therapy com-
binations across a broad range of patients, including
men and premenopausal women. Kisqali was devel-
oped by Novartis as part of a drug discovery collabo-
ration with Astex Pharmaceuticals.
• Kymriah (tisagenlecleucel) is a CD19-directed geneti-
cally modified autologous chimeric antigen receptor
T-cell (CAR-T) therapy that uses the patient’s own
immune system to fight certain types of cancer. CARs
are engineered proteins that enable a patient’s own
T-cells to seek out specific target proteins present on
a patient’s cancerous cells. When these cells are rein-
troduced into the patient’s blood, they demonstrate the
potential to bind to the cancer cells and destroy them.
Kymriah targets a protein called CD19, which is asso-
ciated with a number of B-cell malignancies. Novartis
is starting pivotal clinical studies of Kymriah in relapsed
or refractory (r/r) follicular lymphoma, adult r/r acute
lymphoblastic leukemia (ALL), first-line high-risk pedi-
atric ALL, diffuse large B-cell lymphoma after first
relapse, and r/r chronic lymphoblastic leukemia.
Novartis and the University of Pennsylvania’s Perelman
School of Medicine, which developed Kymriah, have a
global collaboration to research, develop and commer-
cialize CAR-T therapies, including Kymriah, for the
investigational treatment of cancers.
• LJN452 (tropifexor) is a potent, non-bile acid, farne-
soid X receptor (FXR) agonist that is being developed
for the treatment of nonalcoholic steatohepatitis
(NASH). LJN452 has been shown to reduce steatosis,
inflammation and fibrosis in animal models, alongside
a favorable safety profile in first-in-human studies. This
oral treatment is designed to break the cycle of fatty
buildup in the liver and harness the body’s built-in
mechanisms for coping with excess bile acid. Recruit-
ment is underway for the first LJN452 clinical study
with histological endpoints in NASH patients.
• OMB157 (ofatumumab) is a fully human monoclonal
antibody administered by subcutaneous injection. It is
in development for multiple sclerosis (MS). OMB157
works by binding to the CD20 molecule on the B-cell
surface and inducing B-cell depletion. Positive Phase
IIb results in MS patients were presented in 2014 and
showed significant reduction in the number of new
brain lesions in the first 24 weeks after OMB157 admin-
istration. Novartis initiated a Phase III program for
OMB157 in relapsing MS in August 2016. The program
is fully enrolled and is on track for completion in 2019.
In addition, a registration study for Japan was initiated
in March 2018.
• PDR001 (spartalizumab) is an investigational PD-1
antagonist that may restore the ability of immune cells
to induce cell death and fight cancer. PDR001 is being
evaluated in a Phase III trial in combination with Tafinlar
+ Mekinist for metastatic BRAF V600+ melanoma, and
in combination in other clinical trials across different
tumor types.
inflammatory cascade. By targeting the DP2 pathway,
QAW039 blocks the asthma inflammatory cascade at
multiple points. In asthma, this results in the reduction
of eosinophil activation and migration; in the reduced
release of pro-inflammatory cytokines IL-4, IL-5 and
IL-13; and in the reduction of smooth muscle cell mass
in the airways. Positive Phase II results showed improve-
ment of lung function, reduction of sputum eosinophil
levels, and improvement of asthma symptoms. Phase
III studies are ongoing, measuring improvement of lung
function and reduction of asthma attacks in moderate
to severe patients with unresolved asthma despite
treatment with inhaled therapies. Phase III develop-
ment started in 2015, with first pivotal trial readouts
expected this year.
• QVM149 (indacaterol acetate, glycopyrronium bro-
mide, mometasone furoate) is a fixed-dose combina-
tion of indacaterol acetate (an inhaled long-acting
beta2-adrenergic agonist), glycopyrronium bromide (an
inhaled long-acting muscarinic antagonist), and
mometasone furoate (an inhaled corticosteroid) deliv-
ered once-daily via the Breezhaler device, a unit dose
dry powder inhaler. It is in development as a mainte-
nance treatment for poorly controlled asthmatic
patients. All three mono-components have previously
been developed as individual drugs for either chronic
obstructive pulmonary disease or asthma. QVM149 is
currently in Phase III clinical trials to support registra-
tion outside the US.
• RTH258 (brolucizumab) is a single-chain antibody frag-
ment that acts as an anti-vascular endothelial growth
factor (anti-VEGF) agent. RTH258 is currently in devel-
opment for neovascular age-related macular degen-
eration (nAMD) and diabetic macular edema. In nAMD,
RTH258 met its primary endpoint of non-inferiority to
aflibercept in mean change in best-corrected visual
acuity in two Phase III clinical trials, HAWK and HAR-
RIER. Additionally, superiority was shown in three sec-
ondary endpoints that are considered key markers of
nAMD disease: central subfield retinal thickness, reti-
nal fluid (intraretinal and subretinal), and disease activ-
ity. A majority of patients were maintained on a 12-week
treatment schedule immediately following the loading
phase to Week 48, also assessed by secondary end-
points in the HAWK and HARRIER trials. Year Two data
reaffirmed the Year One findings. We expect to make
global regulatory filings for nAMD, starting in the US,
the EU and Japan.
• SEG101 (crizanlizumab) is an investigational humanized
anti-P-selectin monoclonal antibody that is in late-
stage development for the prevention of vaso-occlu-
sive pain crises (VOCs) in patients with sickle cell dis-
ease (SCD). SCD is a debilitating genetic blood disorder
that affects the shape of red blood cells and can cause
VOCs. In December 2018, the FDA granted SEG101
breakthrough therapy designation for the prevention
of vaso-occlusive crises in sickle cell disease.
• QAW039 (fevipiprant) is a once-daily oral therapy that
blocks the DP2 pathway, a principal regulator of the
• UNR844 is a potential first-in-class topical treatment
in development for presbyopia. It is believed to work
through the reduction of disulfide bonds, softening the
47
Item 4. Information on the Company
crystalline lens. Presbyopia is a common age-related
loss of near-distance vision characterized by a pro-
gressive inability to focus on objects nearby, making
everyday activities (such as reading) a challenge. In a
Phase I/II masked, placebo-controlled proof-of-con-
cept study, 50 patients were treated daily for 90 days
with topical UNR844, and 25 patients were treated with
placebo. UNR844 showed a statistically significant
difference to placebo in distance-corrected near vision
at all time points measured (from Day Eight). At Day 90,
82% of participants treated with UNR844 had 20/40
near vision (or 0.30 LogMAR) versus 48% in the pla-
cebo group. Near vision of 20/40 allows for the major-
ity of near-vision tasks in most people. UNR844 was
acquired by Novartis through the acquisition of Encore
Vision, Inc. in January 2017.
Projects added to and subtracted from the development table since 2017
Project/product Potential indication/disease area
Change
ACZ885
Secondary prevention of cardiovascular events
Removed
Afinitor/Votubia
Tuberous sclerosis complex seizures
Commercialized
AMG 334
Prophylaxis of migraine
Commercialized as Aimovig
Arzerra
Refractory indolent non-Hodgkin’s lymphoma
Removed
AVXS-101
(Zolgensma)
Spinal muscular atrophy type 1 (IV formulation)
Added
Spinal muscular atrophy type 2/3 (IT formulation)
Added
AVXS-201
Rett syndrome
BYM338
Hip fracture recovery
Sarcopenia
CFZ533
Sjögren’s syndrome
Cosentyx
Hidradenitis suppurativa
CSJ117
Severe asthma
EGF816
Non-small cell lung cancer
Gilenya
Kisqali
Pediatric multiple sclerosis
HR+/HER2- advanced breast cancer
(postmenopausal women), 1st/2nd line
(+ fulvestrant)
HR+/HER2- advanced breast cancer
(premenopausal women), 1st line
(+ tamoxifen + goserelin or NSAI +
goserelin)
Added
Removed
Removed
Added
Added
Added
Removed
Commercialized
Commercialized
Commercialized
Kymriah (CTL019) Pediatric/young adult acute lymphoblastic leukemia
Commercialized
Relapsed/refractory diffuse large B-cell lymphoma
Commercialized
LHW090
Resistant hypertension
LIK066
LJC242
LNP023
Weight loss
Nonalcoholic steatohepatitis
IgA nephropathy
Membranous nephropathy
177Lu-PSMA-617 Metastatic castration-resistant prostate cancer
Lucentis
Diabetic retinopathy
MAA868
Stroke prevention in atrial fibrillation
MOR106
Atopic dermatitis
MTV273
Multiple myeloma
Removed
Removed
Added
Added
Added
Added
Added
Removed
Added
Removed
Reason
Development discontinued
Development discontinued
Acquired with acquisition of
AveXis, Inc.
Acquired with acquisition of
AveXis, Inc.
Acquired with acquisition of
AveXis, Inc.
Development discontinued
Development discontinued
Entered Confirmatory Development
Entered Confirmatory Development
Entered Confirmatory Development
Development discontinued
Development discontinued
Development discontinued
Entered Confirmatory Development
Entered Confirmatory Development
Entered Confirmatory Development
Acquired with acquisition of
Endocyte
Entered Confirmatory Development
Development discontinued
Entered Confirmatory Development
Development discontinued
PDR001
Malignant melanoma (w/ Tafinlar + Mekinist)
Now disclosed as metastatic BRAF V600+ melanoma
(w/ Tafinlar + Mekinist)
Endocrine neoplasm
Malignant melanoma
Removed
Development discontinued
Now disclosed as malignant melanoma (combo)
RTH258
Retinal vein occlusion
Signifor LAR
Cushing’s disease
Tafinlar + Mekinist BRAF V600+ melanoma (adjuvant)
Added
Commercialized
Commercialized
Entered Confirmatory Development
VPM087
Colorectal cancer, 1st line; renal cell carcinoma, 1st line
Added
Entered Confirmatory Development
48
Item 4. Information on the Company
Principal markets
The Innovative Medicines Division sells products in approximately 155 countries worldwide. Net sales are gener-
ally concentrated in the US, Europe, Japan and China. The following table sets forth the aggregate 2018 net sales
of the Innovative Medicines Division by region:
Innovative Medicines
Europe
United States
Asia, Africa, Australasia
Canada and Latin America
Total
Of which in Established Markets *
Of which in Emerging Growth Markets *
2018 net sales
to third parties
USD millions
12 296
11 864
8 097
2 635
34 892
26 258
8 634
%
35
34
23
8
100
75
25
* Emerging Growth Markets comprise all markets other than the Established Markets of the US, Canada, Western Europe, Japan, Australia and New Zealand.
Many of our Innovative Medicines Division products are used for chronic conditions that require patients to con-
sume the product over long periods of time, ranging from months to years. However, certain of our marketed prod-
ucts and development projects, such as gene therapies, are administered only once. Net sales of the vast majority
of our products are not subject to material changes in seasonal demand.
Production
The primary goal of our manufacturing and supply chain
management program is to ensure the uninterrupted,
timely and cost-effective supply of products that meet
all product specifications and quality standards. The
manufacture of our products is heavily regulated by gov-
ernmental health authorities around the world, including
the FDA and EMA. In addition to regulatory requirements,
many of our products involve technically complex man-
ufacturing processes or require a supply of highly spe-
cialized raw materials.
We manufacture our products at facilities worldwide.
See also “—Item 4.D Property, plants and equipment.”
Active pharmaceutical ingredients are manufactured in
our own facilities or purchased from third-party suppli-
ers. We maintain state-of-the-art processes, with qual-
ity as a primary goal within our own production network.
Those processes include fermentation, chemical syn-
theses and precipitation processes, such as sterile pro-
cessing. Many biologic medicines are manufactured
using recombinant DNA-derived technology, by which a
gene is introduced into a host cell, which then produces
a human protein. This manufacturing process requires
sophisticated technical expertise. We are constantly
working to improve current, and to develop new, manu-
facturing processes, and to review and adapt our man-
ufacturing network to meet the needs of our Innovative
Medicines Division.
Raw materials for the manufacturing process are
either produced in-house or purchased from a number
of third-party suppliers. Where possible, we maintain
multiple supply sources so that the business is not
dependent on a single or limited number of suppliers.
However, our ability to do so may at times be limited by
regulatory or other requirements. We monitor market
developments that could have an adverse effect on the
supply of essential materials. Our suppliers of raw mate-
rials are required to comply with Novartis quality stan-
dards.
Because the manufacture of our products is complex
and heavily regulated by governmental health authori-
ties, supply is never guaranteed. If we or our third-party
suppliers fail to comply with applicable regulations, then
there could be a product recall or other shutdown or dis-
ruption of our production activities. We have experienced
supply interruptions for our products in the past, and
there can be no assurance that supply will not be inter-
rupted again in the future. We have implemented a global
manufacturing strategy to maximize business continuity
in case of such events. However, there can be no guar-
antee that we will always be able to successfully man-
age such issues when they arise.
Marketing and sales
The Innovative Medicines Division serves customers with
25 783 field force representatives, as of December 31,
2018, including supervisors and administrative person-
nel. These trained representatives present the therapeu-
tic risks and benefits of our products to physicians, phar-
macists, hospitals, insurance groups, managed care
organizations and other healthcare professionals. We
continue to see increasing influence of customer groups
beyond prescribers, and Novartis is responding by adapt-
ing our business practices to engage appropriately with
such constituencies.
The marketplace for healthcare is also evolving, with
patients becoming more informed stakeholders in their
healthcare decisions and looking for solutions to meet
their changing needs. Novartis seeks to support the
49
Item 4. Information on the Company
patient, delivering innovative solutions to drive educa-
tion, access and improved patient care. Additionally, in
the US, certain products can be advertised by way of
internet, television, newspaper and magazine advertis-
ing.
Although specific distribution patterns vary by coun-
try, Novartis generally sells its prescription drugs primar-
ily to wholesale and retail drug distributors, hospitals,
clinics, government agencies and managed healthcare
providers. The growing number of so-called “specialty”
drugs in our portfolio has resulted in increased engage-
ment with specialty pharmacies. In the US, specialty
pharmacies continue to grow as a distribution channel
for specialty products, with an increasing number of
health plans mandating use of specialty pharmacies to
monitor specialty drug utilization and costs.
Novartis pursues co-promotion/co-marketing oppor-
tunities as well as licensing and distribution agreements
with other companies in various markets, when econom-
ically attractive.
As a result of continuing changes in healthcare eco-
nomics and an aging population, the US Centers for
Medicare & Medicaid Services (CMS) is the largest sin-
gle payer for healthcare services in the US. In addition,
both commercial and government-sponsored managed
care organizations continue to be among the largest
groups of payers for healthcare services in the US. In
other countries, national health services are often the
only significant payer for healthcare services. In an effort
to control prescription drug costs, almost all managed
care organizations and national health services use for-
mularies that list specific drugs that may be reimbursed
and/or the level of reimbursement for each drug. Man-
aged care organizations and national health services
also increasingly utilize various cost-benefit analyses to
determine whether or not newly approved drugs will be
added to a formulary and/or the level of reimbursement
for that drug, and to determine whether or not to con-
tinue to reimburse existing drugs. We have dedicated
teams that actively seek to optimize patient access,
including formulary positions, for our products.
Recent trends have been toward continued consoli-
dation among distributors and retailers of Innovative
Medicines Division products, both in the US and interna-
tionally. This has increased our customers’ purchasing
leverage and resulted in increased pricing pressure on
our products. Moreover, we are exposed to increased
concentration of credit risk as a result of the consolida-
tion among our customers.
Competition
The global pharmaceutical market is highly competitive,
and we compete against other major international cor-
porations that have substantial financial and other
resources, as well as against smaller companies that
operate regionally or nationally. Competition within the
industry is intense and extends across a wide range of
activities, including pricing, product characteristics, cus-
tomer service, sales and marketing, and research and
development.
In addition, as is the case with other pharmaceutical
companies selling patented pharmaceuticals, Novartis
faces ever-increasing challenges from companies sell-
ing products that compete with our products, including
competing patented products and generic forms of our
products following the expiry of intellectual property pro-
tection. Generic companies may also gain entry to the
market through successfully challenging our intellectual
property rights, but we vigorously use legally permissi-
ble measures to defend those rights. See also “—Intel-
lectual property” below. We also may face competition
from over-the-counter (OTC) products that do not require
a prescription from a physician. See also “—Regulation—
Price controls” below.
There is ongoing consolidation in the pharmaceuti-
cal industry. At the same time, new entrants are looking
to use their expertise to establish or expand their pres-
ence in healthcare, including technology companies hop-
ing to benefit as data and data management become
increasingly important in our industry.
Research and development
The discovery and development of a new drug is a
lengthy process, usually requiring approximately 10 to
15 years from the initial research to bringing a drug to
market, including approximately six to eight years from
Phase I clinical trials to market entry. At each of these
steps, there is a substantial risk that a compound will not
meet the requirements to progress further. In such an
event, we may be required to abandon a compound in
which we have made a substantial investment.
We manage our research and development expendi-
tures across our entire portfolio in accordance with our
strategic priorities. We make decisions about whether
or not to proceed with development projects on a proj-
ect-by-project basis. These decisions are based on the
project’s potential to meet a significant unmet medical
need or to improve patient outcomes, the strength of the
science underlying the project, and the potential of the
project (subject to the risks inherent in pharmaceutical
development) to generate significant positive financial
results for the Company. Once a management decision
has been made to proceed with the development of a
particular molecule, the level of research and develop-
ment investment required will be driven by many factors,
including the medical indications for which it is being
developed, the number of indications being pursued,
whether the molecule is of a chemical or biological
nature, the stage of development, and the level of evi-
dence necessary to demonstrate clinical efficacy and
safety.
Research program
Our research program is conducted by the Novartis Insti-
tutes for BioMedical Research (NIBR), which was estab-
lished in 2002 and is the research and early develop-
ment innovation engine of Novartis. NIBR is responsible
for the discovery of new medicines for diseases with
unmet medical need. We focus our work in areas where
we believe we can have the most impact for patients.
This requires the hiring and retention of extraordinary
talent, a focus on fundamental disease mechanisms that
are relevant across different disease areas, continuous
improvement in technologies for drug discovery and
50
Item 4. Information on the Company
potential therapies, close alliances with clinical col-
leagues, and the establishment of strategic external alli-
ances.
At NIBR sites in Basel, Switzerland; Cambridge, Mas-
sachusetts; East Hanover, New Jersey; San Diego, Cal-
ifornia; Emeryville, California; and Shanghai, China,
approximately 6 000 full-time equivalent scientists, phy-
sicians and business professionals contribute to research
into disease areas such as cardiovascular and metabolic
diseases, neuroscience, oncology, muscle disorders,
ophthalmology, autoimmune diseases and respiratory
diseases. Research at the Friedrich Miescher Institute
and the Genomics Institute of the Novartis Research
Foundation focuses on basic genetic and genomic
research, and the Novartis Institute for Tropical Diseases
(NITD), located in Emeryville, California, focuses on dis-
covering new medicines to fight tropical diseases, includ-
ing malaria and cryptosporidiosis.
All drug candidates are taken to the clinic via
proof-of-concept trials to enable an early assessment
of the safety and efficacy of the drug while collecting
basic information on pharmacokinetics and tolerability,
and adhering to the guidance for early clinical testing set
forth by health authorities. Following proof of concept,
our Global Drug Development unit conducts confirma-
tory trials on the drug candidates.
In July 2018, we announced the decision to exit anti-
bacterial and antiviral research. While the science for
these programs is compelling, we have decided to pri-
oritize our resources in other areas where we believe we
are better positioned to develop innovative medicines
that will have a positive impact for patients. The San Fran-
cisco Bay Area will continue to be home to NITD and
global drug discovery teams focused on “undruggable”
targets in collaboration with the Novartis-Berkeley Cen-
ter for Proteomics and Chemistry Technologies. The
need for new types of medicines to combat antimicro-
bial resistance is clear, and following the announcement,
we began to explore out-licensing opportunities for com-
pounds within our infectious diseases portfolio.
Development program
Our Global Drug Development (GDD) organization over-
sees drug development activities for our Innovative
Medicines Division. GDD works collaboratively with NIBR
to execute our overall pipeline strategy and takes an
enterprise approach to pipeline portfolio management.
The GDD organization includes centralized global func-
tions such as Regulatory Affairs and Global Development
Operations, and Global Development units aligned with
our business franchises. GDD was created to improve
resource allocation, technology implementation and pro-
cess standardization to further increase innovation. GDD
includes approximately 11 000 full-time equivalent asso-
ciates worldwide.
Under our Global Drug Development unit, the focus
of our development program is to determine and then
establish the safety and efficacy of a potential new med-
icine in humans.
The traditional model of development comprises three
phases, which are defined as follows:
Phase I: The first clinical trials of a new compound –
generally performed in a small number of healthy human
volunteers – to assess the drug’s safety profile, includ-
ing the safe dosage range. These trials also determine
how a drug is absorbed, distributed, metabolized and
excreted, and the duration of its action.
Phase II: Clinical studies performed with patients who
have the target disease, with the aim of continuing the
Phase I safety assessment in a larger group, assessing
the efficacy of the drug in the patient population, and
determining the appropriate doses for further evaluation.
Phase III: Large-scale clinical studies with several hun-
dred to several thousand patients, which are conducted
to establish the safety and efficacy of the drug in spe-
cific indications for regulatory approval. Phase III trials
may also 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.
In each of these phases, physicians monitor volunteer
patients closely to assess the potential new drug’s safety
and efficacy.
Though we use this traditional model as a platform,
we have tailored the development process to be simpler,
more flexible and efficient. We view the development pro-
cess as generally consisting of Exploratory Development
where proof of concept is established, and Confirmatory
Development where this concept is confirmed in large
numbers of patients. Exploratory Development consists
of clinical proof-of-concept (PoC) studies, which are
small clinical trials (typically involving five to 15 patients)
that combine elements of traditional Phase I/II testing.
These customized trials are designed to give early
insights into issues such as safety, efficacy and toxicity
for a drug in a given indication and are conducted by
NIBR. Once a positive proof of concept has been estab-
lished, the drug moves to the Confirmatory Development
stage and becomes the responsibility of GDD. Confir-
matory Development has elements of traditional Phase II/
III testing and includes trials aimed at confirming the
safety and efficacy of the drug in the given indication,
leading up to submission of a dossier to health authori-
ties for approval. This stage can also include trials that
compare the drug to the current standard of care for the
disease in order to evaluate the drug’s overall risk-ben-
efit profile. Further, with new treatment approaches such
as gene therapy, elements of Exploratory and Confirma-
tory Development may be combined.
The vast amount of data that must be collected and
evaluated makes clinical testing the most time-consum-
ing and expensive part of new drug development. The
next stage in the drug development process is to seek
registration for the new drug. For more information, see
“—Regulation.”
At each phase of clinical development, our activities
are managed by our Innovation Management Board
(IMB). The IMB is responsible for oversight over all major
aspects of our development portfolio and oversees our
drug development budget. In particular, the IMB is
responsible for the endorsement of proposals to com-
mence the first clinical trials of a development com-
pound, and of major project phase transitions and mile-
stones following a positive proof-of-concept outcome,
including transitions to full development and the decision
to submit a regulatory application to the health authori-
is also responsible for project
ties. The
IMB
51
Item 4. Information on the Company
discontinuations, the endorsement of overall develop-
ment strategy, and the endorsement of development
project priorities. The IMB is chaired by our Chief Exec-
utive Officer and has representatives from Novartis
senior management with expertise spanning multiple
fields, among its core members and extended member-
ship.
Alliances and acquisitions
Our Innovative Medicines Division enters into business
development agreements with other pharmaceutical and
biotechnology companies and with academic and other
institutions to develop new products and access new
markets. We license products that complement our cur-
rent product line and are appropriate to our business
strategy. Therapeutic area strategies have been estab-
lished to focus on alliances and acquisition activities for
key disease areas and indications that are expected to
be growth drivers in the future. We review products and
compounds we are considering licensing, using the same
criteria that we use for our own internally discovered
drugs.
On December 21, 2018, we completed our acquisi-
tion of Endocyte, a US-based biopharmaceutical com-
pany focused on developing targeted therapeutics for
cancer treatment. This acquisition expanded our radioli-
gand therapy platform and added 177Lu-PSMA-617 – a
potential first-in-class radioligand therapy in Phase III
development for metastatic, PSMA-positive castra-
tion-resistant prostate cancer – as well as other investi-
gational treatments.
In December 2018, we announced an offer to acquire
CellforCure, a French company that is one of the largest
contract development and manufacturing organizations
producing cell and gene therapies in Europe. This pro-
posed acquisition builds on an existing agreement with
CellforCure to produce CAR-T therapies, including
Kymriah (tisagenlecleucel). If completed, the acquisition
would bolster our CAR-T therapy manufacturing capac-
ity with the potential to expand to other cell and gene
therapies in the Novartis pipeline. This transaction is sub-
ject to customary closing conditions, including regula-
tory approval. For additional information, see “Item 18.
Financial Statements—Note 2. Significant transactions—
Significant pending transactions.”
In October 2018, we licensed three of our infectious
disease programs, with the potential to address the need
for new approaches to treat antibiotic-resistant
Gram-negative infections, to Boston Pharmaceuticals.
This agreement is part of our strategy to collaborate with
external innovators to further develop new medicines
that fall outside of our strategic direction but have the
potential to have a positive impact on the lives of patients.
In August 2018, we closed an agreement with phar-
maceutical company Mylan. Under the agreement, Mylan
purchased the worldwide rights to commercialize our
cystic fibrosis products TOBI solution and TOBI Podhaler.
In July 2018, we announced an exclusive license
agreement with biotech companies Galapagos NV and
MorphoSys AG regarding their compound MOR106.
Under the agreement, Novartis acquires the exclusive
global development and marketing rights to MOR106 for
atopic dermatitis and all other potential indications. This
transaction became effective on September 10, 2018.
In May 2018, we successfully completed the acqui-
sition of AveXis, Inc., a US-based clinical stage gene ther-
apy company. AveXis has several ongoing clinical stud-
ies for the treatment of spinal muscular atrophy (SMA),
an inherited neurodegenerative disease. The lead AveXis
gene therapy candidate, AVXS-101, has the potential to
be the first-ever one-time gene replacement therapy for
SMA. For additional information, see “Item 18. Financial
Statements—Note 2. Significant transactions—Signifi-
cant transactions in 2018.”
In March 2018, we announced a collaboration and
licensing agreement with the Wyss Institute for Biologi-
cally Inspired Engineering at Harvard University and the
Dana-Farber Cancer Institute to develop biomaterial sys-
tems for our portfolio of immuno-oncology therapies.
The implantable and injectable systems aim to overcome
barriers to success that have faced traditional cancer
vaccines. The work will combine Harvard’s expertise in
tumor biology and materials science with our diverse
immuno-oncology pipeline.
In March 2018, we announced a collaboration with
Pear Therapeutics to develop novel prescription digital
therapeutics for patients with schizophrenia and multi-
ple sclerosis. Under the agreement, we are working with
Pear Therapeutics to advance clinical development of
the Pear-004 prescription digital therapeutic for patients
with schizophrenia. We will also work together on the
design and development of a new prescription digital
therapeutic to address underserved mental health bur-
den in multiple sclerosis patients.
In January 2018, we announced a licensing agree-
ment and a manufacturing and supply agreement with
Spark Therapeutics covering development, registration
and commercialization rights to Luxturna (voretigene
neparvovec) in markets outside the US. Luxturna received
FDA approval in December 2017 as a one-time gene ther-
apy to restore functional vision in children and adult
patients with biallelic mutations of the RPE65 gene,
which typically lead to blindness. Luxturna was approved
in the EU in November 2018.
On January 19, 2018, we successfully completed a
tender offer for all of the then-outstanding ordinary
shares, including ordinary shares represented by Amer-
ican Depositary Shares (ADSs), of Advanced Accelera-
tor Applications S.A. (AAA). In addition, we commenced
a subsequent offering period that expired on January 31,
2018. As of December 31, 2018, Novartis held 99.1% of
the then outstanding fully-diluted ordinary shares, includ-
ing ordinary shares represented by ADSs, which were
validly tendered during the initial offering period, the sub-
sequent offering period, and afterward. AAA is a radio-
pharmaceutical company headquartered in Saint-Ge-
nis-Pouilly, France, that develops, produces and
commercializes nuclear medicines – including Lutathera
(USAN: lutetium Lu 177 dotatate/INN: lutetium (177Lu) oxo-
dotreotide), a first-in-class radioligand therapy for gas-
troenteropancreatic neuroendocrine tumors – and diag-
nostic products. For additional information, see “Item 18.
Financial Statements—Note 2. Significant transactions—
Significant transactions in 2018.”
In November 2017, we announced an expanded col-
laboration with Amgen Inc. and Banner Alzheimer’s Insti-
tute to collaborate on a new Generation Study 2 to
assess whether investigational BACE1 inhibitor CNP520
52
Item 4. Information on the Company
can prevent or delay the symptoms of Alzheimer’s dis-
ease in a high-risk population.
development for atopic dermatitis. This acquisition was
completed on January 20, 2017.
In September 2017, we announced a collaboration
agreement with the University of California, Berkeley, in
the field of covalent chemoproteomics to establish the
Novartis-Berkeley Center for Proteomics and Chemistry
Technologies, based at Berkeley. The collaboration
focuses on discovery of drug targets on proteins inac-
cessible to conventional therapeutic molecules.
In June 2017, we announced a clinical research col-
laboration in which Bristol-Myers Squibb is to investigate
the safety, tolerability and efficacy of Mekinist (trame-
tinib) in combination with Opdivo® (nivolumab) and
Opdivo® + Yervoy® (ipilimumab) regimen as a potential
treatment option for metastatic colorectal cancer in
patients with microsatellite stable tumors where the
tumors are proficient in mismatch repair (MSS mCRC
pMMR).
In April 2017, we announced an expanded collabora-
tion agreement with Amgen to co-commercialize Aimovig
(erenumab) in the US. Aimovig, formerly known as AMG
334, was approved for the prevention of migraine. Under
the agreement, Novartis retained exclusive rights to com-
mercialize Aimovig in the rest of the world and gained
commercialization rights in Canada. This agreement
builds on the previously announced 2015 global collab-
oration between Novartis and Amgen.
In January 2017, we entered into a collaboration and
option agreement with Ionis Pharmaceuticals, Inc. (Ionis)
and its affiliate Akcea Therapeutics, Inc. (Akcea) to
license two investigational treatments with the potential
to significantly reduce cardiovascular risk in patients suf-
fering from high levels of lipoproteins known as Lp(a) and
ApoCIII. The two investigational antisense therapies
developed by Ionis – called AKCEA-APO(a)-LRx and
AKCEA-APOCIII-LRx – have the potential to lower both
lipoproteins up to 90% and significantly reduce cardio-
vascular risk in high-risk patient populations. In addition,
Novartis entered into a stock purchase agreement with
Ionis and Akcea. This transaction was completed on Feb-
ruary 14, 2017.
In December 2016, we entered into a definitive agree-
ment for the acquisition of Encore Vision, Inc., a privately
held company focused on the development of UNR844
(formerly EV06), an investigational, first-in-class, poten-
tially disease-modifying topical treatment for presby-
opia. This acquisition was completed on January 20,
2017.
In December 2016, we signed an exclusive option,
collaboration and license agreement with Conatus
Pharmaceuticals Inc. for the global rights to VAY785
(emricasan), an investigational, first-in-class, oral,
pan-caspase inhibitor for the treatment of nonalcoholic
steatohepatitis with advanced fibrosis and cirrhosis of
the liver. Novartis exercised the option on May 3,
2017. Novartis obtained an exclusive, worldwide license
to develop and commercialize products containing emri-
casan on July 5, 2017.
In December 2016, we entered into a definitive agree-
ment for the acquisition of Ziarco Group Limited, a pri-
vately held company focused on the development of
novel treatments in dermatology, including ZPL389 (adri-
forant), a once-daily oral H4 receptor antagonist in
In November 2016, we acquired Reprixys
Pharmaceuticals Corporation and SEG101 (crizanli-
zumab), an anti-P-selectin antibody being investigated
in the reduction of vaso-occlusive pain crises in patients
with sickle cell disease.
In June 2016, we announced a collaboration and
licensing agreement with Xencor for the development of
bispecific antibodies for treating cancer. We are collab-
orating with Xencor to co-develop its bispecific T-cell-en-
gaging antibody targeting CD3xCD123 for the treatment
of acute myeloid leukemia. As part of the agreement,
Novartis also received the right to develop four additional
bispecific antibodies and to use other Xencor proprietary
antibody engineering technology for up to 10 additional
biotherapeutic programs across the Novartis research
and development portfolio. The original terms also
included co-development of Xencor’s bispecific
T-cell-engaging antibody targeting CD3xCD20 for the
treatment of B-cell malignancies, which we have since
agreed to revert to Xencor.
In January 2016, we announced a collaboration and
licensing agreement with Surface Oncology. Novartis
obtained an exclusive worldwide license to develop and
commercialize an anti-CD73 antibody. As part of the col-
laboration, Novartis has options to license additional
next-generation cancer immunotherapies.
As part of our previously announced exclusive global
research and development collaboration with the Uni-
versity of Pennsylvania (Penn) to develop and commer-
cialize targeted chimeric antigen receptor (CAR) immu-
notherapies for the treatment of cancer, in February 2016
Penn opened the Center for Advanced Cellular Thera-
peutics (CACT) at the Perelman School of Medicine cam-
pus in Philadelphia, Pennsylvania. The CACT is a first-
of-its-kind research and development center established
specifically to develop and manufacture adoptive T-cell
immunotherapies under the research collaboration
guided by scientists and clinicians from NIBR and Penn.
On March 2, 2015, we acquired a right of first nego-
tiation over the co-development or commercialization of
GSK’s current and future oncology R&D pipeline, exclud-
ing oncology vaccines, which expires on September 2,
2027. We acquired this right with the completion of our
acquisition of the oncology products of GSK and certain
related assets.
Regulation
The international pharmaceutical industry is highly reg-
ulated. Regulatory authorities around the world admin-
ister numerous laws and regulations regarding the test-
ing, approval, manufacturing, importing, labeling and
marketing of drugs, and also review the safety and effi-
cacy of pharmaceutical products. Extensive controls
exist on the non-clinical and clinical development of
pharmaceutical products. These regulatory require-
ments, and the implementation of them by local health
authorities around the globe, are a major factor in deter-
mining whether a substance can be developed into a
marketable product, and the amount of time and expense
associated with that development.
53
Item 4. Information on the Company
Health authorities, including those in the US, the EU
and Japan, have high standards of technical evaluation.
The introduction of new pharmaceutical products gen-
erally entails a lengthy approval process. Products must
be authorized or registered prior to marketing, and such
authorization or registration must subsequently be main-
tained. In recent years, the registration process has
required increased testing and documentation for the
approval of new drugs, with a corresponding increase in
the expense of product introduction.
To register a pharmaceutical product, a registration
dossier containing evidence establishing the safety, effi-
cacy and quality of the product must be submitted to
regulatory authorities. Generally, a therapeutic product
must be registered in each country in which it will be sold.
In every country, the submission of an application to a
regulatory authority does not guarantee that approval to
market the product will be granted. Although the criteria
for the registration of therapeutic drugs are similar in
most countries, the formal structure of the necessary
registration documents and the specific requirements,
including risk tolerance, of the local health authorities
can vary significantly from country to country. It is pos-
sible that a drug can be registered and marketed in one
country while the registration authority in another coun-
try may, prior to registration, request additional informa-
tion from the pharmaceutical company or even reject the
product. It is also possible that a drug may be approved
for different indications in different countries.
The registration process generally takes between six
months and several years, depending on the country, the
quality of the data submitted, the efficiency of the regis-
tration authority’s procedures, and the nature of the
product. Many countries provide for accelerated pro-
cessing of registration applications for innovative prod-
ucts of particular therapeutic interest. In recent years,
efforts have been made among the US, the EU and Japan
to harmonize registration requirements in order to
achieve shorter development and registration times for
medical products. However, the requirement in many
countries to negotiate selling prices or reimbursement
levels with government regulators and other payers can
substantially extend the time until a product may finally
be available to patients.
The following provides a summary of the regulatory
processes in the principal markets served by Innovative
Medicines Division affiliates:
United States
In the US, applications for drug registration are submit-
ted to and reviewed by the FDA. The FDA regulates the
testing, manufacturing, labeling and approval for market-
ing of pharmaceutical products intended for commer-
cialization in the US. The FDA continues to monitor the
safety of pharmaceutical products after they have been
approved for sale in the US market. The pharmaceutical
development and registration process is typically inten-
sive, lengthy and rigorous. When a pharmaceutical com-
pany has gathered data that it believes sufficiently
demonstrates a drug’s safety, efficacy and quality, then
the company may file a New Drug Application (NDA) or
Biologics License Application (BLA), as applicable, for
the drug. The NDA or BLA must contain all the scientific
information that has been gathered about the drug and
typically includes information regarding the clinical expe-
riences of patients tested in the drug’s clinical trials. A
Supplemental New Drug Application (sNDA) or BLA
amendment must be filed for new indications for a pre-
viously approved drug.
Once an application is submitted, the FDA assigns
reviewers from its staff, including experts in biopharma-
ceutics, chemistry, clinical microbiology, pharmacology/
toxicology, and statistics. After a complete review, these
content experts provide written evaluations of the NDA
or BLA. These recommendations are consolidated and
are used by senior FDA staff in its final evaluation of the
NDA or BLA. Based on that final evaluation, the FDA then
provides to the NDA or BLA’s sponsor an approval, or a
“complete response” letter if the NDA or BLA applica-
tion is not approved. If not approved, the letter will state
the specific deficiencies in the NDA or BLA that need to
be addressed. The sponsor must then submit an ade-
quate response to the deficiencies in order to restart the
review procedure.
Once the FDA has approved an NDA, BLA, sNDA or
BLA amendment, the company can make the new drug
available for physicians to prescribe. The drug owner
must submit periodic reports to the FDA, including any
cases of adverse reactions. For some medications, the
FDA requires additional post-approval studies (Phase IV)
to evaluate long-term effects or to gather information on
the use of the product under specified conditions.
Throughout the life cycle of a product, the FDA
requires compliance with standards relating to good lab-
oratory, clinical and manufacturing practices. The FDA
also requires compliance with rules pertaining to the
manner in which we may promote our products.
European Union
In the EU, there are three main procedures for applica-
tion for authorization to market pharmaceutical products
in more than one EU member state at the same time: the
centralized procedure, the mutual recognition procedure
and the decentralized procedure. It is also possible to
obtain a national authorization for products intended for
commercialization in a single EU member state only, or
for additional indications for licensed products. The pro-
cedure used for first authorization must continue to be
followed for subsequent changes, e.g., to add an indica-
tion for a licensed product.
Under the centralized procedure, applications are
made to the EMA for an authorization that is valid for the
European Union (all member states). The centralized pro-
cedure is mandatory for all biotechnology products; new
chemical entities in cancer, neurodegenerative disor-
ders, diabetes, AIDS, autoimmune diseases and other
immune dysfunctions; advanced therapy medicines,
such as gene therapy, somatic cell therapy and tis-
sue-engineered medicines; and orphan medicines
(medicines for rare diseases). It is optional for other new
chemical entities, innovative medicinal products, and
medicines for which authorization would be in the inter-
est of public health. When a pharmaceutical company
has gathered data that it believes sufficiently demon-
strates a drug’s safety, efficacy and quality, the company
may submit an application to the EMA. The EMA then
receives and validates the application, and the special-
ized committee for human medicines, the CHMP, appoints
54
Item 4. Information on the Company
a rapporteur and co-rapporteur to review it. The entire
review cycle must be completed within 210 days, although
there is a “clock stop” at Day 120 to allow the company
to respond to questions set forth in the rapporteur and
co-rapporteur’s assessment report. When the compa-
ny’s complete response is received by the EMA, the clock
restarts on Day 121. If there are further aspects of the
dossier requiring clarification, the CHMP will issue fur-
ther questions at Day 180, and may also request an oral
explanation, in which case the sponsor must not only
response to the further questions but also appear before
the committee to justify its responses. On Day 210, the
CHMP will take a vote to recommend the approval or
non-approval of the application, and their opinion is
transferred to the European Commission (EC). The final
EC decision under this centralized procedure is a deci-
sion that is applicable to all member states. This deci-
sion occurs 60 days, on average, after a positive CHMP
recommendation.
Under both the mutual recognition procedure (MRP)
and the decentralized procedure (DCP), the assessment
is led by one member state, called the reference mem-
ber state (RMS) which then liaises with other member
states, known as the concerned member states (CMSs).
In the MRP, the company first obtains a marketing autho-
rization in the RMS, which is then recognized by the
CMSs in 90 days. In the DCP, the application is done
simultaneously in the RMS and all CMSs. During the DCP,
the RMS drafts an assessment report within 120 days.
Within an additional 90 days, the CMSs review the appli-
cation and can issue objections or requests for additional
information. On Day 90, each CMS must be assured that
the product is safe and effective, and that it will cause
no risks to the public health. Once an agreement has
been reached, each member state grants national mar-
keting authorizations for the product.
After the marketing authorizations have been granted,
the company must submit periodic safety reports to the
relevant health authority (EMA for the centralized pro-
cedure, national health authorities for DCP or MRP). In
addition, pharmacovigilance measures must be imple-
mented and monitored, including the collection, evalua-
tion and expedited reporting of adverse events, and
updates to risk management plans. For some medica-
tions, post-approval studies (Phase IV) may be imposed
to complement available data with additional data to eval-
uate long-term effects (called a Post-Approval Safety
Study, or PASS) or to gather additional efficacy data
(called a Post-Approval Efficacy Study, or PAES).
European marketing authorizations have an initial
duration of five years. The holder of the marketing autho-
rization must actively apply for its renewal after this first
five-year period. As part of the renewal procedure, the
competent authority will perform a full benefit-risk review
of the product. Should the authority conclude that the
benefit-risk balance is no longer positive, the marketing
authorization can be suspended or revoked. Once
renewed, the marketing authorization is valid for an unlim-
ited period. If the holder does not apply for renewal, the
marketing authorization automatically lapses. Any mar-
keting authorization that is not followed within three
years of its granting by the actual placing on the market
of the corresponding medicinal product ceases to be
valid.
Japan
In Japan, applications for new products are made through
the Pharmaceutical and Medical Devices Agency
(PMDA). Once an NDA is submitted, a review team is
formed, which consists of specialized officials of the
PMDA, including chemistry/manufacturing, non-clinical,
clinical and biostatistics. While a team evaluation is car-
ried out, a data reliability survey and Good Clinical Prac-
tice/Good Laboratory Practice/Good Manufacturing
Practice inspection are carried out by the Office of Con-
formity Audit and Office of GMP/GQP Inspection of the
PMDA. Team evaluation results are passed to the PMDA’s
external experts, who then report back to the PMDA.
After a further team evaluation, a report is provided to
the Ministry of Health, Labor and Welfare (MHLW); the
MHLW makes a final determination for approval and
refers this to the Council on Drugs and Foods Sanitation,
which then advises the MHLW on final approvability. Mar-
keting and distribution approvals require a review to
determine whether or not the product in the application
is suitable as a drug to be manufactured and distributed
by a person who has obtained a manufacturing and dis-
tribution business license for the type of drug concerned,
and to confirm that the product has been manufactured
in a plant compliant with Good Manufacturing Practices.
Once the MHLW has approved the application, the
company can make the new drug available for physicians
to prescribe. After that, the MHLW lists its National
Health Insurance price within 60 days (or 90 days) from
the approval, and physicians can obtain reimbursement.
For some medications, the MHLW requires additional
post-approval studies (Phase IV) to further evaluate
safety and/or to gather information on the use of the
product under specified conditions. The MHLW also
requires the drug’s sponsor to submit periodic safety
update reports. Within three months from the specified
re-examination period, which is designated at the time
of the approval of the application for the new product,
the company must submit a re-examination application
to enable the drug’s safety and efficacy to be reassessed
against approved labeling by the PMDA.
Price controls
In most of the markets where we operate, the prices of
pharmaceutical products are subject to both direct and
indirect price controls and to drug reimbursement pro-
grams with varying price control mechanisms. Due to
increasing political pressure and governmental budget
constraints, we expect these mechanisms to continue
to remain robust – and to potentially even be strength-
ened – and to have a negative influence on the prices we
are able to charge for our products.
Direct governmental efforts to control prices
United States:
• In the US, President Trump declared the reduction of
drug prices as one of his key priorities to be addressed
by his administration. In May 2018, the Trump adminis-
tration unveiled its blueprint of potential actions that
could be used to lower drug prices and reduce drug
out-of-pocket costs for patients. In the second half of
2018, the Trump administration released a series of
55
Item 4. Information on the Company
prescription drug-related proposals that may ultimately
lead to new price restrictions and cost reduction solu-
tions for pharmaceuticals. A key area of focus is Medi-
care Part B, which includes prescription drugs dis-
pensed by physicians in their offices or in outpatient
clinics. The administration is also considering use of
an international pricing comparison model for Medi-
care Part B drugs that would reduce costs of select
medications by aligning US drug reimbursements to
prices in other countries.
• In November 2018, the Democratic Party regained
majority leadership of the US House of Representa-
tives. Democratic Party leaders have outlined prescrip-
tion drug costs as one of their priorities in the congres-
sional session that began in January 2019.
• The Independent Payment Advisory Board (IPAB), an
entity created under the Patient Protection and Afford-
able Care Act with authority to implement broad actions
to reduce future costs of the Medicare program, was
repealed in February 2018.
• Additionally, seven states have passed legislation
intended to impact pricing or requiring price transpar-
ency reporting (California, Connecticut, Louisiana,
Maine, Nevada, Oregon and Vermont). The California
law requires 60-day advance notification of price
increases for products exceeding a specific threshold
over the past two years, as well as additional quarterly
reporting requirements. Various formats of drug price
reporting and disclosure are required in all seven
states. It is expected in 2019 that state legislatures will
continue to focus on drug pricing and that similar bills
will be passed in more states.
Europe: In Europe, our operations are subject to signif-
icant price and marketing regulations. Many govern-
ments are introducing healthcare reforms in a further
attempt to curb increasing healthcare costs. In the EU,
governments influence the price of pharmaceutical prod-
ucts through their control of national healthcare systems
that fund a large part of the cost of such products to
patients. The downward pressure on healthcare costs in
general in the EU, particularly with regard to prescription
drugs, has become very intense. Increasingly strict anal-
yses are applied when evaluating the entry of new prod-
ucts, and as a result, access to innovative medicines is
limited based on strict cost-benefit assessments. In addi-
tion, prices for marketed products are referenced within
member states and across member state borders, fur-
ther impacting individual EU member state pricing. As an
additional control for healthcare budgets, some EU coun-
tries have passed legislation to impose further manda-
tory rebates for pharmaceutical products and/or finan-
cial claw-backs on the pharmaceutical industry. The
calculation of these rebates and claw-backs may lack
transparency in some cases and can be difficult to pre-
dict.
Japan: In 2018, the National Health Insurance price cal-
culation method for new products and the price revision
rule for existing products were reviewed by the
Japanese government, and new drug tariffs became
effective beginning April 2018. Also in 2018, the MHLW
implemented a price maintenance scheme with a nar-
rower scope and decreased number of products. The
MHLW also increased the frequency of price cuts from
every other year to annually beginning in 2021, and plans
to introduce a cost-effectiveness assessment in 2019.
The Japanese government is continuing deliberations
regarding a healthcare reform initiative with a goal of sus-
taining universal coverage under the National Health
Insurance program, and is addressing the efficient use
of drugs, including promotion of use of generic drugs.
Rest of world: Many other countries around the world
are also taking steps to control prescription drug prices.
For example, China – one of our most important Emerg-
ing Growth Markets – organized national price negotia-
tions in 2017 for 36 patented drugs and in 2018 for 17
oncology drugs directly linked to national drug reim-
bursement, which applied nationwide both in public and
military hospitals, as well as a national procurement pilot
on certain generic drugs at the end of 2018. These efforts
resulted in drug price reductions of more than 50% on
average for the drugs subject to these programs. Drug
prices in China may further decline due to the national
health reform, but meanwhile, reimbursement access is
expected to accelerate, which aims to resolve the pub-
lic issue of accessibility and the high cost of healthcare
services. In addition, in 2016, the Colombian government
took steps to unilaterally reduce the price of Glivec by
up to 43% through a local procedural mechanism called
a Declaration of Public Interest. While the government’s
use of this exceptional mechanism as a tool to control
the price of a prescription drug and to generally manage
its healthcare budget is unprecedented, we continue to
contest its appropriateness, as its use could become
more widespread if upheld in this case, potentially lead-
ing to a more systemic impact on drug pricing. In 2018,
Canada proposed amendments to its patented medicines
regulations to introduce three new economics-based
price regulatory factors and the concept of affordability
in price assessments; to update the schedule of com-
parator countries to include 12 countries with similar con-
sumer protection priorities, economic wealth and mar-
keted medicines as Canada and to exclude Switzerland
and the US; and to require reporting of all confidential
discounts and rebates.
Regulations favoring generics and biosimilars
In response to rising healthcare costs, most govern-
ments and private medical care providers have instituted
reimbursement schemes that favor the substitution of
generic pharmaceuticals for more expensive brand-name
pharmaceuticals. In the US, generic substitution statutes
have been enacted by all states and permit or require
the dispensing pharmacist to substitute a less expensive
generic drug instead of an original patented drug. Other
countries, including numerous European countries, have
similar laws. We expect that the pressure for generic
substitution will continue to increase. In addition, the US,
EU and other jurisdictions are increasingly crafting laws
and regulations encouraging the development of biosim-
ilar versions of biologic drugs, which can also be expected
to have an impact on pricing.
56
Item 4. Information on the Company
Cross-border sales
Price controls in one country can also have an impact in
other countries as a result of cross-border sales. In the
EU, products that we have sold to customers in coun-
tries with stringent price controls can be legally resold
to customers in other EU countries at a lower price than
the price at which the product is otherwise available in
the importing country (known as parallel trade). In North
America, products that we have sold to customers in
Canada – which has relatively stringent price controls –
are sometimes resold into the US, again at a lower price
than the price at which the product is otherwise sold in
the US. Such imports from Canada and other countries
into the US are currently illegal. Given the increased
focus on pharmaceutical prices in the US, the Trump
administration, certain members of the US Congress,
and select state legislators continue to explore legisla-
tion to allow the safe importation of pharmaceutical prod-
ucts into the US from select countries, including Canada.
We expect that pressures on pricing will continue
worldwide and will likely increase. Because of these
pressures, there can be no certainty that in every instance
we will be able to charge prices for a product that, in a
particular country or in the aggregate, would enable us
to earn an adequate return on our investment in that
product.
Intellectual property
We attach great importance to intellectual property –
including patents, trademarks, copyrights, know-how
and research data – in order to protect our investment
in research and development, manufacturing and mar-
keting. In general, we seek intellectual property protec-
tion under applicable laws for significant product devel-
opments in major markets. Among other things, patents
may cover the products themselves, including the prod-
uct’s active ingredient or ingredients and its formulation.
Patents may cover processes for manufacturing a prod-
uct, including processes for manufacturing intermediate
substances used in the manufacture of the product. Pat-
ents may also cover particular uses of a product, such
as its use to treat a particular disease, or its dosage reg-
imen. In addition, patents may cover assays or tests for
certain diseases or biomarkers – which can improve
patient outcomes when administered with certain drugs
– as well as assays, research tools and other techniques
used to identify new drugs. The protection offered by
such patents extends for varying periods, depending on
the grant and duration of patents in the various jurisdic-
tions. The protection afforded, which may vary from
country to country, depends upon the type of patent and
its scope of coverage.
In addition to patent protection, various countries
offer data or marketing exclusivities for a prescribed
period of time. Data exclusivity may be available that
would preclude a potential competitor from filing a reg-
ulatory application for a set period of time that relies on
the sponsor’s clinical trial data, or the regulatory author-
ity from approving the application. The data exclusivity
period can vary depending upon the type of data included
in the sponsor’s application. When it is available, market
exclusivity, unlike data exclusivity, precludes a compet-
itor from obtaining marketing approval for a product even
if a competitor’s application relies on its own data. Data
exclusivity and other regulatory exclusivity periods gen-
erally run from the date a product is approved, and so
their expiration dates cannot be known with certainty
until the product approval date is known.
In the US and other countries, pharmaceutical prod-
ucts are eligible for a patent term extension for patent
periods lost during product development and regulatory
review. The law recognizes that product development
and review by the FDA and other health authorities can
take an extended period, and permits an extension of
the patent term for a period related to the time taken for
the conduct of clinical trials and for the health authori-
ty’s review. However, the length of this extension and the
patents to which it applies cannot be known in advance
and can only be determined after the product is approved.
United States
Patents
In the US, a patent issued for an application filed today
will receive a term of 20 years from the earliest applica-
tion filing date, subject to potential patent term adjust-
ments for delays in patent issuance based upon certain
delays in prosecution by the United States Patent and
Trademark Office (USPTO). A US pharmaceutical patent
that claims a product, method of treatment using a prod-
uct, or method of manufacturing a product may also be
eligible for a patent term extension based on the time
the FDA took to approve the product. This type of exten-
sion may only extend the patent term for a maximum of
five years, and may not extend the patent term beyond
14 years from regulatory approval. Only one patent may
be extended for any product based on FDA delay.
In practice, however, it is not uncommon for signifi-
cantly more than the five-year maximum patent exten-
sion period to pass between the time that a patent appli-
cation is filed for a product and the time that the product
is approved by the FDA. As a result, it is rarely the case
that, at the time a product is approved by the FDA, it will
have the full 20 years of remaining patent life. Rather, in
our experience, it is not uncommon that, at the date of
approval, a product will have from 13 to 16 years of pat-
ent protection remaining, including all extensions avail-
able at that time.
Data and market exclusivity
In addition to patent exclusivities, the FDA may provide
data or market exclusivity for a new chemical entity or
an “orphan drug,” each of which runs in parallel to any
patent protection. Regulatory data protection or exclu-
sivity prevents a potential generic competitor from rely-
ing on clinical trial data generated by the sponsor when
establishing the safety and efficacy of its competing
product. Market exclusivity prohibits any marketing of
the same drug for the same indication.
• A new small-molecule active pharmaceutical ingredi-
ent shall have five years of regulatory data exclusivity,
during which time a competitor generally may not sub-
mit an application to the FDA based on a sponsor’s
clinical data.
57
Item 4. Information on the Company
• Orphan drug exclusivity provides seven years of mar-
ket exclusivity for drugs designated by the FDA as
“orphan drugs,” meaning drugs that treat rare diseases,
as designated by the FDA. During this period, a poten-
tial competitor may not market the same drug for the
same indication even if the competitor’s application
does not rely on data from the sponsor.
• A new biologic active pharmaceutical ingredient shall
have 12 years of market exclusivity, during which time
a competitor may not market the same drug for the
same indication.
• The FDA may also request that a sponsor conduct
pediatric studies, and in exchange, it will grant an addi-
tional six-month period of pediatric market exclusivity
if the FDA accepts the data, the sponsor makes a timely
application for approval for pediatric treatment, and
the sponsor has either a patent-based or regulato-
ry-based exclusivity period for the product that can be
extended.
European community
Patents
Patent applications in Europe may be filed in the Euro-
pean Patent Office (EPO) or in a particular country in
Europe. The EPO system permits a single application to
be granted for the EU plus other non-EU countries such
as Switzerland and Turkey. When the EPO grants a pat-
ent, it is then validated in the countries that the patent
owner designates. The term of a patent granted by the
EPO or a European country office is generally 20 years
from the filing date of the patent application on which
the patent is based, subject to potential patent term
extensions. Pharmaceutical patents can be granted a
further period of exclusivity under the Supplementary
Protection Certificate (SPC) system. SPCs are designed
to compensate the owner of the patent for the time it
took to receive marketing authorization of a product by
the European health authorities. An SPC may be granted
to provide, in combination with the patent, up to 15 years
of exclusivity from the date of the first European market-
ing authorization. However, an SPC cannot last longer
than five years. The SPC duration can additionally be
extended by a further Pediatric Extension of six months
if the product is the subject of an agreed pediatric inves-
tigation plan. The post-grant phase of patents, including
the SPC system, is currently administered on a coun-
try-by-country basis under national laws that, while dif-
fering, are intended to (but do not always) have the same
effect.
In practice, as in the US, it is not uncommon for pat-
ent term extensions to not fully compensate the owner
of a patent for the time it took to develop the product
and receive marketing authorization by the European
health authorities. Accordingly, it is not uncommon that
a pharmaceutical product, at the date of approval, will
have patent protection for 10 to 15 years, including exten-
sions available at that time.
Data and market exclusivity
In addition to patent exclusivity, the EU provides a sys-
tem of regulatory data exclusivity for authorized human
medicines, which runs in parallel to any patent protec-
tion. The system for drugs being approved today is usu-
ally referred to as “8+2+1” because it provides: an initial
period of eight years of data exclusivity, during which a
competitor cannot rely on the relevant data; a further
period of two years of market exclusivity, during which
the data can be used to support applications for market-
ing authorization but the competitive product cannot be
launched; and a possible one-year extension of the mar-
ket exclusivity period if, during the initial eight-year data
exclusivity period, the sponsor registered a new thera-
peutic indication with “significant clinical benefit.” This
system applies both to national and centralized authori-
zations. It has been in force since 2005; therefore, some
medicines remain covered by the previous system in
which EU member states provided either six or 10 years
of data exclusivity.
The EU also has an orphan drug exclusivity system
for medicines similar to the US system. If a medicine is
designated as an “orphan drug,” then it benefits from
10 years of market exclusivity after it is authorized, during
which time a similar medicine for the same indication will
not receive marketing authorization. Under certain cir-
cumstances, this exclusivity can be extended with a
two-year Pediatric Extension.
Japan
Patents
In Japan, a patent can be issued for active pharmaceu-
tical ingredients. Although methods of treatment – such
as dosage and administration – are not patentable in
Japan, pharmaceutical compositions for a specific dos-
age or administration method are patentable. Processes
to make a pharmaceutical composition are also patent-
able. The patent term granted is generally 20 years from
the filing date of the patent application on which the pat-
ent is based, subject to potential patent term extensions
and adjustments. A patent term extension can be granted
for up to five years under the Japanese Patent Act to
compensate for erosion against the patent term caused
by the time needed to obtain marketing authorization
from the MHLW. As in the US and EU, patent term exten-
sions in Japan may not fully compensate for the time
necessary to develop a product and obtain a marketing
authorization. As a result, it is not uncommon for the
effective term of patent protection for an active pharma-
ceutical ingredient in Japan to be approximately 10 to
15 years, including available extensions.
Data and market exclusivity
Japan also has a regulatory data protection system
called a “re-examination period” of eight years for new
chemical entities and of four to six years for new indica-
tions and formulations, and a 10-year orphan drug exclu-
sivity system.
Third-party patents and challenges to intellectual
property
Third parties can challenge our patents, patent term
extensions and marketing exclusivities, including pedi-
atric extensions and orphan drug exclusivity, through var-
ious proceedings. For example, patents in the US can be
challenged in the USPTO through various proceedings,
including Inter Partes Review (IPR) proceedings. They
58
Item 4. Information on the Company
may also be challenged through patent infringement lit-
igation under the Abbreviated New Drug Application
(ANDA) provisions of the Hatch-Waxman Act, or the Bio-
logics Price Competition and Innovation Act (BPCIA).
See generally “—Sandoz—Intellectual property.” In the
EU, EU patents may be challenged through oppositions
in the EPO, or national patents may be challenged in
national courts or national patent offices. In Japan, pat-
ents may be challenged in the Japanese patent office
and in national courts. The outcomes of such challenges
can be difficult to predict.
In addition to directly challenging our intellectual
property rights, in some circumstances a competitor may
be able to market a generic version of one of our prod-
ucts by, for example, designing around our intellectual
property or marketing the generic product for non-pro-
tected indications. Despite data exclusivity protections,
a competitor could opt to incur the costs of conducting
its own clinical trials and preparing its own regulatory
application, and avoid our data exclusivity protection
altogether. There is a risk that some countries may seek
to impose limitations on the availability of intellectual
property right protections for pharmaceutical products,
or on the extent to which such protections may be
enforced. For example, a review of several intellectual
property rights is currently ongoing in the EU (orphan
drug exclusivity, pediatric extensions, SPCs and regula-
tory data protection), which could lead to legislative
changes in the scope and/or term of protection under
those rights. Also, even though we may own, co-own or
in-license patents protecting our products, and conduct
pre-launch freedom-to-operate analyses, a third party
may nevertheless claim that one of our products infringes
a third-party patent for which we do not have a license.
As a result, there can be no assurance that our intel-
lectual property will protect our products or that we will
be able to avoid adverse effects from the loss of intel-
lectual property protection or from third-party patents
in the future.
Intellectual property protection for certain key
marketed products and compounds in
development
We present below certain additional details regarding
intellectual property protection for certain Innovative
Medicines Division products and compounds in devel-
opment. For each product and compound in develop-
ment below, we identify issued, unexpired patents by
general subject matter and, in parentheses, years of
expiry in, if relevant, the US, EU and Japan that are
owned, co-owned or exclusively in-licensed by Novartis
and that relate to the product or to the method of its use
as it is currently approved and marketed or, in the case
of a compound in development, as it is currently filed with
the FDA and/or the EMA for approval. Identification of
an EU patent refers to national patents in EU countries
and/or to the national patents that have been derived
from a patent granted by the EPO. Novartis may own or
control additional patents relating to, for example, com-
pound forms, methods of use, formulations, processes,
synthesis, purification and detection.
We identify unexpired regulatory data protection peri-
ods and, in parentheses, years of expiry if the relevant
marketing authorizations have been authorized or
granted. The term “RDP” refers to regulatory data pro-
tection, regulatory data exclusivity (which in the EU refers
to the protections under “8+2+1” regulatory data exclu-
sivity), and data re-examination protection systems. We
identify certain unexpired patent term extensions and
marketing exclusivities and, in parentheses, years of
expiry if they are granted; their subject matter scope may
be limited and is not specified. Marketing exclusivities
and patent term extensions include orphan drug exclu-
sivity (ODE), pediatric exclusivity (PE), patent term exten-
sions (PTE) and SPCs. We designate them as “pending”
if they have been applied for but not granted and years
of expiry are estimable. Such pending applications may
or may not ultimately be granted.
In the case of the EU, identification of a patent, pat-
ent term extension, marketing exclusivity or data protec-
tion means grant, authorization and maintenance in at
least one country and possibly pending or found invalid
in others.
For each product below, we indicate whether there
is current generic competition – which in the case of
products containing biologics, refers to biosimilar com-
petition – for one or more product versions in one or more
approved indications in each of the major markets for
which intellectual property is disclosed. We identify
ongoing challenges to the disclosed intellectual prop-
erty that have not been finally resolved, including IPRs if
instituted by the USPTO. Challenges identified as being
in administrative entities, such as national patent offices,
include judicial appeals from decisions of those entities.
Resolution of challenges to the disclosed intellectual
property, which in the EU may involve intellectual prop-
erty of one or more EU countries, may include settlement
agreements under which Novartis permits or does not
permit future launch of generic versions of our products
before expiration of that intellectual property. We iden-
tify certain material terms of such settlement agree-
ments where they could have a material adverse effect
on our business. In other cases, such settlement agree-
ments may contain confidentiality obligations restricting
what may be disclosed.
For additional information regarding commercial
arrangements with respect to these products, see “—
Key marketed products.”
Novartis Oncology business unit
Oncology
• Tasigna. US: Patent on compound (2023), PE (2024);
patents on salt forms (2026, 2027, 2028), three PEs
(2027, 2028, 2029); patent on polymorph compound
form (2026), PE (2027); patents on capsule form (2026,
2027), two PEs (2027, 2028) and patent on method of
treatment (2032), PE (2032). EU: Patent on compound
(2023); patent on salt form (2026); patent on poly-
morph compound form (2026); patent on capsule form
(2027); patent on method of treatment (2030); ODE
(2017), PE (2019). Japan: Patent on compound (2023),
PTE (2024); patent on salt form (2026); patent on poly-
morph compound form (2026); patent on capsule form
(2027); patent on method of treatment (2030).
There is currently no generic competition in the US, EU
or Japan. In the US, the salt form patents, the poly-
morph patent, the capsule form patent and the method
59
Item 4. Information on the Company
of treatment patent are being challenged in ANDA pro-
ceedings against generic manufacturers. The EU
method of treatment patent, the capsule form patent,
and the polymorph compound patent are being
opposed in the EPO.
• Sandostatin SC and Sandostatin LAR.
Sandostatin SC. There is no patent protection in the
US, EU or Japan. There is generic competition in the
US, EU and Japan.
Sandostatin LAR. There is no patent protection in the
US, EU or Japan. There is currently no generic compe-
tition in the US, EU or Japan.
• Gleevec/Glivec. US: Patent on polymorphic compound
form (2019), PE (2019); patent on GIST method of use
(2021), PE (2022). EU: Patent on GIST method of use
(2021); patent on tablet formulation (2023). Japan: Pat-
ent on polymorphic compound form (2019); patent on
GIST method of use (2021); patent on tablet formula-
tion (2023).
There is generic competition in the US, EU and Japan.
In the US and EU, Novartis has resolved patent litiga-
tion with certain generic manufacturers. Novartis is tak-
ing steps in some EU countries to enforce the tablet
formulation patent and the GIST method of use patent.
The EU GIST method of use patent is being challenged
in one EU country. The EU tablet formulation patent is
being challenged in the EPO and in the patent office of
one EU country.
• Afinitor/Votubia and Afinitor Disperz/Votubia dispers-
ible tablets. US: Patent on compound (2014), PTE
(2019), PE (2020); patent on dispersible tablet formu-
lation (2022), PE (2023); patent on antioxidant (2019);
patent on antioxidant (2019), PE (2020); patent on
tuberous sclerosis complex (TSC)/subependymal
giant cell astrocytoma (SEGA) use (2022), PE (2022);
patent on breast cancer use (2022), PE (2022); patent
on renal cell carcinoma use (2025), PE (2026); patent
on pancreatic neuroendocrine tumor use (2028); RDP
for neuroendocrine tumors of gastrointestinal or lung
origin (2019), PE (2019); ODE for TSC/renal angiomy-
olipoma (2019), PE (2019). EU: Patent on dispersible
tablet formulation (2022); patent on antioxidant (2019);
patent on breast cancer use (2022); patent on renal
cell carcinoma use (2022); patent on TSC/SEGA use
(2022); patent on use in neuroendocrine tumors of lung
origin (2022); ODE (Votubia) (2021). Japan: Patent on
dispersible tablet formulation (2022); patent on antiox-
idant (2019); patent on breast cancer use (2022); pat-
ent on pancreatic neuroendocrine tumor use (2026);
patent on renal cell carcinoma use (2022); patent on
gastrointestinal and lung neuroendocrine tumor use
(2026), PTE (2027); patent on TSC/SEGA and TSC/
AML use (2027); ODE (tuberous sclerosis) (2022);
ODE (dispersible tablet) (2022).
cell carcinoma use patent are being challenged in
ANDA proceedings against generic manufacturers.
The US renal cell carcinoma use and pancreatic neu-
roendocrine tumor use patents are being challenged
in IPR proceedings in the USPTO. In the US, Novartis
has resolved patent litigation with certain generic man-
ufacturers which may result in limited generic compe-
tition for Afinitor toward the end of 2019, and has
resolved patent litigation relating to Afinitor Disperz.
The EU breast cancer use patent, the EU TSC/SEGA
use patent and the EU renal cell carcinoma use patent
are being opposed in the EPO. The Japanese breast
cancer use patent is being challenged in the Japanese
Patent Office.
• Promacta/Revolade. US: Patent on compound (2021),
PTE (2022), PE (2023); patent on compound (2018),
PE (2019); two patents on compound (2021, 2021), PEs
(2021, 2021); patent on method of treating thrombocy-
topenia (2021), PE (2021); patent on method of enhanc-
ing platelet production (2021), PE (2021); patent on
method of enhancing platelet production (2023), PE
(2023); patent on salt form (2025); PE (2026); four pat-
ents on formulation of different dose strengths (2027)
(4), PE (2028) (4); ODE (2021), two PEs (2022, 2022).
EU: Patents on compound (2021); patent on compound
(2021), SPC (2025); patent on salt form (2023); patent
on formulation (2027); RDP (2020). Japan: Patent on
compound (2021), PTE (2025); patent on salt form
(2023); PTE (2023), patent on formulation (2027); RDP
(2020). There is currently no generic competition in the
US, EU or Japan. In the US, generic manufacturers have
filed ANDAs challenging certain patents other than the
compound patents. The EU formulation patent is being
opposed in the EPO.
• Tafinlar and Mekinist.
Tafinlar. US: Two patents on compound (2030; 2030);
patent on method of use (2029); RDP (2018); ODE
(2020). EU: Patent on compound (2029); RDP (2023).
Japan: Patent on compound (2031). There is currently
no generic competition in the US, EU or Japan.
Mekinist. US: Patent on compound (2025), PTE (2027);
patent on method of use (2025); three patents on for-
mulation (2032) (3); RDP (2018); ODE (2020). EU: Pat-
ent on compound (2025), SPC (2029); RDP (2025).
Japan: Patent on compound (2025); patent on method
of use (2025); patent on formulation (2031). There is
currently no generic competition in the US, EU or
Japan.
Use of Mekinist with Tafinlar or Tafinlar with Mekinist.
US: Patent on combination (2030); patent on method
of use of combination (2030); RDP (2020); ODE on
melanoma with certain mutations (2021), ODE on
non-small cell lung cancer (2024). EU: RDP (2025).
Japan: Patent on method of use of combination (2030).
There is currently no generic competition in the US, EU
or Japan.
There is currently no generic competition in the US, EU
or Japan. In the US, the compound patent and renal
• Exjade and Jadenu.
60
Item 4. Information on the Company
Exjade. US: Patent on compound (2017), PTE (2019),
ODE for non-transfusion iron overload (2020). EU: Pat-
ent on compound (2017), SPC (2021), PE (2022); pat-
ent on dispersible tablet formulation (2023). Japan:
Patent on compound (2017), PTE (2021); patent on dis-
persible tablet formulation (2023). There is currently
no generic competition in the US, EU or Japan. In the
US, Novartis has resolved patent litigation with generic
manufacturers relating to Exjade.
Jadenu (marketed as Exjade FCT in EU and Japan). The
compound patents for Exjade also protect Jadenu (US),
and Exjade FCT (EU/Japan). US: Patent on film-coated
tablet formulation (2034), ODE for non-transfusion iron
overload (2020). EU: Patent on film-coated tablet for-
mulation (2034). There is currently no generic compe-
tition in the US, EU or Japan. In the US, the formulation
patent is being challenged in ANDA proceedings
against a generic manufacturer. Novartis has resolved
patent litigation relating to the US formulation patent
with a generic manufacturer. In the EU, the formulation
patent is being opposed in the EPO.
Novartis Pharmaceuticals business unit
Ophthalmology
• Lucentis. EU: Patent on compound (2018), SPC (2022).
Japan: Patent on compound (2018), PTE for age-re-
lated macular degeneration (2019), PTE for pathologic
myopia (2021), PTE for retinal vein occlusion (2023).
There is currently no generic competition in the EU or
Japan.
• Duotrav, Travatan and Travatan Z.
Duotrav. EU: Six patents on formulations (2029) (6).
Japan: Two patents on formulations (2029, 2029).
Duotrav is not marketed in the US. There is generic
competition in some EU countries. There is currently
no generic competition in Japan. In the EU, the six for-
mulation patents are being opposed in the EPO.
Travatan. EU: Six patents on formulations (2029) (6).
Travatan is not marketed in the US or Japan. There is
generic competition in the EU. In the EU, the six formu-
lation patents are being opposed in the EPO.
• Jakavi. EU: Patent on compound (2026), SPC (2027);
patent on salt (2028); RDP (2023). Japan: Patent on
compound (2026), PTE (2028), PTE (2030); patent on
salt (2028), PTE (2028), PTE (2030); patent on method
of use (2026), PTE (2027); RDP (2022). There is cur-
rently no generic competition in the EU or Japan. The
EU salt patent is being opposed in the EPO.
Travatan Z. US: Three patents on formulations (2027,
2027, 2029). Japan: Three patents on formulation
(2027) (3). Travatan Z is not marketed in the EU. There
is currently no generic competition in the US. There is
generic competition in Japan. In the US, Novartis has
resolved patent litigation with certain generic manu-
facturers.
• Votrient. US: Patent on compound (2021), PTE (2023),
two patents on compound (2021, 2021), ODE (2019).
EU: Patent on compound (2021), SPC (2025); RDP
(2021). Japan: patent on compound (2021), two PTEs
(2025, 2026); RDP (2020). There is currently no generic
competition in the US, EU or Japan.
• Kisqali. US: Three patents on compound (2028, 2030,
2031), pending PTE (2031); three patents on methods
of use (2029, 2029, 2031); patent on salt (2031); RDP
(2022). EU: Patent on compound (2027); patent on
compound (2029), SPC (2032); patent on methods of
use (2029); RDP (2027). Japan: Two patents on com-
pound (2027, 2029). Kisqali is currently not marketed
in Japan. There is currently no generic competition in
the US or EU.
• Kymriah. US: Seven patents on cells and/or pharma-
ceutical compositions comprising the cells (2031) (7);
four patents on methods of use (2031) (4); RDP (2029),
PE (2030); ODE for r/r pedALL (2024); ODE for r/r
DLBCL (2025), PE (2025). EU: Two patents on meth-
ods of use (2031, 2031); RDP (2028); ODE (2028), PE
(2030). Japan: One patent on pharmaceutical compo-
sitions (2031); one patent on cells, pharmaceutical
compositions and medical uses (2031). Kymriah is cur-
rently not marketed in Japan. There is currently no
generic competition in the US or Europe.
• Lutathera. US: RDP (2023), ODE (2025); EU: RDP
(2027), ODE (2027). Lutathera is currently not mar-
keted in Japan. There is currently no generic competi-
tion in the US or EU.
• Luxturna. EU: ODE (2028).
Immunology, Hepatology and Dermatology
• Cosentyx. US: Patent on compound (2026), PTE
(2029); patent on method of use (psoriasis) (2032);
patent on method of use (ankylosing spondylitis)
(2033); RDP (2027). EU: Patent on compound (2025),
SPC (2030); patent on method of use (psoriasis) (2031);
RDP (2026). Japan: Patent on compound (2025), PTE
(2026, 2028, 2029); patent on method of use (psoria-
sis) (2031), PTE (2032, 2033); patent on method of use
(psoriatic arthritis) (2031); RDP (2022). There is cur-
rently no generic competition in the US, EU or Japan.
• Xolair. US: Two patents on syringe formulation (2021,
2024). EU: Two patents on syringe formulation (2021,
2024). Japan: Two patents on syringe formulation
(2021, 2024). There is currently no generic competition
in the US, EU or Japan.
• Ilaris. US: Patent on compound (2024); patent on
method of use in cryopyrin-associated periodic syn-
dromes (CAPS) (2026), patent on method of use in
familial Mediterranean fever (FMF) (2026), patent on
method of use in systemic onset juvenile idiopathic
arthritis (SJIA) (2027), patent on method of use in
hyperimmunoglobulin D syndrome (HIDS) and tumor
necrosis factor receptor-associated periodic syn-
drome (TRAPS) (2028); patent on formulation (2029);
RDP (2021). EU: Patent on compound (2021), SPC
(2024), PE (2025); patent on method of use in SJIA
(2026), patent on method of use in FMF (2026), patent
61
Item 4. Information on the Company
on formulation (2029); RDP (2020). Japan: Patent on
compound (2021), PTE for CAPS (2024), PTE for FMF,
HIDS and TRAPS (2026); patent on method of use in
familial cold urticaria, neonatal onset multisystem
inflammatory disease, SJIA and FMF (2026), patent on
method of use in Muckle Wells syndrome (2026), pat-
ent on formulation (2029); ODE for CAPS (2021); ODE
for FMF, HIDS and TRAPS (2026); ODE for SJIA (2028).
There is currently no generic competition in the US, EU
or Japan.
Japan. The EU Eucreas formulation patent is being
opposed in the EPO.
• Diovan and Co‑Diovan/Diovan HCT. Diovan: There is
generic competition in the US, EU and Japan. Co‑Dio‑
van/Diovan HCT: There is generic competition in the
US, EU and Japan.
• Exforge and Exforge HCT.
Neuroscience
• Gilenya. US: Patent on compound (2014), PTE (2019),
PE (2019); patent on dosage regimen (2027). EU: RDP
(2022); patent on formulation (2024), SPC (2026).
Japan: RDP (2021); two patents on formulation (2024,
2024). There is currently no generic competition in the
US, EU or Japan. In the US, the compound patent is
being challenged in ANDA proceedings against generic
manufacturers. The US dosage regimen patent is being
challenged in an IPR proceeding in the USPTO. Novartis
is taking steps to enforce the US dosage regimen pat-
ent against generic manufacturers.
• Aimovig (formerly AMG 334). US (co-commercialized
with Amgen): Patent on compound (2031), RDP (2030).
EU: Patent on compound (2029), RDP (2028). There is
currently no generic competition in the US or EU.
Respiratory
• Xolair. The information set forth in the IP paragraph for
Xolair under the “Immunology, Hepatology and Derma-
tology” heading also applies to Xolair for respiratory
indications. There is currently no generic competition
in the US, EU or Japan.
Cardio‑Metabolic
• Entresto. US: Four patents on combination (2023) (4);
two patents on complex (2026; 2027); RDP (2020). EU:
Patent on combination (2023), SPC (2028); patent on
complex (2026), SPC (2030); RDP (2025). Japan: Pat-
ent on combination (2023); patent on complex (2026);
patent on formulation (2028). There is currently no
generic competition in the US, EU or Japan. The EU
complex patent is being opposed in the EPO.
Established Medicines
• Galvus and Eucreas. EU: Patent on compound (2019),
SPC (2022); patent on combination (2021), SPC (2022);
patent on Galvus formulation (2025); patent on Eucreas
formulation (2026). Japan: Patent on compound (2019),
PTE on mono therapy and combinations with sulfo-
nyureas (2024), PTE on combinations with other anti-
diabetics (2022), PTE on Eucreas combination (2024);
patent on combination (2021); patent on Galvus formu-
lation (2025), PTE (2025); patent on Eucreas formula-
tion (2026), PTE (2028); Eucreas RDP (2019). Galvus/
Eucreas is not marketed in the US. There is generic
competition for Galvus and Eucreas in some EU coun-
tries. There is currently no generic competition in
Exforge. US: Patent on Exforge combination (2019). EU:
Patent on Exforge combination/Exforge HCT combi-
nation (2019), SPC (2021). There is generic competi-
tion in the US, EU and Japan. The EU Exforge combi-
nation/Exforge HCT combination patent is being
challenged in the EPO and in the patent offices and
courts of some EU countries. In the EU, Novartis has
resolved patent litigation with certain generic manu-
facturers. Novartis is taking steps to enforce the EU
Exforge combination/Exforge HCT combination patent
against generic manufacturers.
Exforge HCT. US: Patent on Exforge HCT combination
(2023); patent on formulation (2023). EU: patent on
Exforge combination/Exforge HCT combination (2019),
SPC (2021); RDP (2019). Japan: Patent on Exforge HCT
combination (2023). There is generic competition in
the US. There is currently no generic competition in the
EU. Exforge HCT is not currently marketed in Japan.
The EU Exforge combination/Exforge HCT combina-
tion patent is being challenged in the EPO and in the
patent offices and courts of some EU countries. In the
EU, Novartis has resolved patent litigation with certain
generic manufacturers.
• Zortress/Certican. US: Patent on compound (2014),
PTE (2019), PE (2020); patent on dispersible tablet for-
mulation (2022), PE (2023); patent on antioxidant
(2019); patent on antioxidant (2019), PE (2020); EU:
Patent on dispersible tablet formulation (2022); patent
on antioxidant (2019). Japan: Patent on dispersible tab-
let formulation (2022); patent on antioxidant (2019).
There is currently no generic competition in the US, EU
or Japan. In the US, the compound patent is being chal-
lenged in ANDA proceedings against generic manu-
facturers.
• Neoral. There is no patent protection for Neoral in the
US, EU or Japan. There is generic competition in the
US, EU and Japan.
Compounds in development
We provide the following information for non-marketed
compounds in development that have been filed with the
FDA and/or the EMA for registration but have not yet
been approved by either agency for any indication.
• AVXS-101
(onasemnogene abeparvovec-xxxx,
Zolgensma). US: Patent on vector (2026). EU: Two pat-
ents on vector (2024, 2028); patent on method of treat-
ment (2028). Japan: Patent on vector (2024); two pat-
ents on method of treatment (2028, 2028).
62
Item 4. Information on the Company
• BAF312 (siponimod, Mayzent). US: Patent on com-
pound (2024); patent on dosage regimen (2030). EU:
Patent on compound (2024); patent on solid form
(2029); patent on dosage regimen (2029). Japan: Pat-
ent on compound (2024); patent on solid form (2029);
patent on dosage regimen (2029); two patents on for-
mulation (2032).
• BYL719 (alpelisib). US: Patent on compound (2029);
patent on compound and method of treatment (2030).
EU: Patent on compound and method of treatment
(2029). Japan: Patent on compound and method of
treatment (2029).
• LCI699 (osilodrostat). US: Patent on compound (2028),
patent on method of treatment (2031), patent on tab-
let form (2035). EU: Patent on compound (2026), pat-
ent on method of treatment (2031); patent on poly-
morph compound form (2033); patent on tablet form
(2035). Japan: Patent on compound (2026), patent on
method of treatment (2031); patent on polymorph com-
pound form (2033).
Sandoz
Our Sandoz Division is a global leader in generic
pharmaceuticals and biosimilars and sells products in
well over 100 countries. In 2018, the Sandoz Division
achieved consolidated net sales of USD 9.9 billion, rep-
resenting 19% of the Group’s total net sales. Sandoz
develops, manufactures and markets finished dosage
form medicines as well as intermediary products includ-
ing active pharmaceutical ingredients.
Sandoz is organized globally into three franchises:
Retail Generics, Anti-Infectives and Biopharmaceuticals.
In Retail Generics, Sandoz develops, manufactures and
markets active ingredients and finished dosage forms of
pharmaceuticals to third parties. Retail Generics includes
the areas of cardiovascular, central nervous system, der-
matology, 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 biosimilars, and provides biotechnol-
ogy manufacturing services to other companies.
The Sandoz strategic goal is to be a leader in off-pat-
ent medicines, driving sustainable and profitable growth.
The divisional strategy focuses simultaneously on two
pillars: leading the development of an emerging segment
of the healthcare market between innovation-driven orig-
inator medicines and cost-driven commodity generic
medicines, such as biosimilars, complex generics, val-
ue-added medicines and digital therapeutics, and excel-
lence in the development, manufacturing and marketing
of medicines in selected parts of the standard generics
segment.
Sandoz executes on its divisional strategy by focus-
ing on several key priorities, including investing in key
markets and therapeutic areas where it is best positioned
to make a real difference, increasing the performance of
its small-molecule Development and Regulatory organi-
zation, and maximizing opportunities in biosimilars.
Sandoz also focuses on products that can add more
value for patients, payers and healthcare professionals
than standard generics, including seeking opportunities
to leverage digital therapeutics.
In 2018, in a key strategic step to evolve the Sandoz
portfolio toward more differentiated products, Novartis
announced an agreement to sell selected portions of its
Sandoz US portfolio, specifically the Sandoz US derma-
tology business and generic US oral solids portfolio, to
Aurobindo Pharma USA Inc., for USD 0.9 billion in cash
plus USD 0.1 billion in potential earn-outs. The Sandoz
US portfolio to be sold to Aurobindo includes approxi-
mately 300 products, as well as additional development
projects. The sale includes the Sandoz US generic and
branded dermatology businesses as well as its derma-
tology development center. As part of the transaction,
Aurobindo agreed to acquire the manufacturing facilities
in Wilson, North Carolina, as well as Hicksville, New York,
and Melville, New York. These businesses had net sales
of approximately USD 1.2 billion in 2018. The transaction
is expected to close in the course of 2019 following the
satisfaction of customary closing conditions.
Sandoz has a strong and continued strategic focus
on biosimilars, which it began developing in 1996 and
today sells in more than 80 countries. Sandoz is a mar-
ket leader in biosimilars, with a total of eight approved
and marketed products. Availability of our biosimilars var-
ies by country.
We launched Hyrimoz (biosimilar adalimumab) in the
EU in October 2018, and Zessly (biosimilar infliximab) in
the EU in November 2018. Hyrimoz was also approved
in the US in October 2018. However, under the terms of
our settlement with AbbVie, we are not entitled to launch
Hyrimoz in the US until October 2023. Please see “—Item
4.B Business overview—Sandoz—Intellectual property”
below for additional information.
The FDA approved biosimilar Erelzi (etanercept-szzs)
in 2016 to treat multiple inflammatory diseases. The
launch of this biosimilar in the US is pending litigation
with Amgen, which markets Enbrel®.
Our biosimilar pegfilgrastim was approved and
launched in the EU as Ziextenzo in November 2018, and
we plan to submit additional data for biosimilar pegfil-
grastim to the FDA in 2019 to address a complete
response letter (CRL) received from the FDA in June
2016.
We received a CRL from the FDA in May 2018 for our
biosimilar rituximab, and subsequently announced in
November 2018 that we do not plan to pursue our sub-
mission for biosimilar rituximab in the US at this time.
63
Item 4. Information on the Company
Separately, we received a CRL from the FDA in 2018
for our submission for a generic form of fluticasone pro-
pionate and salmeterol inhalation powder, for oral inha-
lation (GSK’s Advair®).
According to IQVIA (formerly IMS Health), as of
November 2018, Sandoz holds a leading global position
in sales of biosimilars and of generic anti-infectives and
oncology medicines. In addition, Sandoz holds leading
global positions in key therapeutic areas, including
generic cardiovascular, central nervous system, gastro-
intestinal, metabolism, pain and respiratory medicines.
In 2018 and January 2019, key Retail Generics prod-
uct launches in the US included Glatopa 40 mg/mL
(generic Copaxone® 40 mg/mL), palonesetron hydro-
chloride injection (generic Aloxi®), generic bupropion XL,
and SYMJEPI (epinephrine) 0.15 mg injection (pediatric
formulation), as well as innovative digital therapeutics
reSET and reSET-O (together with Pear Therapeutics).
In 2018, Retail Generics product launches in various
European countries included generic versions of rosu-
vastatin film-coated tablets, ezetimide and simvastatin
film-coated tablets, and ezetimide film-coated tablets,
as well as buprenorphine and naloxone sublingual tab-
lets.
Following an internal reorganization announced on
January 27, 2016, 19 mature products were transferred
from our Innovative Medicines Division to the Retail
Generics franchise of Sandoz.
Sandoz also holds operational responsibility for the
Novartis Social Business unit. Novartis Social Business
aims to help improve public health in lower-income coun-
tries by developing novel, sustainable business models
that enable access to high-quality medicines against
infectious and chronic diseases while also strengthen-
ing healthcare capacity. Everything Novartis Social Busi-
ness does is rooted in the local communities it serves
and relies on its network of partners who share the same
purpose. The unit comprises several legacy programs
(Novartis Access, the Novartis Malaria Initiative, and
Novartis Healthy Family) supported by digital enabling
platforms, and has full responsibility for the entire
Novartis product range for seven countries in Asia and
Key marketed products
Africa. For additional information, see “—Item 4.B Busi-
ness overview—Overview—Corporate responsibility.”
New products
Sandoz launched a number of products in various coun-
tries in 2018 and January 2019, including:
• reSET (FDA-authorized prescription digital therapeu-
tic for the treatment of patients with substance use
disorder in the US)
• reSET-O (FDA-cleared prescription digital therapeutic
for the treatment of patients with opioid use disorder
in the US)
• Ziextenzo (biosimilar pegfilgrastim), approved in Europe
in 2018 to reduce the duration of neutropenia and inci-
dence of febrile neutropenia in adult patients treated
with cytotoxic chemotherapy for malignancy with the
exception of chronic myeloid leukemia and myelodys-
plastic syndromes
• Hyrimoz (biosimilar adalimumab), approved in Europe
in 2018 to treat multiple inflammatory diseases
• Zessly (biosimilar infliximab), approved in Europe in
2018 to treat multiple immunological diseases
• Glatopa 40 mg/mL (generic Copaxone® 40 mg/mL)
• Palonesetron hydrochloride injection
• Bupropion XL
• Rosuvastatin film-coated tablets
• Ezetimide and simvastatin film-coated tablets
• Ezetimide film-coated tablets
• Buprenorphine and naxolone sublingual tablets
Sandoz markets approximately 1 000 molecules in countries around the world. The following are some of the Sandoz
key marketed products in each of its franchises (availability varies by market):
Retail Generics
Product
Amoxicillin/clavulanic acid
Cyclophosphamide
Leuprorelin
Levothyroxine sodium
Potassium
Zoledronic acid
Originator drug
Augmentin®
Endoxan®
Various
Description
Antibiotic
Breast, ovarian and non-small cell cancer treatment
Hormonal treatment
Synthroid®; Levoxyl®
Hypothyroidism treatment
Klor-Con®
Aclasta
Hypokalemia treatment
Osteoporosis treatment
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Item 4. Information on the Company
Anti-Infectives
Active ingredients
Oral and sterile penicillins
Oral and sterile cephalosporins
Description
Anti-infectives
Anti-infectives
Clavulanic acid and mixtures with clavulanic acid
ß-lactam inhibitors
Classical and semisynthetic erythromycins
Anti-infectives
Intermediates
Various cephalosporin intermediates
Erythromycin base
Description
Anti-infectives
Anti-infectives
Various crude compounds produced by fermentation Cyclosporine, ascomysin, rapamycin, mycophenolic acid, etc.
Biopharmaceuticals
Product
Omnitrope
Originator drug
Genotropin®
Description
Recombinant human growth hormone
Binocrit and Epoetin alfa Hexal
Eprex®/Erypo®
Recombinant protein used for anemia
Zarzio, Zarxio and Filgrastim Hexal
Glatopa
Erelzi
Rixathon
Hyrimoz
Zessly
Ziextenzo
Neupogen®
Copaxone®
Enbrel®
MabThera®
Humira®
Remicade®
Neulasta®
Recombinant protein used in oncology
Treatment for multiple sclerosis (MS)
Treatment for multiple inflammatory diseases
Treatment for blood cancers and immunological diseases
Treatment for multiple inflammatory diseases
Treatment for gastroenterological, rheumatological and
dermatological diseases
Treatment to reduce duration of chemotherapy-induced
neutropenia and incidence of chemotherapy-induced
febrile neutropenia with the exception of chronic myeloid
leukemia and myelodysplastic syndromes
Biosimilars in Phase III development and registration
The following table describes Sandoz biosimilar projects that are in Phase III clinical trials (including filing prepa-
ration) and registration:
Project/
product
Route of
administration
Potential indication/indications
Common
name
Mechanism of action
Therapeutic areas
Current phase
GP2017
adalimumab
TNF-α inhibitor
Arthritides (rheumatoid arthritis, ankylosing
spondylitis, psoriatic arthritis), plaque psoriasis
and others (same as originator)
Immunology
Subcutaneous
EU: Approved
US: Registration
LA-EP2006 pegfilgrastim Pegylated granulocyte
colony-stimulating factor
Chemotherapy-induced neutropenia and others Oncology
(same as originator)
Subcutaneous
EU: Approved
US1: Registration
1 Resubmission planned for 2019 to address FDA complete response letter received June 2016
Principal markets
The two largest generics markets in the world – the US and Europe – are the principal markets for Sandoz. The
following table sets forth the aggregate 2018 net sales of Sandoz by region:
Sandoz
Europe
United States
Asia, Africa, Australasia
Canada and Latin America
Total
Of which in Established Markets *
Of which in Emerging Growth Markets *
2018 net sales
to third parties
USD millions
4 963
2 754
1 363
779
9 859
7 233
2 626
%
50
28
14
8
100
73
27
* Emerging Growth Markets comprise all markets other than the Established Markets of the US, Canada, Western Europe, Japan, Australia and New Zealand.
65
Item 4. Information on the Company
Many Sandoz products are used for chronic conditions that require patients to consume the product over long peri-
ods of time, from months to years. Sales of our anti-infective products and over-the-counter cough and cold prod-
ucts are subject to seasonal variation. Sales of the vast majority of our other products are not subject to material
changes in seasonal demand.
Production
The primary goal of our manufacturing and supply chain
management program is to ensure the uninterrupted,
timely and cost-effective supply of products that meet
all product specifications and quality standards. The
manufacture of our products is heavily regulated by gov-
ernmental health authorities around the world, including
the FDA and EMA. In addition to regulatory requirements,
many of our products involve technically complex man-
ufacturing processes or require a supply of highly spe-
cialized raw materials.
We manufacture our products at facilities worldwide.
See also “—Item 4.D Property, plants and equipment.”
Active pharmaceutical ingredients are manufactured in
our own facilities or purchased from third-party suppli-
ers. We maintain state-of-the-art and cost-competitive
processes, with quality as a primary goal within our own
production network. Those processes include fermen-
tation, chemical syntheses and precipitation processes,
as well as sterile processing. Many biologic medicines
are manufactured using recombinant DNA-derived tech-
nology, by which a gene is introduced into a host cell,
which then produces a human protein. This manufactur-
ing process requires sophisticated technical expertise.
We are constantly working to improve current, and
develop new, manufacturing processes, and to review
and adapt our manufacturing network to meet the needs
of our Sandoz Division.
Raw materials for the manufacturing process are
either produced in-house or purchased from a number
of third-party suppliers. Where possible, we maintain
multiple supply sources so that the business is not
dependent on a single or limited number of suppliers.
However, our ability to do so may at times be limited by
regulatory or other requirements. We monitor market
developments that could have an adverse effect on the
supply of essential materials. Our suppliers of raw mate-
rials are required to comply with Novartis quality stan-
dards.
Because the manufacture of our products is complex
and heavily regulated by governmental health authori-
ties, supply is never guaranteed. If we or our third-party
suppliers fail to comply with applicable regulations, then
there could be a product recall or other shutdown or dis-
ruption of our production activities. We have experienced
supply interruptions for our products in the past, and
there can be no assurance that supply will not be inter-
rupted again in the future. We have implemented a global
manufacturing strategy to maximize business continuity
in case of such events. However, there can be no guar-
antee that we will always be able to successfully man-
age such issues when they arise.
Due to impurities found in valsartan, losartan, and
ibersartan active ingredient batches sourced from a third
party manufacturer, we recalled Sandoz valsartan, losar-
tan and ibersartan products in the third and fourth quar-
ters of 2018 in several countries, in line with our quality
standards for all of our marketed products, and in agree-
ment with local health authorities.
Marketing and sales
Sandoz sells a broad portfolio of products, including the
products of our Retail Generics franchise and biosimi-
lars, to wholesalers, pharmacies, hospitals and other
healthcare outlets. Sandoz adapts its marketing and
sales approach to local decision-making processes,
depending on the structure of the market in each coun-
try.
In response to rising healthcare costs, many govern-
ments and private medical care providers, such as health
maintenance organizations, have instituted reimburse-
ment schemes that favor the substitution of bioequiva-
lent generic versions of originator pharmaceutical prod-
ucts, such as those sold by our Retail Generics franchise.
In the US, statutes have been enacted by all states that
permit or require pharmacists to substitute a less expen-
sive generic product for the brand-name version of a
drug that has been prescribed to a patient. Generic use
is growing in Europe, but penetration rates in many EU
countries (as a percentage of volume) remain well below
those in the US.
Recent trends have been toward continued consoli-
dation among distributors and retailers of Sandoz prod-
ucts, both in the US and internationally, which has
increased our customers’ purchasing leverage.
Legislative or regulatory changes can have a signifi-
cant impact on our business in a country. In Germany,
for example, healthcare reforms have increasingly shifted
decision-making from physicians to insurance funds.
Our Anti-Infectives franchise supplies active phar-
maceutical ingredients and intermediates – mainly anti-
biotics – for internal use by Retail Generics and for sale
to the pharmaceutical industry worldwide.
Our Biopharmaceuticals franchise operates in an
emerging business environment, particularly in the US.
Regulatory pathways for approving biosimilar products
are either relatively new or still in development, and pol-
icies have not yet been fully defined or implemented for
the automatic substitution and reimbursement of biosim-
ilars in many markets, including the US. As a result, in
many of these markets, our biosimilar products are mar-
keted as branded competitors to the originator products.
Competition
The market for generic products is characterized by
increasing demand for high-quality pharmaceuticals that
can be marketed at lower costs due to comparatively
minimal initial research and development investments.
Increasing pressure on healthcare expenditures and
numerous patent and data exclusivity period expirations
have encouraged more generic product launches,
66
Item 4. Information on the Company
resulting in increased competition among the companies
selling generic pharmaceutical products, leading to
ongoing price pressure. In particular, Sandoz faces
increased industrywide pressure on prices for generic
products, particularly in the US, driven by factors includ-
ing customer consolidation and growing competition
from other manufacturers of generic medicines. These
factors contributed to a decline in US sales that began
in 2017 and continued in 2018.
In addition, research-based pharmaceutical compa-
nies are participating directly in the generic conversion
process by licensing their patented products to generic
companies (so-called “authorized generics”). Conse-
quently, generic companies that were not otherwise in a
position to launch a specific product may participate in
the market using the innovator’s product authorization.
Authorized generics serve as a business opportunity for
Sandoz when the product of a research-based pharma-
ceutical company loses patent protection and Sandoz
secures a license from the research-based pharmaceu-
tical company to launch the authorized generic of that
product.
Development and registration
Development of Sandoz Biopharmaceuticals products
is jointly overseen by Sandoz and by Novartis Global Drug
Development. Development and registration activities for
Retail Generics products, and certain registration activ-
ities for Biopharmaceuticals products, continue to be
overseen directly by Sandoz.
Before a generic pharmaceutical may be marketed,
intensive technical and clinical development work must
be performed to demonstrate, in bioavailability studies,
the bioequivalence of the generic product to the refer-
ence product. Nevertheless, research and development
costs associated with generic pharmaceuticals gener-
ally are much lower than those of the originator
pharmaceuticals, as no preclinical studies or clinical tri-
als on dose finding, safety and efficacy must be per-
formed by the generic company. As a result, generic
pharmaceutical products can be offered for sale at
prices often much lower than those of products pro-
tected by patents and data exclusivity, which must
recoup substantial research and development costs
through higher prices over the life of the product’s pat-
ent and data exclusivity period.
While generic pharmaceuticals are follow-on ver-
sions of chemically synthesized molecules, biosimilar
products contain a version of the active substance of an
already approved biological reference medicine. Due to
the inherent variability and complexity of biologic prod-
ucts, including batch-to-batch differences and variations
following manufacturing changes, the development and
the regulatory pathway of biosimilars differ significantly
from that of generics.
The development of a biosimilar product is much
more technically challenging than the development of a
typical generic pharmaceutical. While generic
pharmaceuticals normally do not require clinical studies
in patients, regulators worldwide do require such tar-
geted studies for biosimilar products. Biosimilars are
engineered to match the reference medicine in quality,
safety and efficacy. This is achieved by systematically
defining the target range of the reference medicine and
then comparing the biosimilar to the reference medicine
at various development stages to confirm biosimilarity
and to establish that there are no clinically meaningful
differences between the proposed biosimilar and the ref-
erence biologic. Because the purpose of a biosimilar clin-
ical development program is to confirm biosimilarity and
not to establish efficacy and safety de novo, the clinical
studies required are less than those required for a ref-
erence biologic. Therefore, the cost of development for
a biosimilar is usually less than that of a reference bio-
logic.
The Development and Registration staff employed by
affiliates of the Sandoz Division are based worldwide,
including at facilities in Holzkirchen, Germany; Rudol-
stadt, Germany; Kundl, Austria; Ljubljana, Slovenia; Mel-
ville, New York; and Hicksville, New York. In 2018, the
divestment of the Boucherville, Canada, development
(and associated manufacturing) facility to Avara Phar-
maceutical Services was announced and subsequently
completed, including a long-term agreement to secure
supply of key products to the Canadian market. Also in
2018, Sandoz announced the planned opening of a new
development center in Hyderabad, India, initially focused
on oral solid medicines.
Regulation
Generics
The Hatch-Waxman Act in the US (and similar legislation
in the EU and in other countries) eliminated the require-
ment that manufacturers of generic pharmaceuticals
repeat the extensive clinical trials required for reference
products, so long as the generic version could be shown
in bioequivalence studies to be of identical quality and
purity, and to be therapeutically equivalent to the refer-
ence product.
In the US, the decision on whether a generic phar-
maceutical is bioequivalent to the original patented prod-
uct is made by the FDA based on an Abbreviated New
Drug Application (ANDA) filed by the generic product’s
manufacturer. The process typically takes nearly two
years from the filing of the ANDA until FDA approval.
However, delays can occur if issues arise regarding the
interpretation of bioequivalence study data, labeling
requirements for the generic product, or qualifying the
supply of active ingredients. In addition, the Hatch-Wax-
man Act requires a generic manufacturer to certify in
certain situations that the generic product does not
infringe on any current applicable patents on the prod-
uct held by the holder of the marketing authorization for
the reference product, or to certify that such patents are
invalid or that the product is non-infringing. This certifi-
cation often results in a patent infringement lawsuit being
brought by the patent holder against the generic com-
pany. In the event of such a lawsuit, the Hatch-Waxman
Act imposes an automatic 30-month delay in the approval
of the generic product to allow the parties to resolve the
intellectual property issues. For generic applicants who
are the first to file their ANDA containing a certification
claiming non-infringement or patent invalidity, the
Hatch-Waxman Act provides those applicants with
67
Item 4. Information on the Company
180 days of marketing exclusivity to recoup the expense
of challenging the patents on the reference product.
However, generic applicants must launch their products
within certain timeframes or risk losing the marketing
exclusivity that they had gained by being a first-to-file
applicant.
In the EU, decisions on the granting of a marketing
authorization are made either by the European Commis-
sion based on a positive recommendation by the EMA
under the centralized procedure, or by a single member
state under the national or decentralized procedure. See
“—Innovative Medicines—Regulation—European Union.”
Companies may submit Abridged Applications for
approval of a generic medicinal product based upon its
“essential similarity” to a medicinal product authorized
and marketed in the EU following the expiration of the
product’s data exclusivity period. In such cases, the
generic company is able to submit its Abridged Applica-
tion based on the data submitted by the innovator com-
pany for the reference product, without the need to con-
duct extensive Phase III clinical trials of its own. For all
products that received a marketing authorization in the
EU after late 2005, the Abridged Application can be sub-
mitted throughout the EU. However, the data submitted
by the innovator company in support of its application
for a marketing authorization for the reference product
will be protected for 10 years after the first grant of mar-
keting authorization in all member states, and can be
extended for an additional year if a further innovative
indication has been authorized for that product, based
on preclinical and clinical trials filed by the innovator
company that show a significant clinical benefit in com-
parison to the existing therapies.
Biosimilars
The regulatory pathways for approval of biosimilar
medicines are still being developed and established in
many countries of the world. A regulatory framework for
the approval of biosimilars has been established in the
EU, Japan, Canada and the US, while the World Health
Organization (WHO) has issued guidance. Sandoz has
successfully registered and launched the first biosimilar
(or biosimilar-type) medicine in Europe, the US, Canada,
Japan, Taiwan, Australia, and many countries in Latin
America and Asia. Sandoz was the first company to
secure approval for and launch a biosimilar under the US
biosimilar pathway that was established as part of the
Biologics Price Competition and Innovation Act (BPCIA).
The approval of biosimilars in Europe follows a pro-
cess similar to that followed for small molecules. How-
ever, biosimilars usually have to be approved through the
centralized procedure because they are manufactured
using recombinant DNA technology. As part of the
approval process in the EU, biosimilars have to demon-
strate comparability to the reference medicine in terms
of safety, efficacy and quality through an extensive com-
parability exercise, based on strict guidelines set by the
authorities. Regulators will only approve a biosimilar
based on data that allows the regulators to conclude that
there are no clinically meaningful differences between
the reference medicine and the biosimilar.
In the US, under the BPCIA, a biosimilar must be
highly similar with no clinically meaningful differences
compared to the reference medicine. Approval of a bio-
similar in the US requires the submission of a BLA to the
FDA, including an assessment of immunogenicity, and
pharmacokinetics or pharmacodynamics. The BLA for
a biosimilar can be submitted as soon as four years after
the initial approval of the reference biologic, but can only
be approved 12 years after the initial approval of the ref-
erence biologic. This pathway is still relatively new, and
some aspects remain untried and controversial.
Intellectual property
We take all reasonable steps to ensure that our products
do not infringe valid intellectual property rights held by
others. Nevertheless, competing companies commonly
assert patent and other intellectual property rights. As
a result, we can become involved in significant litigation
regarding our products. If we are unsuccessful in defend-
ing these suits, we could be subject to injunctions pre-
venting us from selling our products and to potentially
substantial damages.
Wherever possible, our products are protected by
our own patents. Among other things, patents may cover
the products themselves, including the product’s formu-
lation, or the processes for manufacturing a product.
However, there can be no assurance that our intellectual
property will protect our products or that we will be able
to avoid adverse effects from the loss of intellectual prop-
erty protection in the future.
In October 2018, Sandoz announced a global reso-
lution of all intellectual property-related litigation with
AbbVie concerning adalimumab. Under the terms of the
agreement, AbbVie grants Sandoz a non-exclusive
license to AbbVie’s intellectual property relating to
Humira®, beginning on certain dates in certain countries
in which AbbVie has intellectual property. Sandoz will
pay royalties to AbbVie for licensing its Humira® patents.
AbbVie will make no payments to Sandoz.
Alcon
Our Alcon Division, a global leader in eye care, researches,
develops, manufactures, distributes and sells eye care
products. Its products are sold in more than 140 countries.
In 2018, the Alcon Division had consolidated net sales of
USD 7.1 billion, representing 14% of total Group net sales.
To meet the needs of patients, ophthalmologists, sur-
geons, optometrists, opticians and physician specialists,
Alcon operates with two global business franchises: Sur-
gical and Vision Care. Each business franchise operates
with specialized sales forces and marketing support.
In November 2018, Novartis announced that Alcon
had filed an initial Form 20-F registration statement with
the SEC in relation to the previously announced inten-
tion of Novartis to spin off our Alcon Division as an
68
Item 4. Information on the Company
independent, publicly traded company. An application
will be made to list the shares in Alcon on SIX and the
NYSE under the ticker symbol “ALC.” In addition to share-
holder approval, completion of the proposed Alcon spin-
off remains subject to certain conditions precedent, such
as no material adverse events, receipt of necessary
authorizations as well as tax rulings and opinions. If
approvals are secured and conditions are met, the spin-
off is expected to be completed in the first half of 2019.
Effective January 1, 2018, we transferred our
over-the-counter ophthalmic products and certain sur-
gical diagnostic products from the Innovative Medicines
Division to the Alcon Division. Our prescription ophthal-
mic medicines business remains with the Innovative
Medicines Division. In compliance with IFRS, beginning
with our first-quarter 2018 results, Novartis updated its
segment financial information to reflect this transfer, both
for the current and prior years, to aid comparability of
year-on-year results. The products of the Ophthalmic
Pharmaceuticals franchise of Alcon had previously been
transferred to our Innovative Medicines Division follow-
ing an internal reorganization announced on January 27,
2016.
In April 2016, Alcon entered into a strategic alliance
with PowerVision to develop an accommodating intra-
ocular lens (IOL) that has the potential to change focus
via a fluid-driven shape-changing technology.
In December 2018, Alcon acquired 100% of TrueVi-
sion, the manufacturer of NGENUITY, a 3-D visualization
system that combines a high-dynamic 3-D camera,
advanced high-speed image optimization, polarizing sur-
geon glasses, and an ultra-high-definition 4K OLED 3-D
display to create a platform for digitally assisted vitreo-
retinal surgery to help improve visualization of the deli-
cate tissues in the back of the eye. Alcon has distributed
NGENUITY since February 2016 under an exclusive
agreement with TrueVision.
In December 2018, Alcon acquired 100% of Tear Film
Innovations, Inc., for its iLux Device, a therapeutic device
used to treat meibomian gland dysfunction (MGD), a
leading cause of dry eye.
Alcon Division products
Surgical
Our Alcon Division’s Surgical franchise is the leader in
global ophthalmic surgical product sales, offering implant-
able products, consumables, instruments and equipment
for use in surgical procedures to address cataracts, vit-
reoretinal conditions, refractive errors and glaucoma. We
also offer service on the equipment we sell.
The Alcon Surgical portfolio includes IOLs and equip-
ment for use in cataract procedures; equipment, instru-
ments and devices for use in vitreoretinal surgeries; sur-
gical equipment and diagnostic devices used in refractive
surgical procedures; and devices for use in treating
patients with glaucoma. Our IOL portfolio includes our
Clareon and AcrySof IOL families, with options ranging
from monofocal IOLs for basic cataract surgery to spe-
cialized IOLs for the correction of presbyopia and astig-
matism at the time of cataract surgery; as well as the
UltraSert and AutonoMe innovative IOL delivery systems.
The Cataract Refractive Suite by Alcon features the
Centurion vision system for phacoemulsification and cat-
aract removal; the Infiniti vision system for phacoemul-
sification and cataract removal; the LenSx femtosecond
laser used for specific steps in the cataract surgical pro-
cedure; the LuxOR ophthalmic microscope; the ORA
SYSTEM technology for cataract surgery planning and
intra-operative guidance during surgery; and the Verion
imaged guided system for use during cataract surgery.
The Alcon vitreoretinal portfolio includes the NGENUITY
3D visualization system, designed to enhance visualiza-
tion of the back of the eye, and the Constellation vision
system and associated handpieces and instruments. Our
WaveLight devices are used for LASIK and other
vision-correcting refractive procedures, including topog-
raphy-guided procedures marketed under the Contoura
brand. For glaucoma surgery, Alcon offers the EX-PRESS
glaucoma filtration device, and formerly distributed the
CyPass Micro-Stent. However, in August 2018, Alcon vol-
untarily withdrew the CyPass Micro-Stent from the global
market based on analysis of five-year post-surgery data
from the COMPASS-XT long-term safety study. In addi-
tion, Alcon provides advanced viscoelastics, surgical solu-
tions, diagnostic ophthalmic products, surgical packs, and
other disposable products for cataract and vitreoretinal
surgery.
Vision Care
Our Alcon Division’s Vision Care franchise develops and
markets contact lenses and ocular health products.
Alcon’s broad portfolio of silicone hydrogel, daily dispos-
able and color contact lenses includes our Dailies, Air
Optix and Freshlook brands. Our Dailies product line
includes the Dailies Total1 lens, a first-of-its-kind water
gradient contact lens that is also offered in a multifocal
option for patients with presbyopia. Our Air Optix monthly
replacement product line features silicone hydrogel con-
tact lenses in monofocal, astigmatism-correcting and
multifocal options, as well as Air Optix Colors and Air
Optix plus HydraGlyde contact lenses. Our contact lens
care solutions business includes the Opti‑Free line of
multipurpose disinfecting solutions, as well as the Clear
Care and AOSEPT Plus line of hydrogen peroxide lens
care solutions. Over-the-counter ophthalmic products
that have moved from our Innovative Medicines Division
to the Alcon Vision Care franchise include artificial tear
and related dry eye products marketed under the
Systane, Tears Naturale and Genteal brands; Naphcon A
and Zaditor eye drops for the temporary relief of ocular
itching due to allergies; and vitamins for ocular health,
marketed under the ICAPS and Vitalux brands. With the
acquisition of Tear Film, the Alcon Vision Care portfolio
also includes the iLux Device, a therapeutic device used
to treat MGD, a leading cause of dry eye.
69
Item 4. Information on the Company
New products
We received a number of approvals and launched a number of products in 2018, including:
• Systane Complete was launched in the US and EU. This addition to the Systane product line offers fast hydration
and lasting relief, with nano droplet technology for enhanced coverage.
• Air Optix plus HydraGlyde multifocal contact lenses launched in the US and EU. These lenses offer clear, seam-
less vision at all distances and combine the innovative Air Optix multifocal design with lasting lens surface mois-
ture provided by the HydraGlyde moisture matrix.
Key marketed products
The following tables set forth certain key marketed products in our Alcon Division. While we intend to sell our mar-
keted products throughout the world, not all products and indications are currently available in every country.
Surgical
Cataract AcrySof family of IOLs, including:
AcrySof IQ monofocal IOLs
AcrySof IQ Toric astigmatism-correcting IOLs
AcrySof IQ ReSTOR presbyopia-correcting IOLs
AcrySof IQ ReSTOR Toric presbyopia- and astigmatism-correcting IOLs
AcrySof IQ PanOptix presbyopia-correcting IOLs
AcrySof IQ PanOptix Toric presbyopia- and astigmatism-correcting IOLs
AutonoMe pre-loaded IOL delivery system
Cataract Refractive Suite by Alcon, including:
Centurion vision system for phacoemulsification and cataract removal
Infiniti vision system for phacoemulsification and cataract removal
LenSx femtosecond laser used for specific steps in the cataract surgical procedure
LuxOR ophthalmic microscope
ORA SYSTEM technology for cataract surgery planning and intra-operative guidance
during surgery
Verion imaged-guided system for use during cataract surgery
Clareon monofocal IOLs
UltraSert pre-loaded IOL delivery system
Vitreoretinal Constellation vision system for vitreoretinal operations
Grieshaber surgical instruments
NGENUITY 3D visualization system
Purepoint laser system and probes
Ultravit vitrectomy probes
Refractive WaveLight EX500 excimer laser for LASIK and other refractive correction procedures
Glaucoma EX-PRESS glaucoma filtration device
WaveLight FS200 femtosecond laser for refractive surgery
In addition, Alcon provides advanced viscoelastics, surgical solutions, surgical packs, diagnostic ophthalmics, and
other disposable products for cataract and vitreoretinal surgery.
Vision Care
Contact lenses Air Optix family of silicone hydrogel contact lenses (including Air Optix Colors and Air Optix
plus HydraGlyde lenses)
Dailies family of daily disposable contact lenses (including Dailies Total1 lenses)
FreshLook family of color contact lenses
Contact lens care Clear Care family of hydrogen peroxide lens care solution (AOSEPT Plus outside of North
America)
Opti‑Free family of multipurpose disinfecting solution
Dry eye Genteal family of artificial tears
Systane family of artificial tears and related dry eye products
Tears Naturale lubricant eye drops
iLux Device for the treatment of MGD, a leading cause of dry eye
Allergy Naphcon A for the temporary relief of ocular redness and itching due to allergies
Vitamins
Zaditor for the temporary relief of ocular itching due to allergies
ICAPS and Vitalux families of eye vitamin products
70
Item 4. Information on the Company
Principal markets
The principal markets for our Alcon Division include North America, Latin America, Japan, Asia and Europe. The
following table sets forth the aggregate 2018 net sales of the Alcon Division by region:
Alcon
Europe
United States
Asia, Africa, Australasia
Canada and Latin America
Total
Of which in Established Markets *
Of which in Emerging Growth Markets *
2018 net sales
to third parties
USD millions
1 805
2 942
1 781
621
7 149
5 395
1 754
%
25
41
25
9
100
75
25
* Emerging Growth Markets comprise all markets other than the Established Markets of the US, Canada, Western Europe, Japan, Australia and New Zealand.
Sales of the vast majority of our Alcon Division products are not subject to material changes in seasonal demand.
However, sales of certain of our Vision Care products, including those for allergies and dry eye, are subject to sea-
sonal variation.
Research and development
Production
Alcon has made one of the largest commitments to
research and development in the eye care devices mar-
ket, with proven R&D capabilities in the areas of optical
design, material and surface chemistry, automation and
equipment platforms. Currently, our Alcon Division
research and development organization employs over
1 200 individuals dedicated to its research and develop-
ment efforts, including physicians, doctors of optometry,
and Ph.Ds. Alcon researchers have extensive experience
in the field of ophthalmology and frequently have aca-
demic or practitioner backgrounds to complement their
product development experience.
Research and development activities for Alcon’s Sur-
gical franchise are focused on expanding intraocular lens
capabilities to further improve surgical and refractive out-
comes, and on developing equipment and instrumenta-
tion for cataract, vitreoretinal, refractive and glaucoma
surgeries, as well as new platforms for diagnostics and
visualization. The focus of the Vision Care franchise is
on the research and development of new manufacturing
platforms, novel contact lens materials, coatings and
optical designs for various lens replacement schedules
with the ultimate goal of improving patient outcomes, and
novel delivery systems that safely deliver products that
provide relief from symptoms of dry eye and ocular aller-
gies.
Alcon continues to seek opportunities to collaborate
with third parties on advanced technologies for various
ophthalmic conditions. These include the potential to
provide accommodative contact and intraocular lenses
for patients living with presbyopia.
The manufacture of our products is heavily regulated by
governmental health authorities around the world, includ-
ing the FDA. In addition to regulatory requirements, many
of our products involve technically complex manufactur-
ing processes or require a supply of highly specialized
raw materials. For some products and raw materials, we
may also rely on a single source of supply. The combi-
nation of these factors means that supply is never guar-
anteed.
Like some of our competitors, our Alcon Division
faces manufacturing issues from time to time. If we or
our third-party suppliers fail to comply fully with regula-
tions, then there could be a product recall or other shut-
down or disruption of our production activities. There
can be no assurance that we will not experience supply
interruptions for our products in the future. We have
implemented a global manufacturing strategy to maxi-
mize business continuity in case of such events. How-
ever, there can be no guarantee that we will be able to
successfully manage such issues if and when they arise.
For additional information on Alcon production facilities,
see “Item 4. Information on the Company—Item 4.D Prop-
erty, plants and equipment.”
Marketing and sales
Our Alcon Division conducts sales and marketing activ-
ities around the world, organized under five operating
regions: Europe (including Russia)/Middle East/Africa,
North America, Latin America/Caribbean, Asia and
Japan. The Alcon Division’s global commercial capabil-
ity is organized around sales and marketing organiza-
tions dedicated to the Surgical and Vision Care fran-
chises.
71
Item 4. Information on the Company
Most of our global Alcon marketing efforts are sup-
ported by advertising in trade publications and by mar-
keting and sales representatives attending regional and
national medical conferences. Marketing efforts are rein-
forced by targeted and timely promotional materials and
direct mail to eye care practitioners in the office, hospi-
tal or surgery center setting. Technical service after the
sale is provided, and an integrated customer relationship
management system is in place in many markets. We also
rely on direct-to-consumer marketing campaigns to pro-
mote selected products.
While our Alcon Division markets all of its products
by calling on medical professionals, direct customers
and distribution methods differ across business lines.
Alcon Surgical products are sold directly to hospitals
and ambulatory surgical centers, although Alcon sells
through distributors in certain markets outside the US.
In most countries, contact lenses are available only by
prescription. Our contact lenses can be purchased from
eye care professionals, optical chains and large retail-
ers, subject to country regulation. Over-the-counter lens
care, dry eye, allergy and ocular vitamin products can be
found in major drugstore, food, mass merchandising and
optical retail chains globally, subject to country regula-
tions.
Competition
The eye care industry is highly competitive and subject
to rapid technological change and evolving industry
requirements and standards. Our Alcon Division com-
petes with a number of different companies across its
two franchises. Companies within this industry compete
on technological leadership and innovation, quality and
efficacy of their products, relationships with eye care
professionals and healthcare providers, breadth and
depth of product offerings, and pricing. The presence of
these factors varies across our Alcon Division’s product
offerings. Our principal competitors also sometimes form
strategic alliances and enter into co-marketing agree-
ments in an effort to better compete.
Regulation
Most of our Surgical products and many of our Vision
Care products are regulated as medical devices in the
US and the EU. These jurisdictions each have risk-based
classification systems that determine the type of infor-
mation that must be provided to the local regulatory bod-
ies in order to obtain the right to market a product. In the
US, safety and effectiveness information for Class II and
III devices must be reviewed by the FDA. Our Class II and
Class III devices typically are subject to one of the fol-
lowing two pre-market review procedures: the Pre-Mar-
ket Approval (PMA) process typically applies to Class III
devices, and the Pre-Market Notification (510(k)) sub-
mission process typically applies to Class II devices.
Under a PMA, the manufacturer must submit to the FDA
supporting evidence sufficient to prove the safety and
effectiveness of the device. Under a 510(k) submission,
the manufacturer notifies the FDA that it intends to com-
mence marketing the product, with data that establishes
the product as substantially equivalent to another
already-marketed Class II product.
In the EU, CE marking is required for all medical
devices sold. By affixing the CE Mark, the manufacturer
certifies that a product is in compliance with provisions
of the EU’s Medical Device Directive. Most such prod-
ucts are subject to a self-certification process by the
manufacturer, which requires the manufacturer to con-
firm that the product performs to appropriate standards.
This allows the manufacturer to issue a Declaration of
Conformity and to notify competent authorities in the EU
that the manufacturer intends to market the product. In
order to comply with European regulations, our Alcon
Division maintains a full Quality Assurance system and
is subject to routine auditing by a certified third party (a
“notified body”) to ensure that this quality system is in
compliance with the requirements of the EU’s Medical
Device Directive as well as the requirements of ISO 13485.
Many of our Vision Care dry eye and allergy products
are regulated as over-the-counter pharmaceuticals in the
US, and several Surgical diagnostic ophthalmic products
are regulated as prescription pharmaceuticals in the US
and the EU. In the US, over-the-counter pharmaceuticals
that comply with the FDA over-the-counter monograph
regulations may be marketed without prior FDA approval.
Alcon’s prescription pharmaceutical products are sub-
ject to the same regulatory approval procedures as the
prescription pharmaceutical products of our Innovative
Medicines Division. See “—Innovative Medicines—Reg-
ulation.”
Price controls
The prices of our Surgical devices and our drugs that
require a prescription are subject to reimbursement pro-
grams and price control mechanisms that vary from
country to country. Due to increasing political pressure
and governmental budget constraints, we expect these
programs and mechanisms to remain robust – and to
potentially even be strengthened. As a result, such pro-
grams and mechanisms could have a negative influence
on the prices we are able to charge for our Surgical prod-
ucts, particularly those used in cataract and vitreoretinal
surgeries.
For example, in India, the National Pharmaceutical
Pricing Authority (NPPA) has imposed 75% to 85% price
reductions on coronary stents (implantable medical
devices intended to ensure an adequate flow of blood to
the heart). The NPPA has begun to evaluate prices on
other categories of medical devices, potentially includ-
ing IOLs used in cataract surgeries. If the NPPA chooses
to impose similar price reductions on IOLs from Alcon,
this could have a negative impact on our Surgical fran-
chise sales in India. It is also possible that regulatory
agencies in other countries may consider applying sim-
ilar price controls on IOLs and other Surgical products
sold by Alcon.
Intellectual property
We strive to protect our investment in the research,
development, manufacturing and marketing of our
72
Item 4. Information on the Company
products through the use of patents, trademarks, copy-
rights, trade secrets and other intellectual property. In
general, we seek intellectual property protection under
applicable laws for significant product developments in
major markets. Among other things, patents may cover
the products themselves, the processes for manufactur-
ing a product, and particular uses of a product.
The protection offered by our intellectual property
extends for varying periods, depending on its legal life
in the various countries. The protection afforded, which
may also vary from country to country, depends upon
the type of intellectual property and its scope of cover-
age. We monitor infringements of our intellectual prop-
erty and typically challenge such infringements. We also
defend challenges through litigation and administrative
proceedings to the validity of our intellectual property.
However, because the outcomes of intellectual property
challenges can be difficult to predict, there can be no
assurance that we will be able to successfully protect
our intellectual property rights in all cases. If we are
unsuccessful in defending such challenges, we may face
loss of exclusivity and increased competition in the
affected territories. See generally “—Innovative
Medicines—Intellectual property.”
We take reasonable steps to ensure that our prod-
ucts do not infringe valid intellectual property rights held
by others. Nevertheless, third parties may assert patent
and other intellectual property rights against our prod-
ucts. As a result, we can become involved in significant
intellectual property litigation regarding our products. If
we are unsuccessful in defending these suits, we could
be subject to injunctions preventing us from selling our
products and to damages that may be substantial.
In addition to our patents and pending patent appli-
cations in the United States and selected non-US mar-
kets, we rely on proprietary know-how and trade secrets
in our businesses and work to ensure the confidentiality
of this information, including through the use of confi-
dentiality agreements with employees and third parties.
In some instances, we also acquire, or obtain licenses
to, intellectual property rights that are important to our
businesses from third parties.
All of our major Alcon Division products are sold
under trademarks that we consider in the aggregate to
be important to our Alcon Division business as a whole.
We consider trademark protection to be particularly
important to the protection of our investment in the sales
and marketing of our Vision Care franchise. The scope
and duration of trademark protection varies widely
throughout the world. In some countries, trademark pro-
tection continues only as long as the mark is used. Other
countries require the registration of trademarks and the
payment of registration fees. Trademark registrations are
generally for fixed, but renewable, terms.
We rely on copyright protection in various jurisdic-
tions to protect the software and printed materials our
business relies upon, including software used in our sur-
gical and diagnostic equipment. The scope of copyright
protection for computer software varies throughout the
world, although it is generally for a fixed term that begins
on the date of copyright registration.
73
Item 4. Information on the Company
4.C Organizational structure
Organizational structure
See “Item 4. Information on the Company—Item 4.A History and development of Novartis,” and “Item 4. Information
on the Company—Item 4.B Business overview—Overview.”
Significant subsidiaries
See “Item 18. Financial Statements—Note 31. Principal Group subsidiaries and associated companies.”
4.D Property, plants and equipment
Our principal executive offices are located in Basel, Swit-
zerland. Our divisions operate through a number of affil-
iates that have offices, research and development facil-
ities, and production sites throughout the world.
We generally own our facilities or have entered into
long-term lease arrangements for them. Some of our
principal facilities are subject to mortgages and other
security interests granted to secure indebtedness to cer-
tain financial institutions.
Novartis Technical Operations manages the produc-
tion and supply chains of our Innovative Medicines and
Sandoz Division products through a network of 64 man-
ufacturing sites, as well as through external suppliers,
and warehouse and distribution centers. Our Alcon Sur-
gical and Vision Care manufacturing sites continue to be
managed by the Alcon Division. In addition, following the
transition of our over-the-counter ophthalmic products
and certain surgical diagnostics products to Alcon, and
the overall strategic decision to create greater opera-
tional autonomy for our Alcon Division, management of
the manufacturing site in Fort Worth, Texas, was trans-
ferred back to Alcon on July 1, 2018, and our aseptic
manufacturing site in Singapore was transferred to Alcon
on January 1, 2019. Our Puurs, Belgium, site will remain
within Novartis Technical Operations, with the exception
of Alcon Custom Pak production and warehousing, which
was transferred to Alcon on January 1, 2019. AAA man-
ages four sites for radioligand therapies production, and
certain other small sites for diagnostics and enriched
water production. AveXis manages five sites for research
and development, production, warehousing, its head-
quarters and administrative offices. Endocyte manages
two sites for research and its headquarters and admin-
istrative offices.
74
Item 4. Information on the Company
The following table sets forth our major headquarters and most significant production, research and development,
and administrative facilities. See also “—Item 4.B Business overview—Innovative Medicines—Production,” “—Item 4.B
Business overview—Sandoz—Production” and “—Item 4.B Business overview—Alcon—Production” for a discussion
of our manufacturing processes.
Major facilities
Location
Size of site (in
square meters) Major activity
Basel, Switzerland – St. Johann
724 000 Global Group headquarters, global Innovative Medicines Division headquarters,
research and development, production of drug substances and drug intermediates
Kundl and Schaftenau, Austria
480 000
Production of biotechnological products, drug products and finished products, anti-infectives,
active drug substances, product development
East Hanover, New Jersey
391 000
Innovative Medicines Division US headquarters, research and development
Barleben, Germany
Fort Worth, Texas
340 000
Production of broad range of generics finished dosage forms
315 200 Alcon Division US headquarters; production, research and development
for Alcon Vision Care and Surgical franchises; Novartis Finance Service Center
Changshu (Suzhou), China
230 000
Technical research, development and manufacturing of drug substances and drug intermediates
Cambridge, Massachusetts
205 000 Research and development
Shanghai, China
Ringaskiddy, Ireland
Johns Creek, Georgia
Ljubljana, Slovenia
Hyderabad, India
106 500 Research and development
85 000
Production of drug substances and drug intermediates
84 100
Production, research and development for Alcon Vision Care franchise
83 000
Production of broad range of finished solid and sterile dosage forms
80 500 General administrative and development global service center
Grosswallstadt, Germany
65 200
Production, research and development for Alcon Vision Care franchise
Stein, Switzerland
64 700
Production of sterile vials, pre-filled syringes and ampoules, and of inhalation capsules,
tablets and transdermals, and of active pharmaceutical ingredients
Holzkirchen, Germany
64 200 Sandoz Division global headquarters, production of oral films, transdermal delivery systems,
Grimsby, UK
Menges, Slovenia
Puurs, Belgium
Kurtkoy, Turkey
Stryków, Poland
matrix patches, product development
64 000
Production of drug substances and drug intermediates
62 400
Production of drug substances and drug intermediates
55 000
Production for Innovative Medicines ophthalmic products and Alcon Surgical franchise
51 700
Production of Innovative Medicines solids
45 000
Production of broad range of bulk oral solid forms and packaging
Rudolstadt, Germany
44 000 Development and production of respiratory technologies and ophthalmics
Johor, Malaysia
43 900
Production for Alcon Vision Care franchise
Rueil-Malmaison, France
43 700 Administrative offices for Innovative Medicines and Alcon
Irvine, California
Torre, Italy
Houston, Texas
Batam, Indonesia
Huningue, France
Singapore
Barbera, Spain
40 800
Production, research and development for Alcon Surgical franchise
40 100
Production of Innovative Medicines solids
37 400
Production for Alcon Surgical franchise
35 000
Production for Alcon Vision Care franchise
35 000
Production of drug substances for clinical and commercial supply
35 000
Production for Alcon Vision Care franchise and Innovative Medicines solids and biologics
33 000
Production of tablets, capsules and inhalation products
Basel, Switzerland – Schweizerhalle
31 700
Production of drug substances and drug intermediates
Wehr, Germany
31 700
Production of tablets and packaging
Huntington, West Virginia
27 500
Production for Alcon Surgical franchise
Tokyo, Japan
Sasayama, Japan
26 000 Administrative offices for Innovative Medicines, Sandoz and Alcon
23 300
Packaging site for Innovative Medicines
Sinking Spring, Pennsylvania
21 800
Production for Alcon Surgical franchise
Morris Plains, New Jersey
15 600
Production for Innovative Medicines Division cell and gene therapies
Princeton, New Jersey
14 300 Sandoz Division US headquarters
Cork, Ireland
Libertyville, Illinois
13 600
Production for Alcon Surgical franchise
9 800
Production, warehouse, and administrative offices for AveXis
Targu Mures, Romania
9 070
Production of solids for Innovative Medicines and Sandoz
Schaffhausen, Switzerland
4 100
Production for Alcon Surgical franchise
La Jolla, California
Bannockburn, Illinois
3 300 Research and development, and quality control testing for AveXis
3 000 AveXis headquarters
West Lafayette, Indiana
2 000 Headquarters, research laboratory and administrative offices for Endocyte
Millburn, New Jersey
1 400 AAA primary production site for radioligand therapy
Colleretto Giacosa/Ivrea, Italy
1 200 AAA primary production site for radioligand therapy
Saint-Genis-Pouilly, France
600 AAA global headquarters
75
Item 4. Information on the Company
To support the objectives of Novartis Technical Opera-
tions, we are progressing with our network transforma-
tion project, under which we are reviewing our manufac-
turing network to ensure it can appropriately meet the
future needs of the Group. Under this transformation
plan, we have made the following announcements:
• In May 2017, we announced the planned closure of one
manufacturing building at each of our Basel, Switzer-
land, and Schweizerhalle, Switzerland, sites by 2019.
• In October 2017, we announced our plan to close com-
mercial production operations at our Broomfield, Col-
orado, site, with production anticipated to conclude
during 2019.
• In November 2017, we announced our plan to exit our
packaging operations in Wehr, Germany, by 2022.
• In April 2018, we announced the planned closure of our
Kaminoyama, Japan, site and the transfer of all pack-
aging activities to Sasayama, Japan, by 2020.
• In May 2018, we announced an agreement with Avara
Pharmaceutical Services to divest our Boucherville,
Canada, plant. This divestment was completed on Sep-
tember 1, 2018.
• In September 2018, we announced that Aurobindo
Pharma USA Inc. agreed to acquire our manufacturing
facilities in Wilson, North Carolina; Hicksville, New York;
and Melville, New York, as part of the divestment of the
US dermatology business and generic US oral solids
portfolio of our Sandoz Division. We expect this trans-
action to be completed during the course of 2019.
• In September 2018, we announced the acquisition of
our Mahad, India, site by Olon S.p.A., which we expect
to be completed in 2019.
• Also in September 2018, we announced the proposed
exit of manufacturing operations in Grimsby, United
Kingdom, as well as the closure of a building in Sch-
weizerhalle, Switzerland, by 2020 and the milling and
blending center in Stein, Switzerland, by 2021.
• In December 2018, we announced the transfer of the
packaging and repackaging activities from our Can-
delaria, Mexico, site to a local contract manufacturer
in 2019.
• In December 2018, we announced an offer to acquire
CellforCure from LFB, including its cell and gene man-
ufacturing facility located in Les Ulis, France. If this
transaction closes as planned, CellforCure is expected
to become a wholly owned Novartis manufacturing site
managed by NTO. We expect this transaction to be
completed during the first half of 2019.
• In December 2018, we completed the exit of our site
in Turbhe, India.
In 2012, Novartis announced the construction of a new
state-of-the-art production facility to produce solid dos-
age form medicines for the Innovative Medicines
Division in Stein, Switzerland. We expect our investment
in this facility to exceed USD 0.6 billion. The new facility
is planned to replace an older facility. In addition, Novartis
is investing in new technologies and packaging facilities
for pharmaceuticals at Stein. Stein is a technological
competence center for both sterile and solid dosage
form drugs. Through December 31, 2018, the total
amount paid and committed to be paid on this project is
equivalent to approximately USD 0.6 billion.
In 2012, we announced the planned construction of
a new state-of-the-art biotechnology production site in
Singapore, with a planned investment of over USD 0.8 bil-
lion. The new facility will focus on drug substance man-
ufacturing based on cell culture technology. Ground was
broken in February 2013, and construction was com-
pleted in the third quarter of 2015 for phase one of the
project. Phase one of this project is now operational, and
we expect phase two to be operational in 2019. The facil-
ity is co-located with the pharmaceutical production site
based in Tuas, Singapore. In the future, Singapore is
expected to be a technological competence center for
both biotechnology and pharmaceutical manufacturing
at Novartis. Through December 31, 2018, the total amount
paid and committed to be paid on this project is equiva-
lent to USD 0.7 billion.
An expansion of our Alcon Division’s Johns Creek,
Georgia, facility was approved in 2017 to add three pro-
duction lines of Dailies Total1 contact lenses. This proj-
ect is still in progress. We expect to pay a total amount
of approximately USD 0.1 billion on this project. Through
December 31, 2018, the total amount paid and commit-
ted to be paid on this project is approximately USD 0.1
billion.
In March 2018, the second phase of expansion of the
Grosswallstadt, Germany, and Singapore facilities relat-
ing to the production of contact lenses was approved.
We expect to pay a total amount of approximately USD
0.4 billion on the Grosswallstadt project and approxi-
mately USD 0.1 billion on the Singapore project, in each
case for both the first and second phases of expansion.
Through December 31, 2018, the total amount paid and
committed to be paid on the Grosswallstadt project is
equivalent to approximately USD 0.3 billion, and the total
amount paid and committed to be paid on the Singapore
project is equivalent to approximately USD 0.1 billion.
In July 2018, AveXis initiated construction of a new
15 800-square-meter state-of-the-art gene therapy
manufacturing facility in Durham, North Carolina. The
new facility is expected to complement the existing
AveXis site in Libertyville, Illinois, and allow for produc-
tion of multiple gene therapy products simultaneously.
The site is expected to be fully operational in 2020. We
expect to pay a total amount of USD 0.2 billion. Through
December 31, 2018, the total amount paid and commit-
ted to be paid on this project is approximately USD 0.1
billion.
In August 2018, Novartis Technical Operations
announced its plan to establish a European cell and gene
therapy hub in Stein, Switzerland. We expect our invest-
ment in this project to exceed USD 0.1 billion. Through
December 31, 2018, the total amount paid and commit-
ted to be paid on this project is equivalent to USD 22 mil-
lion.
76
Item 4. Information on the Company
In November 2018, Novartis announced the construc-
tion of a new state-of-the-art advanced integrated bio-
logics manufacturing facility in Schaftenau, Austria. We
expect our investment in this facility to exceed USD 0.2
billion. We expect phase one of this project to be oper-
ational in 2020. Through December 31, 2018, the total
amount paid and committed to be paid on this project is
equivalent to approximately USD 0.1 billion.
Environmental matters
We integrate core values of environmental protection into
our business strategy to protect the environment, add
value to the business, manage risk and enhance our rep-
utation. For example, our Executive Committee recently
endorsed new targets for environmental sustainability
related to our carbon footprint, waste production and
water sustainability, and we announced a virtual power
purchase agreement for renewable energy.
We are subject to laws and regulations concerning
the environment, safety matters, regulation of chemicals,
and product safety in the countries where we manufac-
ture and sell our products or otherwise operate our busi-
ness. These requirements include regulation of the han-
dling, manufacture, transportation, use and disposal of
materials, including the discharge of pollutants into the
environment. In the normal course of our business, we
are exposed to risks relating to possible releases of haz-
ardous substances into the environment that could
cause environmental or property damage or personal
injuries, and that could require remediation of contami-
nated soil and groundwater – in some cases over many
years – regardless of whether the contamination was
caused by us or by previous occupants of the property.
See “Item 3. Key Information—Item 3.D Risk factors—
Environmental, social and governance matters may
impact our business and reputation,” and “Item 3. Key
Information—Item 3.D Risk factors—Environmental lia-
bilities may adversely impact our financial results.” See
also “Item 4. Information on the Company—Item 4.B Busi-
ness overview—Overview—Corporate responsibility,”
and “Item 18. Financial Statements—Note 19. Provisions
and other non-current liabilities.”
77
Item 4A. Unresolved Staff Comments
Item 4A. Unresolved Staff Comments
Not applicable.
78
Item 5. Operating and Financial Review and Prospects
Item 5. Operating and Financial Review
and Prospects
5.A Operating results
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 (see “Item 18. Financial
Statements”). “Item 5 Operating and Financial Review
and Prospects” together with the sections on com-
pounds in development and key development projects
of our divisions (see “Item 4. Information on the Compa-
ny-Item 4.B Business overview”) constitute the Operat-
ing and Financial Review (“Lagebericht”), as defined by
the Swiss Code of Obligations.
Overview
As a leading global medicines company, we use innovative
science and digital technologies to create transforma-
tive treatments in areas of great medical need. Our pur-
pose is to reimagine medicine 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
focus Novartis as a leading medicines company powered
by advanced therapy platforms and data science.
The Group comprises three global operating divisions
and we separately report the results of Corporate activ-
ities:
• Innovative Medicines: innovative patent protected pre-
scription medicines
• Sandoz: generic pharmaceuticals and biosimilars
• Alcon: surgical and vision care products
• Corporate activities
The financial results of our Corporate activities
include the costs of the Group headquarters and those
of corporate coordination functions in major countries.
In addition, Corporate includes other items of income
and expense that are not attributable to specific seg-
ments such as certain revenues from intellectual prop-
erty rights and certain expenses related to post employ-
ment benefits, environmental remediation liabilities,
charitable activities, donations and sponsorships.
In June 2018, we announced that we plan to spin off
Alcon into a separately-traded standalone company. As
two distinct publicly traded companies, we believe
Novartis and Alcon will be better positioned to capital-
ize on significant growth opportunities and focus
resources on their respective businesses and strategic
priorities.
Our divisions are supported by the following cross-di-
visional organizational units: the Novartis Institutes for
BioMedical Research, Global Drug Development,
Novartis Technical Operations and Novartis Business
Services. The financial results of these organizational
79
units are included in the results of the divisions for which
their work is performed. As part of the planned spin-off
of Alcon, efforts are being undertaken to prepare for the
separation of Alcon from Novartis and to enable Alcon
to operate as a standalone public company. As part of
these efforts, Alcon is forming its own supporting func-
tions and service organizations.
As part of the long-term strategy to build a leading,
focused medicines company powered by advanced ther-
apy platforms and data science, we announced and/or
completed several acquisitions and divestments during
2018, 2017 and 2016. For a description of these acqui-
sitions and divestments and other significant transac-
tions, refer to “Item 4.A History and development of
Novartis – Important Corporate developments 2016 –
2018”, and “Item 18. Financial Statements – Note 2. Sig-
nificant transactions” and “Note 30. Events subsequent
to the December 31, 2018, consolidated balance sheet
date – proposal to the Annual General Meeting of Share-
holders to approve a spin-off transaction of the Alcon
Division”.
During 2018 and 2017 Novartis announced several
new nominations to the Executive Committee of Novartis
including the appointment of Vasant (Vas) Narasimhan,
M.D., Global Head of Drug Development and Chief Med-
ical Officer, as CEO of Novartis, effective February 1,
2018. For a more detailed description of these nomina-
tions please refer to “Item 4. Information on the Com-
pany – Item 4.B Business overview”.
In 2018, Novartis achieved net sales of USD 51.9 bil-
lion, of which USD 13.0 billion, or 25%, came from Emerg-
ing Growth Markets, and USD 38.9 billion, or 75%, came
from Established Markets. Emerging Growth Markets
comprise all markets other than the Established Markets
of the US, Canada, Western Europe, Japan, Australia and
New Zealand.
Innovative Medicines accounted for USD 34.9 billion,
or 67%, of Group net sales, and for USD 7.9 billion, or
87%, of Group operating income (excluding Corporate
income and expense, net).
Sandoz accounted for USD 9.9 billion, or 19%, of
Group net sales, and for USD 1.3 billion, or 15%, of Group
operating income (excluding Corporate income and
expense, net).
Alcon accounted for USD 7.1 billion, or 14%, of Group
net sales, and an increased operating loss of USD 0.2
billion.
Effective January 1, 2018, following the internal reor-
ganization, announced on October 24, 2017, and Janu-
ary 24, 2018, we transferred our over-the-counter oph-
thalmic products and certain surgical diagnostic products
with sales in 2017 of USD 747 million (2016: USD 731 mil-
lion) from the Innovative Medicines Division to the Alcon
Division. Our prescription Ophthalmic medicines busi-
ness remains with the Innovative Medicines Division. As
Item 5. Operating and Financial Review and Prospects
the Innovative Medicines Division will discontinue its use
of the Alcon brand name, the intangible asset has been
transferred from corporate to the Alcon Division. In com-
pliance with IFRS, we updated our segment reporting to
reflect this transfer, both for the current and prior years,
to aid comparability of year-on-year results. This restate-
ment had no impact on the reported financial results of
the Sandoz Division or the total Group.
Opportunity and risk summary
Our financial results are affected to varying degrees by
external factors. The healthcare industry is entering a
phase of significant progress and change. Over the next
two decades, we believe biomedical innovation will con-
tinue to accelerate – potentially spawning new treat-
ments that could have unparalleled impact on humanity,
including in areas such as cancer and heart disease. The
digital revolution that is now gaining momentum in health-
care is likely to transform everything from drug research
and development to how doctors diagnose and treat dis-
eases.
These trends could help society address the chang-
ing healthcare needs of aging populations and produce
better health outcomes for patients. At the same time,
loss of market exclusivity and the introduction of branded
and generic competitors could significantly 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. Our manufacturing processes
are technically complex and subject to strict regulatory
requirements, which introduce a greater chance for dis-
ruptions and liabilities.
Our dependence on information technology puts us
at risk of information security threats and losses of per-
sonal data. 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 portions of our busi-
ness
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 scrutiny of com-
pany tax filings. In addition, tax reform initiatives by the
OECD, the EU, Switzerland and the US will require us to
continually assess our organizational structure against
tax policy trends, 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.
For more details on these trends and how they could
impact our results, see “—Factors affecting results of
operations” starting on page 105.
80
Item 5. Operating and Financial Review and Prospects
Results of operations
2018 compared to 2017
Key figures
(USD millions unless indicated otherwise)
Net sales to third parties
Other revenues
Cost of goods sold
Gross profit
Selling, general and administration
Research and development
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)
Net cash flows from operating activities
Free cash flow 1
Year ended
Year ended
Dec 31, 2018 Dec 31, 2017
Change
in USD
%
Change in
constant
currencies
%
51 900
49 109
1 266
1 026
– 18 407
– 17 175
34 759
32 960
– 16 471
– 14 997
– 9 074
– 8 972
1 690
1 969
– 2 735
– 2 331
8 169
8 629
15.7
6 438
– 957
185
17.6
1 108
– 777
39
13 835
8 999
– 1 221
– 1 296
12 614
7 703
12 611
7 703
3
0
5.44
3.28
14 272
12 621
11 717
10 428
6
23
– 7
5
– 10
– 1
– 14
– 17
– 5
nm
– 23
nm
54
6
64
64
nm
66
13
12
5
23
– 6
5
– 9
0
– 15
– 16
– 5
nm
– 27
nm
54
5
64
64
nm
66
1 For an explanation of non-IFRS measures and reconciliation tables, see “ —Item 5.A Operating results—Non-IFRS measures as defined by Novartis.”
nm = not meaningful
Group overview
Novartis delivered strong performance in 2018 driven by
continued sales momentum from our key growth prod-
ucts and the successful acquisition of Advanced Accel-
erator Applications (AAA).
Net sales for Novartis were USD 51.9 billion, up 6%
in reported terms and up 5% measured in constant cur-
rencies (cc) to remove the impact of exchange rate move-
ments. The strong sales growth was driven by volume
growth of 9 percentage points (cc), mainly driven by
Cosentyx, AAA and four additional drugs reaching block-
buster status (Promacta/Revolade, Tafinlar + Mekinist,
Entresto and Xolair). The strong volume growth was
partly offset by the negative impacts of pricing (-2 per-
centage points) and generic competition (-2 percentage
points).
Cosentyx, our treatment for psoriasis and other auto-
immune diseases, grew strongly across all indications,
with sales rising 37% (+36% cc), to USD 2.8 billion.
Entresto, our product for heart failure has now more than
doubled sales reaching USD 1.0 billion.
Our treatments for certain cancer and related rare
diseases continued to grow, driven by strong demand.
Promacta/Revolade, a treatment for blood disorders,
grew 35% (+35% cc) to USD 1.2 billion. Tafinlar + Mekinist,
a combination treatment for skin and lung cancers, had
sales of USD 1.2 billion, up 32% (+31% cc). Jakavi, a treat-
ment for rare blood cancers, grew 26% (+24% cc) to USD
977 million. Sales of the products from AAA, including
Lutathera, a radioligand therapy for a rare type of can-
cer in the pancreas or gut, amounted to USD 355 million.
By division, Innovative Medicines sales grew 8% (+8%
cc). Alcon sales grew 6% (+5% cc), reflecting the sec-
ond consecutive year of growth, mainly as a result of
improved operations and customer relationships. Sandoz
sales declined 2% (–3% cc), mainly due to lower retail
generics, which was impacted by continued US indus-
try-wide pricing pressures, partly offset by growth in Bio-
pharmaceuticals including the continued uptake of Rix-
athon and Erelzi in Europe.
Operating income in 2018 was USD 8.2 billion (–5%,
–5% cc), mainly due to the impacts from M&A transac-
tions, higher restructuring and net impairment charges,
and growth investments, partly offset by higher sales.
Operating income margin in constant currencies
decreased 1.6 percentage points; currency had a nega-
81
Item 5. Operating and Financial Review and Prospects
tive impact of 0.3 percentage points resulting in a net
decrease of 1.9 percentage points to 15.7% of net sales.
Net income was USD 12.6 billion compared to USD
7.7 billion in the prior year, mainly benefiting from a USD
5.7 billion net gain from the divestment of our stake in
the GSK consumer healthcare joint venture. Earnings
per share were USD 5.44 compared to USD 3.28 in the
prior year, driven by higher net income and the lower
number of shares outstanding.
Free cash flow grew 12% to USD 11.7 billion compared
to USD 10.4 billion in the prior year driven by higher cash
flows from operating activities, which includes the receipt
of a GSK sales milestone from the divested Vaccines
business, partly offset by higher net investments in intan-
gible assets.
We also present our core results, which exclude the
impact of amortization, impairments, disposals, acquisi-
tions, restructurings and other significant one-time items,
to help investors understand our underlying perfor-
mance.
Core operating income was USD 13.8 billion (+8%,
+8% cc) driven by higher sales and gross margin, which
were partly offset by growth investments, including
AveXis. Core operating income margin in constant cur-
rencies increased 0.7 percentage points; currency had
a negative impact of 0.3 percentage points resulting in
a net increase of 0.4 percentage points to 26.6% of net
sales.
Core net income was USD 11.9 billion (+5%, +5% cc),
driven by growth in core operating income, which was
partly offset by the discontinuation of core income from
the GSK consumer healthcare joint venture from April 1,
2018. Core earnings per share were USD 5.15 (+6%, +6%
cc), driven by growth in core net income and the lower
number of shares outstanding.
Net sales by segment
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
1 Restated to reflect the product transfers between divisions that was effective as of January 1, 2018.
Year ended
Year ended Dec 31, 2017
restated 1
Dec 31, 2018
Change
in USD
%
34 892
32 278
9 859
10 060
7 149
6 771
51 900
49 109
8
– 2
6
6
Change in
constant
currencies
%
8
– 3
5
5
Innovative Medicines
Following the internal reorganization announced on
October 24, 2017, and January 24, 2018, that was effec-
tive January 1, 2018, we transferred our over-the-counter
ophthalmic products and certain surgical diagnostic
products with sales in 2017 of USD 747 million (2016:
USD 731 million) from the Innovative Medicines Division
to the Alcon Division. Our prescription Ophthalmic
medicines business remains with the Innovative
Medicines Division. In compliance with IFRS, we updated
our segment reporting to reflect this transfer, both for
the current and prior years, to aid comparability of year-
on-year results. For details on the Innovative Medicines
net sales by business franchise see also “Item 18. Finan-
cial Statement – Note 3. Segmentation of key figures
2018, 2017 and 2016.”
In addition to this, the former Immunology and Der-
matology franchise was reorganized into Immunology,
Hepatology and Dermatology, and certain products were
transferred to Established Medicines.
Innovative Medicines Division delivered net sales of
USD 34.9 billion in 2018, up 8% in reported terms and in
constant currencies (cc). The Pharmaceuticals Business
Unit grew 7% (cc), driven by Cosentyx reaching USD 2.8
billion and Entresto reaching USD 1.0 billion. Oncology
Business Unit grew 9% (cc), driven by AAA, including
Luthathera, Promacta/Revolade and Tafinlar + Mekinist
both reaching USD 1.2 billion and Jakavi reaching USD
977 million. Volume contributed 11 percentage points to
sales growth. Generic competition had a negative impact
of 2 percentage points. Pricing had a negative impact of
1 percentage point.
Regionally, in the US (USD 11.9 billion, +9%), the
strong performance was driven by Cosentyx, Entresto,
Promacta/Revolade and Lutathera. Europe sales (USD
12.3 billion, +8% cc) were driven by Cosentyx, Entresto
and Jakavi. Japan sales (USD 2.4 billion, –3% cc) declined
mainly due to the biennial price cut and generic compe-
tition. Emerging Growth Markets sales increased 10%
(cc) to USD 8.6 billion, mainly driven by strong growth in
China.
82
Item 5. Operating and Financial Review and Prospects
The following table provides an overview of net sales to third parties by franchise of the Innovative Medicines Divi-
sion:
(USD millions)
Total Oncology business unit
Total Pharmaceuticals business unit
Ophthalmology
Neuroscience
Immunology, Hepatology and Dermatology
Respiratory
Cardio-Metabolic
Established Medicines
Total Innovative Medicines
Year ended
Year ended
Dec 31, 2018 Dec 31, 2017 1
13 428
12 274
21 464
20 004
4 558
3 429
3 392
1 767
1 050
7 268
4 621
3 287
2 474
1 617
524
7 481
34 892
32 278
Change
in USD
%
Constant
currencies
change %
9
7
– 1
4
37
9
100
– 3
8
9
7
– 2
4
37
8
100
– 3
8
1 Restated to reflect the product transfers between divisions that was effective as of January 1, 2018, and the new franchise structure of Immunology, Hepatology and Dermatology
The following table provides the top 20 Innovative Medicines Division product net sales – 2018
US
Rest of world
Total
Business franchise
Indication
%
change
USD m USD/cc 2
%
%
change change
cc 2
USD
USD m
%
%
change change
cc 2
USD
USD m
Neuroscience
Relapsing multiple sclerosis
1 765
3
1 576
7
5
3 341
5
4
Brands
Gilenya
Cosentyx
Lucentis
Tasigna
Xolair 1
Entresto
Jakavi
Votrient
Ilaris
Immunology,
Hepatology and
Dermatology
Ophthalmology
Psoriasis, ankylosing
spondylitis and
psoriatic arthritis
Age-related
macular degeneration
1 674
31
1 163
46
44
2 837
37
36
Oncology
Chronic myeloid leukemia
806
0
1 068
2 046
8
4
7
3
2 046
1 874
8
2
7
1
Sandostatin
Oncology
Gleevec/Glivec
Oncology
Carcinoid tumors
and acromegaly
Chronic myeloid
leukemia and GIST
817
– 2
770
– 1
– 1
1 587
– 2
– 2
440 – 30
1 121 – 15 – 16
1 561 – 20 – 20
Afinitor/Votubia
Oncology
Breast cancer/TSC
929
13
627 – 11 – 12
1 556
Galvus Group
Established Medicines Diabetes
1 284
4
6
1 284
Promacta/Revolade Oncology
Immune
thrombocytopenic purpura
Tafinlar + Mekinist
Oncology
Melanoma
Exjade/Jadenu
Oncology
Chronic iron overload
581
457
521
30
35
1
593
698
578
41
31
6
40
29
1 174
1 155
5
1 099
2
4
35
32
4
Respiratory
Asthma
1 039
13
12
1 039
13
Cardio-Metabolic
Chronic heart failure
556
87
472 125 124
1 028 103 102
Diovan Group
Established Medicines Hypertension
Exforge Group
Established Medicines Hypertension
84
– 3
19 – 32
939
983
8
5
8
5
1 023
1 002
7
4
Oncology
Oncology
Myelofibrosis
977
26
24
977
26
Renal cell carcinoma
404
– 1
424
6
5
828
2
Immunology,
Hepatology and
Dermatology
Auto-inflammatory (CAPS,
TRAPS, HIDS/MKD, FMF,
SJIA, AOSD and gout)
262
34
292
42
44
554
38
39
2
6
35
31
3
12
7
4
24
2
Travoprost Group
Ophthalmology
Reduction of elevated
intraocular pressure
194 – 10
323 – 13 – 13
517 – 12 – 12
Zortress/Certican
Established Medicines Transplantation
145
12
319
Top 20 products total
Rest of portfolio
Total division sales
9 654
11 17 292
2 210
4
5 736
11 864
9 23 028
12
10
0
8
12
464
9 26 946
0
7 946
7 34 892
12
10
1
8
12
10
1
8
1 Net sales reflect Xolair sales for all indications (e.g., including Xolair SAA and Xolair CSU, which is managed by the Immunology, Hepatology and Dermatology franchise).
2 Constant currencies (cc) is a non-IFRS measure. For an explanation of non-IFRS measures, see “ —Item 5.A Operating results—Non-IFRS measures as defined by Novartis.”
For information about the approved indications for the products described, see “Item 4. Information on the Com-
pany—Item 4.B Business overview—Innovative Medicines—Key marketed products”.
83
Item 5. Operating and Financial Review and Prospects
Novartis Oncology business unit
Oncology sales were USD 13.4 billion (+9% cc) driven by
AAA, including Luthathera, Promacta/Revolade, Tafinlar
+ Mekinist and Jakavi.
Tasigna (USD 1.9 billion, +1% cc) was broadly in line
focused global campaign and strong retina market
growth.
Travoprost Group (USD 517 million, −12% cc) sales
declined mainly due to generic competition in Europe
and increased competition in the US.
with prior year across most regions.
Sandostatin (USD 1.6 billion, −2% cc) sales declined
slightly, due to competitive pressure across most regions.
Gleevec/Glivec (USD 1.6 billion, −20% cc) continued
to decline due to generic competition in most major mar-
kets.
Afinitor/Votubia (USD 1.6 billion, +2% cc) sales grew
slightly mainly driven by the tuberous sclerosis complex
(TSC) and neuroendocrine tumor (NET) indications in
the US.
Promacta/Revolade (USD 1.2 billion, +35% cc) sales
grew at a strong double-digit rate across all regions.
Tafinlar + Mekinist (USD 1.2 billion, +31% cc) contin-
ued strong double-digit growth due to increased demand
in metastatic melanoma and NSCLC across all regions,
with strong uptake in the adjuvant melanoma indication
also contributing in the US and Europe.
Exjade/Jadenu (USD 1.1 billion, +3% cc) grew driven
by continued uptake in Europe and Japan as well as the
FCT (film-coated tablets) formulation launch in Europe.
Jakavi (USD 977 million, +24% cc) continued strong
double-digit growth across all regions driven by both the
myelofibrosis and polycythemia vera indications.
Votrient (USD 828 million, +2% cc) sales grew slightly
driven by growth in Japan and Emerging Growth Mar-
kets partially offset by competitive pressures in the US
and Europe.
Kisqali (USD 235 million, +210% cc) continues to build
momentum with growth in the US and launches in sev-
eral European and Emerging Growth Markets. In July
2018, the US FDA approved two new indications for
Kisqali based on the MONALEESA 3/7 trials, also
approved in Europe in December 2018.
Lutathera (USD 167 million) launch in the US is pro-
gressing well, with over 100 centers actively treating.
Sales from all AAA brands (including Lutathera and radio-
pharmaceutical diagnostic products) were USD 355 mil-
lion in 2018. The US FDA approved Lutathera in late Jan-
uary 2018, shortly following the acquisition of AAA. In
Europe, full reimbursement for Lutathera has been
achieved in several countries during 2018. European
authorities approved Lutathera in late September 2017.
Kymriah sales were USD 76 million. In May, the US
FDA approved Kymriah for a second indication – in
relapsed/refractory (r/r) DLBCL. Approval of Kymriah
was also granted by the European Commission, Health
Canada and Swissmedic for the r/r pediatric and young
adult ALL and r/r DLBCL indications.
Novartis Pharmaceuticals business unit
Ophthalmology
Sales in the Ophthalmology franchise were USD 4.6 bil-
lion (–2% cc), with increased sales of Lucentis partially
offsetting the impact of generic competition for glau-
coma and anti-infective portfolios mainly in the US and
Europe, as well as price erosion.
Lucentis (USD 2.0 billion, +7% cc) sales delivered
strong growth benefitting from the implementation of a
Neuroscience
Sales in the Neuroscience franchise were USD 3.4 bil-
lion (+4% cc), mainly driven by Gilenya.
Gilenya (USD 3.3 billion, +4% cc) with approximately
267,000 treated patients worldwide, continued solid
growth, driven by increased demand in Europe and US.
Gilenya was approved by the FDA in May 2018 and by
the European Commission in November 2018 as the first
disease-modifying therapy for pediatric relapsing multi-
ple sclerosis addressing the strong unmet clinical need
of younger patients.
Aimovig received FDA approval in May 2018 and
European Commission approval in July 2018 and is now
available in 25 countries as the first novel treatment
designed specifically for migraine prevention. Aimovig
was successfully launched in the US and ex-US launches
are now underway, including local reimbursement pro-
cedures. Additional regulatory filings are pending with
other health authorities worldwide. Aimovig is co-com-
mercialized with Amgen in the US, where Amgen records
sales, and Novartis has exclusive commercialization
rights for all territories excluding the US and Japan. More
than 165,000 patients have been treated with Aimovig
worldwide since launch.
Immunology, Hepatology and Dermatology
Sales in the Immunology, Hepatology & Dermatology
franchise reached USD 3.4 billion (+37% cc), of which
Cosentyx delivered USD 2.8 billion.
Cosentyx (USD 2.8 billion, +36% cc) delivered strong
volume growth across all indications in the US and EU.
In October, Novartis presented five-year data in psori-
atic arthritis and ankylosing spondylitis confirming the
efficacy and safety benefits of Cosentyx. This adds to
the results of a Phase III psoriasis study reported in 2017,
demonstrating that Cosentyx delivers high and long-last-
ing skin clearance in patients with moderate-to-severe
plaque psoriasis, with high response rates essentially
maintained from year one to year five. These scientific
data are reinforcing Cosentyx’s unique position as a
long-lasting comprehensive treatment across PsO, PsA
and AS.
Ilaris (USD 554 million, +39% cc) sales were driven
by strong double-digit growth across most regions
driven by volume.
Respiratory
Sales in the Respiratory franchise were USD 1.8 billion
(+8% cc). Xolair sales amounted to USD 1.0 billion and
our chronic obstructive pulmonary disease (COPD) port-
folio including Onbrez Breezhaler, Seebri Breezhaler and
Ultibro Breezhaler achieved sales of USD 703 million
(+2% cc).
Xolair (USD 1.0 billion, +12% cc) continued to grow in
both indications, Severe Allergic Asthma (SAA) and in
Chronic Spontaneous Urticaria (CSU, also known as
CIU), a severe skin disease, driven by increasing disease
84
Item 5. Operating and Financial Review and Prospects
awareness. The asthma indication is managed by the
Respiratory franchise which reports all Xolair sales.
Ultibro Breezhaler (USD 454 million, +8% cc) contin-
ued to grow driven by positive FLAME and CLAIM study
results as well as the GOLD Strategy 2018 Report and
further supported by the published SUNSET study
results.
Cardio-Metabolic
Sales in the Cardio-Metabolic franchise were USD 1.1 bil-
lion (+100% cc).
Entresto (USD 1.0 billion, +102% cc) sales doubled
year on year driven by growing adoption by physicians
and strong volume in all markets (US +87%, rest of world
+124% cc). New data from the landmark PIONEER-HF
trial presented at AHA 2018 and published in the NEJM
reconfirms the superiority of Entresto over enalapril as
demonstrated in PARADIGM-HF.
Established Medicines
The Established Medicines franchise had sales of USD
7.3 billion (−3% cc).
Galvus Group (USD 1.3 billion, +6% cc) continues to
grow driven by solid performance in Emerging Growth
Markets including China.
Diovan Group (USD 1.0 billion, +7% cc) saw increased
demand mainly due to the recall of generic products in
many markets.
Exforge Group (USD 1.0 billion, +4% cc) saw increased
sales mainly in Emerging Growth Markets.
Zortress/Certican (USD 464 million, +12% cc) sales
were driven by strong double-digit growth across all
regions.
Neoral/Sandimmun(e) (USD 463 million, −6% cc)
declined due to generic competition and mandatory price
reductions.
Voltaren/Cataflam (USD 445 million, −3% cc) declined
due to generic competition.
Sandoz
Sandoz net sales in 2018 were USD 9.9 billion, down 2%
in reported terms. In constant currencies, or cc, sales
declined 3%, as 8 percentage points of price erosion,
mainly in the US, were partially offset by volume growth
of 5 percentage points. In the US, sales were USD 2.8
billion (−16%), down mainly due to continued indus-
try-wide pricing pressure. Sales in Europe were USD 5.0
billion (+5% cc) with growth in biosimilars mainly in Ger-
many, France, UK and Italy. Sales in Asia, Africa and Aus-
tralasia were USD 1.4 billion, down 2% (cc). Sales in Can-
ada and Latin America were USD 779 million (+8% cc).
Excluding the US, net sales grew 4% (cc).
(USD millions)
Year ended
Year ended
Dec 31, 2018 Dec 31, 2017
Retail Generics1
7 880
Biopharmaceuticals 1 436
8 409
1 135
Anti-Infectives
(partner label/API)
543
516
Total
9 859
10 060
Change
in USD
%
Constant
currencies
change %
– 6
27
5
– 2
– 7
24
3
– 3
1 Of which USD 826 million (2017: USD 880 million) represents anti-infectives sold
under the Sandoz name
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. Retail Generics sales in 2018 were USD
7.9 billion (–7% cc), due to the decline in the US (–22%).
Biopharmaceuticals
The Biopharmaceuticals business comprises biosimilars,
contract biologics supplied to third parties, and Glatopa,
a generic version of Copaxone®, which treats relapsing
forms of multiple sclerosis and is marketed in the US.
Global sales of Biopharmaceuticals grew 24% (cc) to
USD 1.4 billion driven by both Europe and the US. By
region, Europe continued double-digit growth driven by
Rixathon (rituximab) and Erelzi (etanercept). In the US,
growth was mainly driven by Zarxio (now the leading fil-
grastim in the US market).
Anti-Infectives
Sandoz sells pharmaceutical ingredients and intermedi-
ates (mainly antibiotics) to third-party customers, as well
as finished dosage forms. Anti-infectives sold to third
parties for sale under their own name were USD 543 mil-
lion, up 3% (cc). Total Anti-Infectives sales were USD 1.4
billion (–3% cc), and included USD 826 million sales of
finished dosage forms sold under the Sandoz name.
85
Item 5. Operating and Financial Review and Prospects
Alcon
Sales in Alcon were restated for 2017 to reflect the prod-
uct transfer between the Innovative Medicines Division
and Alcon Division, announced on October 24, 2017, and
January 24, 2018, that was effective as of January 1,
2018. In 2017, these sales transferred from the Innovative
Medicines Division to Alcon Division amounted to USD
747 million.
Alcon net sales in 2018 were USD 7.1 billion (+6%,
+5% cc), compared to USD 6.8 billion in the prior year.
Alcon’s results reflect the second consecutive year of
net sales growth mainly as a result of improved opera-
tions and customer relationships.
Surgical
Surgical sales were USD 4.0 billion (+7% cc), with growth
across all key product categories, driven mainly by
advanced technology intraocular lenses (AT-IOLs) and
consumables.
Vision Care
Vision Care sales were USD 3.2 billion (+3% cc), driven
by growth in contact lenses with continued double-digit
growth of Dailies Total1.
Year ended
Year ended Dec 31, 2017
restated 1
Dec 31, 2018
Change
in USD
%
Constant
currencies
change %
(USD millions)
Surgical
Consumables
Implantables
2 227
1 136
2 097
1 034
594
Equipment/other
636
Total
3 999
3 725
Vision Care
Contact lenses
Ocular health
Total
1 928
1 222
3 150
1 833
1 213
3 046
Total net sales
7 149
6 771
6
10
7
7
5
1
3
6
6
11
8
7
4
1
3
5
1 Restated to reflect the product transfers between divisions that was effective as of
January 1, 2018.
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, 2018
Year ended
% of Dec 31, 2017
restated 1
net sales
7 871
1 332
– 194
– 840
8 169
22.6
13.5
– 2.7
15.7
7 595
1 368
– 3
– 331
8 629
% of
net sales
23.5
13.6
0.0
Change
in USD
%
4
– 3
nm
Change in
constant
currencies
%
4
– 2
nm
– 154
– 148
17.6
– 5
– 5
nm = not meaningful
1 Restated to reflect the product transfers between divisions that was effective as of January 1, 2018.
Operating income in 2018 was USD 8.2 billion (–5%, –5%
cc), mainly due to the impacts from M&A transactions,
higher restructuring and net impairment charges, and
growth investments, partly offset by higher sales. Oper-
ating income margin in constant currencies decreased
1.6 percentage points; negative currency impact was 0.3
percentage points, resulting in a net decrease of 1.9 per-
centage points to 15.7% of net sales.
86
Item 5. Operating and Financial Review and Prospects
Core operating income key figures1
(USD millions unless indicated otherwise)
Core gross profit
Selling, general and administration
Research and development
Other income
Other expense
Core operating income
As % of net sales
Year ended
Year ended
Dec 31, 2018 Dec 31, 2017
39 418
36 578
– 16 429
– 15 000
– 8 681
– 8 313
596
778
– 1 081
– 1 193
13 823
12 850
26.6
26.2
Change
in USD
%
Change in
constant
currencies
%
8
– 10
– 4
– 23
9
8
7
– 9
– 4
– 24
11
8
1 For an explanation of non-IFRS measures and reconciliation tables, see “ —Item 5.A Operating results—Non-IFRS measures as defined by Novartis.”
The adjustments made to operating income to arrive at
core operating income amounted to USD 5.7 billion (com-
pared to USD 4.2 billion in 2017), increasing mainly due
to higher restructuring and net impairment charges.
Core operating income was USD 13.8 billion (+8%,
+8% cc) driven by higher sales and gross margin, partly
offset by growth investments, including AveXis. Core
operating income margin in constant currencies
increased by 0.7 percentage points; currency had a neg-
ative impact of 0.3 percentage points, resulting in a net
increase of 0.4 percentage points to 26.6% of net sales.
The following table provides an overview of core operating income by segment:
(USD millions)
Innovative Medicines
Sandoz
Alcon
Corporate
Year ended
Dec 31, 2018
Year ended
% of Dec 31, 2017
restated 1
net sales
11 151
2 002
1 279
– 609
32.0
20.3
17.9
10 019
2 080
1 168
– 417
% of
net sales
31.0
20.7
17.3
Core operating income
13 823
26.6
12 850
26.2
1 Restated to reflect the product transfers between divisions that was effective as of January 1, 2018.
Change
in USD
%
11
– 4
10
– 46
8
Change in
constant
currencies
%
11
– 3
10
– 43
8
Innovative Medicines
Operating income was USD 7.9 billion (+4%, +4% cc)
mainly driven by higher sales, partly offset by increased
growth and launch investments, and higher restructur-
ing charges and net impairment charges. Operating
income margin in constant currencies decreased 0.8
percentage points; currency had a negative impact of 0.1
percentage points, resulting in a net decrease of 0.9 per-
centage points to 22.6% of net sales.
Core adjustments amounted to USD 3.3 billion,
including USD 2.2 billion of amortization of intangible
assets. Prior year core adjustments were USD 2.4 billion.
Core adjustments increased compared to prior year
mainly due to higher restructuring and net impairment
charges. Core operating income was USD 11.2 billion
(+11%, +11% cc) mainly driven by strong sales growth and
gross margin expansion, partly offset by higher growth
investments. Core operating income margin in constant
currencies increased by 1.0 percentage points; currency
had a negligible impact, resulting in a net increase of 1.0
percentage points to 32.0% of net sales.
Core gross margin as a percentage of net sales
increased by 0.9 percentage points (cc). Core R&D
expenses decreased by 0.8 percentage points (cc). Core
SG&A expenses increased by 0.7 percentage points (cc)
due to launch investments and AveXis and AAA acquisi-
tions. Core Other Income and Expense, net, was in line
with prior year.
Sandoz
Operating income was USD 1.3 billion (–3%, –2% cc)
mainly driven by impairment charges related to the
Sandoz US dermatology business and generic US oral
solids portfolio and lower sales partly offset by contin-
ued gross margin expansion and lower amortization.
Operating income margin was broadly in line with prior
year.
Core adjustments amounted to USD 670 million,
including USD 363 million of amortization. Prior year core
adjustments were USD 712 million. Core adjustments
declined compared to prior year driven by net changes
in legal provisions and lower amortization partially offset
by impairment charges related to the Sandoz US derma-
tology business and generic US oral solids portfolio.
Core operating income was USD 2.0 billion (–4%, –3%
cc), mainly due to the sales decline, ex-US M&S invest-
ments, partially offset by continued core gross margin
expansion. Core operating income margin decreased by
0.1 percentage points, currency had a negative impact
87
Item 5. Operating and Financial Review and Prospects
of 0.3 percentage points, resulting in a net decrease of
0.4 percentage points to 20.3% of net sales.
Core gross margin as a percentage of net sales
increased by 2.4 percentage points (cc), mainly driven
by productivity gains and favorable product and geo-
graphic mix. Core R&D expenses increased by 0.4 per-
centage points (cc). Core SG&A expenses increased by
2.2 percentage points (cc), mainly due to higher M&S
investments in key ex-US markets. Core Other Income
and Expense increased the margin by 0.1 percentage
points (cc).
Alcon
Operating loss was USD 194 million for the full year, com-
pared to a loss of USD 3 million in prior year, as higher
sales were more than offset by the voluntary withdrawal
of CyPass (USD 0.3 billion) and higher investments in
growth drivers. Operating income margin in constant cur-
rencies decreased 2.5 percentage points; currency had
a negative impact of 0.2 percentage points, resulting in
a net decrease of 2.7 percentage points to negative 2.7%
of net sales.
Core adjustments increased to USD 1.5 billion com-
pared to USD 1.2 billion in the prior year, primarily due to
the voluntary withdrawal of CyPass. Core operating
income was USD 1.3 billion (+10%, +10% cc) as higher
sales and improved gross margin were partly offset
investments in growth drivers. Core operating income
margin in constant currencies increased by 0.8 percent-
age points; currency had a negative impact of 0.2 per-
centage points, resulting in a net increase of 0.6 percent-
age points to 17.9% of net sales.
Core gross margin as a percentage of net sales
increased by 1.4 percentage points (cc). Core R&D
expenses decreased 0.2 percentage points (cc). Core
SG&A expenses increased by 0.9 percentage points (cc)
reflecting higher growth and operational investments.
Core Other Income and Expense increased the margin
by 0.1 percentage points (cc).
Corporate income and expense, net
Corporate income and expense, which includes the cost
of Group management and central services, amounted
to an expense of USD 840 million in 2018 compared to
USD 331 million in prior year. The increase in net expense
compared to prior year was mainly due to lower contri-
butions from the Novartis Venture Fund, lower income
from retained vaccines intellectual property, higher NBS
restructuring costs and an income from a sales milestone
in the prior year related to the Vaccines divestment.
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 development
Confirmatory development
Total Innovative Medicines Division research and development expense
As % of Innovative Medicines net sales to third parties
Core research and exploratory development2
Core confirmatory development2
Total core Innovative Medicines Division research and development expense
As % of Innovative Medicines net sales to third parties
Year ended
Year ended Dec 31, 2017
restated 1
Dec 31, 2018
Change
in USD
%
Change in
constant
currencies
%
– 2 770
– 2 729
– 4 905
– 4 886
– 7 675
– 7 615
22.0
23.6
– 2 665
– 2 603
– 4 675
– 4 431
– 7 340
– 7 034
21.0
21.8
– 2
0
– 1
– 2
– 6
– 4
– 1
0
0
– 2
– 5
– 4
1 2017 figures are restated to reflect the product transfers between divisions that was effective as of January 1, 2018, and in addition for certain amounts that were reclassified from
research and exploratory development to confirmatory development for comparative purposes.
2 Core excludes impairments, amortization and certain other items. For an explanation of non-IFRS measures and reconciliation tables, see “ —Item 5.A Operating results—Non-IFRS
measures as defined by Novartis.”
Innovative Medicines Division research and explor-
atory development expense increased by 2% (–1% cc)
to USD 2.8 billion in 2018, and confirmatory development
expense amounted to USD 4.9 billion, broadly in line with
prior year. This was mainly due to higher pipeline invest-
ments, including AveXis, which were offset by lower net
impairment charges (mainly prior-year RLX030) and pro-
ductivity.
Total core research and development expense in the
Innovative Medicines Division as a percentage of sales
decreased by 0.8 percentage points in constant curren-
cies mainly driven by continued resource allocation and
productivity efforts, and the higher net sales. The impact
from currency exchange rates was negligible, yielding a
net decrease of 0.8 percentage points to 21.0% of net
sales.
88
Item 5. Operating and Financial Review and Prospects
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, 2018 Dec 31, 2017
8 169
6 438
– 957
185
8 629
1 108
– 777
39
13 835
8 999
– 1 221
– 1 296
12 614
7 703
5.44
3.28
Change
in USD
%
Change in
constant
currencies
%
– 5
nm
– 23
nm
54
6
64
66
– 5
nm
– 27
nm
54
5
64
66
Income from associated companies
Income from associated companies increased to USD
6.4 billion from USD 1.1 billion in prior year, an increase
of USD 5.3 billion. This increase was mainly due to the
pre-tax gain of USD 5.8 billion recognized on the divest-
ment of the 36.5% stake in the GSK consumer health-
care joint venture. Excluding this divestment gain, income
from associated companies amounted to USD 648 mil-
lion compared to USD 1.1 billion in prior year.
The share of income from Roche was USD 526 mil-
lion compared to USD 456 million in prior year. The higher
estimated income for Roche of USD 130 million in 2018,
was partly offset by the net impacts from a negative prior
year adjustment of USD 125 million recognized in 2018,
compared to a negative prior year adjustment of USD 67
million recognized in 2017. The share of income from the
GSK consumer healthcare joint venture decreased by
USD 509 million compared to prior year, due to the dis-
continuation of the recognition of income from April 1,
2018 (see “Item 18. Financial Statements—Note 2. Sig-
nificant transactions”).
Interest expense and other financial income and
expense
Interest expense was USD 957 million compared to USD
777 million in prior year, an increase of USD 180 million
due to higher interest expense of USD 134 million relat-
ing to the level of outstanding debt, and higher interest
expense of USD 46 million on discounting of long term
liabilities.
Other financial income and expense amounted to an
income of USD 185 million compared to an income of
USD 39 million in prior year, mainly due to higher inter-
est income of USD 294 million compared to USD 110 mil-
lion in prior year, partly offset by higher currency losses
of USD 65 million compared to currency losses of USD
58 million in prior year and higher other financial
expenses, net of USD 44 million compared to USD 13
million in prior year.
Taxes
The tax rate in 2018 was 8.8% compared to 14.4% in prior
year, due to the impact on taxes of the divestment of the
36.5% stake in the GSK consumer healthcare joint ven-
ture. Excluding the impact of the divestment, the tax rate
in 2018 would have been 14.4% in line with the 14.4% in
prior year, as the benefit from favorable profit mix was
offset by the impact from the discontinuation of the rec-
ognition of the income from associated companies
related to the GSK consumer healthcare joint venture
from April 1, 2018 (see “Item 18. Financial Statements—
Note 2. Significant transactions”).
Net income
Net income was USD 12.6 billion, compared to USD 7.7
billion in prior year, mainly benefiting from a USD 5.7 bil-
lion net gain from the divestment of our stake in the GSK
consumer healthcare joint venture, in the second quar-
ter of 2018.
EPS
Basic earnings per share (EPS) in 2018 was USD 5.44,
compared to USD 3.28 in the prior year, driven by higher
net income and lower number of shares outstanding.
89
Item 5. Operating and Financial Review and Prospects
Core non-operating income and expense1
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)
Year ended
Year ended
Dec 31, 2018 Dec 31, 2017
13 823
12 850
1 113
– 957
185
1 335
– 777
39
14 164
13 447
– 2 226
– 2 056
11 938
11 391
5.15
4.86
Change
in USD
%
Change in
constant
currencies
%
8
– 17
– 23
nm
5
– 8
5
6
8
– 17
– 27
nm
5
– 8
5
6
1 For an explanation of non-IFRS measures and reconciliation tables, see “ —Item 5.A Operating results—Non-IFRS measures as defined by Novartis.”
nm = not meaningful
Core income from associated companies
Core income from associated companies amounted to
USD 1.1 billion compared to USD 1.3 billion in prior year.
The core income contribution from Roche amounted to
USD 970 million compared to USD 832 million in prior
year, an increase of USD 138 million, mainly due to the
higher estimated contribution from core income. The
share of core income from GSK consumer healthcare
joint venture decreased by USD 338 million compared
to prior year, due to the discontinuation of core income
from April 1, 2018 (see “Item 18. Financial Statements—
Note 2. Significant transactions”).
Core interest expense and other financial income
and expense
Core interest expense was USD 957 million compared
to USD 777 million in prior year. Core other financial
income and expense amounted to a net income of USD
185 million, compared to USD 39 million in 2017.
Core taxes
The core tax rate (core taxes as a percentage of core
pre-tax income) increased to 15.7% from 15.3% in the
prior year.
Core net income
Core net income was USD 11.9 billion (+5%, +5% cc)
driven by growth in core operating income, partly offset
by the discontinuation of core income from the GSK con-
sumer healthcare joint venture from April 1, 2018.
Core EPS
Core earnings per share were USD 5.15 (+6%, +6% cc),
driven by growth in core net income and the lower num-
ber of shares outstanding.
90
Item 5. Operating and Financial Review and Prospects
2017 compared to 2016
Key figures
(USD millions unless indicated otherwise)
Net sales to third parties
Other revenues
Cost of goods sold
Gross profit
Selling, general and administration
Research and development
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)
Net cash flows from operating activities
Free cash flow 1
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
– 14 997
– 14 192
– 8 972
– 9 039
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
12 621
11 475
10 428
9 455
1
12
2
3
– 6
1
2
1
4
58
– 10
nm
15
– 16
15
15
nm
16
10
10
2
11
2
4
– 7
1
1
0
7
58
– 12
nm
12
– 13
12
12
nm
14
1 For an explanation of non-IFRS measures and reconciliation tables, see “ —Item 5.A Operating results—Non-IFRS measures as defined by Novartis.”
nm = not meaningful
Group overview
Novartis had solid performance in 2017, as strong sales
of our growth drivers – including Cosentyx (secuki-
numab), Entresto (sacubitril/valsartan) and other recently
launched products – continued to offset the impact of
generic competition 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 suc-
cess 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 in 2017 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
movements. 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 in 2017 was USD 7.7 billion (+15%, +12%
cc), benefiting from growth in operating income and
higher income from our stake in GSK Consumer Health-
care Holdings Ltd.
Basic 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.
91
Item 5. Operating and Financial Review and Prospects
Net sales by segment
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
1 Restated to reflect the product transfers between divisions that was effective as of January 1, 2018.
Year ended
Year ended
Dec 31, 2017 Dec 31, 2016
restated 1
restated 1
Change
in USD
%
Change in
constant
currencies
%
32 278
31 831
10 060
10 144
6 771
6 543
49 109
48 518
1
– 1
3
1
2
– 2
4
2
Innovative Medicines
Following changes to the divisional structure of Novartis
effective January 1, 2018, the sales and results of
Innovative Medicines in 2017 and 2016 were restated and
exclude the sales of the over-the-counter ophthalmic
products and certain surgical diagnostic products, which
were transferred to the Alcon Division. In 2017, these
sales amounted to USD 747 million, and in 2016, they
amounted to USD 731 million. In both years, they were
reported under the Ophthalmology franchise.
In addition to this, the former Immunology and Der-
matology franchise was reorganized into Immunology,
Hepatology and Dermatology, and certain products were
transferred to Established Medicines. For details on the
Innovative Medicines net sales by business franchise,
see also “Item 18. Financial Statements—Note 3. Seg-
mentation of key figures 2018, 2017 and 2016.”
Innovative Medicines Division sales in 2017 were USD
32.3 billion, up 1% in reported terms. In constant curren-
cies (cc), sales grew 2%. An 8% increase in volume more
than offset the impact of generic competition (−5 per-
centage points) and price declines (−1 percentage point).
Products contributing to sales growth included Cosentyx,
Entresto, Promacta/Revolade, Tafinlar + Mekinist, and
Jakavi.
Regionally, sales performance was mixed. In the US,
sales rose 2% to USD 10.9 billion, overcoming the impact
of generic competition, mainly for Gleevec. Sales in
Europe were USD 11.1 billion, up 1% in reported terms and
in line with the prior year in constant currencies, as
growth drivers offset the impact of patent loss for
Gleevec/Glivec. Sales rose 3% (+7% cc) in Emerging
Growth Markets to USD 8.1 billion. Sales in Japan were
USD 2.4 billion, a decline of 4% in reported terms and in
line with the prior year in constant currencies.
The following table provides an overview of net sales to third parties by franchise of the Innovative Medicines Divi-
sion:
(USD millions)
Total Oncology business unit
Total Pharmaceutical business unit
Ophthalmology
Neuroscience
Immunology, Hepatology and Dermatology
Respiratory
Cardio-Metabolic
Established Medicines
Total Innovative Medicines
Year ended
Year ended
Dec 31, 2017 1 Dec 31, 2016 1
12 274
12 790
20 004
19 041
4 621
3 287
2 474
1 617
524
4 733
3 233
1 412
1 521
184
7 481
7 958
32 278
31 831
Change
in USD
%
Constant
currencies
change %
– 4
5
– 2
2
75
6
185
– 6
1
– 3
6
– 2
2
74
8
182
– 4
2
1 Restated to reflect the product transfers between divisions that was effective as of January 1, 2018, and the new franchise structure of Immunology, Hepatology and Dermatology
92
Item 5. Operating and Financial Review and Prospects
The following table provides the Top 20 Innovative Medicines Division product net sales—2017
US
Rest of world
Total
Brands
Business franchise
Indication
Gilenya
Cosentyx
Neuroscience
Immunology,
Hepatology and
Dermatology
Gleevec/Glivec
Oncology
Lucentis
Ophthalmology
Tasigna
Oncology
Sandostatin
Oncology
Relapsing multiple
sclerosis
Psoriasis, ankylosing
spondylitis and
psoriatic arthritis
Chronic myeloid
leukemia and GIST
Age-related
macular degeneration
Chronic myeloid
leukemia
Carcinoid tumors
and acromegaly
Afinitor/Votubia
Oncology
Breast cancer/TSC
Galvus Group
Cardio-Metabolic
Diabetes
Exjade/Jadenu
Oncology
Chronic iron overload
Exforge Group
Established Medicines Hypertension
%
change
USD m USD/cc 3
%
%
change change
cc 3
USD
USD m
%
%
change change
cc 3
USD
USD m
1 709
2
1 476
4
3
3 185
2
2
1 275
67
796 119 115
2 071
84
82
627 – 48
1 316 – 38 – 37
1 943 – 42 – 41
1 888
3
4
1 888
810
12
1 031
1
6
1 841
3
6
4
9
832
– 2
819
6
780
706
– 2
– 5
515
15
28 180
1 233
544
932
3
7
2
5
8
2
1
1 612
– 2
– 1
– 3
1 525
1 233
1
3
1 059
11
960
4
2
5
11
4
Diovan Group
Established Medicines Hypertension
87 – 41
870
– 6
– 4
957 – 11
– 9
Xolair 1
Respiratory
Tafinlar + Mekinist
Oncology
Asthma
Melanoma
339
14
920
534
10
43
11
41
Promacta/Revolade Oncology
Votrient
Jakavi
Oncology
Oncology
Travoprost Group
Ophthalmology
Immune thrombocytopenic
purpura
Renal cell carcinoma
Myelofibrosis
Reduction of elevated
intraocular pressure
446
407
44
14
421
30
31
401
8
7
777
34
32
Entresto
Cardio-Metabolic
Chronic heart failure
297 161
210 275 262
507 198 195
Immunology,
Hepatology and
Neoral/Sandimmun(e) Dermatology
Transplantation
38
– 7
450
– 5
Voltaren/Cataflam
Established Medicines
Inflammation/pain
465 – 11
– 4
– 4
488
– 5
465 – 11
216
2
373
– 9
– 9
589
– 5
– 5
920
873
867
808
777
10
30
37
11
34
11
29
37
10
32
8 445
6 16 123
2
3 24 568
4
2 412 – 11
5 298
– 2
0
7 710
– 5
– 4
10 857
2 21 421
1
2 32 278
1
2
– 4
– 4
4
Top 20 products total
Rest of portfolio2
Total division sales2
1 Net sales reflect Xolair sales for all indications (e.g. including Xolair SAA and Xolair CSU, which are managed by the Immunology, Hepatology and Dermatology franchise).
2 Restated to reflect the product transfers between the Innovative Medicines and Alcon Divisions that was effective as of January 1, 2018
3 Constant currencies (cc) is a non-IFRS measure. For an explanation of non-IFRS measures, see “ —Item 5.A Operating results—Non-IFRS measures as defined by Novartis.”
For information about the approved indications for the products described below, see “Item 4. Information on the
Company—Item 4.B Business overview—Innovative Medicines—Key marketed products.”
Novartis Oncology business unit
Oncology sales in 2017 were USD 12.3 billion (−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. Significant gains on key
hematology products, such as Tasigna, Promacta/
Revolade and Jakavi, were complemented by Tafinlar +
Mekinist, which was approved for advanced non-small
cell lung cancer in addition to the existing use in mela-
noma.
Gleevec/Glivec (USD 1.9 billion, −41% cc) continued
to decline this year, driven by generic competition pri-
marily across Europe and the US.
Tasigna (USD 1.8 billion, +9% cc) continued to grow
this year, primarily in the US and Emerging Growth Mar-
kets, despite some impact of generic imatinib in Europe
for patients with previously untreated Philadelphia chro-
mosome-positive (Ph+) chronic myeloid leukemia.
Sandostatin (USD 1.6 billion, −1% cc) declined slightly
this year, driven by increased competitive pressure pri-
marily in the US and Japan, which was partially offset by
growth in Latin America and Emerging Growth Markets.
Afinitor/Votubia (USD 1.5 billion, +2% cc) grew slightly
this year as the neuroendocrine tumors and tuberous
sclerosis complex indications compensated for compet-
itive pressure in the breast cancer and renal cell carci-
noma indications.
Exjade/Jadenu (USD 1.1 billion, +11% cc) sales growth
was primarily driven by solid growth in the US in addition
to continued uptake of the film-coated tablet formulation
in Europe.
93
Item 5. Operating and Financial Review and Prospects
Tafinlar + Mekinist (USD 873 million, +29% cc) sales
growth was primarily driven by combination uptake
across Europe in addition to launch uptake in the US for
the non-small cell lung cancer indication.
Promacta/Revolade (USD 867 million, +37% cc) con-
tinued to deliver solid double-digit growth across all
regions.
Votrient (USD 808 million, +10% cc) worldwide growth
was driven primarily by the advanced renal cell carci-
noma indication both in the US and in Emerging Growth
Markets, specifically China and Asia-Pacific countries.
Jakavi (USD 777 million, +32% cc) delivered strong
double-digit growth across all regions, driven by contin-
ued momentum in the myelofibrosis indication in addi-
tion to reimbursement and launch uptake in the polycy-
themia vera indication across Europe.
Novartis Pharmaceuticals business unit
Ophthalmology
Sales in the Ophthalmology franchise were restated for
2017 and 2016 to reflect the product transfers between
the Innovative Medicines and Alcon Divisions, announced
on October 24, 2017, and January 24, 2018, that was
effective January 1, 2018.
Total sales for 2017 amounted to USD 4.6 billion (−2%
cc), with increased sales of Lucentis helping to partially
offset the impact of generic competition.
Lucentis (USD 1.9 billion, +4% cc) sales continued to
grow, driven by market expansion in Europe, Japan and
Emerging Growth Markets, and reimbursement listing in
China for neovascular age-related macular degenera-
tion.
Travoprost Group (USD 589 million, −5% cc) sales
declined mainly due to loss of exclusivity in Europe.
Neuroscience
Neuroscience franchise sales in 2017 were USD 3.3 bil-
lion (+2% cc), driven by increased sales for Gilenya (USD
3.2 billion, +2% cc) which continued to grow across
regions, mainly driven by volume.
Immunology, Hepatology and Dermatology
Sales in 2017 in the Immunology, Hepatology and Der-
matology franchise reached USD 2.5 billion ( +74% cc).
Cosentyx saw continued strong growth across all indi-
cations, particularly in the US and Europe, reaching USD
2.1 billion (+82% cc). Ilaris also continued to deliver strong
gains (+42% cc).
Respiratory
Respiratory franchise sales in 2017 were USD 1.6 billion
(+8% cc). Our chronic obstructive pulmonary disease
(COPD) portfolio – including Onbrez Breezhaler, Seebri
Breezhaler and Ultibro Breezhaler – achieved sales of
USD 674 million (+5% cc). Sales of Xolair, for moder-
ate-to-severe or severe, persistent asthma, as well as
for chronic hives, reached USD 920 million (+11% cc) and
showed balanced growth across all regions.
Cardio-Metabolic
Sales for the franchise in 2017 were USD 524 million
(+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 (+195% cc). Entresto perfor-
mance was driven by growing adoption by physicians in
the US and EU, and continued market access improve-
ment.
Established Medicines
The Established Medicines franchise had sales in 2017
of USD 7.5 billion (−4% cc). Increased sales of Galvus
Group and Exforge Group were more than offset by
declines for products such as Diovan Group, Neoral/San-
dimmun(e) and Exelon/Exelon Patch (−14% cc) due to
generic competition.
Galvus Group (USD 1.2 billion, +5% cc) continued to
grow, driven by solid performance in Japan and Emerg-
ing Growth Markets.
Exforge Group (USD 960 million, +4% cc) grew
despite ongoing generic competition in the US and
Japan, and new generic competition in Europe in 2017.
Growth was driven by Emerging Growth Markets.
Diovan Group (USD 957 million, −9% cc) saw sales
decline due to loss of exclusivity including in the US, EU
and Japan, while sales continued to grow in China and
some Emerging Growth Markets.
Neoral/Sandimmun(e) (USD 488 million, –4% cc)
sales declined slightly due to generic competition and
mandatory price reductions, mainly in Europe and Japan.
Voltaren/Cataflam (USD 465 million, −4% cc) sales
were impacted by increased generic competition.
Sandoz
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 cus-
tomer consolidation and greater competition, sales were
USD 3.3 billion (−12%), 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.
(USD millions)
Year ended
Year ended
Dec 31, 2017 Dec 31, 2016
Retail Generics1
8 409
Biopharmaceuticals 1 135
8 623
1 002
Anti-Infectives
(partner label/API)
516
519
Total
10 060
10 144
Change
in USD
%
Constant
currencies
change %
– 2
13
– 1
– 1
– 3
12
– 2
– 2
1 Of which USD 880 million (2016: USD 860 million) represents Anti-infectives sold
under Sandoz name
94
Item 5. Operating and Financial Review and Prospects
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, down 3% (cc). Declines in the US (−14%) 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 in 2017 of Biopharmaceuticals grew
12% (cc) to USD 1.1 billion, driven by Zarxio (filgrastim),
Binocrit (epoetin alfa), and the launch of Rixathon (ritux-
imab) and Erelzi (etanercept) in several European coun-
tries.
Anti-Infectives
Sandoz sells pharmaceutical ingredients and intermedi-
ates (mainly antibiotics) to third-party customers, as well
as finished dosage forms. Anti-infectives sold to third
parties for sale under their own name were USD 516 mil-
lion, down 2% (cc) due to the discontinuation of some
low-margin products. Total Anti-Infectives sales in 2017
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).
Surgical
Surgical sales in 2017 grew 5% (cc) to USD 3.7 billion,
mainly driven by the by the consumables portfolio (+5%
cc), particularly for cataract and vitreoretinal surgery.
Implantables grew 4% (cc) as strong performance of new
products, including the UltraSert pre-loaded IOL deliv-
ery system, the AcrySof IQ PanOptix trifocal IOL and
AcrySof IT ReSTOR +2.5D Toric IOL , was partly offset
by declines in monofocal IOLs which continued to face
competitive pressures. Sales of equipment grew 5% (cc),
mainly driven by sales of vitreoretinal equipment.
Vision Care
Vision Care sales in 2017 grew 2% (cc) to USD 3.0 bil-
lion driven by contact lens sales (+4% cc). Contact lens
sales growth was driven by continued double-digit
growth of Dailies Total1, the world’s first and only water
gradient lens, and was partly offset by declines in reus-
able lenses as the market continues to shift to daily dis-
posable lenses. Ocular health sales remained broadly in
line with the prior year (0% cc), as dry eye growth was
offset by a decline in contact lens care product sales
impacted by the continued market shift to daily dispos-
able lenses.
Alcon
Sales in Alcon were restated for 2017 and 2018 to reflect
the product transfer between the Innovative Medicines
Division and Alcon Division, announced on October 24,
2017, and January 24, 2018, that was effective as of Jan-
uary 1, 2018. In 2017, these sales transferred from the
Innovative Medicines Division to Alcon Division amounted
to USD 747 million and in 2016 USD 731 million.
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.
Year ended
Year ended
Dec 31, 2017 Dec 31, 2016
restated 1
restated 1
(USD millions)
Surgical
Consumables
Implantables
2 097
1 034
2 007
1 007
565
Equipment/other
594
Total
3 725
3 579
Vision Care
Contact lenses
Ocular health
Total
1 833
1 213
3 046
1 762
1 202
2 964
Total net sales
6 771
6 543
Change
in USD
%
Constant
currencies
change %
4
3
5
4
4
1
3
3
5
4
5
5
4
0
2
4
1 Restated to reflect the product transfers between divisions that was effective as of
January 1, 2018.
95
Item 5. Operating and Financial Review and Prospects
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
restated 1
Year ended
% of Dec 31, 2016
restated 1
net sales
% of
net sales
7 595
1 368
– 3
– 331
8 629
23.5
13.6
0.0
17.6
7 255
1 445
39
– 471
8 268
22.8
14.2
0.6
17.0
Change
in USD
%
Change in
constant
currencies
%
5
– 5
nm
30
4
7
– 7
nm
27
7
nm = not meaningful
1 Restated to reflect the product transfers between divisions that was effective as of January 1, 2018.
Operating income in 2017 was USD 8.6 billion (+4%, +7%
cc), as growth drivers, productivity, lower amortization,
and a gain from the 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.
Core operating income key figures1
(USD millions unless indicated otherwise)
Core gross profit
Selling, general and administration
Research and development
Other income
Other expense
Core operating income
As % of net sales
Year ended
Year ended
Dec 31, 2017 Dec 31, 2016
36 578
35 806
– 15 000
– 14 111
– 8 313
– 8 402
778
753
– 1 193
– 1 059
12 850
12 987
26.2
26.8
Change
in USD
%
Change in
constant
currencies
%
2
– 6
1
3
– 13
– 1
3
– 6
1
2
– 13
0
1 For an explanation of non-IFRS measures and reconciliation tables, see “ —Item 5.A Operating results—Non-IFRS measures as defined by Novartis.”
The adjustments made to operating income to arrive at
core operating income in 2017 amounted to USD 4.2 bil-
lion (2016: USD 4.7 billion), less than in the prior year due
to lower amortization and a gain from the achievement
of a sales milestone related to the 2015 Vaccines divest-
ment to GSK.
Core operating income in 2017 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 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.
The following table provides an overview of core operating income by segment:
(USD millions)
Innovative Medicines
Sandoz
Alcon
Corporate
Year ended
Dec 31, 2017
restated 1
Year ended
% of Dec 31, 2016
restated 1
net sales
10 019
2 080
1 168
– 417
31.0
20.7
17.3
10 054
2 071
1 150
– 288
% of
net sales
31.6
20.4
17.6
Core operating income
12 850
26.2
12 987
26.8
1 Restated to reflect the product transfers between divisions that was effective as of January 1, 2018.
Change
in USD
%
0
0
2
– 45
– 1
Change in
constant
currencies
%
2
– 1
5
– 53
0
96
Item 5. Operating and Financial Review and Prospects
Innovative Medicines
Operating income in 2017 was USD 7.6 billion (+5%, +7%
cc), mainly driven by higher sales, productivity improve-
ments and lower amortization, which offset the impact
of generic competition and investments in growth driv-
ers.
Core operating income, which excludes certain items,
in 2017 was USD 10.0 billion (0%, +2% cc). Core operat-
ing income margin decreased 0.2 percentage points in
constant currencies, and fluctuations in exchange rates
had a further negative impact of 0.4 percentage points,
resulting in a net decrease of 0.6 percentage points to
31.0% of net sales.
Sandoz
Operating income in 2017 was USD 1.4 billion (−5%, −7%
cc), down mainly due to pressure on prices in the US,
investments in marketing and sales in key markets out-
side 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,
in 2017 was USD 2.1 billion (0%, −1% cc). Core operating
income margin in constant currencies increased 0.1 per-
centage points, and an additional 0.2 percentage point
increase from exchange rates yielded a result of 20.7%
of net sales.
Alcon
Operating loss in 2017 was USD 3 million, compared to
an operating income of USD 39 million the year before,
as higher sales were offset by continued investment in
the division’s growth plan and charges related to busi-
ness development activities.
Core operating income, which excludes certain items,
in 2017 was USD 1.2 billion (+2%, +5% cc). Core operat-
ing income margin in constant currencies increased by
0.2 percentage points, offset by negative currency
impact of 0.5 percentage points, yielding a net decrease
of 0.3 percentage points to 17.3% of net sales.
Corporate income and expense, net
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 the 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 insur-
ance companies.
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 development
Confirmatory development
Total Innovative Medicines Division research and development expense
As % of Innovative Medicines net sales to third parties
Core research and exploratory development2
Core confirmatory development2
Total core Innovative Medicines Division research and development expense
As % of Innovative Medicines net sales to third parties
Year ended
Year ended
Dec 31, 2017 Dec 31, 2016
restated 1
restated 1
– 2 729
– 2 720
– 4 886
– 4 976
– 7 615
– 7 696
23.6
24.2
– 2 603
– 2 618
– 4 431
– 4 482
– 7 034
– 7 100
21.8
22.3
Change
in USD
%
Change in
constant
currencies
%
0
2
1
1
1
1
0
2
1
1
1
1
1 2017 and 2016 figures are restated to reflect the product transfers between divisions that was effective as of January 1, 2018, and in addition for certain amounts that were
reclassified from research and exploratory development to confirmatory development for comparative purposes.
2 Core excludes impairments, amortization and certain other items. For an explanation of non-IFRS measures and reconciliation tables, see “ —Item 5.A Operating results—Non-IFRS
measures as defined by Novartis.”
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 curren-
cies, mainly due to resource allocation and continued
productivity efforts. Currency exchange rates had a neg-
ative impact of 0.2 percentage points, yielding a net
decrease of 0.5 percentage points to 21.8% of net sales.
97
Item 5. Operating and Financial Review and Prospects
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
Total basic EPS (USD)
nm = not meaningful
Year ended
Year ended
Dec 31, 2017 Dec 31, 2016
8 629
1 108
– 777
39
8 268
703
– 707
– 447
8 999
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
Income from associated companies in 2017 increased
to USD 1.1 billion, compared to USD 703 million in the
prior year. The increase was due to higher income rec-
ognized 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 cantonal
statutory tax rate; and a positive prior-year adjustment
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.
The estimated income from our investment in Roche
in 2017 amounted to USD 456 million (2016: USD 464
million). This reflected our estimated share of income for
2017 of USD 523 million (2016: USD 532 million), offset
by the negative prior-year adjustment of USD 67 million,
based on actual 2016 results (2016: negative prior-year
adjustment of USD 68 million, based on actual 2015
results).
Interest expense and other financial income and
expense
Interest expense in 2017 increased to USD 777 million
from USD 707 million in the prior year due to higher out-
standing 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.
Taxes
The tax rate in 2017 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 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 lia-
bilities, 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
Net income in 2017 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. The prior year also included the excep-
tional charges related to Venezuela.
EPS
Basic earnings per share in 2017 were USD 3.28 (+16%,
+14% cc), up more than net income in constant curren-
cies, benefiting from our share buyback program.
98
Item 5. Operating and Financial Review and Prospects
Core non-operating income and expense1
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)
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
1 For an explanation of non-IFRS measures and reconciliation tables, see “ —Item 5.A Operating results—Non-IFRS measures as defined by Novartis.”
nm = not meaningful
Core income from associated companies
Core income from associated companies in 2017
increased to USD 1.3 billion from USD 1.1 billion in the pri-
or-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 interest expense and other financial income
and expense
Core other financial income and expense in 2017
amounted to an income, net of USD 39 million, compared
to an expense, net 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 Vene-
zuela were excluded from the 2016 core other financial
expense.
Core taxes
The core tax rate in 2017 (core taxes as a percentage of
core pre-tax income) increased to 15.3% from 15.0% in
the prior year.
Core net income
Core net income in 2017 was USD 11.4 billion (+1%, +2%
cc), benefiting from higher core income from associated
companies.
Core EPS
Core earnings per share in 2017 were USD 4.86 (+2%,
+3% cc), reflecting the benefit of our share buyback pro-
gram.
Factors affecting comparability of year-on-year results
of operations
Significant transactions in 2018,
2017, 2016 and significant pending
transactions
The comparability of the year-on-year results of our
operations for the total Group can be significantly
affected by acquisitions and divestments. As part of the
long-term strategy to focus Novartis as a leading
medicines company, we announced and/or completed
several acquisitions and divestments during 2018, 2017
and 2016.
A detailed description of the significant transactions
of 2018, 2017, 2016 and significant pending transactions
can be found in “Item 4.A History and development of
Novartis – Important Corporate developments 2016 –
2018”, and “Item 18. Financial Statements—Note 2 Sig-
nificant transactions”.
99
Item 5. Operating and Financial Review and Prospects
Critical accounting policies and estimates
Our significant accounting policies are set out in “Item
18. Financial Statements—Note 1. Significant accounting
policies,” which are prepared in accordance with Inter-
national Financial Reporting Standards (IFRS) as issued
by the International 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.
New accounting pronouncements
Novartis implemented IFRS 9 Financial Instruments as
of January 1, 2018, which substantially changes the clas-
sification and measurement of financial instruments. The
new standard requires impairments to be based on a for-
ward-looking model, changes the approach to hedging
financial exposures and related documentation, changes
the recognition of certain fair value changes, and amends
disclosures requirements.
Novartis implemented the new standard IFRS 15 Rev-
enue from Contracts with Customers as of January 1,
2018. The new standard amends revenue recognition
requirements and establishes principles for reporting
information about the nature, amount, timing and uncer-
tainty of revenue and cash flows arising from contracts
with customers. The standard replaces IAS 18 Revenue
and IAS 11 Construction contracts and related interpre-
tations.
The Group applied the modified retrospective method
upon adoption of IFRS 9 and IFRS 15 on January 1, 2018.
This method requires the recognition of the cumulative
effect of initially applying IFRS 9 and IFRS 15 to retained
earnings and not to restate prior years. As a result, the
critical accounting policies related to revenue and trade
receivables described below are applicable to the prepa-
ration of the 2018 consolidated financial statements. The
accounting policies for revenue and trade receivables
that are applicable to the preparation of the 2017 and
2016 consolidated financial statements are described in
Note 1; see “Item 18. Financial Statements—Note 1. Sig-
nificant accounting policies.”
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 judgment when estimat-
ing the effect of these sales deductions on gross sales
for a reporting period. These adjustments are deducted
from gross sales to arrive at net sales.
The following summarizes the nature of some of
these deductions and how the deduction is estimated.
After recording these, net sales represent our best esti-
mate of the cash that we expect to ultimately collect. The
US market has the most complex arrangements related
to revenue deductions.
United States-specific healthcare plans and
program rebates
The United States Medicaid Drug Rebate Program is
administered by state governments, using state and fed-
eral funds to provide assistance to certain vulnerable
and needy individuals and families. Calculating the
rebates to be paid related to this program involves inter-
preting relevant regulations, which are subject to chal-
lenge or change in interpretative guidance by govern-
ment authorities. Provisions for estimating Medicaid
rebates are calculated using a combination of historical
experience, product and population growth, product
pricing, and the mix of contracts and specific terms in
the individual state agreements.
The United States Federal Medicare Program, which
funds healthcare benefits to individuals age 65 and older,
and to people with certain disabilities, provides prescrip-
tion drug benefits under the Part D section of the pro-
gram. This benefit is provided and administered through
private prescription drug plans. Provisions for estimating
Medicare Part D rebates are calculated based on the
terms of individual plan agreements, product sales and
population growth, product pricing, and the mix of con-
tracts.
We offer rebates to key managed healthcare and pri-
vate plans in an effort to sustain and increase the mar-
ket share of our products, and to ensure patient access
to our products. These programs provide a rebate after
the plans have demonstrated they have met all terms and
conditions set forth in their contract with us.
These rebates are estimated based on the terms of
individual agreements, historical experience, product
pricing, and projected product growth rates, and are
recorded as a deduction from revenue at the time, the
related revenues are recorded.
These provisions are adjusted based on established
processes and experiences from filing data with individ-
ual states and plans. There is often a time lag of several
months between the recording of the revenue deduc-
tions and the 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, we enter into innovative pay- for-
performance arrangements with certain healthcare pro-
viders. Under these agreements, we may be required to
make refunds to the healthcare providers or to provide
additional medicines free of charge if anticipated treat-
100
Item 5. Operating and Financial Review and Prospects
ment outcomes do not meet predefined targets. Poten-
tial refunds or the delivery of additional medicines at no
cost are estimated and recorded as a deduction from
revenue at the time the related revenues are recorded.
Estimates are based on historical experience and clini-
cal data. In cases where historical experience and clini-
cal data are not sufficient for a reliable estimation of the
outcome, revenue recognition is deferred until such his-
tory is available.
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.
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 sales growth rates.
Chargebacks 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 chargeback 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 by the estimate of charge-
backs attributable to a sales transaction. Provisions for
estimated chargebacks are calculated using a combina-
tion of factors, such as historical experience, product
growth rates, product pricing, level of inventory in the
distribution channel and the terms of individual agree-
ments.
When we sell a product providing a customer the right
to return it, we record a provision for estimated sales
returns based on our sales return policy and historical
return rates. Other factors considered include actual
product recalls, expected marketplace changes, the
remaining shelf life of the product, and the expected
entry of generic products. In 2018, 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.
For the table showing the worldwide extent of our
revenue deductions provisions and related payment
experiences for the Group see “Item 18. Financial State-
ments – Note 21 Provisions and other current liabilities”.
101
Item 5. Operating and Financial Review and Prospects
Gross-to-net sales reconciliation
The table below shows the gross to net sales reconciliation for our Innovative Medicines Division:
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
2018
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 2018
20171
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
20161
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
1 Restated to reflect the product transfers between divisions, that was effective as of January 1, 2018
USD millions
– 3 921
– 2 108
– 3 157
– 9 186
– 3 303
– 1 712
– 2 652
– 7 667
– 3 051
– 1 341
– 2 696
– 7 088
47 785
100.0
– 3 921
– 1 032
– 3 140
– 2 675
– 5 832
– 3 707
– 12 893
34 892
– 8.2
– 6.6
– 12.2
– 27.0
73.0
43 127
100.0
– 3 303
– 940
– 2 652
– 2 242
– 4 894
– 3 182
– 10 849
32 278
– 7.7
– 6.1
– 11.4
– 25.2
74.8
41 798
100.0
– 3 051
– 873
– 2 214
– 2 006
– 4 702
– 2 879
– 9 967
31 831
– 7.3
– 5.3
– 11.2
– 23.8
76.2
Surgical equipment revenue
Surgical equipment may be sold together with other
products and services under a single contract. Revenues
are recognized upon satisfaction of each of the perfor-
mance obligations in the contract and the consideration
is allocated based on the standalone selling price of each
performance obligation.
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. It is 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
102
Item 5. Operating and Financial Review and Prospects
limited cases where the value in use method is applied,
net present value techniques are utilized using pre-tax
cash flows and discount rates.
Fair value reflects estimates of assumptions that mar-
ket participants would be expected to use when pricing
the asset and, for this purpose, management considers
the range of economic conditions that are expected to
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:
• The amount and timing of projected cash flows
• The behavior of competitors (launch of competing
products, marketing initiatives, etc.)
• The probability of obtaining regulatory approvals
• Future tax rates
• The appropriate royalty rate for the Alcon brand name
• The appropriate terminal growth rate
• The appropriate discount rate
Due to the above factors and those further described in
“Item 18. Financial Statements—Note 1. Significant
accounting policies – Impairment of goodwill and intan-
gible assets”, actual cash flows and values could vary
significantly from forecasted future cash flows and
related values 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 “Item 18. Financial Statements
– Note 1. Significant accounting policies – Impairment of
goodwill and intangible assets and Note 10. Goodwill and
intangible assets.”
In 2018, intangible asset impairment charges of USD
1.2 billion were recognized, of which USD 592 million was
recorded in the Innovative Medicines Division, USD 249
million was recorded in the Sandoz Division, and USD
391 million was recorded in the Alcon Division.
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 was recorded in the Sandoz Division, and USD
57 million was recorded in the Alcon Division.
In 2016, intangible asset impairment charges of USD
591 million were recognized, of which USD 522 million
was recorded in the Innovative Medicines Division, USD
65 million was recorded in the Sandoz Division, and USD
4 million was recorded in the Alcon Division.
In 2018, 2017 and in 2016, there were no reversals of
prior-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 “Item 18. Financial
Statements—Note 10. Goodwill and intangible assets.”
Additionally, net impairment charges for property,
plant and equipment during 2018 amounted to USD 304
million (2017: USD 157 million; 2016: USD 102 million).
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.”
Trade receivables
Trade receivables are initially recognized at their invoiced
amounts, including any related sales taxes less adjust-
ments for estimated revenue deductions such as rebates,
chargebacks and cash discounts.
From January 1, 2018, with the adoption of IFRS 9
Financial Instruments, provisions for expected credit
losses are established using an expected credit loss
model (ECL). The provisions are based on a forward-look-
ing ECL, which includes possible default events on the
trade receivables over the entire holding period of the
trade receivable. These provisions represent the differ-
ence between the trade receivable’s carrying amount in
the consolidated balance sheet and the estimated col-
lectible amount. Charges for doubtful trade receivables
are recorded as marketing and selling costs recognized
in the consolidated income statement within “Selling,
General & Administration” expenses.
Trade receivable balances include sales to drug
wholesalers, retailers, private health systems, govern-
ment agencies, managed care providers, pharmacy ben-
efit managers and government-supported healthcare
systems. Novartis continues to monitor sovereign debt
issues and economic conditions in Greece, Italy, Portu-
gal, Spain, Brazil, Russia, Saudi Arabia, Turkey, Argen-
tina, and other countries, and evaluates trade receivables
in these countries for potential collection risks. Substan-
tially all of the trade receivables overdue from Greece,
Portugal, Spain, Brazil, Argentina and Saudi Arabia are
due directly from local governments or from govern-
ment-funded entities. 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 col-
lect these trade receivables, and may require the Group
to re-evaluate the estimated collectable amount 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-
103
Item 5. Operating and Financial Review and Prospects
ments related to certain assets and are recognized as a
financial liability or financial asset at their fair value, which
is then remeasured 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 and
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 are recorded as interest
income recognized in the consolidated income state-
ment within “other financial income and expense”.
Retirement and other post-
employment benefit plans
We sponsor pension and other post-employment bene-
fit plans in various forms that cover a significant portion
of our current and former associates. For post-employ-
ment plans with defined benefit obligations, we are
required to make significant assumptions and estimates
about future events in calculating the expense and the
present value of the liability related to these plans. These
include assumptions about the interest rates we apply
to estimate future defined benefit obligations and net
periodic pension expense, as well as rates of future pen-
sion increases. In addition, our actuarial consultants pro-
vide our management with historical statistical informa-
tion, such as withdrawal and mortality rates in connection
with these estimates.
Assumptions and estimates used by the Group may
differ materially from the actual results we experience
due to changing market and economic conditions, higher
or lower withdrawal rates, and longer or shorter life spans
of participants, among other factors. For example, in
2018, a decrease in the interest rate we apply in deter-
mining the present value of the defined benefit obliga-
tions of one-quarter of 1% would have increased our
year-end defined benefit pension obligation for plans in
Switzerland, the United States, the United Kingdom, Ger-
many and Japan, which represent 94% of the Group total
defined benefit pension obligation, by approximately
USD 0.8 billion. Similarly, if the 2018 interest rate had
been one-quarter of 1 percentage point lower than actu-
ally assumed, the net periodic pension cost for pension
plans in these countries, which represent about 86% of
the Group’s total net periodic pension cost for pension
plans, would have increased by approximately USD 26
million. Depending on events, such differences could
have a material effect on our total equity. For more infor-
mation on obligations under retirement and other
post-employment benefit plans and underlying actuarial
assumptions, see “Item 18. Financial Statements—Note
24. Post-employment benefits for associates.”
Provisions and contingencies
A number of Group companies are involved in various
government investigations and legal proceedings (intel-
lectual property, sales and marketing practices, product
liability, commercial, employment and wrongful dis-
charge, environmental claims, etc.) arising out of the nor-
mal conduct of their businesses. For more information,
see “Item 18. Financial Statements—Note 19. Provisions
and other non-current liabilities” and “Item 18. Financial
Statements—Note 27. Commitments and contingencies.”
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 and development
Internal research and development costs are fully
charged to the consolidated income statement in the
period in which they are incurred. We consider that reg-
ulatory and other uncertainties inherent in the develop-
ment of new products preclude the capitalization of inter-
nal development expenses as an intangible asset usually
until marketing 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 esti-
mates 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 prior-year qualifying
sales as a percentage of the prior year’s govern-
ment-funded program sales. This pharmaceutical fee
levy is recognized in “Other expense.”
104
Item 5. Operating and Financial Review and Prospects
Taxes
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.
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, 2018.
Factors affecting results of operations
Transformational changes fueling
demand
Accelerating biomedical innovation
We are seeing an explosion of innovation in medical sci-
ence. 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, is expected to
continue to yield results. In addition, new molecular tech-
niques, such as gene editing, 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 medi-
cal treatment. For instance, mobile applications that aim
to treat substance abuse and help diabetics manage
their disease have received clearance from the FDA.
Combining traditional medicines with digital technology
that helps patients follow healthy behaviors holds great
promise for improving the quality of care as well as treat-
ment 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 help-
ing researchers and doctors gather increasing amounts
of information about patients’ health and how they
respond to treatment. Care providers are starting to mine
healthcare data using a combination of statistical meth-
ods and artificial intelligence to flag emerging medical
problems and help physicians diagnose and treat
patients.
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.
Transforming drug research and development
Digital technology may also increasingly improve the effi-
ciency and effectiveness of researching and developing
potential new therapies. The marriage of data and arti-
ficial intelligence could enable complex biological simu-
lations that complement human scientific ingenuity. Such
tools are already being considered by the FDA as replace-
ments for preclinical animal studies to assess toxicity in
potential new medicines. In 2017, for example, the FDA
announced a collaboration with Emulate, Inc. to evaluate
the company’s “organs-on-chips” technology – part of a
system that recreates the physiology of human tissues
and organs, and is designed to predict human responses
to diseases with greater precision than animal-based
testing. As digital tools become more widespread, they
may be able to shorten research times and improve the
likelihood that experimental drugs will prove safe and
effective.
This surge in medical innovation will likely occur in an
increasingly diverse and fragmented research environ-
ment, with new advances coming from a variety of
sources – sometimes unexpected ones. Molecular biol-
ogy may intersect with other disciplines, from engineer-
ing to computer science, to advance the practice of med-
icine. And we expect there will be greater diversity in
funding for research. Already we see governments, com-
panies 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.
105
Item 5. Operating and Financial Review and Prospects
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 num-
ber of people in the world aged 60 or over will reach
nearly 2.1 billion by 2050, according to projections by the
United Nations, up from less than 1 billion today. Aging
populations, in addition to rapid urbanization and chang-
ing 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
expand access to healthcare. For example, China has
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 tril-
lion 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 world-
wide: cardiovascular disease, cancer and respiratory dis-
ease.
To keep costs in check, governments and health
insurers are already employing a variety of tactics, includ-
ing increasing the use of generics and biosimilars, impos-
ing price cuts, and limiting access to some innovative
therapies. 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. 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
progression of disease or that help avoid events requir-
ing 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.
We think the trends driving changes in healthcare will
bring new opportunities for Novartis, as well as new chal-
lenges. And we believe the changes now underway in
our industry raise the importance of delivering true inno-
vation that produces better health outcomes for patients
and health systems, with greater efficiency.
Increasingly challenging business
environment
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 Divi-
sions, are protected by patent or other intellectual prop-
erty rights, allowing us to exclusively market those prod-
ucts. The loss of exclusivity has had, and will continue to
have, an adverse effect on our results. In 2018, the total
impact of generic competition on our net sales amounted
to approximately USD 1 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 pro-
tection. For example, our former top selling products
Gleevec/Glivec, Diovan and Exforge all face continued
and increasing generic competition in major markets.
which will continue. Patent protection for our Sandostatin
products has expired and there is a risk that generic
competition for Sandostatin LAR may arise in the future.
Looking forward, intellectual property protecting a num-
ber 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 los-
ing intellectual property protection in key countries
during the coming 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 2018, we invested 17% of total net sales in
R&D. One measure of the output of our efforts is the per-
formance of our growth drivers, including Cosentyx,
Entresto, Kymriah and Kisqali, and the Sandoz biosimi-
lars. Novartis also has a number of late stage product
candidates in its pipeline with the potential to come to
market in the next few years. Novartis plans to launch
three potentially significant products in 2019, AVXS-101,
BAF312 and RTH258 (brolucizumab).
Commercial success of key products
Our ability to maintain and grow our business and to
replace revenue and income lost to generic and other
competitors depends in part on our commercial success,
particularly with respect to our key growth driver prod-
ucts, 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 competitors, 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 commercial acceptance of new
products.
All of our businesses face intense competition from
new products and scientific advances from competitors.
Physicians, patients and payers may choose competitor
products instead of ours if they perceive them to be bet-
ter in terms of efficacy, safety, cost or convenience.
106
Item 5. Operating and Financial Review and Prospects
For example, our US Sandoz business has suffered
significant declines in sales and profits in recent years
due, at least in part, to increased competition for its prod-
ucts. There can be no certainty that Sandoz US sales
will recover in the coming years. In any event, such com-
petition and the costs of our efforts to improve the busi-
ness’s performance, as well as other factors, can be
expected to affect the business, financial condition or
results of operations of this organization, at least in the
near term. In addition, despite the devotion of significant
resources to our efforts to improve the performance of
Sandoz US, and our agreement to sell the Sandoz US
dermatology business and generic US oral solids port-
folio to Aurobindo Pharma USA Inc., our efforts may ulti-
mately prove insufficient. Should our efforts fail to accom-
plish their goals, or fail to do so in a timely manner, it
could have a material adverse impact on our business,
financial condition or results of operations beyond the
near term, as well.
Ability to deliver new products
Our ability to grow depends not only on the commercial
success of our marketed products, but also on the suc-
cess 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 payers.
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 payers 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, approval and marketing of biosimilars. Further
delays in establishing regulatory frameworks, or any
other difficulties that may arise in the development or
marketing of biosimilars, could put at risk the significant
investments that Sandoz has made, and will continue to
make, in this area.
Our Alcon Division faces medical device develop-
ment and approval processes that are often similarly dif-
ficult. As part of its growth plan, Alcon 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 recent years, including Clareon and
PanOptix IOLs, AutonoMe and Ultrasert IOL delivery sys-
tems, and, ReSTOR Toric IOL with ACTIVEFOCUS opti-
cal design, as well as a multifocal version of Dailies Total1.
But there is no certainty that Alcon will continue to be
successful in these efforts, and if it is not, there could be
a material adverse effect on the success of the Alcon
Division, and on the Group as a whole.
In spite of our significant investments, there can be
no guarantee that our R&D activities will produce com-
mercially viable new products that will enable us to grow
our business and replace revenue and income lost to
competition.
Pricing and reimbursement
Around the world, governments and payers 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
politicians and members of the public have considered
excessive. These factors have intensified the pressures
we face regarding the prices we charge for our drugs,
and our ability to establish satisfactory rates of reim-
bursement for our products by governments, insurers
and other payers.
We expect scrutiny to continue in 2019, 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 medicines,
increasing coinsurance or copays owed by patients for
medicines, increasing the use of generics, and imposing
price cuts. In this environment, we believe it is more
important than ever to demonstrate the value that true
innovation brings to the healthcare system.
To manage these pressures, we are investing in real
world data and analytics to provide additional evidence
of the health benefits of our products, exploring new
technologies and patient management services, and
partnering with payers to develop and scale outcomes
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 meet-
ing 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. In addi-
tion, governments and regulatory authorities worldwide
107
Item 5. Operating and Financial Review and Prospects
are also increasingly challenging practices previously
considered to be legal and compliant. But beyond legal
requirements, we strive to meet evolving public expec-
tations for ethical behavior. We have a significant 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 publicly acceptable manner.
Despite these efforts, any failure to comply with the law
could lead to substantial liabilities that may not be cov-
ered by insurance and could affect our business and rep-
utation.
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 2018. The func-
tion is headed by our Chief Ethics, Risk and Compliance
Officer, who reports directly to the CEO of Novartis.
Investors and Novartis are increasingly focused on
Environmental, Social and Governance (ESG) issues.
Novartis has made strides to transform culture and return
more to society in 2018, which are two of the key prior-
ities of our new CEO. We continue our journey to rebuild
trust with society and for all our new medicines, we will
systematically integrate access strategies in how we
research, develop and deliver globally and we are devel-
oping innovative treatments for under-treated diseases,
including SEG101 in sickle cell disease.
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 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, we manufacture and sell a number of sterile products,
biologic products and products involving advanced ther-
apy platforms, such as CAR-T therapies, gene therapy
and radioligand therapy, all of which are particularly com-
plex and involve highly specialized manufacturing tech-
nologies. As a result, even slight deviations at any point
in their production process may lead to production fail-
ures or recalls.
Given the complexity of our manufacturing pro-
cesses, we have worked for several years to adopt a sin-
gle high quality standard across the company. We believe
these efforts are having an impact. The results of inspec-
tions by regulatory agencies in 2018 were consistent with
the year before. Out of a total of 192 inspections, all but
two (99%) were without major findings.
IT security, data integrity and data privacy
We are heavily dependent on critical, complex and inter-
dependent information technology systems, including
Internet based systems, to support our business pro-
cesses.
The size, age and complexity of our information tech-
nology systems make them potentially vulnerable to
external and internal security threats, outages, mis-
placed or lost data, programming or human errors, or
other similar events. Although we have devoted and con-
tinue to devote significant resources and management
attention to cybersecurity, information management and
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 exter-
nal and internal information security threat continues to
grow. We believe that the information security incidents
we have experienced to date have yet to result in signif-
icant disruptions to our operations, and have not had a
significant adverse effect on our results of operations,
or on third parties. However, we may not be able to pre-
vent future outages, security incidents or other breaches
in our systems from having a material adverse effect on
our business, financial condition, results of operation or
reputation.
In addition, our routine business operations increas-
ingly involve our gathering personal information (includ-
ing sensitive personal information) about patients, ven-
dors, customers, employees, collaborators and others,
through the use of information technologies such as the
Internet, social media, mobile technologies, and technol-
ogy based medical devices. Breaches of our systems or
those of our third party contractors, or other failures to
protect such information, could expose such people’s
personal data to unauthorized persons. Any event involv-
ing the substantial loss of personal data could give rise
to significant potential liability, reputational harm, dam-
aged relationships with business partners and potentially
substantial monetary penalties under laws enacted or
being enacted around the world. Such events could also
lead to restrictions on our ability to transfer personal data
across country borders.
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
an industry leader in leveraging advanced analytics and
other new technologies. This includes the 2018 launch
of reSET the first digital therapeutic for substance abuse
disorder. At the same time, there is a risk that other com-
panies with specialized expertise or business models
may enter the healthcare field, potentially disrupting our
relationships with patients, healthcare professionals,
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-
108
Item 5. Operating and Financial Review and Prospects
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 success-
fully enter the healthcare field with disruptive new tech-
nologies or business models, then we potentially may
see our business supplanted in whole or in part by these
new entrants.
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.
We regularly review our long lived intangible and tan-
gible assets for impairment. In 2018, for example, we
recorded intangible asset impairment charges of USD
1.2 billion, including USD 0.4 billion write-down of Votrient,
USD 0.3 billion for the net charges from the voluntary
withdrawal of CyPass and USD 0.2 billion related to the
write-down of the goodwill and the currently marketed
products related to the sale of the Sandoz US portfolio
to Aurobindo Pharma USA Inc. Impairment testing may
lead to additional impairment charges in the future. Any
significant impairment charges could have a material
adverse effect on our results of operations and financial
condition.
Tax
Our multinational operations are taxed under the laws
of the countries and other jurisdictions in which we oper-
ate. However, the integrated 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 potential dis-
putes relating to the prices our subsidiaries charge one
another for intercompany transactions, known as trans-
fer pricing. The majority of the jurisdictions in which we
operate have double tax treaties with other foreign juris-
dictions, 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,
including in the EU, Switzerland and the US, have
increased their scrutiny of company tax filings, and have
become more rigid in exercising any discretion they may
have, and numerous changes in tax laws and rules have
been enacted or proposed. The current tax regime of
Switzerland is under international pressure and efforts
are underway in Switzerland to transform its corporate
tax laws and regulations. The outcome of these efforts
remains subject to change and could end up in a mate-
rially different form from what is currently proposed, or
could be administered or implemented in a manner dif-
ferent from our expectations.
As a result, 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.
Approach to risk management
See “Item 6. Directors, Senior Management and Employ-
ees—Item 6.C Board Practices—Our Board of Direc-
tors—Information and control systems of the Board vis-
à-vis management—Risk management” and “Item 18.
Financial Statements—Note 28. Financial instruments—
additional disclosures.”
Non-IFRS measures as defined by Novartis
Novartis uses certain non-IFRS metrics when measur-
ing performance, especially when measuring cur-
rent-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, net gains and
losses on fund investments and equity securities valued
at fair value through profit and loss, and certain acquisi-
tion-related items. The following items that exceed a
threshold of USD 25 million are also excluded: integra-
tion- and divestment-related income and expenses;
109
Item 5. Operating and Financial Review and Prospects
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 because, since they exclude
items that can vary significantly from year to year, the
core measures enable better comparison of business
performance across years. For this same reason,
Novartis uses these core measures in addition to IFRS
and other measures as important factors in assessing
the Group’s performance.
The following are examples of how these core mea-
sures are utilized:
• In addition to monthly reports containing financial 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-US dollar func-
tional currencies to US dollars
• 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 US dollars, using the
average exchange rates from the prior year and compar-
ing them to the prior-year values in US dollars.
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.
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 and investment in
strategic opportunities, and for returning to sharehold-
ers. 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 net cash flows from operating activ-
ities as determined under IFRS.
Novartis defines free cash flow as net cash flows from
operating activities and cash flows associated with the
purchase or sale of property, plant and equipment, as
well as intangible, other non-current and financial assets,
excluding marketable securities. Cash flows in connec-
tion with the acquisition or divestment of subsidiaries,
associated companies and non-controlling interests in
subsidiaries are not taken into account to determine free
cash flow.
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.
Novartis Cash Value Added
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
Performance Plan introduced in 2014. More information
on NCVA is presented as part of the Compensation
Report; see “Item 6. Directors, Senior Management and
Employees—Item 6.B Compensation.”
110
Item 5. Operating and Financial Review and Prospects
Additional information
EBITDA
Novartis defines earnings before interest, tax, depreci-
ation and amortization (EBITDA) as operating income,
excluding depreciation of property, plant and equipment
(including any related impairment charges) and amorti-
zation of intangible assets (including any related impair-
ment charges).
(USD millions)
2018
2017
Operating income
8 169
8 629
2016
8 268
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, 2018 Dec 31, 2017 Dec 31, 2016
Market capitalization
196 950
195 541
172 048
Non-controlling interests
78
59
59
Financial debts and
derivatives
32 148
28 532
23 802
Liquidity
– 15 964
– 9 485
– 7 777
Enterprise value
213 212
214 647
188 132
Depreciation of property,
plant and equipment
Amortization of intangible
assets
Impairments of property,
plant and equipment, and
intangible assets
1 717
1 520
1 489
Enterprise value/EBITDA
14
15
13
3 639
3 690
3 861
1 536
866
693
EBITDA
15 061
14 705
14 311
111
Item 5. Operating and Financial Review and Prospects
2018 and 2017 reconciliation from IFRS results to core results
Innovative Medicines
Sandoz
Alcon
Corporate
Group
(USD millions unless indicated otherwise)
2018
2017
restated 1
2018
2017
2018
2017
restated 1
2018
2017
2018
2017
IFRS operating income
7 871
7 595
1 332
1 368
– 194
– 3
– 840
– 331
8 169
8 629
Amortization of intangible assets
2 158
2 119
363
454
1 007
1 025
3 528
3 598
592
591
249
61
391
57
1 232
709
Impairments
Intangible assets
Property, plant and equipment
related to the Group-wide
rationalization of manufacturing sites
Other property, plant and equipment
Financial assets 2
170
65
7
77
63
60
13
Total impairment charges
827
675
312
134
391
Acquisition or divestment of
businesses and related items
- Income
- Expense
Total acquisition or divestment of
businesses and related items, net
Other items
Divestment gains
126
– 2
32
126
30
– 482
– 368
– 78
Financial assets – fair value adjustments 2 – 107
– 18
Restructuring and related items
233
65
67
90
226
197
197
1 530
1 092
29
86
– 21
– 115
– 21
– 117
29
130
155
162
8
15
134
45
– 56
113
– 616
– 368
– 12
- Income
- Expense
Legal-related items
- Income
- Expense
Additional income
Additional expense
Total other items
Total adjustments
– 25
665
– 53
268
– 12
179
– 7
134
– 4
45
– 4
34
– 2
133
– 1
– 43
29
1 022
– 1
36
– 21
– 63
35
90
28
61
– 64
154
– 65
465
– 21
96
– 73
– 534
– 171
– 3
– 66
– 51
– 19
– 372
– 329
– 960
156
273
169
– 400
50
– 5
124
90
75
20
60
54
46
350
339
223
– 298
462
– 514
3 280
2 424
670
712
1 473
1 171
231
– 86
5 654
4 221
Core operating income
11 151 10 019
2 002
2 080
1 279
1 168
– 609
– 417 13 823 12 850
as % of net sales
32.0% 31.0% 20.3% 20.7% 17.9% 17.3%
26.6% 26.2%
Income from associated companies
1
– 1
5
23
6 432
1 086
6 438
1 108
Core adjustments to income from
associated companies, net of tax
Interest expense
Other financial income and expense
Taxes, adjusted for above items (core taxes)
Core net income
Core net income attributable
to shareholders of Novartis AG
Core basic EPS (USD) 3
1
– 5 325
226 – 5 325
227
– 957
– 777
185
39
– 2 226 – 2 056
11 938 11 391
11 935 11 391
5.15
4.86
1 Restated to reflect the product transfers between Innovative Medicines and Alcon that was effective as of January 1, 2018
2 For financial instruments accounted for as fair value through profit and loss, as of January 1, 2018, unrealized gains/losses on financial assets are shown under “Financial assets
– fair value adjustments”, due to the change in IFRS 9 (see Note 1).
3 Earnings per share (EPS) is calculated on the amount of net income attributable to shareholders of Novartis AG.
112
Impairments
Intangible assets
Property, plant and equipment
related to the Group-wide
rationalization of manufacturing sites
Other property, plant and 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
Item 5. Operating and Financial Review and Prospects
2017 and 2016 reconciliation from IFRS results to core results
Innovative Medicines
Sandoz
Alcon
Corporate
Group
(USD millions unless indicated otherwise)
2017
restated 1
2016
restated 1
2017
2016
2017
restated 1
2016
restated 1
2017
2016
2017
2016
IFRS operating income
7 595
7 255
1 368
1 445
– 3
39
– 331
– 471
8 629
8 268
Amortization of intangible assets
2 119
2 316
454
460
1 025
1 025
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
413
– 7
134
– 23
123
– 4
34
– 4
38
– 1
29
– 5
65
– 65
465
– 21
35
– 534
273
– 99
205
– 61
84
61
– 21
96
– 3
– 51
– 13
– 372
– 22
– 960
– 400
– 107
2 424
2 799
124
712
6
100
20
60
61
82
46
100
339
– 298
90
– 514
626
1 171
1 111
– 86
183
4 221
4 719
– 73
639
– 99
205
– 96
251
165
Core operating income
10 019 10 054
2 080
2 071
1 168
1 150
– 417
– 288 12 850 12 987
as % of net sales
31.0% 31.6% 20.7% 20.4% 17.3% 17.6%
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 2
Taxes, adjusted for above items (core taxes)
Core net income
Core net income attributable
to shareholders of Novartis AG
Core basic EPS (USD) 3
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 Restated to reflect the product transfers between Innovative Medicines and Alcon that was effective as of January 1, 2018
2 Adjusted for charges of USD 0.3 billion in 2016 related mainly to devaluation losses in Venezuela
3 Earnings per share (EPS) is calculated on the amount of net income attributable to shareholders of Novartis AG.
113
Item 5. Operating and Financial Review and Prospects
2018, 2017 and 2016 reconciliation from IFRS results to core results – Group
2018 (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
34 759
8 169
13 835
– 1 221
12 614
5.44
3 338
3 528
3 972
877
1 530
5
134
1 530
– 5 656
439
462
483
39 418
13 823
14 164
– 2 226
11 938
5.15
The following are adjustments to arrive at core gross profit
Cost of goods sold
– 18 407
3 338
877
5
439
– 13 748
The following are adjustments to arrive at core operating income
Selling, general and administration
Research and development
Other income
Other expense
– 16 471
– 9 074
1 690
– 2 735
190
2
167
28
23
12
13
– 16 429
– 8 681
– 21
– 1 073
596
484
99
1 071
– 1 081
The following are adjustments to arrive at core income before taxes
Income from associated companies
6 438
444
– 5 790
21
1 113
1 Amortization of intangible assets: cost of goods sold includes amortization of acquired rights to in-market products, and other production-related intangible assets; research and
development includes the amortization of acquired rights, including technology platforms; income from associated companies includes USD 444 million for the Novartis share of
the estimated Roche core items
2 Impairments: cost of goods sold, selling, general and administration and research and development include impairment charges related to intangible assets; research and
development also includes impairment reversals of property, plant and equipment; other expense includes impairment charges related to property, plant and equipment; cost of
goods sold and other expense include impairment charges related to a disposal group held for sale for goodwill and currently marketed products
3 Acquisition or divestment of businesses and related items, including restructuring and integration charges: cost of goods sold, selling, general and administration, research and
development and other expense include charges related to acquisitions; other income and other expense include transitional service fee income and expenses, and other items
related to the portfolio transformation; income from associated companies includes the pre-tax gain of USD 5.8 billion on the sale of the 36.5% investment in GSK Consumer
Healthcare Holdings Ltd.
4 Other items: cost of goods sold, selling, general and administration and research and development include charges and reversal of charges related to a product’s voluntary market
withdrawal; 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, selling, general and administration, research and development, other income and other expense include other restructuring income and charges and related items;
cost of goods sold and other expense include charges related to changes in a contractual agreement; cost of goods sold also includes inventory write-off and other product
recall-related costs; selling, general and administration includes a reversal of a provision; research and development includes fair value adjustments of contingent consideration
liabilities, a charge for onerous contracts, and amortization of option rights; other income and other expense include fair value adjustments and divestment gains and losses on
financial assets; other income also includes product divestment gains, divestment gains on property, plant and equipment, releases of accruals and a legal settlement gain; other
expense includes legal-related items and restructuring charges; income from associated companies includes an adjustment of USD 21 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 329 million to arrive at the core results before tax amounts to USD -1.0 billion. Excluding the gain on the
sale of the 36.5% investment in GSK Cosumer Healthcare Holdings Ltd., the tax on the total adjustments of USD 6.1 billion to arrive at the core results before tax amounts to USD 1.1
billion. The average tax rate on the adjustments excluding this transaction is 17.4%
6 Earnings per share (EPS) is calculated on the amount of net income attributable to shareholders of Novartis AG.
114
Item 5. Operating and Financial Review and Prospects
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
Selling, general and administration
Research and development
Other income
Other expense
– 14 997
– 8 972
1 969
– 2 331
197
680
– 9
329
– 3
– 15 000
– 218
– 8 313
– 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 and 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 and development include impairment charges related to intangible assets; research and development and other expense include
impairment charges related to financial assets; research and 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 and development, selling, general and administration, other income and other expense include other restructuring income and charges and related items;
selling, general and administration includes an income from the release of a provision; research and 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, 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.
115
Item 5. Operating and Financial Review and Prospects
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
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
31 916
8 268
7 817
– 1 119
6 698
2.82
918
– 17 520
3 758
96
36
35 806
– 33
– 33
165
648
12 987
13 315
– 2 001
11 314
4.75
– 50
868
86
– 13 580
The following are adjustments to arrive at core operating income
Selling, general and administration
Research and development
Other income
Other expense
– 14 192
– 9 039
1 927
– 2 344
43
495
– 10
205
81
99
– 14 111
– 8 402
– 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 and 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 and 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 and development, selling, general and administration, other income
and other expense include other restructuring income and charges; cost of goods sold and research and development include adjustments of contingent considerations; selling,
general and 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.
116
Item 5. Operating and Financial Review and Prospects
2018, 2017 and 2016 reconciliation from IFRS results to core results – Innovative Medicines
2018 (USD millions)
Gross profit
Operating income
Amortization
of intangible
assets 1
IFRS results
Acquisition or
divestment of
businesses and
Impairments 2
related items 3 Other items 4 Core results
26 951
7 871
1 979
2 158
423
827
5
126
329
169
29 687
11 151
The following are adjustments to arrive at core gross profit
Cost of goods sold
– 9 870
1 979
423
5
329
– 7 134
The following are adjustments to arrive at core operating income
Selling, general and administration
– 10 907
Research and development
– 7 675
179
167
28
23
Other income
Other expense
977
– 1 475
237
70
– 11
– 10 890
– 34
– 7 340
– 671
556
306
– 612
1 Amortization of intangible assets: cost of goods sold includes amortization of acquired rights to in-market products and other production-related intangible assets; research and
development includes the amortization of acquired rights, including technology platforms
2 Impairments: cost of goods sold and research and development include impairment charges related to intangible assets; research and development also includes impairment
reversals of property, plant and equipment; other expense includes impairment charges related to property, plant and equipment
3 Acquisition or divestment of businesses and related items, including restructuring and integration charges: cost of goods sold, selling, general and administration, research and
development and other expense include charges related to acquisitions; other expense also includes items related to the portfolio transformation
4 Other items: cost of goods sold and other expense include restructuring and other charges related to the Group-wide rationalization of manufacturing sites and charges related to
changes in a contractual agreement; cost of goods sold, research and development, other income and other expense include other restructuring income and charges and related
items; cost of goods sold and research and development also include fair value adjustments of contingent consideration liabilities; cost of goods sold also includes an inventory
write-off; selling, general and administration includes a reversal of a provision; research and development includes a charge for onerous contracts; other income and other expense
include fair value adjustments on financial assets and legal-related items; other income also includes product divestment gains and releases of accruals
2017
(USD millions)
Gross profit
Operating income
IFRS Amortization
of intangible
assets 2
restated
results 1
25 194
7 595
1 932
2 119
Acquisition or
divestment of
businesses and
related items 4
Impairments 3
31
675
Other
items 5
Core
restated
results 1
56
27 213
30
– 400
10 019
The following are adjustments to arrive at core gross profit
Cost of goods sold
– 8 650
1 932
31
56
– 6 631
The following are adjustments to arrive at core operating income
Selling, general and administration
Research and development
Other income
Other expense
– 9 887
– 7 615
1 027
– 1 124
187
594
– 9
59
– 2
32
– 3
– 9 890
– 200
– 7 034
– 665
412
351
– 621
1 Restated to reflect the product transfers between Innovative Medicines and Alcon that was effective as of January 1, 2018
2 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 and development includes the recurring amortization of acquired rights for technology platforms
3 Impairments: cost of goods sold and research and development include impairment charges related to intangible assets; research and development, other income and other
expense include reversals and charges related to the impairment of property, plant and equipment
4 Acquisition or divestment of businesses and related items, including restructuring and integration charges: other income includes transitional service fee income; other expense
includes items related to the portfolio transformation and costs related to an acquisition
5 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;
costs of goods sold, research and development, selling, general and administration, other income and other expense include other restructuring income and charges and related
items; selling, general and administration includes an income from the release of a provision; research and 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, income from a settlement of a
contract dispute, as well as product and financial asset divestment gains; other expense also includes a provision for contract termination costs, an amendment to the Swiss
pension plan, a charge for onerous contracts, and other charges
117
Item 5. Operating and Financial Review and Prospects
2016 (USD millions)
Gross profit
Operating income
IFRS Amortization
of intangible
assets 2
restated
results 1
24 294
7 255
2 285
2 316
Acquisition or
divestment of
businesses and
Impairments 3
related items 4 Other items 5
Core
restated
results 1
41
617
– 10
26 610
– 27
– 107
10 054
The following are adjustments to arrive at core gross profit
Other revenues
Cost of goods sold
815
– 8 976
2 285
41
– 50
765
40
– 6 610
The following are adjustments to arrive at core operating income
Selling, general and administration
Research and development
Other income
Other expense
– 9 225
– 7 696
1 091
– 1 209
31
481
95
– 68
41
7
84
– 759
571
– 9 218
– 7 100
264
– 502
1 Restated to reflect the product transfers between Innovative Medicines and Alcon that was effective as of January 1, 2018
2 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 and development includes the recurring amortization of acquired rights for technology platforms
3 Impairments: cost of goods sold and research and development include impairment charges related to intangible assets; other expense includes impairment charges related to
property, plant and equipment, and financial assets
4 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
5 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 and development, selling, general and adminstration, other income
and other expense include other restructuring income and charges; research and development also includes an expense due to an adjustment of a contingent consideration; other
income and other expense also include legal settlements and changes in provisions; other income also includes gains from product divestments; other expense also includes a
charge as a result of a pension plan amendment
2018, 2017 and 2016 reconciliation from IFRS to core results – Sandoz
2018 (USD millions)
Gross profit
Operating income
Amortization
of intangible
assets 1
IFRS results
Acquisition or
divestment of
businesses and
Impairments 2
related items Other items 3 Core results
4 568
1 332
363
363
65
312
133
– 5
5 129
2 002
The following are adjustments to arrive at core gross profit
Cost of goods sold
– 5 530
363
65
133
– 4 969
The following are adjustments to arrive at core operating income
Selling, general and administration
Other income
Other expense
– 2 305
505
– 622
247
10
– 2 295
– 295
147
210
– 228
1 Amortization of intangible assets: cost of goods sold includes amortization of acquired rights to in-market products and other production-related intangible assets
2 Impairments: cost of goods sold includes impairment charges related to intangible assets and impairment charges for currently marketed products related to a disposal group held
for sale; other expense includes impairment charges related to property, plant and equipment, and goodwill impairment charges related to a disposal group held for sale
3 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 also includes inventory write-off and other product recall-related costs; cost of goods sold, selling, general and administration, other income and other expense
include other restructuring income and charges and related items; other income also includes product divestment gains, a legal settlement gain and fair value adjustments of
contingent consideration liabilities; other expense includes legal-related items and restructuring charges
118
Item 5. Operating and Financial Review and Prospects
2017
(USD millions)
Gross profit
Operating income
Amortization
of intangible
assets 1
IFRS
results
Acquisition or
divestment of
businesses and
related items
Impairments 2
4 415
1 368
454
454
61
134
Other
items 3
69
124
Core
results
4 999
2 080
The following are adjustments to arrive at core gross profit
Cost of goods sold
– 5 800
454
61
69
– 5 216
The following are adjustments to arrive at core operating income
Other income
Other expense
204
– 351
73
– 10
65
194
– 213
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
2 Impairments: cost of goods sold includes impairment charges related to intangible assets; other expense includes impairment charges related to property, plant and equipment
3 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, and
other restructuring income and charges and related items; other income also includes a gain from a Swiss pension plan amendment
2016 USD millions)
Gross profit
Operating income
Amortization
of intangible
assets 1
IFRS
results
4 314
1 445
460
460
Acquisition or
divestment of
businesses and
related items
Impairments 2
55
66
Other
items 3
60
100
Core
results
4 889
2 071
The following are adjustments to arrive at core gross profit
Cost of goods sold
– 5 971
460
55
60
– 5 396
The following are adjustments to arrive at core operating income
Research and development
Other income
Other expense
– 814
185
– 259
10
– 10
11
– 29
69
– 804
146
– 179
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
2 Impairments: cost of goods sold and research and 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
3 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, and
other restructuring income and charges; other income also includes gains from product divestments; other expense also includes other costs
2018, 2017 and 2016 reconciliation of IFRS results to core results – Alcon
2018
(USD millions)
Gross profit
Operating income
Amortization
of intangible
assets 1
IFRS results
Acquisition or
divestment of
businesses and
related items
Impairments 2
3 170
– 194
996
1 007
389
391
Other
items 3 Core results
– 23
75
4 532
1 279
The following are adjustments to arrive at core gross profit
Cost of goods sold
– 3 983
996
389
– 23
– 2 621
The following are adjustments to arrive at core operating income
Selling, general and administration
Research and development
Other income
Other expense
2
11
– 2 754
– 585
58
– 83
13
47
– 23
61
– 2 739
– 527
35
– 22
1 Amortization of intangible assets: cost of goods sold includes amortization of acquired rights to in-market products and other production-related intangible assets; research and
development includes the amortization of acquired rights for technology platforms
2 Impairments: cost of goods sold and selling, general and administration includes impairment charges related to intangible assets
3 Other items: cost of goods sold, selling, general and administration and research and development include charges and reversal of charges related to a product’s voluntary market
withdrawal; cost of goods sold, selling, general and administration, research and development, other income and other expense also include other restructuring income and
charges and related items; research and development also includes amortization of option rights and a fair value adjustment of a contingent consideration liability; other income
includes fair value adjustments on a financial asset; other expense includes legal-related items
119
Item 5. Operating and Financial Review and Prospects
2017
(USD millions)
Gross profit
Operating loss/income
IFRS Amortization
of intangible
assets 2
restated
results 1
3 189
– 3
1 015
1 025
Acquisition or
divestment of
businesses and
related items
Impairments 3
86
Other
items 4
60
The following are adjustments to arrive at core gross profit
Cost of goods sold
– 3 588
1 015
Core
restated
results 1
4 204
1 168
– 2 573
The following are adjustments to arrive at core operating income
Research and development
Other income
Other expense
10
86
– 583
47
– 124
– 18
– 17
95
– 505
30
– 29
1 Restated to reflect the product transfers between Innovative Medicines and Alcon that was effective as of January 1, 2018
2 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 and development includes the recurring amortization of acquired rights for technology platforms
3 Impairments: research and development includes impairment charges related to intangible and financial assets
4 Other items: research and development includes fair value adjustments to contingent consideration liabilities; other income and other expense include restructuring income and
charges and related items; other income also includes a gain from a Swiss pension plan amendment and the partial reversal of a prior period charge; other expense also includes
legal-related items
2016
(USD millions)
Gross profit
Operating income
IFRS Amortization
of intangible
assets 2
restated
results 1
3 100
39
1 013
1 025
Acquisition or
divestment of
businesses and
related items
Impairments 3
4
Other
items 4
– 14
82
Core
restated
results 1
4 099
1 150
The following are adjustments to arrive at core gross profit
Cost of goods sold
– 3 447
1 013
– 14
– 2 448
The following are adjustments to arrive at core operating income
Research and development
Other income
Other expense
12
4
– 529
48
– 100
15
– 4
85
– 498
44
– 15
1 Restated to reflect the product transfers between Innovative Medicines and Alcon that was effective as of January 1, 2018
2 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 and development includes the recurring amortization of acquired rights for technology platforms
3 Impairments: research and development includes impairment charges related to intangible assets
4 Other items: cost of goods sold includes income due to an adjustment of a contingent consideration; research and development, other income and other expense include
restructuring income and charges; research and development also includes an expense due to an adjustment of a contingent consideration; other expense also includes a charge
for an indirect tax settlement
2018, 2017 and 2016 reconciliation from IFRS results to core results – Corporate
Amortization
of intangible
assets
IFRS results
Acquisition or
divestment of
businesses and
related items 1
Impairments
2018
(USD millions)
Gross profit
Operating loss
The following are adjustments to arrive at core operating loss
Other income
Other expense
70
– 840
150
– 555
Other
items 2 Core results
70
8
223
– 609
– 21
29
– 84
307
45
– 219
1 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
2 Other items: other income and other expense include fair value adjustments and divestment gains and losses on financial assets, as well as restructuring income and charges and
related items; other income also includes divestment gains on property, plant and equipment
120
Item 5. Operating and Financial Review and Prospects
2017
(USD millions)
Gross profit
Operating loss
The following are adjustments to arrive at core operating loss
Other income
Other expense
Amortization
of intangible
assets
IFRS
results
Acquisition or
divestment of
businesses and
related items 2
Impairments 1
Other
items 3
162
– 331
691
– 732
197
15
– 298
– 115
– 373
197
130
75
Core
results
162
– 417
203
– 330
1 Impairments: other expense includes impairment charges related to financial assets
2 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
3 Other items: other income includes a fair value adjustment to contingent consideration sales milestone receivables, a Swiss pension plan amendment and other items; other income
and other expense include restructuring income and charges and related items; other expense also includes an amendment to the Swiss pension plan
2016
(USD millions)
Gross profit
Operating loss
The following are adjustments to arrive at core operating loss
Selling, general and administration
Other income
Other expense
Amortization
of intangible
assets
IFRS results
Acquisition or
divestment of
businesses and
related items 2
Impairments 1
Other
items 3 Core results
208
– 471
– 506
603
– 776
99
– 6
90
– 229
223
99
74
– 75
91
208
– 288
– 432
299
– 363
1 Impairments: other expense includes impairment charges related to financial assets
2 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
3 Other items: selling, general and administration, other income and other expense include items related to setup costs for Novartis Business Services; other income also includes
income related to the portfolio transformation and a gain related to the sale of real estate; other expense also includes other restructuring charges and other costs
121
Item 5. Operating and Financial Review and Prospects
5.B Liquidity and capital resources
The following tables summarize the Group’s cash flow and net debt.
(USD millions)
Net cash flows from operating activities
Net cash flows used in investing activities
Net cash flows used in investing activities from discontinued operations
Net 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
2018
2017
2016
14 272
12 621
11 475
– 5 591
– 2 979
– 2 693
– 140
– 748
– 4 244
– 7 733
– 5 314
– 26
4 411
2 068
84
1 853
– 145
– 387
2 333
– 3
Change in current and non-current financial debts and derivative financial instruments
– 3 616
– 4 730
– 1 871
Change in net debt
Net debt at January 1
Net debt at December 31
Cash flow
2 863
– 3 022
459
– 19 047
– 16 025
– 16 484
– 16 184
– 19 047
– 16 025
Financial year 2018
Net cash flows from operating activities amounted to
USD 14.3 billion, compared to USD 12.6 billion in 2017.
The increase was mainly driven by higher net income
adjusted for non-cash items and other adjustments,
including divestment gains, as well as favorable hedging
results and working capital, which includes the receipt
of a GSK sales milestone from the divested Vaccines
business.
Net cash flows used in investing activities amounted
to USD 5.6 billion, compared to USD 3.1 billion in 2017.
The current year includes cash inflows of USD 13.0 bil-
lion from the divestment of our 36.5% stake in the GSK
consumer healthcare joint venture and of USD 1.1 billion
for the proceeds from sales of property, plant and equip-
ment, intangible and financial assets. This was offset by
cash outflows for the acquisitions of businesses of USD
13.9 billion, mainly Advanced Accelerator Applications
S.A. of USD 3.5 billion, net (USD 3.9 billion, net of cash
acquired USD 0.4 billion), AveXis, Inc. of USD 8.3 billion,
net (USD 8.7 billion, net of cash acquired USD 0.4 billion)
and Endocyte, Inc. of USD 1.8 billion, net (USD 2.1 billion,
net of cash acquired USD 0.3 billion), as well as for the
purchase of property, plant and equipment of USD 1.8
billion and for the purchase of intangible assets of USD
1.6 billion. Net purchases of marketable securities and
commodities amounted to USD 2.0 billion.
Net cash flows used in financing activities amounted
to USD 4.2 billion, compared to USD 7.7 billion in 2017.
The current year mainly includes the cash outflows for
the dividend payment of USD 7.0 billion and for net trea-
sury share transactions of USD 1.3 billion, partly offset
by a net increase in current and non-current financial
debt of USD 4.2 billion. This increase was mainly from
the issuance of euro bonds totaling USD 2.8 billion
(notional amount EUR 2.25 billion) and the net increase
in current financial debts of USD 1.7 billion, partly offset
by repayments of non-current financial debts of USD 0.4
billion.
Financial year 2017
Net 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 and other adjustments.
Net cash flows used in investing activities from con-
tinuing operations amounted to USD 3.0 billion in 2017.
This amount included cash outflows for the purchase of
property, plant and equipment of USD 1.7 billion, intan-
gible assets of USD 1.1 billion, and financial assets and
other non-current assets of USD 0.5 billion; and for
acquisitions and divestments of businesses, net (includ-
ing the Ziarco Group Limited and Encore Vision, Inc.
acquisitions) of USD 0.8 billion. This was partly offset by
cash inflows from the sale of property, plant and equip-
ment; intangible assets; and financial assets of USD 1.1
billion.
Net cash flows used in investing activities from dis-
continued operations, which consists of payments out
of provisions related to the portfolio transformation
transactions, amounted to USD 0.1 billion, compared to
USD 0.7 billion in 2016, which also included capital gains
taxes.
The net cash flows used in financing activities
amounted to USD 7.7 billion, compared to USD 5.3 billion
in 2016. The 2017 amount included mainly 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 billion were mainly from the issuance
of bonds denominated 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.
122
Item 5. Operating and Financial Review and Prospects
Financial year 2016
Net cash flows from operating activities from continuing
operations amounted to USD 11.5 billion, compared to
USD 12.1 billion in 2015. The decrease of USD 0.6 billion
was driven by lower operating income adjusted for non-
cash items and other adjustments, lower hedging results
and higher payments out of provisions, partially offset by
dividends received from GSK Consumer Healthcare
Holdings Ltd., lower cash outflows for taxes paid, and
net current assets and other operating cash flow items.
Net cash flows used in investing activities from con-
tinuing operations amounted to USD 2.7 billion in 2016.
This amount includes cash outflows of USD 1.9 billion for
the purchase of property, plant and equipment; USD 1.4
billion for intangible, financial and other non-current
assets; and USD 0.8 billion for acquisitions and divest-
ments of businesses, net (including the Transcend Med-
ical, Inc. and Reprixys Pharmaceuticals Corporation
acquisitions). This was offset by cash inflows of USD 1.3
billion of proceeds from the sale of non-current assets,
and USD 0.1 billion net proceeds from the sales of mar-
ketable securities and commodities. In 2015, cash flows
used in investing activities from continuing operations
amounted to USD 19.7 billion, primarily due to the acqui-
sition of the GSK oncology assets for USD 16.0 billion.
Group net debt
Net cash flows used in investing activities from dis-
continued operations amounted to USD 0.7 billion in 2016
due to portfolio transformation transactions payments,
including capital gains taxes. In 2015, the cash flows from
investing activities from discontinued operations of USD
8.9 billion were mainly driven by net proceeds from the
portfolio transformation divestments.
The net cash flows used in financing activities
amounted to USD 5.3 billion, compared to USD 9.2 bil-
lion in 2015. The 2016 amount includes cash outflows of
USD 6.5 billion for the dividend payment and USD 0.9
billion for treasury share transactions, net. The net inflow
of USD 2.1 billion from current and non-current financial
debts was due to the increase in short-term borrowings
of USD 1.8 billion and the issuance of two euro-denom-
inated bonds for total proceeds of USD 1.9 billion, par-
tially offset by the repayment at maturity of a euro-de-
nominated bond of USD 1.7 billion.
The 2015 amount included mainly a cash outflow of
USD 6.6 billion for the dividend payment, and USD 4.5
billion for treasury share transactions, net, partially off-
set by a net inflow from financial debts of USD 2.0 bil-
lion.
Net debt constitutes a non-IFRS financial measure,
which means that it should not be interpreted as a mea-
sure determined under International Financial Reporting
Standards (IFRS). Net debt/liquidity is presented as addi-
tional information, as it is a useful indicator of the Group’s
ability to meet financial commitments and to invest in
new strategic opportunities, including strengthening its
balance sheet.
Group net debt consists of:
(USD millions)
Non-current financial debts
Current financial debts
and derivative financial
instruments
Total financial debt
Less liquidity
Cash and cash equivalents
Marketable securities,
commodities, time deposits
and derivative financial
instruments
Total liquidity
Net debt at December 31
2018
2017
Change
– 22 470
– 23 224
754
– 9 678
– 5 308
– 4 370
– 32 148
– 28 532
– 3 616
13 271
8 860
4 411
2 693
625
15 964
9 485
– 16 184
– 19 047
2 068
6 479
2 863
Financial year 2018
Group net debt at December 31, 2018, decreased to USD
16.2 billion, compared to USD 19.0 billion at December
31, 2017.
Total financial debt increased by USD 3.6 billion to
USD 32.1 billion at December 31, 2018, from USD 28.5
billion at December 31, 2017. Non-current financial debt
decreased by USD 0.8 billion to USD 22.5 billion at
December 31, 2018, from USD 23.2 billion at December
2017, mainly driven by foreign exchange translation
adjustments, as the issuance of euro bonds totaling USD
2.8 billion (notional amount EUR 2.25 billion) was offset
by the reclassification of a US dollar bond of USD 3.0
billion, which becomes due in 2019, to current financial
debt.
Current financial debts and derivative financial instru-
ments increased by USD 4.4 billion to USD 9.7 billion at
December 31, 2018, from USD 5.3 billion at December
31, 2017, mainly due to higher net short-term borrowings
and the reclassification of a US dollar bond of USD 3.0
123
Item 5. Operating and Financial Review and Prospects
billion from non-current liabilities, which becomes due in
2019.
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 1.4 billion) of unsecured commercial paper
notes. Commercial paper notes totaling USD 4.0 billion
under these three programs were outstanding as per
December 31, 2018 (2017: USD 2.3 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, 2018 and December 31,
2017.
As of year-end 2018, Moody’s Investor Service rated
the Company A1 for long-term maturities and P-1 for
short-term maturities and S&P Global Ratings AA- for
long-term maturities and A-1+ for short-term maturities.
Financial year 2017
Group net debt at December 31, 2017, increased to USD
19.0 billion compared to USD 16.0 billion at the end of
2016, mainly due to increased borrowings.
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. Non-current financial debt
increased by USD 5.3 billion to USD 23.2 billion at Decem-
ber 31, 2017, from USD 17.9 billion at December 2016,
The maturity schedule of our net debt is as follows:
mainly due to the issuance of bonds in the first quarter
that are denominated 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.
As of year-end 2017, Moody’s Investor Service rated
the Company Aa3 for long-term maturities and P-1 for
short-term maturities and S&P Global Ratings AA- for
long-term maturities and A-1+ for short-term maturities.
2018
(USD millions)
Current assets
Marketable securities, time deposits and short-term
investments with original maturity more than 90 days
Commodities
Derivative financial instruments and accrued interest
Cash and cash equivalents
Total current financial assets
Non-current liabilities
Financial debt
Financial debt – undiscounted
Total non-current financial debt
Current liabilities
Financial debt
Financial debt – undiscounted
Derivative financial instruments
Total current financial debt
Due later than Due later than Due later than
one year
Due within but less than but less than but less than
five years
one month
three months
three months
one month
one year
39
56
2 091
198
40
3 571
3 650
75
9 700
9 831
27
Due after
five years
Total
63
104
2 447
104
142
13 271
2 118
198
167
15 964
– 8 980
– 13 490
– 22 470
– 9 025
– 13 623
– 22 648
– 8 980
– 13 490
– 22 470
– 5 217
– 4 084
– 5 217
– 4 084
– 16
– 34
– 319
– 319
– 8
– 5 233
– 4 118
– 327
– 9 620
– 9 620
– 58
– 9 678
Net debt
– 1 583
5 713
1 791
– 8 782
– 13 323
– 16 184
124
Item 5. Operating and Financial Review and Prospects
2017
Due later than Due later than Due later than
one year
Due within but less than but less than but less than
five years
one month
three months
three months
one month
one year
(USD millions)
Current assets
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
125
Item 5. Operating and Financial Review and Prospects
The following table provides a breakdown of liquidity and financial debt by currency as of December 31:
Liquidity and financial debt by currency
USD
EUR
CHF
JPY
Other
Liquidity
in % 2018 1
Liquidity
in % 2017 1
Liquidity
in % 2016 1
Financial
debt in %
2018 2
Financial
debt in %
2017 2
Financial
debt in %
2016 2
83
6
7
4
100
77
8
5
1
9
100
77
9
5
9
100
60
25
10
3
2
63
20
11
4
2
66
13
13
5
3
100
100
100
1 Liquidity includes cash and cash equivalents, marketable securities, commodities and time deposits.
2 Financial debt includes non-current and current financial debt.
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 2018, 2017 and 2016, for currencies most important to the Group:
Currency
US dollar (USD)
Euro (EUR)
Swiss franc (CHF)
Japanese yen (JPY)
Chinese yuan (CNY)
British pound (GBP)
Canadian dollar (CAD)
Brazilian real (BRL)
Australian dollar (AUD)
Russian ruble (RUB)
Other currencies
2018
2017
2016
Net sales
%
Operating
expenses
%
Net sales
%
Operating
expenses
%
Net sales
%
Operating
expenses
%
37
27
2
6
5
2
3
2
2
2
12
37
24
17
3
3
2
2
1
1
1
9
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, selling, general and administration, research
and development, 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 opera-
tions as well as the reported value of our assets, liabili-
ties and cash flows. This in turn may significantly affect
reported earnings (both positively and negatively) and
the comparability of period-to-period results of opera-
tions.
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.
126
Item 5. Operating and Financial Review and Prospects
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 prod-
ucts and also have an adverse impact on both our con-
solidated income statement and balance sheet.
The Group is exposed to a potential adverse devalu-
ation risk on its intercompany funding and total invest-
ment in certain subsidiaries operating in countries with
exchange controls. The most significant country in this
respect was Venezuela, where the Group incurred sig-
nificant foreign exchange losses in 2015 and 2016.
Since November 2016, the Group has applied the
floating rate of DICOM (Sistema de Divisa Complemen-
taria) to translate the financial statements of its Venezu-
elan subsidiaries. In 2016, this resulted in a USD 0.3 bil-
lion revaluation loss on the outstanding intercompany
balances, which was recorded in the income statement
of the year 2016. In August 2018, Venezuela introduced
a new currency Bolivar Soberano (VES), replacing the
former currency Bolivar Fuerte (VEF) at a rate of 1 VES
for 100 000 VEF. The net outstanding intercompany pay-
able balance of Venezuela subsidiaries was not signifi-
cant at December 31, 2018, and at December 31, 2017,
due to reserves against the intercompany balances.
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 hyperinflation-
ary economies in which Novartis operates are Venezu-
ela and Argentina. Venezuela was hyperinflationary for
all years presented and Argentina became hyperinfla-
tionary effective July 1, 2018, requiring retroactive imple-
mentation of hyperinflation accounting as of January 1,
2018. The impacts from applying IAS 29 are not signifi-
cant.
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
2018, we entered into various contracts that change in
value with movements in foreign exchange rates to pre-
serve the value of assets, commitments and expected
transactions. We use forward contracts and foreign cur-
rency options to hedge. For more information on how
these transactions affect our consolidated financial
statements and on how foreign exchange rate exposure
is managed, see “Item 18. Financial Statements—Note 1.
Significant accounting policies,” “Item 18. Financial State-
ments—Note 5. Interest expense and other financial
income and expense,” “Item 18. Financial Statements—
Note 14. Trade receivables,” and “Item 18. Financial State-
ments—Note 27. Commitments and contingencies” and
“Item 18. Financial Statements—Note 28. Financial instru-
ments – additional disclosures.”
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))
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
2018
0.748
0.275
0.772
1.023
0.151
1.181
1.336
0.906
1.600
2017 Change in %
0.766
0.313
0.771
1.016
0.148
1.129
1.288
0.892
1.715
– 2
– 12
0
1
2
5
4
2
– 7
2018
0.707
0.258
0.735
1.014
0.145
1.144
1.274
0.907
1.437
2017 Change in %
0.779
0.302
0.797
1.024
0.154
1.195
1.347
0.888
1.734
– 9
– 15
– 8
– 1
– 6
– 4
– 5
2
– 17
Average for year
Year-end
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
2017
0.766
0.313
0.771
1.016
0.148
1.129
1.288
0.892
1.715
127
Item 5. Operating and Financial Review and Prospects
The following table provides a summary of the currency
impact on key Group figures due to their conversion into
USD, the Group’s reporting currency, of the financial data
from entities reporting in non US dollars. Constant cur-
rency (cc) calculations apply the exchange rates of the
prior year to the current year financial data for entities
reporting in non US dollars.
Currency impact on key figures
Net sales
Operating income
Net income
Core operating income
Core net income
Change in
constant
currencies %
2018
5
– 5
64
8
5
USD %
2018
6
– 5
64
8
5
Percentage
Change in point currency
Change in
constant
impact currencies %
2017
2018
Percentage
Change in point currency
impact
2017
USD %
2017
1
0
0
0
0
2
7
12
0
2
1
4
15
– 1
1
– 1
– 3
3
– 1
– 1
For additional information on the effects of currency fluctuations, see “Item 18. Financial Statements—Note 28.
Financial instruments – additional disclosures.”
Free cash flow
Novartis defines free cash flow as net cash flows from
operating activities and cash flows associated with the
purchase or sale of property, plant and equipment, as
well as intangible, other non-current assets and financial
assets, excluding marketable securities. Cash flows in
connection with the acquisition or divestment of subsid-
iaries, associated companies and non-controlling inter-
ests in subsidiaries are not taken into account to deter-
mine free cash flow. For further information about the
free cash flow measure, which is a non-IFRS measure,
see “Item 5. Operating and Financial Review and Pros-
pects—Item 5.A Operating results—Non-IFRS measures
as defined by Novartis—Free cash flow” above. The fol-
lowing is a summary of the free cash flow:
(USD millions)
Operating income
Adjustments for non-cash items
Depreciation, amortization and impairments
Change in provisions and other non-current liabilities
Other
Operating income adjusted for non-cash items
Dividends received from associated companies and others
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
Net cash flows from operating activities
Purchase of property, plant and equipment
Proceeds from sales of property, plant and 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
128
2018
2017
8 169
8 629
6 881
6 332
876
160
– 141
– 360
2016
8 268
6 175
956
– 264
15 785
14 761
15 135
719
461
987
97
899
43
– 858
– 980
– 878
– 1 670
– 1 611
– 2 111
– 664
– 793
1 292
– 877
– 1 536
– 393
– 1 051
637
974
14 272
12 621
11 475
– 1 773
– 1 696
– 1 862
102
92
161
– 1 582
– 1 050
– 1 017
823
640
– 262
– 468
167
– 39
9
330
– 42
1
847
– 247
247
– 149
11 717
10 428
9 455
Item 5. Operating and Financial Review and Prospects
Financial year 2018
Free cash flow amounted to USD 11.7 billion (+12% USD)
compared to USD 10.4 billion in 2017 as higher cash flows
from operating activities, which includes the receipt of a
GSK sales milestone from the divested Vaccines busi-
ness, were partly offset by higher net investments in
intangible assets.
Financial year 2017
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.
Financial year 2016
In 2016, free cash flow from continuing operations
amounted to USD 9.5 billion (+2% USD), compared to
USD 9.3 billion in 2015. The increase of USD 0.2 billion
was mainly driven by lower net investments in property,
plant and equipment.
Free cash flow for the total Group amounted to USD
9.5 billion in 2016, compared to USD 9.0 billion in 2015.
The prior year included a negative free cash flow of
approximately USD 0.3 billion from discontinued opera-
tions.
Condensed consolidated balance sheets
(USD millions)
Assets
Property, plant and 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 without disposal group
Assets of disposal group held for sale
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 without disposal group
Liabilities of disposal group held for sale
Total current liabilities
Total liabilities
Total equity and liabilities
Dec 31, 2018 Dec 31, 2017
Change
15 696
16 464
35 294
31 750
38 719
29 997
– 768
3 544
8 722
20 291
26 660
– 6 369
110 000
104 871
5 129
6 956
8 727
3 109
6 867
8 600
3 256
15 964
9 485
34 756
28 208
807
89
127
– 147
6 479
6 548
807
35 563
28 208
7 355
145 563
133 079
12 484
78 692
74 227
22 470
23 224
14 794
12 225
37 264
35 449
5 556
9 678
5 169
5 308
14 322
12 926
29 556
23 403
51
29 607
23 403
66 871
58 852
4 465
– 754
2 569
1 815
387
4 370
1 396
6 153
51
6 204
8 019
145 563
133 079
12 484
Total non-current assets of USD 110.0 billion at Decem-
ber 31, 2018, increased by USD 5.1 billion compared to
December 31, 2017.
Property, plant and equipment decreased by USD 0.8
billion to USD 15.7 billion, mainly due to unfavorable cur-
rency translation adjustments and depreciation and
impairments, which more than offset net additions.
Goodwill increased by USD 3.5 billion to USD 35.3
billion, and intangible assets other than goodwill
increased by USD 8.7 billion to USD 38.7 billion. These
increases were mainly due to the acquisitions of
Advanced Accelerator Applications S.A., AveXis, Inc. and
Endocyte, Inc.
Financial and other non-current assets decreased by
USD 6.4 billion to USD 20.3 billion, mainly due to the
divestment of the 36.5% stake in the GSK consumer
healthcare joint venture to GSK in 2018, partially offset
by an increase in deferred tax assets from acquisitions.
Total current assets of USD 35.6 billion at December
31, 2018 increased by USD 7.4 billion, compared to
December 31, 2017, mainly due to an increase in cash
and cash equivalents of USD 4.4 billion and marketable
129
Item 5. Operating and Financial Review and Prospects
securities, commodities, time deposits and derivative
financial instruments of USD 2.1 billion. Trade receivables
increased slightly by USD 0.1 billion to USD 8.7 billion
whereas inventories and income tax receivables
remained flat compared to the previous year end. This
was offset by a decrease in other current assets of USD
0.1 billion.
Assets of disposal group held for sale of USD 0.8 bil-
lion include net assets related to the pending divestment
of the Sandoz US dermatology business and generic US
oral solids portfolio to Aurobindo Pharma USA Inc., as
announced on September 6, 2018 (see “item 18. Finan-
cial Statements – Note 2 Significant pending transac-
tions).
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, Turkey and
Argentina, which has been included in 2018. Should there
be a substantial deterioration in our economic exposure
with respect to those countries, we may change the
terms of trade on which we operate.
The gross trade receivables from these countries at
December 31, 2018 amount to USD 1.7 billion (2017: USD
1.7 billion), of which USD 97 million is past due for more
than one year (2017: USD 124 million), and for which pro-
visions of USD 44 million have been recorded (2017: USD
95 million). At December 31, 2018, amounts past due for
more than one year are not significant in any of these
countries on a standalone basis. The majority of the out-
standing trade receivables from Greece, Portugal, Saudi
Arabia and Spain are due directly from local governments
or government-funded entities.
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, 2018 and 2017:
(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
2018
7 916
296
2017
7 758
279
194
136
98
213
230
137
137
249
Provisions for doubtful trade receivables
Total trade receivables, net
– 126
8 727
– 190
8 600
There is also a risk that certain countries could devalue
their currency. Currency exposures are described in
more detail in “—Effects of currency fluctuations” above.
Total non-current liabilities of USD 37.3 billion at
December 31, 2018, increased by USD 1.8 billion com-
pared to December 31, 2017.
Long-term financial debts decreased by USD 0.8 bil-
lion to USD 22.5 billion, mainly driven by foreign exchange
translation adjustments, as the issuance of a euro bond
of USD 2.8 billion (notional amount EUR 2.25 billion) was
offset by the reclassification from non-current to current
financial debts of a US dollar bond of USD 3.0 billion.
Other non-current liabilities increased by USD 2.6
billion to USD 14.8 billion. This includes deferred tax lia-
bilities, which increased by USD 2.3 billion to USD 7.5
billion, mainly due to the acquisitions of Advanced Accel-
erator Applications S.A., AveXis, Inc. and Endocyte, Inc.,
and provisions and other non-current liabilities, which
increased by USD 0.3 billion to USD 7.3 billion, mainly
due to an increase of the pension liabilities of USD 0.4
billion, mainly resulting from actuarial losses.
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.
Total current liabilities of USD 29.6 billion at Decem-
ber 31, 2018 increased by USD 6.2 billion compared to
December 31, 2017. Trade payables of USD 5.6 billion
increased slightly by USD 0.4 billion. Current financial
debts and derivatives of USD 9.7 billion increased by USD
4.4 billion, due to higher net short-term borrowings and
the reclassification of the US dollar bond of USD 3.0 bil-
lion from non-current to current financial debts. Other
current liabilities of USD 14.3 billion include current
income tax liabilities of USD 2.0 billion, which increased
by USD 0.3 billion compared to December 31, 2017, and
provisions and other current liabilities of USD 12.3 billion,
which increased by USD 1.1 billion compared to Decem-
ber 31, 2017, mainly on account of accruals for revenue
deductions and restructuring provisions.
In our key countries, Switzerland and the United
States, assessments have been agreed by the tax author-
ities 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. In addition,
a subsidiary in France, acquired with the AAA acquisi-
tion, has an open position related to the tax years 2014
and 2015.
The Group’s equity of USD 78.7 billion at December
31, 2018, increased by USD 4.5 billion compared to USD
74.2 billion at December 31, 2017. The increase was
mainly due to net income of USD 12.6 billion, partially off-
set by the dividend payment of USD 7.0 billion. The
increase in equity from the exercise of options and
employee transactions, equity-based compensation and
sale of treasury shares of USD 1.5 billion was more than
offset by the net purchase of treasury shares of USD 2.0
billion. Treasury share repurchase obligation under a
share buyback trading plan decreased equity by USD
0.3 billion.
The net debt decreased to USD 16.2 billion at Decem-
ber 31, 2018, compared to USD 19.0 billion at December
31, 2017 .
The Group’s liquidity amounted to USD 16.0 billion at
December 31, 2018, compared to USD 9.5 billion at
December 31, 2017, and total non-current and current
financial debt, including derivatives, amounted to USD
32.1 billion at December 31, 2018, compared to USD 28.5
billion at December 31, 2017. The debt/equity ratio
increased to 0.41:1 at December 31, 2018, compared to
0.38:1 at December 31, 2017.
130
Item 5. Operating and Financial Review and Prospects
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
2018
2017
Change
Change USD millions USD millions USD millions
2017
2018
Balance at beginning of year
Impact of change in accounting policy 1
Restated equity at January 1, 2018
Shares acquired to be canceled
Other share purchases
Exercise of options and employee transactions
Other share sales
Equity-based compensation
Increase of treasury share repurchase
obligation under a share buyback trading plan
Transaction costs 2
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
Other movements 3
Balance at end of year
2 317.5
2 374.1
– 56.6
74 168
74 832
– 664
– 23.3
– 66.2
42.9
– 1 859
– 5 270
60
74 228
74 832
– 1.2
7.8
3.0
7.4
– 3.8
4.6
2.6
3.2
3.0
8.8
– 1.4
– 114
– 304
255
612
434
263
756
– 284
– 79
– 6 966
– 6 495
60
– 604
3 411
190
179
263
144
– 284
– 79
– 471
12 611
7 703
4 908
– 13
– 13
– 401
2 835
– 3 236
38
38
2 311.2
2 317.5
– 6.3
78 614
74 168
4 446
1 The impact of change in accounting policy includes USD 60 million relating to IFRS 15 implementation and USD 177 million relating to IFRS 9 implementation. (See “Item 18.
Financial Statements—Note 1. Significant accounting policies; and Note 29. Impacts of adoption of new IFRS standards.”)
2 Transaction costs directly attributable to the potential distribution (spin-off) of Alcon to Novartis shareholders. (See “Item 18. Financial Statements—Note 1. Significant accounting
policies”)
3 Impact of hyperinflationary economies. (See “Item 18. Financial Statements—Note 1. Significant accounting policies”)
In 2018, Novartis repurchased a total of 23.3 million
shares for USD 1.9 billion on the SIX Swiss Exchange
second trading line under the CHF 10 billion share buy-
back authority approved at the 2016 Annual General
Meeting. This included 9.3 million shares (USD 0.8 bil-
lion) under the new up-to USD 5 billion share buyback
announced in June 2018 and 14.0 million shares (USD 1.1
billion) to offset the dilutive impact from equity-based
participation plans of associates (2017: 66.2 million
shares for USD 5.3 billion, including 56.4 million shares
bought for USD 4.5 billion under the up to USD 5.0 bil-
lion 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 participation plans). In
addition, 1.2 million shares for USD 0.1 billion were
acquired from employees, which were previously granted
to them under the respective programs (2017: 3.8 million
for USD 0.3 billion). In 2018, 15.2 million treasury shares
for USD 1.2 billion were delivered as a result of options
being exercised and physical share deliveries related to
equity-based participation plans (2017: 13.4 million
shares for USD 0.9 billion). Other share sales for USD
0.3 billion resulted in an increase of 3.0 million shares
outstanding (2017: nil). With these transactions, the total
number of shares outstanding decreased by 6.3 million
shares in 2018 (2017: decrease of 56.6 million shares).
These treasury share transactions resulted in an equity
decrease of USD 0.5 billion and a net cash outflow of
USD 1.3 billion.
Treasury shares
At December 31, 2018, our holding of treasury shares
amounted to 239.5 million shares, or approximately 10%
of the total number of issued shares. Approximately 122
million treasury shares were held in entities that limit their
availability for use.
At December 31, 2017, our holding of treasury shares
amounted to 299.4 million shares, or approximately 10%
of the total number of issued shares. Approximately 131
million treasury shares were held in entities that limit their
availability for use.
At December 31, 2016, our holding of treasury shares
amounted to 253.1 million shares, or approximately 10%
of the total number of issued shares. Approximately 135
million treasury shares were held in entities that limit their
availability for use.
Bonds
In February 2018, three euro bonds totaling EUR 2.25
billion were issued: a 5.5 year bond of EUR 750 million
with a coupon of 0.5%, a 12.5 year bond of EUR 750 mil-
lion with a coupon of 1.375% and a 20.5 year bond of
EUR 750 million with a coupon of 1.7%.
In February 2017, three US dollar bonds totaling USD
3.0 billion were issued; a 3 year bond of USD 1.0 billion
with a coupon of 1.80%, a 5 year bond of USD 1.0 billion
with a coupon of 2.40% and a 10 year bond of USD 1.0
billion with a coupon of 3.10%.
In March 2017, two EUR bonds totaling EUR 1.85 bil-
lion were issued; a 4 year bond of EUR 1.25 billion with
a coupon of 0% and a 10 year bond of EUR 0.6 billion
with a coupon of 1.125%.
131
Item 5. Operating and Financial Review and Prospects
In September 2016, two EUR bonds totaling EUR 1.75
billion were issued; a 7 year bond of EUR 1.25 billion with
a coupon of 0.125% and a 12 year bond of EUR 0.5 bil-
lion with a coupon of 0.625%.
In June 2016, a EUR bond of EUR 1.5 billion with a
coupon of 4.25% was repaid at maturity.
Liquidity/short-term funding
We continuously track our liquidity position and asset/
liability profile. This involves modeling cash flow maturity
profiles based on both historical experiences and con-
tractual expectations to project our liquidity require-
ments. We seek to preserve prudent liquidity and fund-
ing capabilities.
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, 2017 and 2018), and raised funds through
our commercial paper programs. In addition, reverse
repurchasing 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 “Item 18. Financial Statements—Note 28. Financial
instruments – additional disclosures.”
5.C Research and development, patents and licenses
Our R&D spending totaled USD 9.1 billion, USD 9.0 bil-
lion and USD 9.0 billion (USD 8.7 billion, USD 8.1 billion
and USD 8.5 billion, excluding impairments and amorti-
zation charges) for the years 2018, 2017 and 2016,
respectively.
Each of our divisions has its own R&D and patent pol-
icies. Our divisions have numerous products in various
stages of development. For further information on these
policies and these products in development, see “Item
4. Information on the Company—Item 4.B Business over-
view.”
As described in the risk factors section and else-
where in this Annual Report, our drug development
efforts are subject to the risks and uncertainties inher-
ent in any new drug development program. Due to the
risks and uncertainties involved in progressing through
preclinical development and clinical trials, and the time
and cost involved in obtaining regulatory approvals,
among other factors, we cannot reasonably estimate the
timing, completion dates and costs, or range of costs, of
our drug development program, or of the development
of any particular development compound (see “Item 3.
Key Information—Item 3.D Risk factors”). In addition, for
a description of the research and development process
for the development of new drugs and our other prod-
ucts, and the regulatory process for their approval, see
“Item 4. Information on the Company—Item 4.B Business
overview.”
5.D Trend information
Please see “—Item 5.A Operating results—Factors affect-
ing results of operations” and “Item 4. Information on the
Company—Item 4.B Business overview” for trend infor-
mation.
5.E Off-balance sheet arrangements
We have no unconsolidated special purpose financing
or partnership entities or other off-balance sheet
arrangements that have or are reasonably likely to have
a current or future effect on our financial condition,
changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or
capital resources, that is material to investors. See also
“Item 18. Financial Statements—Note 27. Commitments
and contingencies,” and matters described in “— Item
5.F Tabular disclosure of contractual obligations.”
132
Item 5. Operating and Financial Review and Prospects
5.F Tabular disclosure of 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)
Payments due by period
Total
Less than
1 year
2–3 years
4–5 years
After
5 years
Non-current financial debt, including current portion
25 660
3 190
4 117
4 863
13 490
Interest on non-current financial debt, including current portion
Operating leases
Unfunded pensions and other post-employment benefit plans
Research and development potential milestone commitments
Property, plant and equipment purchase commitments
5 994
3 612
2 094
4 417
289
572
372
122
228
280
892
500
254
775
377
266
1 632
1 663
9
3 755
2 363
1 452
894
Total contractual cash obligations
42 066
4 764
7 404
7 944
21 954
The Group intends to fund the research and develop-
ment; property, plant and equipment; and intangible
asset purchase commitments with internally generated
resources.
For other contingencies, see “Item 4. Information on
the Company—Item 4.D Property, plants and equip-
ment—Environmental matters,” “Item 8. Financial Infor-
mation—Item 8.A Consolidated statements and other
financial information,” “Item 18. Financial Statements—
Note 19. Provisions and other non-current liabilities,” and
“Item 18. Financial Statements—Note 27. Commitments
and contingencies.”
133
Item 6. Directors, Senior Management and Employees
Item 6. Directors, Senior Management and
Employees
6.A Directors and senior management
The information set forth under “Item 6.C Board prac-
tices—Corporate governance—Our Board of Directors—
Board of Directors” and “Item 6.C Board practices—Cor-
porate governance—Our management—Executive
Committee” is incorporated by reference.
134
Item 6. Directors, Senior Management and Employees
6.B Compensation
Dear shareholder,
As Chairman of the Compensation Committee of the
Board of Directors, I am pleased to share with you the
2018 Compensation Report of Novartis AG. It follows a
similar structure to the report presented in January 2018,
which was supported by over 90% of shareholders.
During 2018, we continued to engage with sharehold-
ers and proxy advisors to gather feedback on the pro-
posed evolution of the compensation system for the
Executive Committee, and we would like to thank you for
the constructive dialogue. It has helped shape the
changes, enhancements and simplifications we are mak-
ing (effective January 1, 2019) to further align our com-
pensation systems and disclosures with our strategy and
best practice.
The Executive Committee underwent a number of
key changes during the course of 2018, with the most
significant being the appointment of our new Chief Exec-
utive Officer, Vasant Narasimhan, in February 2018. Dr.
Narasimhan was appointed by the Board of Directors not
only for his innovative mindset and leadership experi-
ence but also for his integrity, values and behaviors,
which are the foundation blocks of our culture. Dr. Nara-
simhan and the other Executive Committee members
are driving our strategy to build a leading, focused
innovative medicines company powered by advanced
therapy platforms and data science with five strategic
priorities: innovation, operational excellence, data and
digital, people and culture, and building trust with soci-
ety.
2018 Company performance
Novartis delivered strong performance in 2018, with net
sales up 5% in constant currencies (cc), core operating
income up 8%, and free cash flow up 12%. All these were
ahead of targets set by the Board of Directors at the start
of the year. Operating income declined 5%, mainly due
to the impact of M&A transactions made to transform
Novartis into a leading, focused medicines company, and
of restructuring to drive major productivity programs. Net
income increased 64%, primarily due to the one-off gain
from the sale of the OTC joint venture. Strong perfor-
mance was driven by the growth drivers, mainly in the
Innovative Medicines Division, including contributions
from the AAA acquisition. Cosentyx sales reached USD
2.8 billion (+36% cc), Entresto sales more than doubled
to reach USD 1 billion, and Promacta/Revolade, Tafinlar
+ Mekinst, Jakavi and Kisqali sales all delivered strong
double-digit growth. Results in the Sandoz Division were
negatively impacted by continued industrywide pricing
pressures in the US retail generics market. Sandoz Bio-
pharmaceuticals sales grew to USD 1.4 billion (+24% cc),
mainly driven by the launch of Erelzi (etanercept) and
Rixathon (rituximab) in Europe, and Zarxio (filgrastim) in
the US. The Alcon turnaround continued.
In addition to delivering 2018 performance through
strong sales growth and commercial execution, Novartis
continued to focus on managing its costs, including
actions to streamline the Novartis Business Services and
Novartis Technical Operations organizations.
Further highlights of strong performance against the
five strategic priorities included above-target perfor-
mance on the delivery of the innovation pipeline; optimi-
zation of the business unit portfolio through major spin-
off, divestment and acquisition activity; good commercial
execution; starting a culture transformation; taking steps
to simplify processes globally; and finally, prioritizing cor-
porate responsibility projects, including the renewed
commitment to malaria and leprosy.
In 2018, shareholders benefited from a one-year total
shareholder return (TSR) of 4.5%, and between 2016
and 2018, they benefited from a three-year TSR of 8.5%.
2018 realized compensation
In light of our CEO’s achievements, including the Com-
pany’s strong performance and his focus on the five stra-
tegic priorities noted above, the Board of Directors deter-
mined that he will be awarded a 2018 Annual Incentive
of CHF 3 189 606, which is 145% of target, within the
payout range 0% to 200%.
The Long-Term Performance Plan (LTPP) 2016-2018
performance cycle award vested at a value of
CHF 1 796 381, which is 136% of target, within the pay-
out range of 0% to 200%. This was based on cumulative
three-year Novartis Cash Value Added performance
above target (driven by strong sales execution and solid
cost controls) and long-term innovation achievements
also above target. Further information on this perfor-
mance is provided on page 148.
The Long-Term Relative Performance Plan (LTRPP)
2016-2018 award was based on three-year relative TSR
compared to the global healthcare peer group (see page
149). Novartis ranked No. 11 out of 13 companies, result-
ing in the award lapsing in full.
These incentive performance outcomes, combined
with base salary, pension, other benefits, share price
movement and dividend equivalents, resulted
in
2018 total realized compensation for the CEO of
CHF 6 680 288.
The 2018 total realized compensation for the Exec-
utive Committee members (comprising the CEO, the 12
active Executive Committee members, and the four pre-
vious Executive Committee members who stepped down
during the financial year) was CHF 66.3 million. When
compared to the total realized compensation for 2017
(CHF 47.5 million), the difference is primarily due to
changes in the composition of the Executive Committee.
There has been both an increase in the number of Exec-
utive Committee members and an overlap of departing
and appointed members, including the CEO in 2018.
Details on realized compensation for the Executive Com-
mittee members can be found on page 151.
135
Item 6. Directors, Senior Management and Employees
In 2018, there was no legal or factual basis on which
to exercise malus or clawback for current or former
Executive Committee members. However, the Compen-
sation Committee and the Board of Directors decided to
apply its discretion, as foreseen in the plan rules, to
reduce the 2018 Annual Incentive to below-target levels
for certain executives in relation to their responsibilities.
Executive Committee compensation system for
2019
Every year, the Compensation Committee conducts a
review of the Executive Committee compensation sys-
tem. The 2018 review focused on the structure and per-
formance measures of the Long-Term Incentive plans,
taking into account a desire for simplification and the
principle of compensating executives more directly on
performance linked to our strategic priorities of accel-
erating top- and bottom-line growth.
This led to the decision to combine the existing Long-
Term Performance Plan and Long-Term Relative Perfor-
mance Plan into a single Long-Term Incentive plan and
to replace Novartis Cash Value Added with net sales
growth and core operating income growth for the 2019-
2021 performance cycle onward. The objective is to align
the Long-Term Incentive with the evolving Group strate-
gic imperatives of accelerating growth and margin
expansion to drive long-term value. The Compensation
Committee decided to retain the long-term innovation
and relative total shareholder return performance mea-
sures, and an equal weighting will apply to each of the
four performance measures.
he joined Novartis, subject to the achievement of targets
linked to the turnaround of Alcon during the 2016-2018
performance cycle. In 2016, performance was tracking
below target. However, in 2017 and 2018, Alcon began
to close the gap versus the targets. Given that some of
the performance measures are assessed relative to
peers, the achievements and final payout of this three-
year Long-Term Incentive award will be disclosed in the
2019 Compensation Report, once the final performance
is known.
2019 Annual General Meeting
In line with our Articles of Incorporation, at the 2019
Annual General Meeting (AGM), shareholders will be
asked to approve the maximum aggregate amount of
compensation for members of the Board of Directors
from the 2019 AGM to the 2020 AGM, and the maximum
aggregate amount of compensation for members of the
Executive Committee for financial year 2020. For the
Board of Directors, the amount remains broadly
unchanged compared to the prior year. For the Execu-
tive Committee, the requested maximum aggregate
amount of compensation remains unchanged compared
to the prior year. Shareholders will also be asked to
endorse this Compensation Report in an advisory vote.
On behalf of Novartis and the Compensation Com-
mittee, I would like to thank you for your continued sup-
port and feedback, which we consider extremely valu-
able in driving improvements in our compensation
systems and practices.
I invite you to send your comments to me at the follow-
Further details on the 2019 compensation system can
ing email address: investor.relations@novartis.com.
be found on pages 162 and 163.
Alcon
In 2018, the Board of Directors communicated its inten-
tion to spin off Alcon in the first half of 2019. To avoid any
conflict of interest following news of the intention to spin
off Alcon, the former CEO, Alcon, F. Michael Ball, stepped
down from the CEO, Alcon position and from the Novartis
Executive Committee on July 1, 2018, commencing his
12-month contractual notice period that will end on the
Alcon spin-off date (or June 30, 2019, if later). He is still
entitled to the one-off award of 50 000 performance
share units that were awarded in February 2016 when
Respectfully,
Enrico Vanni, Ph.D.
Chairman of the Compensation Committee
136
Item 6. Directors, Senior Management and Employees
Compensation at a glance
2018 Executive Committee compensation system
Fixed pay and benefits
Performance-related variable pay
Annual base salary
Pension and other
benefits
Annual Incentive
Long-term share awards
Purpose
Reflects responsibil-
ities, experience and
skill sets
Provides retirement
and risk insurances
(tailored to local market
practices/regulations)
Form of payment
Cash
Country/
individual-specific
Performance measures
–
–
Rewards for perfor-
mance against short-
term financial and stra-
tegic objectives, and
Values and Behaviors
50% cash
50% equity3 deferred
for three years
Balanced scorecard
comprising:
• Financial measures
(60%)
• Strategic objectives4
(40%)
LTPP1
LTRPP2
Rewards long-term shareholder
value creation and innovation in line
with our strategy
Equity, vesting following a three-
year performance period
• Novartis Cash
Value Added
(75%)
• Innovation mile-
stones (25%)
• Relative TSR
versus global
sector peers
(100%)5
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.
4 Strategic objectives are aligned with the five strategic pillars: innovation, operational excellence, data and digital, people and culture, and building trust with society.
5 For the 2018-2020 performance cycle, the peer group comprises 15 global healthcare companies, as listed on page 140.
Target incentive opportunity levels for the CEO are 150% and 325% of base salary for the Annual Incentive and
Long-Term Incentives (LTPP and LTRPP), respectively. Based on Novartis compensation guidelines, the other mem-
bers of the Executive Committee have Annual Incentive and Long-Term Incentive target opportunity levels that
range from 80% to 120%, and 160% to 270% of base salary, respectively. The payout range remains at 0% to 200%
of target opportunity based on achievement against performance.
Compensation governance at a glance
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 AUTHORITY
Board of Directors
Board of Directors
Compensation Committee
EXECUTIVE COMMITTEE COMPENSATION RISK MANAGEMENT PRINCIPLES
• Rigorous performance management
• Performance-based Long-Term
process
Incentives, with three-year cycles
• Balanced mix of short-term and
• All variable compensation is capped at
• Good and bad leaver provisions apply to
the variable compensation of leavers
• No severance payments or change-of-
long-term variable compensation
elements
• Performance evaluation under the
Annual Incentive includes an individual
balanced scorecard
200% of target
control clauses
• Contractual notice period of 12 months
• Post-contractual non-compete period
limited to a maximum of 12 months from
the end of employment (annual base
salary and prior-year Annual Incentive
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
137
Item 6. Directors, Senior Management and Employees
2018 CEO pay for performance – outcomes
Measure
Target
Achievement versus target
2018 ANNUAL INCENTIVE (SEE PAGES 145-146 FOR FURTHER DETAILS)
Financial measures – 60% of total Annual Incentive, comprising:
Group net sales (cc) (30%)
Group operating income (cc) (30%)
Group free cash flow as a % of sales (cc) (20%)
Share of peers for Novartis Group (USD) (20%)
USD 50 447 million
USD 8 504 million
20%
9.3%
Overall assessment of Group financial targets in constant currencies
Strategic objectives – 40% of total Annual Incentive, comprising:
Innovation (20%)
Operational excellence (20%)
Data and digital (20%)
People and culture (including Values and Behaviors) (20%)
Building trust with society (including access to healthcare and reputation) (20%)
Overall assessment of strategic objectives
Above
Met*
Significantly above
Met
Above
Significantly above
Above
Met
Above
Met
Above
Overall assessment of CEO balanced scorecard
Above Target
TOTAL Annual Incentive:
145% of target (payout range 0% – 200%)
* The Board concluded that the achievement for Group operating income versus target was “met” following adjustments mainly for M&A transactions made to transform Novartis
into a leading, focused medicines company, and for higher restructuring costs to drive major productivity programs, which were not known at the time of target setting.
2016-2018 LONG-TERM INCENTIVES (SEE PAGES 147-149 FOR FURTHER DETAILS)
Long-Term Performance Plan (LTPP)
Novartis Cash Value Added (cc) (75%)
Key innovation milestones (25%)
TOTAL LTPP:
Long-Term Relative Performance Plan (LTRPP)
Relative TSR against a global healthcare peer group (USD)
TOTAL LTRPP:
USD 5.1 billion
Above
Above
136% of target (payout range 0% – 200%)
Below threshold
0% of target (payout range 0% – 200%)
2018 total realized compensation for the CEO
The 2018 total realized compensation for the CEO was CHF 6 680 288. It includes payouts of the Annual Incen-
tive, LTPP and LTRPP based on actual performance assessed for cycles concluding in 2018.
Fixed pay and benefits
Variable pay − performance-related
CHF
Annual base
salary1
Pension and
other benefits
2018 Annual
Incentive1
LTPP 2016-20182
LTRPP 2016-20182
Total realized
compensation
Vasant Narasimhan
(CEO from
February 1, 2018)
1 491 667
202 634
3 189 606
1 796 381
0
6 680 288
1 Base salary and Annual Incentive reflect the compensation relating to Vasant Narasimhan’s roles in 2018 as Head of Global Drug Development (January 1, 2018 – January 31, 2018)
and CEO (from February 1, 2018).
2 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 2016 -2018, which were granted before Vasant Narasimhan was appointed CEO.
138
Item 6. Directors, Senior Management and Employees
2018 Board compensation system
A cost-neutral rebalancing of the Board of Directors fee structure was approved at the 2018 AGM, better recog-
nizing the increased responsibilities and time commitment of the Board committees. 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 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
2018 Board compensation
AGM 2018-2019
annual fee
3 800
280
50
130
90
70
70
40
Total actual compensation earned by Board members in the 2018 financial year is shown in the table below.
CHF 000s
Chairman of the Board
Other 12 members of the Board
Total
2018
total compensation 1
3 804
4 431
8 235
1 Includes an amount of CHF 19 958 for mandatory employer contributions for all Board members paid by Novartis to governmental social security systems. This amount is out of total
employer contributions of CHF 383 864, and provides a right to the maximum future insured government pension benefit for the Board member.
139
Item 6. Directors, Senior Management and Employees
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, and
their contribution to Company performance and long-
term value creation.
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 Incentive
plans are calibrated to promote the creation
of shareholder value
• Executive Committee members are
expected to build and maintain substantial
shareholdings
Balanced
rewards
• Balanced set of measures to create
sustainable value
• Mix of targets based on financial metrics,
strategic objectives, and performance versus
our competitors
Business
ethics
• The Novartis Values and Behaviors are an
integral part of our compensation system
performance within the pharmaceutical and biotechnol-
ogy industries. As such, external peer compensation
data is one of a number of key reference points consid-
ered by the Board of Directors and the Compensation
Committee when making decisions on executive pay,
helping to ensure that the compensation system and
compensation levels at Novartis remain competitive.
Novartis makes the commitment to shareholders to con-
firm benchmarking practices, including the peer group,
each year.
The Compensation Committee believes in a rigorous
approach to peer group construction and maintenance.
The Compensation Committee also believes that using
a consistent set of peers that are similar in size and scope
enables shareholders to evaluate the compensation year
on year and make pay-for-performance comparisons. As
such, following a review of the benchmarking peer group,
the Compensation Committee decided to maintain the
same primary peer group of 15 global healthcare com-
panies, as presented below.
GLOBAL HEALTHCARE PEER GROUP
AbbVie
Biogen
Amgen
AstraZeneca
Bristol-Myers Squibb
Celgene
• They underpin the assessment of overall
performance for the Annual Incentive
Eli Lilly & Co.
Gilead Sciences
GlaxoSmithKline
Johnson & Johnson
Merck & Co.
Novo Nordisk
Competitive
compensation
• Total compensation must be sufficient to
attract and retain key global talent
Pfizer
Roche
Sanofi
• Overarching emphasis on pay for
performance
Alignment with Company strategy
The Novartis strategy is to reimagine medicine to improve
and extend people’s lives. We use innovative science and
technology to address some of society’s most challeng-
ing healthcare issues. We discover and develop break-
through treatments and find new ways to deliver them to
as many people as possible. We reward those who invest
their money, time and ideas in our Company. We have
five strategic priorities: innovation, operational excel-
lence, data and digital, people and culture, and building
trust with society.
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 of Directors determines specific, measur-
able and time-bound performance measures for the
Annual Incentive and the two Long-Term Incentive plans.
Approach to market benchmarking
There remains significant competition for top executive
talent with deep expertise, competencies and proven
The companies in this peer group reflect our industry
and are similar to Novartis in terms of both size and scope
of operations. Target compensation is generally posi-
tioned around the market median benchmark for compa-
rable roles within this group.
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 market. It is therefore
critical that Novartis is able to attract and retain key tal-
ent globally, 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.
140
Item 6. Directors, Senior Management and Employees
Executive Committee appointments compensation policy
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 attract 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 a local market pension and other benefits
in line with the wider senior employee group.
Buyouts
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 an 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 away from their home location to take up their position,
relocation support may be provided in line with our global mobility policies (i.e., relocation support, tax
equalization).
141
Item 6. Directors, Senior Management and Employees
Treatment of variable compensation for Executive Committee leavers
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.
Termination 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 will 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.
Death or long-term disability
Accelerated vesting at target will be applied.
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
accounting policies, or violates laws.
This principle applies to both the short-term Annual
Incentive and Long-Term Incentive plans.
142
Item 6. Directors, Senior Management and Employees
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 of Directors. 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
of Directors and the Compensation Committee consider
performance against the targets originally set. The CEO
and Executive Committee members are not present while
the Board of Directors 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,
general industry trends and good practice are used to
inform the overall performance 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 against
• A recommendation for the CEO’s
the individual balanced scorecard is
assessed by the Board.
• For Executive Committee members,
the CEO discusses with the Chairman
each member’s performance
(assessed against his or her individual
balanced scorecard) 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.
• For the Long-Term Incentive financial
measure payout schedules, a
formulaic approach applies and the
Compensation Committee can also
exercise judgment to ensure there
is appropriate alignment between
payout levels and overall performance
achieved. The same principle of
discretion applies to the relative TSR
and innovation performance measures.
• 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.
143
Item 6. Directors, Senior Management and Employees
2018 Executive Committee compensation
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.
2018 annual base salaries
The 2018 annual base salaries were as follows:
• CEO (effective February 1, 2018): CHF 1 550 000 (CEO base salary may increase as he develops in the
role)
• OTHER EXECUTIVE COMMITTEE MEMBERS (effective March 1, 2018): Increases for two individuals
based on their promotions were made as of March 1, 2018, as disclosed in the 2017 Compensation Report.
For the other Executive Committee members, no merit increases were awarded during the year, except for
promotions in roles, and appointments to the Executive Committee during the course of 2018.
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.
144
Item 6. Directors, Senior Management and Employees
2018 Annual Incentive
PLAN OVERVIEW
Target Annual Incentive
Annual base
salary
x
Target incentive
(% of base salary)
=
Target
Annual Incentive
On-target opportunities
• CEO: 150% of annual base salary
• Other Executive Committee members: 80% to 120% of annual base salary
Performance measures
• A simplified Annual Incentive balanced scorecard was introduced in 2018, containing:
• Financial performance measures related to Group, division or business unit, where relevant (60%
weighting)
• Five key strategic objectives in the areas of innovation, operational excellence, data and digital, people
and culture, and building trust with society (40% weighting)
• The 2018 balanced scorecard targets and achievements of the CEO are detailed on the next page.
• The 2018 balanced scorecard for other Executive Committee members includes Group financial targets as
well as financial or other quantitative targets that relate to their division or business unit, if applicable.
• Values and Behaviors are a key component 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 standards.
Target setting
• Financial targets are set at the beginning of each financial year and align with the strategic plan proposed
by management to the Board for approval.
• The strategic objectives are aligned with the most important priorities in any performance year.
Payout ranges
• The simplified payout schedule for the Annual Incentive incorporates performance against financial and
strategic objectives. The payout range is 0% to 200% of on-target opportunity based on performance, as
shown below:
PERFORMANCE
Outstanding
Exceeds expectations
Meets expectations
Partially meets expectations
Below expectations
PAYOUT (% of on-target)
170% – 200%
130% – 160%
80% – 120%
40% – 70%
0% – 30%
Payout formula
Payout vehicle
Annual base
salary
x
Target incentive
(% of base salary)
x
Payout factor (% of
target: 0%–200%)
=
Realized
Annual Incentive
• At the end of the performance period, 50% is paid in cash, and the remaining 50% is delivered in Novartis
restricted shares or RSUs, deferred for three years (see table on page 142 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
• Novartis restricted shares carry voting rights and dividends during the vesting period. RSUs are of
equivalent value but do not carry voting rights and dividends during the vesting period.
• Following the vesting period, settlement of RSUs is made in unrestricted Novartis shares or ADRs.
145
Item 6. Directors, Senior Management and Employees
2018 CEO BALANCED SCORECARD
This section presents the balanced scorecard for the CEO. Balanced scorecard performance is measured in constant curren-
cies to reflect operational performance that can be influenced. The Board uses a stringent process to set ambitious financial
targets to incentivize superior performance.
CEO achievements – 2018
Financial measures – 60% of total Annual Incentive, comprising:
Group net sales (cc) (30%)
Group operating income (cc) (30%)
Group free cash flow as a % of sales (cc) (20%)
Share of peers for Novartis Group (USD) (20%)
Overall assessment of Group financial targets in constant currencies
Target
Achievement versus
target
50 447 million
| 8 504 million
| 20%
9.3%
|
|
Above
Met*
Significantly above
Met
Above
* The Board concluded that the achievement for Group operating income versus target was “met” following adjustments mainly for M&A transactions made to transform Novartis
into a leading, focused medicines company, and for higher restructuring costs to drive major productivity programs, which were not known at the time of target setting.
Strategic objectives – 40% of total Annual Incentive, comprising:
Innovation (20%)
Novartis was ranked No. 1 by EvaluatePharma on value creation from pipeline products, with more than 200 pro-
jects in clinical development, as of December 31, 2018. With the acquisitions of AveXis, AAA and Endocyte, Novartis
is building leading advanced therapy platforms in gene therapy, radioligand therapy and cell therapy. Novartis had
four US FDA breakthrough therapy designations (e.g., AVXS-101), 20 major approvals (e.g., Aimovig in the US and
EU), and 20 major submissions (e.g., BYL719, alpelisib). 70% of Phase II and III trials in Global Drug Development
are on track for recruitment targets. The majority of projects in the Novartis Institutes for BioMedical Research are
either first-in-class targets or modalities.
Operational excellence (20%)
Novartis set out on its strategy to focus as a leading innovative medicines company. We announced the planned
Alcon spin-off, divested the Sandoz US dermatology business and generic oral solids portfolio to Aurobindo, and
divested the OTC joint venture stake to GSK. The manufacturing and Novartis Business Services transformations
are in early stages and need to be carefully executed. Global Drug Development efficiency has improved, strengt-
hened by the launch of a series of process automations. Launch capability has been built to further strengthen com-
mercial execution, contributing to four new drugs reaching blockbuster status. 98.5% of inspections at manufac-
turing sites resulted in at least acceptable outcomes. Additional financial targets, including core operating income,
net income, core EPS and reported EPS, were all ahead of target.
Data and digital (20%)
Priority digital initiatives were defined for all business units to improve the way we innovate (e.g., partnerships with
Science 37 and Pear Therapeutics), operate and commercialize new therapies, including data acquisition, data
governance and infrastructure. Twelve major projects to embed digital technologies and advanced data into all
areas of the business were initiated, and strong progress was made. The digital organization was established, and
includes 1 500 associates from teams across the organization. Capability building is ongoing to upskill the organi-
zation in data and digital at global scale.
People and culture (20%)
Novartis began a cultural transformation toward a curious, inspired and “unbossed” organization. Around 14 000
associates completed a survey (Organizational Culture Inventory®) to establish a baseline for measuring pro-
gress toward the desired culture. Around 27 000 associates took part in a crowdsourcing event seeking ways
to implement culture change. Significant progress was made toward simplifying the organization and reducing
bureaucracy with the simplification of the process for reviewing employee performance and the introduction of a
companywide (rather than divisional) business performance factor contributing to bonus payouts for the associ-
ates below Executive Committee level (excluding the field force). Good progress was made on diversity, with two
female Executive Committee members and two senior female leaders reporting to the CEO. Novartis ranked No.
2 in the Thomson Reuters Diversity & Inclusion Index and pledged its commitment to gender-equal pay and LGBTI
rights at the United Nations.
Building trust with society (including access to healthcare and reputation) (20%)
Projects in corporate responsibility were prioritized with a renewed commitment to malaria and leprosy. Almost
2.3 million Novartis Access treatments were delivered to patients at USD 1 per treatment, per month, and Healthy
Family reached 7.8 million people with health education initiatives. Our ranking in the Access to Medicine Index
rose to No. 2, and our ranking in the Dow Jones Sustainability Index remained at No. 4. The role of Chief Ethics, Risk
and Compliance Officer was added to the Executive Committee, and a principles-based approach to compliance
through the Professional Practices Policy (P3) was established. Novartis approved new environmental sustainabi-
lity targets, including the goal to achieve carbon neutrality by 2025. Important reputational matters occurred over
the year, and the CEO is working to address them.
| Significantly above
|
|
|
|
Above
Met
Above
Met
Overall assessment of strategic objectives
Overall assessment of CEO balanced scorecard
Above
Above Target
ANNUAL INCENTIVE PAYOUT
Payout
Overall, the Board approved an Annual Incentive payout for the CEO amounting to CHF 3 189 606, which
is 145% of target, within the range of 0–200%.
146
Item 6. Directors, Senior Management and Employees
Long-Term Incentive plans, 2016-2018 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.
• 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.
The structure of the two plans is summarized below.
OVERVIEW OF LONG-TERM INCENTIVE PLANS
Grant formula
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 opportunity
and payout range
LTPP:
• CEO: 200% of annual base salary
• Other Executive Committee members: between 130% and 190% of annual base salary
Payout range
Award vehicle
LTRPP:
• CEO: 125% of annual base salary
• Other Executive Committee members: between 30% and 80% of annual base salary
• From 0% to 200% of the on-target amount based on performance
PSUs granted at the beginning of the cycle 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 142 provides details on the treatment of Long-Term Incentive awards for leavers.
147
Item 6. Directors, Senior Management and Employees
LTPP performance outcomes
NOVARTIS CASH VALUE ADDED (NCVA) (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, whereby 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. Conversely, 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.
Group performance outcome
for the 2016-2018 cycle
During the 2016-2018 cycle, Novartis delivered an NCVA of USD 5.8 billion, 15% ahead of a target of USD 5.1 billion in
constant currencies.
When setting the target for the 2016-2018 cycle, the Compensation Committee took into account an impact of USD
3 billion for the loss of patent of Glivec/Gleevec compared to the previous cycle and other generic erosion.
The 2016-2018 NCVA performance was mainly driven by the following:
• Strong sales execution over the three-year cycle, including Cosentyx (+ USD 2.6 billion1), Entresto (+ USD 1.0
billion1), Promacta/Revolade (+ USD 0.8 billion1,2) and Tafinlar + Mekinist (+ USD 0.7 billion1,2), and the return of Alcon
to growth.
• Solid cost controls resulting in improved gross margin, including benefits from the implementation of the
manufacturing transformation program, and increased R&D productivity. Over the three-year cycle, these cost
actions supported launches via increased sales and marketing investments while broadly maintaining core
operating income margin in constant currencies.
Following the application of the agreed payout curve, the 115% achievement versus target generates a performance
factor of 144% of target for this part of the LTPP.
For Long-Term Incentive cycles starting from 2019, Novartis has decided to replace NCVA as the financial metric
with a combination of a three-year net sales CAGR3 and a three-year core operating income CAGR.3
1 Represents the USD growth in annual sales (2018 vs. 2015)
2 Acquisition of GSK oncology products closed in March 2015. 2015 Novartis results include 10 months of sales.
3 Compound annual growth rate
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
Innovation 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.
At the end of the cycle, the Compensation Committee determines the payout factor based on the
performance assessment made by the Research & Development Committee. In the healthcare industry,
achievement of 60% to 80% of pipeline targets set at the beginning of a three-year cycle is considered good
performance. The payout range 0% to 150% of target is based on the achievement of the target milestones,
and payout above 150% of target is only delivered for truly exceptional performance.
During the 2016-2018 performance cycle, Novartis delivered solid performance versus target on innovation,
which accelerated over the three-year performance period. Novartis was ranked No. 1 in 2018 by
EvaluatePharma on value creation from pipeline products. The Innovative Medicines Division achieved the US
and EU submissions of Aimovig, the US and EU approvals of Kisqali (breast cancer), and the US and EU pediatric
submissions of Kymriah (hematology and solid tumors). The US and EU filings of RTH258 (nAMD) are on track.
Sandoz achievements included EU and US approvals of Hyrimoz, and EU approval of Zessly. Alcon achieved
the EU launch of a next-generation IOL (Clareon monofocal) and the US filing of Daily Disposable Mass Market
SiHy Sphere. NIBR initiated 10 new projects in Respiratory and discovered 27 new targets in Oncology. The US
and EU submission of RLX030 (acute heart failure) was missed, as the pivotal Phase III study failed to confirm
efficacy in the acute heart failure indication. Sandoz did not achieve the approval of several biosimilars in the US,
including rituximab. Alcon voluntarily withdrew the recently approved CyPass from the market. Achievements
during the cycle will contribute to the future success of Novartis and will bring innovative treatments to patients.
Following input from the Research & Development Committee, the Board approved an innovation performance
factor for the CEO and Group function heads of 110% of target.
INNOVATION (25% OF LTPP)
Description
Group performance outcome
for the 2016-2018 cycle
LTPP PAYOUT
Payout
Overall, the Board approved an LTPP payout for the CEO amounting to CHF 1 796 381, which is of 136%
of target, within the range of 0–200%. This amount includes CHF 153 716 of dividend equivalents accrued,
and CHF 172 016 in share price evolution over the performance cycle. It is based on grants made in January
2016, prior to Vasant Narasimhan being appointed CEO.
148
Item 6. Directors, Senior Management and Employees
LTRPP performance outcomes
RELATIVE TOTAL SHAREHOLDER RETURN (TSR) (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 that Novartis is delivering long-term value to its shareholders.
The peer group and payout matrix for the 2016-2018 performance cycle are as follows:
2016-2018 peer group
(12 companies, excluding Novartis)
Novartis position
in the peer group
Payout range
(% 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%
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.
For the LTRPP 2017-2019 performance cycle onward, the revised peer group of 15 global healthcare
companies applies, as listed on page 140. There will be no vesting for below-median performance for the
LTRPP 2018-2020 performance cycle onward.
Group performance outcome
for the 2016-2018 cycle
Novartis TSR over the three-year period (2016-2018) was 8.5%. When compared to the global healthcare
peer group, Novartis TSR ranked 11 out of 13 companies.
LTRPP PAYOUT FOR THE 2016-2018 CYCLE
Payout
Based on the ranking, the Board approved an LTRPP payout of 0% of target for the CEO.
149
Item 6. Directors, Senior Management and Employees
Executive Committee membership changes in 2018
2018 Executive Committee member external appointments and buyout awards
The table below provides an overview of the Executive Committee external hires made during 2018. When an indi-
vidual forfeits variable compensation as a result of an appointment at Novartis, the Compensation Committee may
offer replacement awards, for example performance share units (PSUs), restricted share units (RSUs) or cash, on
a like-for-like basis to mirror the forfeited compensation, based on evidence. Further details on our policy approach
can be found on page 141.
During 2018, out of the four external newly appointed Executive Committee members, three were granted buy-
out awards in place of forfeited compensation, as described in the table below. Buyout awards are of equivalent
economic value and are subject to the same vesting or performance period, payable no earlier than the compen-
sation forfeited upon joining Novartis. Further details on the vesting of the awards below will be provided in rele-
vant future compensation reports.
Name
Date of appointment
Cash payments (CHF)
Equity awards (CHF)
Total value at grant (CHF)
Elizabeth Barrett, 1
CEO Oncology
John Tsai,
Head of Global Drug
Development and
Chief Medical Officer
Klaus Moosmayer,
Chief Ethics, Risk and
Compliance Officer
February 1, 2018
837 258
May 1, 2018
2 089 657
21 267 PSUs,
vesting over the period 2019-2024
6 095 PSUs and 21 286 RSUs,
vesting over the period 2018-2022
December 1, 2018 No cash buyout
8 857 PSUs,
vesting over the period 2020-2022
1 The equity awards presented in the table for Elizabeth Barrett were forfeited in full on December 31, 2018.
2 613 478
4 181 566
808 821
2018 Executive Committee member departures
In determining the compensation arrangements for departing Executive Committee members, the Compensation
Committee ensures that contractual entitlements are respected and that all payments are in line with our plan rules
and the Swiss Ordinance against Excessive Compensation in Listed Companies.
All Executive Committee members have a 12-month notice period during which they are entitled to their con-
tractual base salary, Annual Incentive, pension and other benefits. During the notice period, no new grants of LTPP/
LTRPP awards are made.
The plan rules require that any equity vesting will occur on the normal vesting date (i.e., there is no accelerated
vesting), and malus and clawback as well as non-compete restrictions will continue to apply. No severance or
non-compete payments are made to departing Executive Committee members. Further details on the policy treat-
ment of variable compensation for departing Executive Committee members can be found on page 142.
Retired CEO Joseph Jimenez stepped down from his role on January 31, 2018, and his notice period ended on
August 31, 2018. No Long-Term Incentive grants were awarded in January 2018 for the 2018-2020 performance
cycle.
In 2018, for the three Executive Committee members who retired (the CEO, Group General Counsel and CEO
of Alcon), full vesting of equity applies as per previous plan rules, as communicated in the 2017 Compensation
Report. Going forward, retiring Executive Committee members will receive pro-rata vesting of equity.
The Board of Directors agreed to a six-month reduction of the notice period, without compensation, of the Pres-
ident of Novartis Operations and Country President of Switzerland, to allow him to take on a new position with a
company that does not compete with Novartis from October 1, 2018. Pro-rata vesting of equity will apply.
The CEO, Novartis Oncology decided to step down and leave Novartis, as of December 31, 2018. The Board of
Directors agreed to waive her 12-month notice period in full. Her final annual base salary payment was made in
December 2018. Strictly in line with the Novartis incentive plan rules, her Annual Incentive for the 2018 performance
cycle, her Long-Term Incentives granted for the 2018-2020 performance cycle, and her unvested equity buyouts
of 21 267 PSUs that were made at the point of her recruitment to replace lost equity at her former employer were
forfeited in full.
150
Item 6. Directors, Senior Management and Employees
Realized compensation
To aid shareholders’ understanding of the link between pay and performance, the Compensation Committee dis-
closes the realized compensation for the CEO individually, and for the other members of the Executive Committee
on an aggregated basis. Disclosing realized compensation 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 per-
formance.
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.
2018 realized compensation for the CEO and other Executive Committee members
The table below reports fixed and other compensation for the year, including the Annual Incentive for the 2018 per-
formance year, the realized Long-Term Incentives for the 2016-2018 performance cycle, and any buyouts vesting
in 2018. The portion of the Annual Incentive paid in shares for the year 2018 is disclosed using the underlying value
of Novartis shares at the date of grant, while the realized values of any other equity awards (including dividend
equivalents) are calculated using the share price on the date of vesting.
2018 annual base
salary
2018 pension
benefits1
2018 Annual Incentive
Long-Term Incentives
LTPP
2016-2018 cycle
LTRPP
2016-2018 cycle
Currency
Cash (amount)
Amount
Cash
Equity2
Equity (value
at vesting date)3
Equity (value
at vesting date)
Other 2018
compensation
Total realized
compensation
(incl. share
Amount2,4 price movement)5
Executive Committee members
active on December 31, 2018
Vasant Narasimhan
(CEO from February 1, 2018)
CHF 1 491 667
168 233
1 594 801
1 594 805
1 796 381
0
34 401
6 680 288
Aggregate realized
compensation of the other 16
Executive Committee
members, including the
four members who stepped down
during financial year 2018 6, 7
Total
CHF 9 297 021
CHF 10 788 688
1 874 671
1
2 042 904
5 727 765
7 322 566
5 532 316 24 079 974
7 127 121 25 876 355
0 13 131 653 59 643 400
0 13 166 054 66 323 688
See the next page for 2017 comparative figures.
1 Includes mandatory employer contributions of CHF 4 336 for the CEO and CHF 78 403 for the other Executive Committee members paid by Novartis to governmental social security
systems. This amount is out of total employer contributions of CHF 2 847 422 paid in 2018 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 22, 2019) of CHF 88.14 per
Novartis share and USD 88.32 per ADR.
3 The amounts represent the underlying share value of the 294 971 PSUs vesting on January 22, 2019, to the CEO and other Executive Committee members for the performance cycle
2016-2018, inclusive of earned dividend equivalents for the three-year cycle (details on following page). The taxable value is determined using the closing share price on the day the
Novartis Board approved the final LTPP and LTRPP performance factors (i.e., January 22, 2019) of CHF 88.14 per Novartis share and USD 88.32 per ADR. Vasant Narasimhan,
Shannon Thyme Klinger, Stefan Lang and André Wyss joined the Executive Committee during the course of the performance period 2016-2018, and as such, the information
disclosed reflects their pro-rata LTPP 2016-2018 payout attributable to the period they were a member of the Executive Committee. Elizabeth Barrett, Bertrand Bodson, Paul Hudson,
Klaus Moosmayer, John Tsai and Robert Weltevreden joined post the 2016 LTPP awards being made and hence did not receive an LTPP award for the 2016-2018 performance period.
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) as well as vested shares under LTPP after the step down date.
5 All amounts are before deduction of the social security contribution and income tax due by the Executive Committee member.
6 Comprises the compensation of the outgoing CEO, General Counsel, CEO of Alcon, and President of Novartis Operations and Country President Switzerland, including the vesting of
their Long-Term Incentives for performance cycle 2016-2018, as per the plan rules. See page 150 for details.
7 Amounts for Executive Committee members paid in USD were converted at a rate of UDS 1.00 = CHF 0.978, which is the same average exchange rate used in the Group’s 2018
consolidated financial statements.
The 2018 total realized compensation for the CEO was CHF 6 680 288, and included the payouts of the Annual
Incentive, LTPP and LTRPP based on actual performance assessed for cycles concluding in 2018. The base sal-
ary, pension and other benefits levels below include the compensation for Vasant Narasimhan in the role of Head
of Global Drug Development and Chief Medical Officer during the period January 1, 2018, to January 31, 2018, and
the LTPP and LTRPP levels reflect grants that were made in 2016, prior to Dr. Narasimhan being appointed CEO.
The column titled “Other 2018 compensation” in the 2018 total realized compensation of the Executive Committee
includes the following:
• 1 443 vested ADRs (USD 123 146) to James Bradner, in lieu of the Long-Term Incentive that he forfeited when
leaving his previous employer.
• 1 125 vested RSUs (CHF 83 700) and 9 015 vested PSUs (CHF 670 716) to Paul Hudson, in lieu of the Long-Term
Incentive that he forfeited when leaving his previous employer. The PSUs had the same performance measures
as the LTPP for the 2015-2017 performance cycle (NCVA and long-term innovation). Both awards vested in March
2018.
• Buyout payments made to two external newly appointed Executive Committee members, John Tsai and Elizabeth
Barrett, totaling CHF 2 461 959 (cash and vested shares) and CHF 837 258 (cash), respectively.
151
Item 6. Directors, Senior Management and Employees
The table and information below provide additional details on awards granted as part of the 2016-2018 LTPP and
LTRPP performance cycle, including the number of shares awarded and delivered, following the application of the
payout factor and the addition of dividend equivalent shares.
2016-2018 performance cycle LTPP
PSUs at grant
Shares delivered at vesting
PSUs
(target number)
PSUs
(target value
at grant date)
2
(CHF)
Executive Committee members active on December 31, 2018
Performance shares
Payout factor Performance shares delivered at vesting
equivalent shares delivered at vesting
for LTPP delivered at vesting (value at vesting date) delivered at vesting (value at vesting date)
(CHF)
(CHF)
(number)
(number)
(% of target)
Dividend
3
4
Dividend
Total shares
equivalent shares delivered at vesting
(value at
vesting date)
(CHF)
Vasant Narasimhan
(CEO from February 1, 2018) 1
Other 16 Executive Committee
members, including the
four members who stepped down
during financial year 2018 5
13 704
1 092 209
136%
18 637
1 642 665
1 744
153 716
1 796 381
185 067 14 634 081 124%–142%
251 021 22 013 199
23 569
2 066 775 24 079 974
Total
198 771 15 726 290
269 658 23 655 864
25 313
2 220 491 25 876 355
1 Vasant Narasimhan, Shannon Thyme Klinger, Stefan Lang and André Wyss joined the Executive Committee during the course of the performance period 2016-2018. As such, the
information disclosed reflects their pro-rata LTPP 2016-2018 payout attributable to the period they were a member of the Executive Committee. Elizabeth Barrett, Bertrand Bodson,
Paul Hudson, Klaus Moosmayer, John Tsai and Robert Weltevreden joined post the 2016 LTPP awards being made and hence did not receive an LTPP award for the 2016-2018
performance period.
2 The shown amounts represent the underlying share value of the target number of PSUs granted to each Executive Committee member for the performance period 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.
3 The shown amounts represent the underlying share value of the target number of PSUs vested for the performance period 2016-2018, based on the last closing share price before
the vesting date (i.e., January 22, 2019) of CHF 88.14 per Novartis share and USD 88.32 per ADR.
4 Dividend equivalent shares are calculated on the dividend each member of the Executive Committee would have received, based on the actual number of shares delivered at the end
of the performance period 2016-2018. At vesting, the dividend equivalents are credited in shares or ADRs.
5 Includes the LTPP vesting for the outgoing CEO, General Counsel, CEO of Alcon, and President of Novartis Operations and Country President Switzerland for performance cycle
2016-2018, as per the plan rules. See page 148 for further details.
2016-2018 performance cycle LTRPP
Under the LTRPP, the award made to the CEO of 4 569 PSUs, and the aggregate award of 96 143 PSUs made to
the other Executive Committee members (including those who stepped down during the year) were forfeited, result-
ing in no payout, due to the Company’s TSR over the three-year performance period ranking 11 out of 13 peer com-
panies.
152
Item 6. Directors, Senior Management and Employees
The table and information below provide details of the 2017 realized compensation for the CEO and other Execu-
tive Committee members, for comparative purposes.
2017 realized compensation for the CEO and other Executive Committee members
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)
CHF
2 100 000
166 397
1 968 750
1 968 792
5 068 337
Aggregate realized
compensation of the other
10 ECN members
Total 5
9 310 740
CHF
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
0
72 186 11 344 462
3 248 419 36 174 472
3 320 605 47 518 934
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.
Realized compensation for the Executive Committee for 2018 compared to 2017
When comparing 2018 total realized compensation for the Executive Committee, including the CEO, of CHF 66.3
million to the 2017 total realized compensation of CHF 47.5 million, the difference is primarily due to changes in the
composition of the Executive Committee. There has been both an increase in the number of Executive Committee
members and an overlap of departing and appointed members, including the CEO in 2018.
153
Item 6. Directors, Senior Management and Employees
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 2018 compensation (base salary and benefits)
• The actual cash portion and the deferred portion granted in equity of the 2018 Annual Incentive
• LTPP and LTRPP 2018-2020 performance cycle awards, which are reported at target value at grant date under
the assumption that the awards will vest at 100% achievement, excluding any share price movement and dividend
equivalents that may be accrued over the performance cycle. The future payout will be determined only after the
performance cycle concludes in three years (i.e., end of 2020), with a payout range of 0% to 200% of the target
value.
• Other compensation for 2018, which includes other benefits and the full amount of compensation for lost entitle-
ments from former employers (buyouts), and compensation during the notice period (between the date of step-
ping down from the Executive Committee and either December 31 or the end of the contractual notice), either
paid in cash or granted in equity in the year
To assess CEO actual pay for performance in 2018, including the Annual Incentive payout for the 2018 perfor-
mance year and the Long-Term Incentive payouts for the 2016-2018 performance cycle, shareholders should
refer to the 2018 realized compensation table on page 151.
154
Item 6. Directors, Senior Management and Employees
2018 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 2018
Long-Term Incentive 2018-2020 cycle
grants at target
2018 annual base
salary
2018 pension
benefits
2018 Annual Incentive
(performance achieved)
LTPP
2018-2020 cycle
LTRPP
2018-2020 cycle
Other 2018
compensation
Total
compensation
paid, promised
or granted 2018
Currency
Cash
(amount)
Amount
1
Cash
(amount)
Equity
(value at
2
grant date)
PSUs
(target value
3
at grant date)
PSUs
(target value
3
at grant date)
Amount
4
5
Amount
Executive Committee members active on December 31, 2018
Vasant Narasimhan
(CEO from February 1, 2018) 6
Steven Baert
Elizabeth Barrett
(from February 1, 2018,
to December 31, 2018) 7
Bertrand Bodson
(from April 1, 2018) 8
James Bradner 9
Richard Francis
Paul Hudson
Harry Kirsch
Shannon Thyme Klinger
(from April 1, 2018) 8
Steffen Lang
(from April 1, 2018) 8
Klaus Moosmayer
(from December 1, 2018)
John Tsai
(from May 1, 2018)
Robert Weltevreden
(from June 1, 2018)
Subtotal
CHF
CHF
1 491 667
780 000
168 233
152 914
1 594 801
585 000
1 594 805
585 073
3 100 046
1 170 051
1 937 539
468 053
34 401
77 550
9 921 491
3 818 642
CHF
779 167
174 274
0
0
1 360 040
510 057
2 747 859
5 571 397
CHF
USD
CHF
CHF
CHF
450 000
1 094 462
850 000
985 000
1 040 000
97 666
257 018
176 368
180 771
173 499
216 986
924 000
382 500
1 007 325
858 000
217 001
924 004
382 528
1 007 352
858 043
440 614
1 870 085
1 360 057
1 683 036
1 768 008
110 174
880 086
510 001
792 027
832 067
146 478
63 313
1 790 428
94 355
58 814
1 678 918
6 012 967
5 451 882
5 749 866
5 588 431
CHF
520 833
103 448
275 770
275 790
619 595
185 862
37 118
2 018 416
CHF
540 000
99 535
260 384
260 454
596 631
179 064
8 595
1 944 663
CHF
41 667
9 704
16 986
17 011
CHF
566 667
126 845
313 801
313 867
0
0
0
808 821
894 189
0
4 590 950
5 912 129
CHF
350 000
9 464 855
70 950
1 785 446
77 392
6 492 171
232 337
671 702
6 647 490 14 597 819
155 003
1 561 099
6 540 145 10 460 974 55 988 900
3 715
Executive Committee members who stepped down during 2018 10
Joseph Jimenez
(CEO until January 31, 2018)
178 601
CHF
19 146
133 767
0
0
0
2 357 371
2 688 885
F. Michael Ball
(until June 30, 2018) 9
Felix R. Ehrat
(until May 31, 2018)
André Wyss
(until March 31, 2018) 11
Subtotal
Total
USD
CHF
555 397
126 594
333 238
333 231
888 640
388 845
2 970 642
5 596 587
384 740
68 918
153 896
153 892
654 081
230 877
2 346 072
3 992 477
CHF
217 582
1 323 833
10 788 688
45 646
257 458
2 042 904
216 986
830 395
7 322 566
0
479 632
116 060
1 638 802
7 127 122 16 236 621
43 523
654 503
1 375 802
2 015 599
8 983 098 14 167 721
7 194 648 19 444 072 70 156 621
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 2021.
See the next page for 2017 comparative figures.
1 Includes mandatory employer contributions of CHF 4 336 for the CEO and CHF 78 403 for the other Executive Committee members paid by Novartis to governmental social security systems. This amount is out
of total employer contributions of CHF 2 847 422 paid in 2018 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 22, 2019) of CHF 88.14 per Novartis share and USD 88.32
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 2018-2020, 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 for all members except Elizabeth Barrett and Robert Weltevreden. For Ms. Barrett and Mr. Weltevreden, the closing share price
on the grant date was respectively CHF 83.52 on February 1, 2018, and CHF 74.70 on June 1, 2018, per Novartis share.
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 The figures include Vasant Narasimhan’s compensation of January 2018 as Head of Global Drug Development.
7 Elizabeth Barrett stepped down from the role of CEO, Novartis Oncology and from the Executive Committee as at the end of the 2018 business year. The LTPP and LTRPP grants (16 284 and 6 107 PSUs,
respectively) for the 2018-2020 performance cycle, and the 2018 buyout award of 21 267 performance shares, reflected in other compensation, both included in the table above, were forfeited in full upon her
departure on December 31, 2018.
8 For those members who joined the Executive Committee in 2018, the information under the columns “2018 annual base salary,” “2018 pension benefits,” “2018 Annual Incentive,” “LTPP” and “LTRPP” includes
their pro-rata compensation from the date they joined the Executive Committee to December 31, 2018.
9 Amounts in USD for F. Michael Ball and James Bradner were converted at a rate of CHF 1.00 = USD 0.978, which is the same average exchange rate used in the Group’s 2018 consolidated financial statements.
10 For those members who left the Executive Committee in 2018, the information under the columns “2018 annual base salary,” “2018 pension benefits,” “2018 Annual Incentive,” “LTPP” and “LTRPP” reflects the
pro-rata compensation for the period they were an Executive Committee member in 2018. The information under the column “Other 2018 compensation” also includes, inter alia, their pro-rata compensation
from the date they stepped down from the Executive Committee to December 31, 2018. More information regarding Executive Committee members who stepped down during 2018 is on page 150.
11 The full number of PSUs under LTPP and LTRPP 2018-2020 granted to André Wyss were 16 985 and 6 370, respectively. The amounts included under LTPP and LTRPP in the table above are disclosed on a
pro-rata basis to the end of his notice period (i.e., September 30, 2018), per his contractual agreement and subject to the plan rules.
155
Item 6. Directors, Senior Management and Employees
2017 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 2017.
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)
LTPP
2017-2019 cycle
LTRPP
2017-2019 cycle
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 6
Joseph Jimenez
(CEO)
F. Michael Ball
Steven Baert
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
USD
CHF
USD
CHF
CHF
CHF
CHF
CHF
2 100 000
1 120 000
775 000
1 066 385
928 333
841 667
958 333
1 038 333
841 667
166 397
203 546
154 652
117 394
137 334
176 362
203 485
153 854
168 562
1 968 750
873 600
663 000
898 800
223 200
425 000
950 400
800 800
807 500
1 968 792
873 605
663 034
898 837
892 833
425 028
950 449
800 814
807 529
4 200 018
1 792 047
1 170 069
1 819 043
1 581 045
1 360 002
1 536 023
1 768 053
1 360 002
2 625 038
784 043
468 056
856 033
558 028
510 010
672 046
832 012
510 010
72 186 13 101 181
5 940 130
4 013 029
5 702 347
4 335 807
4 851 017
5 467 837
5 452 576
4 545 873
293 289
119 218
45 855
15 034
1 112 948
197 101
58 710
50 603
CHF
898 333
875 000
CHF
CHF 11 410 740
210 613
154 339
1 841 795
225 000
0
7 809 857
225 074
1 440 057
1 408 021
1 232 060
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.
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 2017-2019 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.
Compensation at grant value for the Executive Committee for 2018 compared to 2017
When comparing the Executive Committee 2018 total compensation at grant value of CHF 70.2 million to the 2017
total compensation at grant value of CHF 61.0 million, the difference is primarily due to the awards granted in 2018
to external newly appointed members of the Executive Committee – Elizabeth Barrett, John Tsai and Klaus Moos-
mayer – as part of their buyout packages when joining Novartis in 2018. However, Elizabeth Barrett forfeited com-
pensation amounting to CHF 3.7 million composed of her equity buyout (CHF 1.8 million) and her LTPP and LTRPP
grants for the 2018-2020 performance cycle (CHF 1.9 million), as she stepped down from the Executive Commit-
tee on December 31, 2018. See page 150 for further details on the changes to the composition of the Executive
Committee in 2018.
156
Item 6. Directors, Senior Management and Employees
Additional disclosures for the CEO and other Executive Committee members
This section provides additional disclosures, including information about the shareholdings of the CEO and the
other Executive Committee members.
Former Alcon CEO one-off performance award update
To avoid any conflict of interest following news of the intention to spin off Alcon, the former Alcon CEO, F. Michael
Ball, gave notice to retire from his role and stepped down from the Executive Committee on July 1, 2018, commenc-
ing his 12-month contractual notice period that will end on the Alcon spin-off date (or June 30, 2019, if later). During
the notice period, Mr. Ball is serving as Chairman-Designate of Alcon, reporting to Vasant Narasimhan and focus-
ing on preparing Alcon for the intended spin-off. In this role, Mr. Ball supports the newly appointed Alcon CEO to
ensure that the turnaround of the Alcon business continues to accelerate, and that the company will be in a strong
position to operate as an independent entity. The Alcon CEO role does not sit on the Novartis Executive Commit-
tee given the potential conflict of interest.
As disclosed in the 2016 Compensation Report, Mr. Ball received a one-off award of 50 000 performance share
units in February 2016 when he joined Novartis, subject to the achievement of targets linked to the turnaround of
Alcon during the 2016-2018 performance cycle.
In line with his contractual terms, this one-off award will vest in early 2019, subject to performance outcomes
versus the targets set. The performance measures are based on financial and non-financial targets, including sales
growth ahead of peers, core operating income growth ahead of sales growth, core operating income margin at
least in line with the average of peers, and the successful launch of new products.
In 2016, performance was tracking below target. However, in 2017 and 2018, Alcon began to close the gap ver-
sus the targets. Given that some of the performance measures are assessed relative to peers, the achievements
and the final payout of this three-year Long-Term Incentive award will be disclosed in the 2019 Compensation
Report, once the final performance is known.
Malus and clawback
Any incentive compensation paid to Executive Committee members is subject to malus and clawback rules. This
means that the Board for the CEO, and the Compensation Committee for the other Executive Committee mem-
bers, 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 accounting policies, or
violates laws. This principle applies to both the short-term Annual Incentive and Long-Term Incentive plans.
In 2018, there was no legal or factual basis on which to exercise malus or clawback for current or former Exec-
utive Committee members. However, the Compensation Committee and the Board of Directors decided to apply
its discretion, as foreseen in the plan rules, to reduce the 2018 Annual Incentive to below-target levels for certain
executives in relation to their responsibilities.
157
Item 6. Directors, Senior Management and Employees
Number of equity instruments granted to the CEO and other Executive Committee members for financial
year 2018
Variable compensation1
2018 Annual Incentive
(performance achieved)
LTPP
2018-2020 cycle
LTRPP
2018-2020 cycle
Other
Equity
(number) 2
PSUs
(target number) 3
PSUs
(target number) 3
Equity/PSUs
(number)
Executive Committee members active on December 31, 2018
Vasant Narasimhan (CEO from February 1, 2018)
Steven Baert
Elizabeth Barrett (from February 1, 2018, to December 31, 2018) 4
Bertrand Bodson (from April 1, 2018)
James Bradner
Richard Francis
Paul Hudson
Harry Kirsch
Shannon Thyme Klinger (from April 1, 2018)
Steffen Lang (from April 1, 2018)
Klaus Moosmayer (from December 1, 2018)
John Tsai (from May 1, 2018)
Robert Weltevreden (from June 1, 2018)
Subtotal
Executive Committee members who stepped down during 2018
Joseph Jimenez (CEO until January 31, 2018) 5
F. Michael Ball (until June 30, 2018)
Felix R. Ehrat (until May 31, 2018)
André Wyss (until March 31, 2018) 6
Subtotal
Total
18 094
6 638
0
2 462
10 462
4 340
11 429
9 735
3 129
2 955
193
3 561
2 636
75 634
0
7 609
4 221
0
11 830
87 464
37 395
14 114
16 284
5 315
21 642
16 406
20 302
21 327
7 474
7 197
0
0
8 992
176 448
0
10 284
7 890
1 400
19 574
196 022
23 372
5 646
6 107
1 329
10 185
6 152
9 554
10 037
2 242
2 160
0
0
2 075
78 859
0
4 500
2 785
525
7 810
86 669
0
0
21 267
0
0
0
0
0
0
0
8 857
27 381
0
57 505
0
18 865
17 603
3 915
40 383
97 888
See the next page for 2017 comparative figures.
1 The values of the awards are reported in the table “2018 compensation at grant value for the CEO and other Executive Committee members” on page 155.
2 Vested shares, restricted shares and/or RSUs granted under the Annual Incentive for performance period 2018
3 Target number of PSUs granted under the LTPP and LTRPP as applicable for the performance cycle 2018-2020
4 Elizabeth Barrett stepped down from the role of CEO, Novartis Oncology and from the Executive Committee as at the end of the 2018 business year. The LTPP and LTRPP grants
(16 284 and 6 107 PSUs, respectively) for the 2018-2020 performance cycle, and the 2018 buyout award of 21 267 performance shares, reflected in other compensation, both
included in the table above, were forfeited in full upon her departure on December 31, 2018.
5 Joseph Jimenez received his 2018 Annual Incentive 100% in cash and was not granted LTPP and LTRPP awards for the performance cycle 2018-2020.
6 André Wyss stepped down from the Executive Committee on March 31, 2018, and ended his notice period on September, 30 2018. He received his 2018 Annual Incentive 100% in
cash on a pro-rata basis, and the LTPP and LTRPP grants for the 2018-2020 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.
158
Item 6. Directors, Senior Management and Employees
Number of equity instruments granted to the CEO and other Executive Committee members for financial
year 2017 (comparative information)
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 compensation1
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
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 156.
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 2017-2019 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.
159
Item 6. Directors, Senior Management and Employees
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 of Directors may, at its discretion,
amend that time period accordingly.
FUNCTION
OWNERSHIP LEVEL
CEO
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), and RSUs acquired under the Compa-
ny’s compensation plans. However, unvested matching
shares granted under former matching programs, 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 and vested options of Novartis
shares or ADRs that are owned directly or indirectly by
“persons closely linked” to an Executive Committee
member. The Compensation Committee reviews com-
pliance with the share ownership guideline on an annual
basis.
Shares, ADRs and other equity rights owned by Executive Committee members at December 31, 20181
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, 2018. As of December 31, 2018, 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 December 31, 2018, 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, 2018
Equity ownership level
Vasant Narasimhan
(CEO from February 1, 2018)
Steven Baert
Elizabeth Barrett
(from February 1, 2018,
to December 31, 2018) 6
Bertrand Bodson
(from April 1, 2018)
James Bradner
Richard Francis
Paul Hudson
Harry Kirsch
Shannon Thyme Klinger
(from April 1, 2018)
Steffen Lang
(from April 1, 2018)
Klaus Moosmayer
(from December 1, 2018)
John Tsai
(from May 1, 2018)
Robert Weltevreden
(from June 1, 2018)
25 240
23 365
0
0
924
48 079
16 756
97 081
57 111
22 598
0
4 600
22 193
19 937
32 589
29 488
14 007
21 705
23 793
14 743
0
0
6 429
16 432
150
0
Total 7
255 824
241 396
4x
4x
0x
0x
1x
6x
4x
10x
4x
4x
0x
2x
0x
56 552
39 461
0
3 914
67 997
47 078
30 585
67 058
4 192
0
0
0
0
0
0
3 756
143 095
85 424
0
8 514
91 114
115 094
79 930
197 383
16 722
1 684
54 118
14 747
4 087
57 370
3 274
2 202
3 690
353 280
0
0
0
13 719
3 274
25 063
3 840
864 219
1 Includes holdings of “persons closely linked” to Executive Committee members (see definition on page 161)
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 2018 financial year. The share price on the final trading day of
2018 was CHF 84.04 / USD 85.81 as at December 31, 2018.
4 The target number of PSUs is disclosed pro-rata to December 31, 2018, 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, 2018, 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.
6 Elizabeth Barrett stepped down from the role of CEO, Novartis Oncology and from the Executive Committee as at the end of the 2018 business year. The LTPP and LTRPP grants
(16 284 and 6 107 PSUs, respectively) for the 2018-2020 performance cycle, and the 2018 buyout award of 21 267 performance shares were forfeited in full upon her departure on
December 31, 2018.
7 Joseph Jimenez, F. Michael Ball, Felix Ehrat and André Wyss stepped down from the Executive Committee in 2018. At the time they stepped down from the Executive Committee,
Mr. Jimenez owned 4 750 vested shares, and 244 297 unvested shares and other equity rights; Mr. Ball owned no vested shares, and 165 810 unvested shares and other equity
rights; Mr. Ehrat owned 236 886 vested shares, and 114 038 unvested shares and other equity rights; and Mr. Wyss owned 81 347 vested shares and 49 344 unvested shares and
other equity rights.
160
Item 6. Directors, Senior Management and Employees
Fixed and variable compensation
The CEO and other Executive Committee members’
annual base salary and variable compensation mix at
grant value for financial year 2018:
Vasant Narasimhan (CEO)
Steven Baert
Elizabeth Barrett
Bertrand Bodson
James Bradner
Richard Francis
Paul Hudson
Harry Kirsch
Shannon Thyme Klinger
Steffen Lang
Klaus Moosmayer
John Tsai
Robert Weltevreden
Total 3
Annual
Variable
base salary 1 compensation 2
15.3%
21.7%
29.4%
31.4%
19.2%
24.4%
18.0%
19.4%
27.7%
29.4%
55.1%
47.4%
23.5%
21.6%
84.7%
78.3%
70.6%
68.6%
80.8%
75.6%
82.0%
80.6%
72.3%
70.6%
44.9%
52.6%
76.5%
78.4%
1 Excludes pension and other benefits
2 See table “2018 compensation at grant value for the CEO and other Executive
Committee members” on page 155 with regard to the disclosure
principles of variable compensation.
3 Excludes Joseph Jimenez, F. Michael Ball, Felix Ehrat and André Wyss, who stepped
down from the Executive Committee during 2018
Other payments to Executive Committee members
During 2018, no other payments or waivers of claims
other than those set out in the tables (including their foot-
notes) contained in this Compensation Report were
made to Executive Committee members or to “persons
closely linked” to them.
Payments to former Executive Committee
members
Under the former Executive Committee members’ con-
tracts and in line with the Company’s Long-Term Incen-
tive plan rules, payments were made to four former mem-
bers totaling CHF 8 884 095. One former Executive
Committee member who stepped down in 2017 received
payments during the contractual notice period in 2018
of salary, pension and other benefits, and an Annual
Incentive totaling CHF 2 096 154 per the employment
contract.
Two former members received payments totaling
CHF 6 287 264 in line with the Company’s Long-Term
Incentive plan rules. The payments related to the vest-
ing of LTPP for the 2016-2018 performance cycle, based
on actual performance outcomes plus dividend equiva-
lents. No payments were or will be made for the 2016-
2018 LTRPP performance cycle.
In addition, in line with the Company’s global mobility
policy, during 2018, one former member received a tax
equalization payment of CHF 517 474 related to incen-
tive compensation granted during an international
assignment. Also, four former members received other
benefits, for example tax return services, totaling CHF
189 737.
No other payments (or waivers of claims) were made
to former Executive Committee members or to “persons
closely linked” to them during 2018.
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 2018, and none were outstanding as of
December 31, 2018.
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 Note 26 to the Group’s
audited consolidated financial statements.
Award and delivery of equity to Novartis associates
During 2018, 14.4 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) and outstand-
ing equity options held by associates represent 1.82%
of issued shares. Novartis delivers treasury shares to
associates to fulfill these obligations, and aims to offset
the dilutive impact from its equity-based participation
plans.
161
Item 6. Directors, Senior Management and Employees
2019 Executive Committee compensation
system
Each year the Executive Committee compensation sys-
tem is reviewed by the Board of Directors and Compen-
sation Committee to ensure it remains closely aligned
with business needs and evolving best practice compen-
sation principles, while also taking into consideration
feedback from dialogue with shareholders.
The Board of Directors and the Compensation Com-
mittee decided to focus the 2018 review on the structure
and performance measures of the Long-Term Incentive
plans, taking into account a desire for simplification and
the principle of compensating executives more directly
on performance linked to our strategic priorities of accel-
erating top- and bottom-line growth.
Annual Incentive
The Compensation Committee decided to maintain the
Annual Incentive structure and the balanced scorecard
approach following the changes announced last year, as
they continue to align with the key strategic priorities.
Values and Behaviors also remain a key component 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 standards.
For 2019, the CEO balanced scorecard will be as fol-
lows:
CEO BALANCED SCORECARD – KEY METRICS
Financial targets – 60% of total Annual Incentive, comprising:
Group net sales (30%)
Group operating income (30%)
Group free cash flow (as % of sales) (20%)
Share of peers for Novartis Group (20%)
Strategic objectives – 40% of total Annual Incentive, comprising:
Innovation (20%)
Operational excellence (20%)
Data and digital (20%)
People and culture (20%)
(including Values and Behaviors)
Building trust with society (20%)
(including access to healthcare and reputation)
The payout schedule for the Annual Incentive will also
remain unchanged, as follows:
PERFORMANCE
Outstanding
Exceeds expectations
Meets expectations
Partially meets expectations
Below expectations
PAYOUT
170%–200%
130%–160%
80%–120%
40%–70%
0%–30%
Long-Term Incentive
Following a thorough evaluation and review of the Long-
Term Incentive plan, the Compensation Committee
approved the change from two Long-Term Incentive
plans to a single Long-Term Incentive plan for perfor-
mance cycles beginning in 2019 onward. The perfor-
mance measures presented below, each with an equal
weighting, have been chosen as the most appropriate
measures to best support the objective of transforming
Novartis into a leading, focused innovative medicines
company over the long term. There will be no increase
in target opportunity as a percentage of annual base sal-
ary for the CEO and most other members of the Execu-
tive Committee (exceptions are on page 164).
THREE-YEAR PERFORMANCE MEASURES
WEIGHTING
Net sales, CAGR 1
Core operating income, CAGR 1
Innovation
Relative TSR
1. CAGR = compound annual growth rate
25%
25%
25%
25%
Financial measures: net sales CAGR and core
operating income CAGR
The Compensation Committee has determined that the
appropriate financial measures to replace NCVA for the
2019-2021 performance cycle are net sales growth and
core operating income growth. These are simpler, more
transparent measures, which will better align the Long-
Term Incentive with the evolving Group strategic imper-
atives of accelerating growth and margin expansion to
drive long-term value.
The net sales growth and core operating income
growth targets will be based on the Novartis three-year
strategic plan, taking into account peer growth and exter-
nal consensus levels, and will be set at the beginning of
each performance cycle. Actual performance will then
be assessed at the end of the three-year performance
cycle against these targets. Core operating income is a
non-IFRS measure, and its definition can be found on
page 109 of this Annual Report.
Payout levels will range from 0% to 200% of target
opportunity. A formulaic payout schedule will apply to
three payout ranges: 40% to 80%, 80% to 120%, and
120% to 200% of target opportunity. For 80% to 120%
payout, a ±1% net sales CAGR and ±2% core operating
income CAGR range around the performance targets
will apply. Between 40% to 80% and 120% to 200% pay-
out, the slope will be two times steeper to penalize or
reward material under or over performance, respectively.
There will be no payout below 40% of target opportu-
nity.
The committee will review performance outcomes in
the context of overall business performance and the
healthcare industry as a whole. In certain circumstances,
the committee can apply discretion to adapt payout lev-
162
Item 6. Directors, Senior Management and Employees
Additional information
Performance shares granted under the Long-Term
Incentive do not carry voting rights but do carry dividend
equivalents that are paid in shares at the end of the per-
formance period.
There will be pro-rata vesting for all departing Exec-
utive Committee members who are considered “good
leavers” (including those who are retiring) for Long-Term
Incentive awards granted from 2019 onward, as
announced in last year’s Compensation Report. There
will continue to be malus and clawback, applicable to any
incentive compensation paid to Executive Committee
members.
Disclosure of performance targets
The three-year forward-looking targets will be disclosed
to shareholders at the end of the performance cycle. Dis-
closing these long-term targets before the end of the
relevant performance cycle would give substantial insight
into the Company’s confidential strategies and could
place the Company and its shareholders at a competi-
tive disadvantage. Therefore, prospective disclosure was
not preferred.
We understand that with this approach, the share-
holder cannot assess performance targets until the per-
formance cycle has ended. To mitigate this, throughout
each cycle, we will provide information on how financial
and innovation performance is tracking against the tar-
gets set at the beginning of the cycles. We will also pro-
vide a yearly relative TSR performance update.
els, to ensure there is appropriate alignment between
payout levels and overall Company performance for the
relevant period. Where discretion is applied, the commit-
tee will explain the rationale in the relevant Compensa-
tion Report.
The Compensation Committee considered the use
of another return-based performance measure and
determined that it is not appropriate at this time. This is
to ensure that decisions on research and development
and future acquisitions and divestments are based on
long-term value creation.
Innovation
The innovation performance measure aligns with the
Novartis mission to reimagine medicine to improve and
extend people’s lives. To simplify the assessment of this
objective, innovation targets will be set in relation to eight
to 10 key research and development programs. The pay-
out ranges remain unchanged, with 0% to 150% payout
for the achievement of the target milestones, and 150%
to 200% of target for truly exceptional performance.
Relative TSR
Relative TSR continues to play an important role in
assessing our performance versus the external market.
Therefore, the Compensation Committee elected to
retain relative TSR within the new single plan Long-Term
Incentive structure. Relative TSR will continue to be
assessed against our global healthcare peer group com-
panies. The payout ranges are unchanged and summa-
rized below.
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%
163
Item 6. Directors, Senior Management and Employees
2019 Executive Committee compensation
2019 Executive Committee total compensation changes
All Executive Committee members, except those outlined below, were awarded increases of between 0% and 3%.
For context, the average of all Novartis employee annual base salary increases was 1.3% in Switzerland and 3% in
the US. Consistent with our Executive Committee appointments compensation policy (see page 141), the members
outlined below were appointed to the Executive Committee in recent years with total target compensation below
external market median level. The total target compensation for these members has been assessed, and increases
in line with proven performance have been made, as disclosed below.
Vasant Narasimhan, CEO
Vasant Narasimhan quickly established himself as CEO. He delivered a good first year of financial results and ini-
tiated many activities, which have already had an impact on the Company performance and its culture. Dr. Nara-
simhan was appointed on a salary significantly below that of his predecessor and the market, with the intention
(communicated in last year’s Compensation Report) to increase his compensation to a more competitive level, sub-
ject to strong performance and proven ability in the role. This prudent approach is in line with our reward principles
for Executive Committee members and all other associates. Given this context, Dr. Narasimhan will receive an
annual base salary increase of 8% as from March 1, 2019 (from CHF 1 550 000 to CHF 1 674 000). There will be
no change to his target Annual Incentive and his target Long-Term Incentive (325% of base salary in total). Over-
all, his 2019 total target compensation will be increased by 8% compared to 2018.
Paul Hudson, CEO, Novartis Pharmaceuticals
During 2018, Paul Hudson delivered above-target performance against his financial targets, led cross-functional
transformation in launch excellence, scaled pioneering efforts in digital, and drove culture change. Mr. Hudson will
receive an annual base salary increase of 4% as from March 1, 2019, and his target Long-Term Incentive will be
increased from 250% of annual base salary to 270% of annual base salary as from 2019. There will be no change
to his Annual Incentive target. Overall, his 2019 total target compensation will be increased by 8.6% compared to
2018.
Shannon Thyme Klinger, Group General Counsel
Shannon Thyme Klinger was appointed on a package significantly below that of her predecessor and the market.
It was the Compensation Committee’s intention to increase her compensation to a more competitive level, subject
to strong performance. Ms. Klinger delivered a very strong contribution in her role. She launched an important stra-
tegic and functional transformation of the legal team, managed critical mergers and acquisitions and led culture
change. Ms. Klinger will therefore receive an annual base salary increase of 14.3% as from March 1, 2019 (from CHF
700 000 to CHF 800 000), and her target Long-Term Incentive will be increased from 180% of annual base salary
to 200% of annual base salary as from 2019. There will be no change to her Annual Incentive. Overall, her 2019
total target compensation will be increased by 20.5%.
Steffen Lang, Global Head of Novartis Technical Operations and Quality
During 2018, Steffen Lang delivered on the technical operations transformation, financial targets and new technol-
ogies. Mr. Lang will receive an annual base salary increase of 4.2% as from March 1, 2019. There will be no change
to his Annual Incentive and his Long-Term Incentive targets.
Susanne Schaffert, CEO, Novartis Oncology
Susanne Schaffert was promoted internally to CEO, Novartis Oncology, and became a member of the Novartis
Executive Committee as of January 1, 2019. Her annual base salary is CHF 850 000, her target Annual Incentive
is 100% of base salary, and her target Long-Term Incentive is 220% of base salary.
164
Item 6. Directors, Senior Management and Employees
Alcon spin-off equity restoration plan
If and when the Alcon spin-off occurs in the first half of 2019, holders of unvested awards in the form of restricted
Novartis shares will receive a dividend in kind resulting from the spin-off. Holders of unvested RSUs and PSUs will
not receive the dividend in kind resulting from the spin-off. Consequently, RSUs and PSUs held by Novartis employ-
ees – including the members of the Executive Committee – will be devalued, as they do not participate in the dis-
tribution. To compensate for the lost value, Novartis will grant equity awards (called Keep Whole awards) to its
employees, including the Executive Committee members, following the spin-off. This will be done in accordance
with the Alcon equity restoration plan, as follows:
• The Keep Whole awards will have a value equivalent to the value of the dividend in kind resulting from the spin-
off that each award would have received had it been a Novartis share.
• The Keep Whole awards will be granted in the same equity instrument (i.e., PSUs or RSUs) and will have the same
vesting terms and performance conditions (if applicable) as the underlying award.
• The Keep Whole awards aim to ensure that Novartis employees who have been granted RSUs or PSUs, includ-
ing Executive Committee members, are not disadvantaged by the spin-off relative to Novartis shareholders.
165
Item 6. Directors, Senior Management and Employees
2018 Board compensation
Philosophy and benchmarking
Other Board members
Aligned with market practice in Switzerland, the Board
of Directors sets compensation for its members at a level
that allows for the attraction of high-caliber individuals,
including both Swiss and international members, who
have global experience.
Board members do not receive variable compensa-
tion, in line with their focus on corporate strategy, super-
vision and governance. Each year at the AGM, share-
holders are requested to approve, in a binding vote, the
total compensation of the Board until the following AGM.
The Board of Directors sets the level of compensa-
tion for its Chairman and the other members to be in line
with relevant benchmark companies, which include other
large Switzerland-based multinational companies: ABB,
Credit Suisse, Lafarge Holcim, Nestlé, Roche and UBS.
This peer group was chosen for Board of Directors com-
pensation due to the comparability of Swiss legal require-
ments, including broad personal and individual liabilities
under Swiss law (and new criminal liability under Swiss
rules regarding Board of Directors and Executive Com-
mittee compensation related to the Ordinance against
Excessive Compensation in Listed Companies), and
under US law (due to the Company’s secondary listing
on the New York Stock Exchange). The Board of Direc-
tors reviews the compensation of its members, including
the Chairman, each year based on a proposal by the
Compensation Committee and on advice from its inde-
pendent advisor, including relevant benchmarking infor-
mation. The peer group used for the Board of Directors
is different than that used for the Executive Committee
to ensure independence of decision-making.
Chairman of the Board
As Chairman, Joerg Reinhardt receives total annual com-
pensation valued at CHF 3.8 million. The total compen-
sation is comprised equally of cash and shares, as fol-
lows:
• Cash compensation: CHF 1.9 million per year
• Share compensation: annual value equal to CHF 1.9
million of unrestricted Novartis shares
For 2018, 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 (1.3% for 2018).
The annual fee rates for Board membership and addi-
tional functions are included in the table below. These
were approved by the Board of Directors with effect from
the 2018 AGM. Aggregate Board compensation is aligned
with other large Swiss companies.
CHF 000s
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
280
50
130
90
70
70
40
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.
2019 Board compensation
The Board of Directors compensation system and fee
levels will remain unchanged in 2019.
166
Item 6. Directors, Senior Management and Employees
Board member total compensation earned for the financial year 2018
Governance,
Nomination
Board
membership Committee
Audit and
and Corporate Research &
Compliance Compensation Responsibilities Development
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 members active on December 31, 2018
Joerg Reinhardt 4
Enrico Vanni
Nancy Andrews
Dimitri Azar
Ton Buechner
Srikant Datar
Elizabeth Doherty
Ann Fudge
Frans van Houten
Andreas von Planta
Charles L. Sawyers
William T. Winters
Subtotal
Chair
Chair
23 889 1 900 000 1 900 000 4 336 3 804 336
Vice Chair
•
Chair
•
•
•
•
•
•
•
•
•
•
• 5
•
Chair
•
•
•
•
•
• 5
•
Chair
•
•
•
• 5
•
4 854
41 667 483 334 3 475 528 476
2 262 180 000 180 000
– 360 000
2 359 182 500 182 500
– 365 000
4 270
– 346 667 4 336 351 003
•
• 6
Chair
2 859 229 167 229 167
– 458 334
•
•
•
2 828 225 000 225 000
– 450 000
2 481 199 167 199 167
– 398 334
2 334 148 333 168 333
– 316 666
2 859 229 167 229 167 4 336 462 670
2 262 180 000 180 000
– 360 000
4 087
– 321 667
– 321 667
57 344 3 515 001 4 645 002 16 483 8 176 486
Board members who stepped down at the 2018 AGM
Pierre Landolt
(until March 2, 2018) 7
Subtotal
Total
•
• 6
2 131
2 131
–
–
55 000 3 475
58 475
55 000 3 475
58 475
59 475 3 515 001 4 700 002 19 958 8 234 961
See page 168 for 2017 comparative figures.
1 The shown amounts represent the gross number of shares delivered to each Board member in 2018 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 2018 for the services from the 2017 AGM to the 2018 AGM, and (ii) the first of two
equity installments delivered in August 2018 for the services from the 2018 AGM to the 2019 AGM. The second and final equity installment for the services from the 2018 AGM to the
2019 AGM will take place in February 2019.
2 Includes an amount of CHF 19 958 for mandatory employer contributions for all Board members paid by Novartis to governmental social security systems. This amount is out of total
employer contributions of CHF 383 864, 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 Joerg Reinhardt.
5 From March 2, 2018
6 Until March 2, 2018
7 According to Pierre Landolt, the Sandoz Family Foundation is the economic beneficiary of the compensation.
167
Item 6. Directors, Senior Management and Employees
Board member total compensation earned for the financial year 2017
Governance,
Nomination
Board
membership Committee
Audit and
and Corporate Research &
Compliance Compensation Responsibilities Development
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 members active on December 31, 2017
Joerg Reinhardt 4
Enrico Vanni
Nancy Andrews
Dimitri Azar
Ton Buechner
Srikant Datar
Elizabeth Doherty
Ann Fudge
Pierre Landolt 6
Frans van Houten
(from February 28, 2017)
Andreas von Planta
Charles L. Sawyers
William T. Winters
Total
•
•
• 7
Chair 5
•
Chair
Vice Chair
•
•
•
•
•
•
•
•
•
•
•
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
4 238
– 330 000 3 475 333 475
1 305
75 000 175 000
– 250 000
• 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
•
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 Mr. 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
168
Item 6. Directors, Senior Management and Employees
Loans to Board members
Our policy does not allow loans to be granted to current
or former members of the Board of Directors or to “per-
sons closely linked” to them. Therefore, no loans were
granted in 2018, and none were outstanding as of Decem-
ber 31, 2018.
Other payments to Board members
During 2018, no payments (or waivers of claims) other
than those set out in the Board member compensation
table (including its footnotes) on page 167 were made to
current members of the Board or to “persons closely
linked” to them.
Payments to former Board members
During 2018, 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.
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 of
Directors are required to own at least 5 000 Novartis
shares within five years after joining the Board of Direc-
tors, to ensure their interests are aligned with those of
shareholders.
Board members are prohibited from hedging or
pledging their ownership positions in Novartis shares
that are part of their guideline share ownership require-
ment, and are required to hold these shares for 12 months
after retiring from the Board of Directors. As of Decem-
ber 31, 2018, all current and former members of the
Board of Directors who were required to meet the mini-
mum share ownership requirements did so.
Shares, ADRs and share options owned by Board
members
The total number of vested Novartis shares and ADRs
owned by members of the Board of Directors and “per-
sons closely linked” to them as of December 31, 2018, is
shown in the table below. As of December 31, 2018, 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 of Directors
held any share options to purchase Novartis shares.
Number of shares
at December 31, 2018 1,2
Joerg Reinhardt
Enrico Vanni
Nancy Andrews
Dimitri Azar
Ton Buechner
Srikant Datar
Elizabeth Doherty
Ann Fudge
Frans van Houten
Andreas von Planta
Charles L. Sawyers
William T. Winters
Total 3
542 199
23 500
5 739
14 863
8 069
39 383
4 882
14 818
2 728
133 493
9 460
15 371
814 505
1 Includes holdings of “persons closely linked” to Board members (see definition on
page 161)
2 Each share provides entitlement to one vote.
3 Pierre Landolt stepped down from the Board of Directors on March 2, 2018. On
March 2, 2018, Mr. Landolt owned 62 520 shares. According to Mr. Landolt, the
Sandoz Family Foundation is the economic beneficiary of the shares.
169
Item 6. Directors, Senior Management and Employees
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 outlined below.
RISK MANAGEMENT PRINCIPLES
• Rigorous performance
• Contractual notice period of
management process, with
approval of targets and
evaluation of performance for
the CEO by the Board
• Balanced mix of short-term
and long-term variable com-
pensation elements
• Values and Behaviors are a
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
key component of the Annual
Incentive and are embedded in
our culture
• Good and bad leaver
provisions apply to variable
compensation of leavers
• Clawback and malus principles
apply to all elements of the
variable compensation
• Performance-vesting Long-
Term Incentives only, with
three-year cycles
• All variable compensation is
capped at 200% of target
• No severance payments or
change-of-control clauses
• Share ownership requirements;
no hedging or pledging of
Novartis share ownership
Executive Committee employment contracts provide for
a notice period of up to 12 months and contain no change-
of-control clauses or severance provisions (for example,
agreements concerning special notice periods, lon-
ger-term contracts, “golden parachutes,” waiver of
lock-up periods for equities and bonds, shorter vesting
periods, and additional contributions to occupational
pension schemes). For share ownership requirements,
please refer to page 160.
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 supervi-
sory 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 AUTHORITY
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 of Directors who meet the inde-
pendence criteria set forth in the Board Regulations.
From the 2018 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 Mercer Limited
during the financial year 2018 as its independent exter-
nal compensation advisor. The advisor was hired directly
by the Compensation Committee in 2017, and the Com-
pensation Committee has been fully satisfied with the
performance and independence of the advisor since its
engagement. In determining whether or not to renew the
engagement with the advisor, the Compensation Com-
mittee evaluates, at least annually, the quality of the con-
sulting service, the independence of the advisor, and the
benefits of rotating advisors.
Compensation Committee meetings held in 2018
In 2018, the Compensation Committee held seven for-
mal meetings, one extraordinary meeting, and two addi-
tional joint meeting with the Research & Development
Committee to review and endorse for approval by the
Board of Directors the innovation targets and achieve-
ments of the LTPP and Annual Incentive. The Compen-
sation Committee conducted a self-evaluation in 2018.
170
Item 6. Directors, Senior Management and Employees
Report of the statutory auditor
on the Compensation Report of Novartis AG
To the General Meeting of Novartis AG, Basel
We have audited the 2018 CEO and other Executive
Committee members’ realized compensation on pages
151-153, the 2018 CEO and other Executive Committee
members’ compensation at grant value on pages 154-
156, and additional disclosures on pages 157-161, as well
as the 2018 Board compensation on pages 166-168 and
the additional disclosures on page 169 of the accompa-
nying Compensation Report of Novartis AG for the year
ended December 31, 2018.
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 Stock Exchange
Listed Companies (Ordinance). The Board of Directors
is also responsible for designing the remuneration sys-
tem and defining individual remuneration 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. Those
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.
An audit involves performing procedures to obtain audit
evidence on the disclosures made in the Compensation
Report with regard to compensation, loans and credits
in accordance with articles 14-16 of the Ordinance. The
procedures selected depend on the auditor’s judgment,
including the assessment of the risks of material mis-
statements in the Compensation Report, whether due to
fraud or error. This audit also includes evaluating the rea-
sonableness of the methods applied to value compo-
nents of remuneration, as well as assessing the overall
presentation of the Compensation Report. We believe
that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our opinion.
Opinion
In our opinion, the Compensation Report of Novartis AG
for the year ended December 31, 2018, complies with
Swiss law and articles 14-16 of the Ordinance.
PricewaterhouseCoopers AG
Martin Kennard
Audit expert
Auditor in charge
Stephen Johnson
Global relationship
partner
Basel, January 29, 2019
171
Item 6. Directors, Senior Management and Employees
6.C Board practices
Corporate governance
Corporate governance overview
Our corporate governance framework
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 controls over financial
reporting, and on the corporate
responsibility reporting of
Novartis
Our corporate governance framework consists of rules
that support sustainable financial performance and long-
term value creation for our shareholders and that are
aligned with our Values and Behaviors (www.novartis.
com/investors/company-overview/corporate-gover-
nance). Developments are continuously monitored and
result in enhanced principles, processes and disclosures
in line with our commitment to maintaining the highest
standards.
Laws and regulations
Novartis AG is subject to and compliant with the laws and
regulations of Switzerland (in particular, Swiss company
and securities laws, SIX Swiss Exchange rules and the
Swiss Code of Best Practice for Corporate Governance)
and the securities laws of the United States, including
New York Stock Exchange (NYSE) rules, as applicable
to foreign private issuers of securities. The NYSE listing
standards on corporate governance require Novartis AG
to describe any material ways in which its corporate gov-
ernance practices differ from those of domestic listed
US companies. These differences are:
• Novartis AG shareholders do not receive written reports
directly from Board committees.
• External auditors are appointed by shareholders at the
Annual General Meeting of Shareholders (AGM), as
opposed to being appointed by the Audit and Compli-
ance Committee.
• While shareholders cannot vote on all equity compen-
sation plans, they are entitled to hold separate, yearly
binding votes on Board and Executive Committee com-
pensation.
• 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.
172
Item 6. Directors, Senior Management and Employees
Board and Executive Committee
compensation
Information on Board and Executive Committee com-
pensation is outlined in our Compensation Report (see
“—Item 6.B Compensation”). Please also refer to articles
29-35 of the Articles of Incorporation (www.novartis.
com/investors/company-overview/corporate-gover-
nance) stipulating the Board and Executive Committee
compensation provisions. According to the general com-
pensation principles as outlined in the Articles of Incor-
poration, the compensation of the non-executive Board
members comprises fixed compensation elements only
(no Company contributions to any pension plan, no per-
formance-related elements and no financial instruments).
Compensation to Executive Committee members com-
prises fixed and variable, performance-related compen-
sation. Fixed compensation is comprised of the base sal-
ary and may include other elements and benefits such
as contributions to pension plans. Variable compensa-
tion may comprise short-term and long-term compen-
sation elements. If the maximum aggregate amount of
compensation already approved by the AGM is not suf-
ficient 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.
173
Item 6. Directors, Senior Management and Employees
Our Group structure and shareholders
Our Group structure
Novartis AG and Group companies
Novartis AG, with its registered office at Lichtstrasse
35, CH-4056 Basel, Switzerland, is a corporation orga-
nized under Swiss law that has issued registered shares.
As the holding company, Novartis AG owns or con-
trols directly or indirectly all entities worldwide belong-
ing to the Novartis Group and conducting its business
operations. The principal Novartis subsidiaries and asso-
ciated companies are listed in Note 31 to the Group’s
consolidated financial statements.
Divisions
The Novartis business is 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 the Novartis Institutes for
BioMedical Research (NIBR), which focuses on discov-
ering new drugs; the Global Drug Development organi-
zation, 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). On June
29, 2018, Novartis announced plans to separate the Alcon
business from the rest of Novartis by means of a spin-off
subject to an approval by the shareholders at the AGM
on February 28, 2019.
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anufacturin g
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Alcon
Majority holdings in publicly traded Group
companies
The Novartis Group owns 70.7% of Novartis India Ltd.,
with its registered office in Mumbai, India, and listed on the
Bombay Stock Exchange (ISIN INE234A01025, symbol:
HCBA). The total market value of the 29.3% free float of
Novartis India Ltd. was USD 74.7 million at December 31,
2018, 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 254.8 million, and that of the shares owned by
Novartis was USD 180.1 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, 2018, was USD 12.9 billion. The total market value of
Roche Holding AG was USD 212.2 billion. Novartis does
not exercise control over Roche Holding AG, which is
independently governed, managed and operated.
Our shareholders
Significant shareholders
According to the Novartis Share Register, as of Decem-
ber 31, 2018, the following registered shareholders (includ-
ing 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 “—Item 6.C Board practices—
Shareholder participation rights—Voting rights, restric-
tions and representation”):1
• Shareholders: Novartis Foundation for Employee Partici-
pation, with its registered office in Basel, holding 2.3%;
Emasan AG, with its registered office in Basel, holding
3.5%; and UBS Fund Management (Switzerland) AG,
with its registered office in Basel, holding 2.2%
• Nominees: Chase Nominees Ltd., London, holding
9.8%; Nortrust Nominees Ltd., London, holding 3.6%;
and The Bank of New York Mellon, New York, holding
4.1% through its nominees, The Bank of New York Mel-
lon, Everett, holding 2.1%, The Bank of New York Mel-
lon, New York, holding 1.3% and the and The Bank of
New York Mellon SA/NV, Brussels, holding 0.7%
• ADS depositary: JPMorgan Chase Bank, N.A., New
York, holding 13.3%
1 Excluding 4.6% of the share capital held as treasury shares by Novartis AG or its fully
owned subsidiaries
174
Item 6. Directors, Senior Management and Employees
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 reg-
istered in the Novartis Share Register as of December
31, 2018.
According to disclosure notifications filed with Novartis
AG and the SIX Swiss Exchange, each of the following
shareholders held between 3% and 5% but was not reg-
istered or registered with less than 2% of the share cap-
ital of Novartis AG as of December 31, 2018:
- BlackRock Inc., New York
- The Capital Group Companies Inc., Los Angeles
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:
www.six-exchange-regulation.com/en/home/publica-
tions/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.
Number of shares held
As of December 31, 2018
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
% of registered
share capital
25 193
98 629
35 458
3 130
458
62
30
0.06
1.61
3.86
3.18
5.41
4.89
50.22
69.23
30.77
100.00
Total registered shareholders/shares
162 960
Unregistered shares
Total
1 Including significant registered shareholders as listed above
Registered shareholders by type
As of December 31, 2018
Shareholders in %
Shares in %
Individual shareholders
Legal entities 1
Nominees, fiduciaries
and ADS depositary
Total
96.36
3.58
0.06
100.00
12.87
32.58
54.55
100.00
1 Excluding 4.6% of the share capital held as treasury shares by Novartis AG or its fully
owned subsidiaries
As of December 31, 2018, Novartis AG had approxi-
Registered shareholders by country
mately 163 000 registered shareholders.
As of December 31, 2018
Shareholders in %
Shares in %
Belgium
France
Germany
Japan
Luxembourg
Switzerland 1
United Kingdom
United States
Other countries
Total
0.12
2.04
5.39
0.19
0.05
88.17
0.52
0.36
3.16
1.23
0.29
1.83
0.73
0.53
42.11
24.64
26.81
1.83
100.00
100.00
Registered shares held by nominees are shown in the country where the company/
affiliate entered in the Novartis Share Register as shareholder has its registered seat.
1 Excluding 4.6% of the share capital held as treasury shares by Novartis AG or its fully
owned subsidiaries
175
Item 6. Directors, Senior Management and Employees
Our capital structure
Our share capital
As of December 31, 2018, the share capital of Novartis
AG is CHF 1 275 312 410 fully paid-in and divided into
2 550 624 820 registered shares (Novartis share). Each
Novartis share has a nominal value of CHF 0.50.
Novartis shares are listed on the SIX Swiss Exchange
(ISIN CH0012005267, symbol: NOVN) and on the NYSE
in the form of American Depositary Receipts (ADRs) rep-
resenting Novartis American Depositary Shares (ADSs)
(ISIN US66987V1098, symbol: NVS).
Authorized and conditional share
capital
No authorized and conditional capital exists as of Decem-
ber 31, 2018.
Changes in capital
Over the past three years, the share capital of Novartis
AG changed as follows:
By completing the sixth share repurchase program
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 49 878 180 Novartis shares repurchased
on the second trading line during 2015 (at an average
price of CHF 93.24 per Novartis share). 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 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
10 270 000 Novartis shares repurchased on the second
trading line during 2016 (at an average price of CHF 74.67
per Novartis share). In 2018, Novartis AG reduced its
share capital by CHF 33.11 million (from CHF 1 308 422 410
to CHF 1 275 312 410) by canceling 66 220 000 Novartis
shares repurchased on the second trading line during
2017 (at an average price of CHF 78.34 per Novartis
share). In 2018, a total of 23.3 million Novartis shares
were purchased at an average price of CHF 79.08 per
Novartis share. The Board will propose to the sharehold-
ers at the 2019 AGM to cancel the Novartis shares repur-
chased in 2018 and to approve the eighth repurchase
program, authorizing the Board to repurchase Novartis
shares up to a maximum of CHF 10 billion until the 2022
AGM.
Capital changes
Number of shares
Year
2016
2017
2018
As of Jan 1
Changes
in shares
As of Dec 31
Changes
in CHF
2 676 993 000 – 49 878 180 2 627 114 820 – 24 939 090
2 627 114 820 – 10 270 000 2 616 844 820 – 5 135 000
2 616 844 820 – 66 220 000 2 550 624 820 – 33 110 000
A table with additional information on changes in the
Novartis AG share capital can be found in Note 8 to the
financial statements of Novartis AG.
Shares, participation certificates,
non-voting equity securities, profit-
sharing certificates
Novartis shares are issued as uncertificated securities (in
the sense of the Swiss Code of Obligations) and as book
entry securities (in terms of the Swiss Act on Intermediated
Securities). All Novartis shares have equal voting rights
and carry equal entitlements to dividends. No participa-
tion certificates, non-voting equity securities (Genusss-
cheine) or profit-sharing certificates have been issued.
Transferability and nominee
registration
No transferability restrictions are imposed on Novartis
shares. The registration of shareholders in the Novartis
Share Register or in the ADR register kept by JPMor-
gan Chase Bank, N.A., does not affect the tradability of
Novartis shares or ADRs.
The Articles of Incorporation provide that no nomi-
nee shall be registered with the right to vote for more
than 0.5% of the registered share capital (for registra-
tion of shareholders, see “—Item 6.C Board practices—
Shareholder participation rights—Voting rights, restric-
tions and representation”). The Board may, upon request,
grant an exemption from this restriction if the nominee
discloses the names, addresses and number 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 in “—Item 6.C Board prac-
tices—Our Group structure and shareholders—Our share-
holders—Significant shareholders,” and for the nominee
Citibank, London, which in 2015 requested an exemp-
tion, but as of December 31, 2018, was not registered in
the Novartis Share Register.
The same restrictions indirectly apply to holders of
ADRs.
Shareholders, ADR holders, or nominees who are
linked to each other or who act in concert to circumvent
registration restrictions are treated as one person or
nominee for the purposes of the restrictions on registra-
tion. The registration restrictions may be changed by
resolution of the General Meeting of Shareholders (Gen-
eral Meeting), with approval of at least two-thirds of the
votes represented at the meeting (see “—Item 6.C Board
practices—Shareholder participation rights—Statutory
quorums”).
176
Item 6. Directors, Senior Management and Employees
Convertible securities and options
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.
Key Novartis share data
Issued shares
Treasury shares 1
Outstanding shares at December 31
2018
2017
2016
2 550 624 820
2 616 844 820
2 627 114 820
239 453 391
299 388 321
253 055 807
2 311 171 429
2 317 456 499
2 374 059 013
Weighted average number of shares outstanding
2 319 322 369
2 345 783 843
2 378 474 555
1 Approximately 122 million treasury shares (2017: 131 million; 2016: 135 million) are held in Novartis entities that restrict their availability for use.
Per-share information1
Basic earnings per share (USD)
Diluted earnings per share (USD)
Operating cash flow (USD)
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 2018: proposal to shareholders for approval at the Annual General Meeting on February 28, 2019
2018
5.44
5.38
6.15
2017
3.28
3.25
5.38
34.01
32.00
2.85
2.80
2016
2.82
2.80
4.82
32.46
2.75
Key ratios – December 31
Share price (CHF)
Price/earnings ratio 1
Enterprise value/EBITDA
Dividend yield (%) 1
2018
15.7
14
3.4
2017
25.7
15
3.4
2016
25.7
13
3.7
Year-end share price
High 1
Low 1
2018
84.04
91.84
72.42
2017
82.40
85.15
69.55
2016
74.10
86.45
68.15
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
2018
85.81
93.91
72.44
2017
83.96
86.65
70.03
2016
72.84
86.21
67.59
338 641 387 320 833 039 315 349 314
1 Based on the daily closing prices
2 The depositary, JPMorgan Chase Bank, N.A., holds one Novartis AG share for every
ADR issued.
Year-end market capitalization
(USD billions) 2
Year-end market capitalization
(CHF billions) 2
197.0
195.5
172.0
194.2
191.0
175.9
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.
177
Item 6. Directors, Senior Management and Employees
Our Board of Directors
Composition of the Board of Directors and its committees (as per December 31, 2018)
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
A. von Planta
C. Sawyers
W. Winters
Audit and Compliance
Committee
Compensation
Committee
Governance, Nominat ion
and Corporate Respon-
sibilities Committee
Research &
Development
Committee
Risk Committee
E. Doherty (Chair)
T. Buechner
S. Datar
A. von Planta
E. Vanni
E. Vanni (Chair)
S. Datar
A. Fudge
W. Winters
A. von Planta (Chair)
D. Azar
A. Fudge
C. Sawyers
E. Vanni
J. Reinhardt (Chair)
N. Andrews
D. Azar
F. van Houten
C. Sawyers
S. Datar (Chair)
N. Andrews
E. Doherty
A. Fudge
A. von Planta
Election and term of office
At the General Meeting, Board members (including the
Chairman) and Compensation Committee members are
individually elected or re-elected by shareholders for a
term of one year.
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 devel-
oped about the Company’s operations and practices.
However, Board members must retire after reaching age
70. Under special circumstances, shareholders may grant
an exemption from this rule and re-elect a Board mem-
ber for additional terms of office.
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
Andreas von Planta, Ph.D.
Charles L. Sawyers, M.D.
William T. Winters
Nationality
Year of birth
First election
at AGM
D
CH
US/CH
US
NLD/CH
US
GB
US
NLD
CH
US
GB/US
1956
1951
1958
1959
1965
1953
1957
1951
1960
1955
1959
1961
2013
2011
2015
2012
2016
2003
2016
2008
2017
2006
2013
2013
178
Item 6. Directors, Senior Management and Employees
Board profile
Board composition and profile of individual Board
members
The composition of the Board aligns with our status as
a listed company as well as our business portfolio, geo-
graphic reach and culture. To ensure appropriate strate-
gic oversight, we seek Board members who have diverse
skills and experience. Collectively, the Board must have
background and expertise in one or several of the fol-
lowing areas:
• Leadership, senior management/executive-level expe-
rience
• Medicine and healthcare
• Finance and accounting
• Law
• Engineering and technology
• Marketing
Diversity is critical to Board effectiveness and an import-
ant criterion for the Governance, Nomination and Corpo-
rate Responsibilities Committee (GNCRC) when identi-
fying new Board member candidates.
Board members’ biographies (see “—Item 6.C Board prac-
tices—Our Board of Directors—Board of Directors”) high-
light the specific qualifications that led the Board to con-
clude that members are qualified to serve on the Board
and will add value.
Board members should also 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 respon-
sive
• Do not have existing board memberships or hold other
positions that could lead to a permanent conflict of
interest
• Understand and respect the boundaries of the role,
leaving the operational management of the Company
to the CEO and the Executive Committee
Diversity
Nationality
AMERICAN
40 %
DUTCH
13 %
GERMAN
7 %
BRITISH
13 %
SWISS
27 %
Background/experience
LEADERSHIP MANAGEMENT
21 %
ENGINEERING/TECHNOLOGY
16 %
MARKETING
5 %
LAW
5 %
FINANCE/ACCOUNTING
21 %
MEDICINE/HEALTHCARE/R&D
32 %
Gender
MALE
75 %
FEMALE
25 %
Age
>66
17 %
61–65
33 %
<55
8 %
55–60
42 %
Tenure
7–9 Y
8 %
<3 Y
25 %
>9 Y
25 %
3–6 Y
42 %
179
Item 6. Directors, Senior Management and Employees
Board succession planning
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 (the suc-
cession plan for the Chairman is discussed in a meet-
ing without him). A search for a new Board member is
launched – normally with the support of a professional
executive search company – based on the established
target profile. Candidates are interviewed by the Chair-
man and other Board members, and evaluated by the
GNCRC. The GNCRC then makes a recommendation
to the full Board, and the Board ultimately decides who
should be proposed to shareholders for election at the
upcoming AGM.
Role of the Board and its committees
The Board is responsible for the overall direction
and oversight 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 duties and respon-
sibilities to its five committees led by a Board-elected
Chairman, as set out in their written charter (www.novartis.
com/sites/www.novartis.com/files/regulations-en.pdf).
In some cases, these responsibilities are of an advisory
or preparatory nature (A/P). In other cases, the commit-
tee has decision-making power that is subject to final
Board approval (FBA), or the responsibilities have been
fully delegated to the committee (FD). 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 on other matters. Moreover, com-
mittees ensure that only Board members who are inde-
pendent oversee audit and compliance, governance and
compensation – as only independent Board members are
members of the respective committees.
Any Board member may request a Board or commit-
tee meeting and the inclusion of an agenda item. Before
meetings, Board members receive materials to help them
prepare the discussions and decision-making.
180
Item 6. Directors, Senior Management and Employees
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 million
— 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 2018/
approximate average
duration (hrs)
of each meeting/
attendance
12/6:15
Documents/
link
Joerg Reinhardt1
Enrico Vanni
Nancy C. Andrews
Dimitri Azar
Ton Buechner
Srikant Datar
Elizabeth Doherty
Ann Fudge
Frans van Houten
12
12
12
12
11
10
12
11
11
Andreas von Planta 12
Charles L. Sawyers 11
William T. Winters
11
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
7/2:45
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.
Ton Buechner3
Elizabeth Doherty1,2 7
5
7
Srikant Datar2
Andreas von Planta 7
Enrico Vanni
7
Compensation Committee
7/2:00
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.
Enrico Vanni1
Srikant Datar
Ann Fudge
William T. Winters
7
7
7
7
Charter of the
Compensation
Committee
www.novartis.com/
investors/
company-overview/
corporate-governance
1 Chairman
2 Audit Committee Financial Expert
3 ACC member after 2018 AGM
* A/P = advisory or preparatory task
** FD = fully delegated task
*** FBA = task subject to final Board approval
181
Item 6. Directors, Senior Management and Employees
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 2018/
approximate average
duration (hrs)
of each meeting/
attendance
Documents/
link
3/2:00
Andreas von Planta1 3
3
3
Dimitri Azar
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
3/8:00
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
Frans van Houten
3
3
3
3
Charles L. Sawyers 3
Charter of the
Research & Development
Committee
www.novartis.com/
investors/
company-overview/
corporate-governance
Risk Committee
4/2:15
Srikant Datar1
Nancy C. Andrews
Elizabeth Doherty
Ann Fudge
4
4
4
4
Andreas von Planta 4
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
182
Item 6. Directors, Senior Management and Employees
Chairman
Joerg Reinhardt has been the independent, non-executive
Chairman since August 1, 2013. He has both industry and
Novartis experience. As independent Chairman, he leads
the Board to represent the interests of all stake holders.
The independent chairmanship also ensures an appropri-
ate balance of power between the Board and the Exec-
utive Committee. In this role, Mr. Reinhardt:
• Provides leadership to the Board
• Supports and mentors the CEO
• 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 com-
mittees are properly established, composed and oper-
ated
• Supported by the GNCRC, ensures effective succession
plans for the Board and the Executive Committee
• Ensures onboarding programs for new Board mem-
bers, and continuing education and specialization for
all Board members
• Ensures that the Board’s performance is annually eval-
uated
• Promotes effective relationships and communication
between Board and Executive Committee members
• Ensures effective communication with the Company’s
shareholders
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
No separate meetings of the independent Board mem-
bers were held in 2018.
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 pro-
vided with Board documents and do not attend Board
meetings.
Board meetings
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 allocated to
Board committee meetings, and the second day allocated
to the meeting of the full Board.
Key activities of our Board and
committees in 2018
The following overview summarizes Board and commit-
tee activities over the course of the year. Although by no
means exhaustive, the lists below provide a flavor of the
discussions and debates held, and detail some of the
key topics addressed.
Board of Directors:
In 2018, the Board focused on strengthening the opera-
tions of Novartis, expanding our therapeutic platforms,
and accelerating our push into the data and digital health-
care space to increase our ability to develop breakthrough
therapies and improve patient outcomes. The Board also
discussed the Alcon spin-off, our investments in break-
through technologies (including the acquisitions of Endo-
cyte, Inc., AveXis, Inc. and Advanced Accelerator Appli-
cations S.A.), as well as the divestments of a part of the
US-based generics business of Sandoz and the selling
of our remaining consumer healthcare stake to joint ven-
ture partner GlaxoSmithKline. Additional topics were the
restructuring of our technical operations and business
services to become a leaner and more agile organization,
our corporate culture as a key driver for the Company,
and an evaluation of the impact of external perspectives
on our strategy. Topics addressed during private meet-
ings included Board self-evaluation and the performance
assessment of the Executive Committee members, as well
as CEO and Executive Committee succession planning.
Audit and Compliance Committee:
• Evaluated the impact of adopting new reporting require-
ments and guidelines
• Focused on acquisitions as well as divestments
• Evaluated the performance of the external auditors
• Discussed the reorganization of Internal Audit
Compensation Committee:
• Decided on compensation related to the changes in
Executive Committee membership during the year
• Reviewed the variable compensation programs for Exec-
utive Committee members, including financial metrics
• Discussed compensation principles and governance
regarding the proposed Alcon spin-off
• Reviewed shareholder feedback from the roadshows
• Discussed potential enhanced disclosures in the 2018
Compensation Report
Governance, Nomination and Corporate
Responsibilities Committee:
• Reviewed our corporate responsibility activities
• Reviewed the composition of the Board and its com-
mittees
• Evaluated the AGM
• Reflected on the role of companies in society
• Discussed corporate governance developments
• Discussed corporate responsibility reporting changes
183
Item 6. Directors, Senior Management and Employees
Research & Development Committee:
• Discussed the Sandoz biosimilar portfolio
• Discussed Global Drug Development clinical functions
• Reviewed an external assessment of the portfolio and
productivity of Novartis research and development
• Discussed technical research and development func-
tions
Risk Committee:
• Assessed main risks and mitigations in Innovative
Medicines, NIBR and IT
• Discussed data privacy
• Analyzed pricing
• Evaluated risks and opportunities associated with the
digital status and strategy
• Reviewed status and measures regarding cybersecu-
rity
• Reviewed the Enterprise Risk Management Report
Independence of Board members
All Board members are non-executive and independent.
The independence of Board members is a key topic in
corporate governance. An independent Board member
is one who is independent of management and has no
business or relationship that could materially interfere
with the exercise of objective, unfettered and indepen-
dent judgment. Only with a majority of Board members
being independent can the Board fulfill its obligation to
represent the interests of shareholders, being account-
able to them and creating sustainable value through the
effective governance of Novartis. Accordingly, Novartis
established independence criteria based on international
best practice standards:
www.novartis.com/sites/www.novartis.com/files/inde-
pendence-criteria-board-of-directors-and-its-commit-
tees.pdf
• The majority of Board members and any member of the
Audit and Compliance Committee, the Compensation
Committee, and the GNCRC must meet the Compa-
ny’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 the Audit and Compliance Com-
mittee and the Compensation Committee members,
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 Board members’
independence. For this assessment, the committee con-
siders all relevant facts and circumstances of which it is
aware – not only the explicit formal independence cri-
teria. 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.
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,
2018. 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 Board members.
184
Item 6. Directors, Senior Management and Employees
Board performance and
effectiveness evaluation
Annually, the Board conducts a review to evaluate its per-
formance, the performance of its committees, and the
performance of each Board member. This review covers
topics including Board composition, purpose, scope and
responsibilities; Board processes and governance; Board
meetings and pre-reading material; and team effective-
ness, leadership and culture.
As part of this process, each Board member completes a
questionnaire, which lays the groundwork for a qualitative
review led by the Chairman. The Chairman of the Board
and the committees each lead a qualitative review with
their colleagues and then with the entire Board. Also,
the Board, without its Chairman, discusses the perfor-
mance of the Chairman. Any suggestion for improvement
is recorded, and actions are agreed upon. The results of
the 2018 review were discussed at the December 2018
and January 2019 meetings. It was concluded that the
Board and its committees operate effectively.
Periodically, this process is conducted by an inde-
pendent consultant. This last happened in 2017.
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 undertake the non-delegable decisions. 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 and Board committees regularly meet with
the CEO and other Executive Committee members, and
occasionally with other senior management members.
• The Board receives detailed written updates from each
division and business unit head via the CEO Report on
a monthly basis and via a yearly presentation 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.
To get an outside view, the Board and Board committees
occasionally invite external advisors to attend and/or
represent a specific topic at Board meetings. In particu-
lar, the independent advisor of the Compensation Com-
mittee is regularly invited to partly attend meetings. The
Chief Financial Officer (CFO), the Group General Coun-
sel, the Global Head of Novartis Business Assurance
& Advisory/Internal Audit, the Head of Group Financial
Reporting & Accounting, the Chief Ethics, Risk and Com-
pliance Officer, and representatives of the external audi-
tors are invited to partly attend each Audit and Compli-
ance Committee meeting. Additionally, the Global Head
of the SpeakUp Office and the Head of Novartis Group
Quality report on a regular basis to the Audit and Com-
pliance Committee.
Novartis management information system
Novartis produces comprehensive, consolidated (unau-
dited) financial statements on a monthly basis for the
Group and its operating divisions. These are typically
available within 10 days after the end of the month, and
include the following:
• Consolidated income statement of the month and
year-to-date in accordance with International Financial
Reporting Standards (IFRS), as well as adjustments to
arrive at core results, as defined by Novartis (see “Item
5. Operating and Financial Review and Prospects—Item
5.A Operating results—Non-IFRS measures as defined
by Novartis”). The IFRS and core figures are compared
to the prior-year period and targets in both USD and
on a constant currency basis.
• Supplementary data on a monthly and year-to-date
basis, such as free cash flow, gross and net debt, head-
count, personnel costs, working capital, and earnings
per share on a USD basis where applicable
An explanation of non-IFRS measures can be found in
“Item 5. Operating and Financial Review and Prospects—
Item 5.A Operating results—Non-IFRS measures as
defined by Novartis.”
Management information related to the consolidated
income statements and free cash flow is made available
to Board members on a monthly basis through the CEO
Report. 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 middle of the year, the Board
also reviews and approves the Company’s strategic plan
for the next three years. In the fourth quarter of the year,
the Board receives and approves the operating targets
for the following year as well as the financial targets for
the following three-year period, including a projected
consolidated income statement in USD prepared in accor-
dance 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 purpose of the Internal Audit function is to assist
the Board and the Executive Committee in discharging
their governance responsibilities by providing indepen-
dent assurance, advice and insights on the effective-
ness and efficiency of processes and controls that sup-
port Novartis in achieving its objectives, identifying and
managing its major risks, and ensuring compliance with
applicable policies, laws and regulations.
The execution of the Audit and Compliance Commit-
tee-approved audit plan via audit and advisory engage-
ments happens at both the Group and individual entity
185
Item 6. Directors, Senior Management and Employees
levels, depending on the risk exposure. Internal Audit
reports the results to the audited units, the Audit and
Compliance Committee, and the Executive Committee.
Additionally, the Audit and Compliance Committee and
the Executive Committee receive consolidated results
(including a root cause analysis). Internal Audit also shares
best practices as well as recurring findings with the busi-
ness to foster learning and continuous improvement. Any
material irregularities, whether actual or suspected, are
directly escalated to the SpeakUp Office for investiga-
tion and to the Audit and Compliance Committee. Action
plans to implement necessary changes and enhance-
ments are developed together with the business and/or
the auditee, and their closure is monitored by Internal
Audit. In case of major findings, a follow-up audit is planned
to ensure proper remediation. All issues and recommen-
dations are stored in a single application to enable effi-
cient follow-up monitoring.
Internal Audit has performed 82 audits from its annual
plan, and has conducted 31 advisory engagements and
site visits. Overall progress has mainly been identified in
the area of compliance. Remediation plans to address
information security, data privacy and business continu-
ity risks are on track. Recurring observations identified
across various functions and business units relate to
improving third-party management, cross-functional col-
laboration, legacy systems and complex processes.
Risk management
In 2018, we combined our risk management and com-
pliance functions into a single organizational umbrella
to provide the businesses with a better view of the risks
we face as an organization, and how those risks could
impact our ability to deliver on strategic priorities. Our
approach to risk management includes streamlining the
risk assessment and monitoring process to ensure that
we have a single risk approach throughout Novartis, fully
supported by online tools and data analytics. In 2018,
we launched our newly harmonized Integrity & Compli-
ance Risk Assessment and Monitoring (RAM) process.
The RAM process integrates current risk assessments,
self-assessments, control activities and monitoring into
a single, continuous, cyclical process.
Organizational and process measures have been designed
to identify and mitigate risks at an early stage. Organi-
zationally, the responsibility for risk assessment and
management is allocated to the divisions, organizational
units and functions, with specialized corporate functions
– such as Group Finance; Group Legal; Group Quality
Assurance; Corporate Health, Safety and Environment;
Business Continuity Management; Integrity and Compli-
ance; and the SpeakUp Office – providing support and
controlling the effectiveness of the risk management in
these respective areas.
The Risk Committee assists the Board of Directors
in ensuring that risks are properly assessed and profes-
sionally managed by overseeing the risk management
system and processes, as well as by reviewing the risk
portfolio and related actions implemented by manage-
ment. For this purpose, the Group Risk Office and the
risk owners of the divisions report on a regular basis to
the Risk Committee. The Risk Committee ensures that
all necessary steps are taken to foster a culture of risk-ad-
justed decision-making without constraining reasonable
risk-taking and innovation. The Risk Committee also
assumes responsibility for approving guidelines and
reviewing guidelines and processes, and informs the
Board on a periodic basis about the risk management
system as well as the most significant risks and how they
are managed. Together with management, internal audi-
tors and external auditors, the Risk Committee reviews
the identification, prioritization and management of the
risks; the accountabilities and roles of the functions
involved with risk management; the risk portfolio; and the
related actions implemented by management. The Group
General Counsel, the Head of the Group Risk Office, the
Global Head of Novartis Business Assurance & Advisory/
Internal Audit, the Chief Ethics, Risk and Compliance
Officer, and other senior executives are invited to the
meetings of the Risk Committee. The Compensation
Committee works closely with the Risk Committee to
ensure that the compensation system does not lead to
excessive risk-taking by management (for details, see
“—Item 6.B Compensation”).
186
Item 6. Directors, Senior Management and Employees
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.
Mr. Reinhardt is chairman of the board of trustees of the Institute of Molecular and Clinical Ophthalmology
Basel (IOB), Switzerland. From 2010 to mid-2013, he 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. Mr.
Reinhardt is a non-executive board member of Swiss Re, Switzerland, and a member of the European Advi-
sory Panel of Temasek, Singapore. 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 Genomics 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, Nomina-
tion 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 King-
dom, and non-listed companies such as Lombard Odier SA and Banque Privée BCP (Suisse) SA – both based
in Switzerland. He previously served on the boards of Eclosion2 in Switzerland from 2009 to 2017, Alcon Inc.
in Switzerland from 2010 to 2011, and Actavis PLC in Ireland in 2010.
Mr. Vanni holds an engineering degree in chemistry from the Federal Polytechnic School of Lausanne, Swit-
zerland; a doctorate in chemistry from the University of Lausanne; and a Master of Business Administration
from INSEAD in Fontainebleau, France. He began his career as a research engineer at the International Busi-
ness Machines Corp. (IBM) in California, United States, and joined McKinsey in Zurich in 1980. He managed
the Geneva office for McKinsey from 1988 to 2004, and consulted for companies in the pharmaceutical, con-
sumer 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 chal-
lenges facing the healthcare industry.
Nancy C. Andrews, M.D., Ph.D.
Member of the Board of Directors | Nationality: American/Swiss | 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 aca-
demic 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 fel-
low 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, a member and former
chair of the board of directors 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, on the Scientific Management
Review Board of the National Institutes of Health and on the Scientific Advisory Board of Dyne Therapeu-
tics, all in the US.
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 attend-
ing 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 of the Howard
Hughes Medical Institute in the US. Her research expertise is in iron homeostasis and mouse models of
human diseases.
187
Item 6. Directors, Senior Management and Employees
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 Governance, Nomination and Corporate Responsibilities
Committee and the Research & Development Committee.
Dr. Azar is senior director of ophthalmological innovation at Alphabet Verily Life Sciences. He also serves as
distinguished professor of ophthalmology, bioengineering and pharmacology at the University of Illinois at
Chicago (UIC) College of Medicine in the United States, and was dean of the UIC College of Medicine from
2011 to 2018. 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, a board member of the Chicago Medical
Society, and former president of the Chicago Ophthalmological 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 ten-
ure 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/Swiss | Year of Birth: 1965
Ton Buechner has been a member of the Board of Directors since 2016. He qualifies as an independent
Non-Executive Director and is a member of the Audit and Compliance 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 served as a member
of the supervisory board of Voith GmbH & Co. KGaA in Germany from 2014 to 2018, and continues to serve
on Voith’s presidential and shareholder committees.
Mr. Buechner is an engineer by training. He received his master’s degree in civil engineering from Delft Uni-
versity 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 indepen-
dent Non-Executive Director. He is Chairman of the Risk Committee, as well as a member of the Audit and
Compliance 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 Uni-
versity in the US. Mr. Datar has worked as an accountant and planner in industry, and as a professor at Car-
negie 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 publications
and has received several academic awards and honors. Mr. Datar has also advised and worked with numer-
ous companies in research, development and training.
188
Item 6. Directors, Senior Management and Employees
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 2016. She qualifies as an inde-
pendent Non-Executive Director and is 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 senior independent director and chairman of the audit and risk committee of Dunelm Group
PLC in the United Kingdom, and a member of the supervisory board and audit committee of Corbion NV in
the Netherlands. She is a fellow of the Chartered Institute of Management Accountants; a non-executive
board member of the UK Ministry of Justice; 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 Man-
chester 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 Cog-
nita 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-Ex-
ecutive Director and is a member of the Compensation Committee; the Governance, Nomination and Cor-
porate Responsibilities Committee; and the Risk Committee.
Ms. Fudge is chair of the United States Program Advisory Panel of the Bill & Melinda Gates Foundation, and
vice chairman of Boston-based WGBH Public Media. She is also a non-executive director of Northrop Grum-
man Corporation in the US, and a member of the visiting committee of Harvard Business School in the US.
She served as a non-executive director of Unilever, London and Rotterdam, from 2009 to 2018, and as vice
chairman and senior independent director of Unilever from 2015 to 2018. Additionally, she was a board mem-
ber 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 2017. He qualifies as an inde-
pendent Non-Executive Director and is a member of the Research & Development Committee.
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. From May 2016 through December 2017, he also served as 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
Rotterdam in the Netherlands. He joined Philips in 1986 and has held multiple global senior leadership posi-
tions. In 2009 and 2010, he was a consultant to the boards of companies such as ING Group NV and ASM
International NV. Before that, he was CEO of NXP Semiconductors (a Philips spin-off) from 2004 to 2009.
189
Item 6. Directors, Senior Management and Employees
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 Audit and Compliance Committee and the Risk Committee.
Mr. von Planta provides senior counsel to the law firm Lenz & Staehelin AG, where he was a partner from
1988 through 2017. He is chairman of HSBC Private Bank (Suisse) SA, chairman of the regulatory board of
the SIX Swiss Exchange AG, and a board member of Helvetia Holding AG in Switzerland. He also serves on
the boards of various Swiss subsidiaries of foreign companies and other non-listed Swiss companies, includ-
ing Burberry (Suisse) SA, A.P. Moller Finance SA and Socotab Frana SA. He previously served on the boards
of Raymond Weil SA (2007 to 2018) and Lenz & Staehelin (1996 to 2018), both based in Switzerland.
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 acqui-
sitions. He 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 Governance, Nomination and Corporate Respon-
sibilities Committee and the Research & Development 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 Cor-
nell 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 Associ-
ation for Cancer Research and of the American Society for Clinical Investigation. He is also a member 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, Bei-
Gene 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 Administra-
tion from the Wharton School of the University of Pennsylvania in the US. From 2011 to 2015, he was chair-
man and CEO of Renshaw Bay, an alternative asset management firm. Prior to that, he was co-CEO of JPMor-
gan’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 Inde-
pendent 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.
190
Item 6. Directors, Senior Management and Employees
Our management
Composition of the Executive Committee (as per December 31, 2018)
Vasant Narasimhan
Chief Executive Officer
Steven Baert
Chief People & Organization Officer
Elizabeth Barrett
CEO, Novartis Oncology
(until December 31, 2018)1
Bertrand Bodson
Chief Digital Offier
James Bradner
President of the Novartis Institutes
for BioMedical Research (NIBR)
Richard Francis
CEO, Sandoz
Paul Hudson
CEO, Novartis Pharmaceuticals
Harry Kirsch
Chief Financial Officer
Shannon Thyme Klinger
Group General Counsel
Steffen Lang
Global Head of Novartis
Technical Operations
Klaus Moosmayer
Chief Ethics, Risk and Compliance
Officer
John Tsai
Head of Global Drug Development
and Chief Medical Officer
Robert Weltevreden
Head of Novartis Business Services
1 Susanne Schaffert was appointed CEO Novartis Oncology and a member of the Executive Committee, effective January 1, 2019.
Executive Committee composition
CEO
The Executive Committee is led 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.
In addition to other Board-assigned duties, the CEO
leads the Executive Committee, building and maintain-
ing an effective executive team. With the support of the
Executive Committee, the CEO:
• Is responsible for the operational management of
Executive Committee role and
functioning
The Board has delegated to the Executive Committee
overall responsibility for and oversight of the operational
management of Novartis. This includes:
• 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
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
• 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
191
Item 6. Directors, Senior Management and Employees
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 limitations:
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 Executive Com-
mittee members.
192
Item 6. Directors, Senior Management and Employees
Executive Committee
Vasant (Vas) Narasimhan, M.D.
Chief Executive Officer of Novartis | Nationality: American | Year of Birth: 1976
Vasant (Vas) Narasimhan, M.D., has been Chief Executive Officer (CEO) of Novartis since February 1, 2018.
Dr. Narasimhan previously was Global Head of Drug Development and Chief Medical Officer for Novartis. He
has also served as Global Head of Development for Novartis Pharmaceuticals, Global Head of the Sandoz
Biopharmaceuticals and Oncology Injectables business unit, Global Head of Development for Novartis Vac-
cines, 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 biological
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.
Steven Baert
Chief People & Organization Officer of Novartis | Nationality: Belgian | Year of Birth: 1974
Steven Baert has been Chief People & Organization Officer 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
other leadership roles at Novartis, including Head of Human Resources for Emerging Growth Markets; Head
of Human Resources, United States and Canada, for Novartis Pharmaceuticals Corporation; and Global Head
of Human Resources for Novartis Oncology. Prior to joining Novartis, he held HR positions at Bristol-Myers
Squibb Co. and Unilever.
Mr. Baert studied in Belgium and received a Master of Business Administration from Vlerick Business School
in Ghent, a Master of Laws from the Katholieke Universiteit Leuven, and a Bachelor of Laws from the Katho-
lieke Universiteit Brussels. He serves on the board of WeSeeHope USA, and from 2015 to 2018, he repre-
sented Novartis on the board of GlaxoSmithKline Consumer Healthcare Holdings Ltd.
Elizabeth (Liz) Barrett (until December 31, 2018)
CEO, Novartis Oncology | Nationality: American | Year of Birth: 1962
Elizabeth (Liz) Barrett was appointed CEO of Novartis Oncology on February 1, 2018. On December 31, 2018,
she stepped down as CEO of Novartis Oncology and as a member of the Executive Committee of Novartis.
Ms. Barrett previously served as global president of oncology at Pfizer Inc. Since joining Pfizer in 2009, she
has held other leadership positions, including president of Global Innovative Pharma for Europe, president
of the specialty care business unit for North America, and president of United States oncology. Prior to Pfizer,
she was vice president and general manager of the oncology business unit at Cephalon Inc. from 2006 to
2009, and before that, she worked at Johnson & Johnson. She started her career at Kraft Foods Group Inc.
in 1984.
Ms. Barrett holds a Bachelor of Science from the University of Louisiana and a Master of Business Admin-
istration from Saint Joseph’s University, both in the US.
Bertrand Bodson
Chief Digital Officer of Novartis | Nationality: Belgian | Year of Birth: 1975
Bertrand Bodson has been Chief Digital Officer of Novartis since January 1, 2018. He is a member of the
Executive Committee of Novartis.
From 2013 to 2017, Mr. Bodson served as chief digital and marketing officer of Sainsbury’s Argos, where he
led Argos’ successful transformation from a traditional catalogue business to the third-largest online retailer
in the United Kingdom. Prior to that, he was executive vice president of the global digital business at EMI
Music from 2010 to 2013. He co-founded Bragster.com, a social networking and content sharing website,
and has also held senior roles at Amazon.
Mr. Bodson earned a Master of Business Administration from Harvard Business School in the United States,
where he was a Baker Scholar, and a master’s degree in commercial engineering from the Solvay Business
School (Belgium)/McGill University (Canada). He is a member of the board of directors of Electrocompo-
nents PLC.
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., has been President of the Novartis Institutes for BioMedical Research (NIBR)
since 2016. He is a member of the Executive Committee of Novartis.
From 2005 through 2015, Dr. Bradner served on the research faculty of Harvard Medical School and as an
attending physician in stem cell transplantation within the Department of Medical Oncology at the Dana-Far-
ber Cancer Institute in the United States. He has co-founded five biotechnology companies and has co-au-
thored more than 200 scientific publications and 30 US patent applications.
Dr. Bradner is a graduate of Harvard College and the University of Chicago Medical School in the US. He
completed his residency in medicine at Brigham and Women’s Hospital, his fellowship in medical oncology
and hematology at the Dana-Farber Cancer Institute, and his postdoctoral training in chemistry and chemi-
cal biology at Harvard University. He has received many honorific awards and was elected into the American
Society for Clinical Investigation in 2011 and the Alpha Omega Alpha Honor Medical Society in 2013.
193
Item 6. Directors, Senior Management and Employees
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 vari-
ous 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 2016. He is a member of the Executive Com-
mittee 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 (MMU) in the UK and a
diploma in marketing from the Chartered Institute of Marketing in the UK. In 2018, he was awarded an hon-
orary doctorate in business administration from MMU. He is a board member of the European Federation of
Pharmaceutical Industries and Associations (EFPIA) and vice chair of the Innovation Board Sponsored Com-
mittee of EFPIA.
Harry Kirsch
Chief Financial Officer of Novartis | Nationality: German/Swiss | Year of Birth: 1965
Harry Kirsch has been Chief Financial Officer (CFO) of Novartis since 2013. He is a member of the Execu-
tive Committee of Novartis.
Mr. Kirsch joined Novartis in 2003 and, prior to his current position, served as CFO of the Pharmaceuticals
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 Pharmaceuticals Divi-
sion. 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 holds a diploma degree in industrial engineering and economics from the University of Karlsruhe
in Germany. From 2015 to 2018, he represented Novartis on the board of GlaxoSmithKline Consumer Health-
care Holdings Ltd.
Shannon Thyme Klinger
Group General Counsel of Novartis | Nationality: American | Year of Birth: 1971
Shannon Thyme Klinger has been Group General Counsel of Novartis since June 1, 2018. She is a member
of the Executive Committee of Novartis.
Ms. Klinger most recently served as Chief Ethics, Risk and Compliance Officer, and was appointed to the
Executive Committee of Novartis in this role. Before that, she was Chief Ethics and Compliance Officer and
Global Head of Litigation. She joined Novartis in 2011 as General Counsel, North America, for Sandoz in the
United States and later became the Global Head of Legal and General Counsel for Sandoz International
GmbH. Prior to Novartis, Ms. Klinger worked in the US as a partner at Mayer Brown LLP from 2010 to 2011,
senior vice president and general counsel for Solvay Pharmaceuticals Inc. from 2008 to 2010, and vice pres-
ident of marketing compliance and associate counsel for Barr Laboratories/Duramed Pharmaceuticals from
2005 to 2007. She was also a partner at Alston & Bird LLP, where she focused on litigation and antitrust,
pharmaceutical legal and regulatory matters.
Ms. Klinger holds a juris doctor with honors from the University of North Carolina at Chapel Hill and a bach-
elor’s degree in psychology from the University of Notre Dame (both in the US). She is a member of the board
of directors of the SIX Group.
Steffen Lang, Ph.D.
Global Head of Novartis Technical Operations | Nationality: German/Swiss | Year of Birth: 1967
Steffen Lang, Ph.D., has been Global Head of Novartis Technical Operations since April 2017. He is a mem-
ber of the Executive Committee of Novartis.
Prior to his current appointment, Mr. Lang served as Global Head of Biologics Technical Development and
Manufacturing within Novartis Technical Operations. He joined Novartis in 1994 as Head of Laboratory in
Research, and over the years has held positions of increasing responsibility within Pharmaceuticals Devel-
opment, including Head of Biotechnology Development and Global Head of Technical Research and Devel-
opment.
Mr. Lang holds a doctorate in pharmaceutical technology from the Swiss Federal Institute of Technology
(ETH Zurich) in Switzerland, and a master’s degree in pharmaceutical sciences from the University of Hei-
delberg in Germany.
194
Item 6. Directors, Senior Management and Employees
Klaus Moosmayer, Ph.D.
Chief Ethics, Risk and Compliance Officer of Novartis | Nationality: German | Year of Birth: 1968
Klaus Moosmayer, Ph.D., has been Chief Ethics, Risk and Compliance Officer of Novartis since December 1,
2018. He is a member of the Executive Committee of Novartis.
Mr. Moosmayer previously was chief compliance officer of Siemens AG, a position he held since 2014. During
his 18-year career at Siemens, Mr. Moosmayer also served as chief counsel compliance, compliance oper-
ating officer and corporate legal counsel. Before joining Siemens, he practiced law in Germany, specializing
in white-collar crime, litigation and business law.
Mr. Moosmayer received his doctor of jurisprudence from the University of Freiburg in Germany and is inter-
nationally recognized in the field of compliance. He is chair of the Anti-Corruption Task Force of the Busi-
ness and Industry Advisory Committee at the Organization for Economic Co-operation and Development
(OECD); co-founder and chair of the European Chief Compliance and Integrity Officers’ Forum; former
co-chair of the B20 Integrity & Compliance Task Force under the G20 presidency of Argentina; and former
chair of the task force under the G20 presidency of Germany. Mr. Moosmayer lectures on compliance at the
University of St.Gallen in Switzerland.
John Tsai, M.D.
Head of Global Drug Development and Chief Medical Officer for Novartis | Nationality: American | Year of Birth: 1967
John Tsai, M.D., has been Head of Global Drug Development and Chief Medical Officer for Novartis since
May 1, 2018. He is a member of the Executive Committee of Novartis.
Dr. Tsai joined Novartis from Amgen Inc., where he was chief medical officer and senior vice president of
Global Medical, overseeing all clinical and medical functions across multiple sites worldwide. Before joining
Amgen in 2017, he spent 11 years at Bristol-Myers Squibb Co. (BMS), most recently as global head of clinical
development for marketed products. During his time at BMS, Dr. Tsai also served as a full development team
lead in oncology, head of Worldwide Medical, chief medical officer for Europe, vice president of US Medical,
and vice president of Cardiovascular Medical. Prior to BMS, he was a cardiovascular group leader at Pfizer
Inc. He started his career as an electrical engineer at General Electric Co.
Dr. Tsai holds a medical degree from the University of Louisville School of Medicine in the United States. He
received a Bachelor of Science in electrical engineering from Washington University in St. Louis, also in the US.
Robert Weltevreden
Head of Novartis Business Services (NBS) | Nationality: Dutch | Year of Birth: 1969
Robert Weltevreden has been Head of Novartis Business Services (NBS) since June 1, 2018. He is a mem-
ber of the Executive Committee of Novartis.
Mr. Weltevreden previously worked at Syngenta AG as head of its business services organization. He joined
Syngenta in 2003 and has held other leadership positions, including head of business process management;
head of finance services; and chief financial officer (CFO) of the Asia-Pacific region for Syngenta Crop Pro-
tection AG. Prior to Syngenta, Mr. Weltevreden worked at Newell Rubbermaid Inc. as vice president/control-
ler of Rubbermaid Europe and as CFO of the Germany, Benelux and Scandinavia markets. He started his
career as a corporate business analyst at Curver and later became CFO of the Iberia region.
Mr. Weltevreden holds a master’s degree in international finance, economics and business administration
from Erasmus University Rotterdam in the Netherlands. He also holds a Master of Business Administration
in financial management from Vlerick Business School in Ghent, Belgium.
Member of the Executive Committee, effective January 1, 2019
Susanne Schaffert, Ph.D.
CEO, Novartis Oncology | Nationality: German | Year of Birth: 1967
Susanne Schaffert, Ph.D., has been CEO of Novartis Oncology since January 1, 2019. She is a member of
the Executive Committee of Novartis.
Ms. Schaffert was appointed Chairperson and President of Advanced Accelerator Applications when it was
acquired by Novartis in January 2018, and will remain President until her successor is in place. She joined
Novartis more than 20 years ago and served as Region Head, Novartis Oncology Europe, from 2012 to 2018.
Prior to that, she was Head of Investor Relations for Novartis. She has also held other leadership positions
during her career at Novartis, including Global Franchise Head for Immunology and Infectious Diseases,
General Manager of Novartis Oncology in Northern and Central Europe, and General Manager of Novartis
Oncology in Germany.
Ms. Schaffert holds a doctorate in organic chemistry from the University of Erlangen in Germany. She is a mem-
ber of the Board of Novartis AG Germany, and previously served on the board of GlaxoSmithKline Consumer
Healthcare Holdings Ltd.
Secretary
Katja Roth Pellanda, Ph.D.
195
Item 6. Directors, Senior Management and Employees
Shareholder participation 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).
Voting rights, restrictions and
representation
Each Novartis share registered with the right to vote
entitles the holder to one vote at General Meetings.
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/investors/company-overview/cor-
porate-governance), the Board may register nominees
with the right to vote (for registration of nominees, see “—
Item 6.C Board practices—Our capital structure—Trans-
ferability and nominee registration”).
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. Given that share-
holder representation at General Meetings traditionally
has been rather low in Switzerland, Novartis AG consid-
ers registration restrictions ne cessary to prevent a minority
shareholder from dominating a General Meeting. The
Board may, upon request, grant an exemption from this
restriction. Considerations include whether the share-
holder supports the Novartis goal of creating sustain-
able value and has a long-term investment horizon. Exemp-
tions are in force for the registered significant
shareholders listed in “—Item 6.C Board practices—Our
Group structure and shareholders—Our shareholders—
Significant shareholders,” and for Norges Bank (Central
Bank of Norway), Oslo, which as of December 31, 2018,
was not registered in the share register but according to
a disclosure notification filed with Novartis AG, held 2.1%
of the share capital of Novartis AG. No further exemp-
tions were requested in 2018.
The same registration and voting restrictions indi-
rectly apply to holders of ADRs. Shareholders, ADR hold-
ers, or nominees who are linked to each other or who act
in concert to circumvent registration restrictions are
treated as one person or nominee for the purposes of
the restrictions on registration.
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 Inde-
pendent Proxy, grant powers of attorney to other share-
holders, and order their admission cards online. The
General Meeting registration form enables shareholders
who are not yet registered on the Sherpany Platform to
order detailed documents related to opening an account.
They may also do so by contacting the Novartis Share
Registry. Shareholders can deactivate their online account
at any time and again receive invitations in paper form.
An ADR holder 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 underlying 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 shareholder. Each ADR represents one Novartis share.
ADR holders exercise their voting rights by instructing
the depositary to exercise their voting rights. JPMorgan
Chase Bank, N.A., exercises the voting rights for regis-
tered Novartis shares underlying ADRs for which no vot-
ing instructions have been given by providing a discre-
tionary proxy to an uninstructed independent designee.
Such designee has to be a Novartis AG shareholder.
Powers of the General Meeting
The following powers are vested exclusively in the
General Meeting:
• Adoption and amendment of the Articles of Incorpora-
tion
• 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 on 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
Statutory quorums
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
196
Item 6. Directors, Senior Management and Employees
Incorporation (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
Extraordinary General Meetings may be convened upon
the request of the Board, the auditors, or shareholders
representing at least 10% of the Novartis share capital.
Agenda
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.
In addition, the law provides for a qualified majority for
other resolutions, such as a merger or demerger.
Registration in the Novartis Share
Register
Convocation of General Meetings
The AGM must be held within six months after the close
of the financial year (December 31), and normally takes
place at the end of February or the beginning of March.
The Novartis Share Register is an internal, non-public
register subject to statutory confidentiality, and privacy
and data protection imposed on Novartis to protect reg-
istered shareholders. Novartis shares can only be voted
if they are registered with voting rights in such register
by the third business day before the General Meeting.
197
Item 6. Directors, Senior Management and Employees
Change-of-control and defense measures
Duty to make an offer
Clauses on change of control
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.
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.
198
Item 6. Directors, Senior Management and Employees
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. Luc Schulthess, auditor in charge, began serving
in his role in 2018, 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.
Auditing fees and additional fees
PwC fees for professional services related to the 12-month
periods ended December 31, 2018, and December 31,
2017, are as follows:
Audit services
Audit-related services
Tax services
Other services
Total
2018
USD million
2017
USD million
25.6
13.4
0.7
2.4
42.1
24.6
7.2
0.8
1.4
34.0
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 the adoption of new accounting poli-
cies, audits of information systems and the related con-
trol environment, as well as reviews of quarterly finan-
cial results.
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, audits in con-
nection with non-recurring transactions, including audit
services related to the Alcon strategic review, contract
audits of third-party arrangements, corporate responsi-
bility assurance, and other audit-related services.
Tax services represent tax compliance, assistance with
historical tax matters, and other tax-related services.
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.
Information to the Board and the
Audit and Compliance Committee
The Audit and Compliance Committee, acting on behalf
of the Board, is responsible for overseeing the activities
of PwC. In 2018, this committee held seven meetings.
PwC was invited to all of these meetings to attend the
discussions on auditing matters and any other matters
relevant to its audit.
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, 2018. 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. To assess the performance
of PwC, the Audit and Compliance Committee holds pri-
vate meetings with the CFO and the Global Head of
Novartis Business Assurance & Advisory/Internal Audit
and, if necessary, obtains an independent external assess-
ment. Criteria applied for the performance assessment
of PwC include an evaluation of its technical and opera-
tional competence; 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, prac-
tical recommendations; and the openness and effective-
ness of its communications and coordination with the
Audit and Compliance Committee, the Internal Audit func-
tion and management.
Once a year, the auditor in charge and the global rela-
tionship partner report to the Board on PwC’s activities
during the current year and on the audit plan for the com-
ing year.
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.
199
Item 6. Directors, Senior Management and Employees
Information policy
Novartis is committed to open and transparent
communication with shareholders, financial analysts,
customers, suppliers and other stakeholders. Novartis
disseminates information about material developments in
its businesses in a broad and timely manner that complies
with the rules of the SIX Swiss Exchange and the NYSE.
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.
Topics discussed with shareholders may include strat-
egy, business performance and corporate governance,
while fully respecting all applicable laws and stock
exchange rules.
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.
Information for our stakeholders
Communications
Novartis publishes this Annual Report to provide infor-
mation on the Group’s results and operations. 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 Annual Reports, US Securities and
Exchange Commission Form 20-F, quarterly results
releases, and all related materials – including presenta-
tions and conference call webcasts – is on the Novartis
website at www.novartis.com/investors.
Novartis also publishes a Novartis in Society 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 Initiative’s G4 guidelines, and fulfills the Com-
pany’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
Investor Relations manages the Group’s interactions with
the international financial community. Several 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
Novartis in Society
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 in Society
www.novartis.com/nisreport2018
Novartis Investor Relations
www.novartis.com/investors
200
Item 6. Directors, Senior Management and Employees
6.D Employees
The table below sets forth the breakdown of the total year-end number of our full-time equivalent employees by
main category of activity and geographic area for the past three years.
For the year ended
December 31, 2018
(full-time equivalents)
USA
Canada and Latin America
Europe
Asia/Africa/Australasia
Total
For the year ended
December 31, 2017
(full-time equivalents)
USA
Canada and Latin America
Europe
Asia/Africa/Australasia
Total
For the year ended
December 31, 2016
(full-time equivalents)
USA
Canada and Latin America
Europe
Asia/Africa/Australasia
Total
Marketing and Production and Research and
supply development
sales
General and
NBS 1 administration
6 825
4 584
7 524
6 700
1 467
960
508
19 608
21 397
10 049
20 099
6 636
3 977
Total
23 427
7 441
911
490
2 780
58 679
1 289
35 614
51 116
36 517
21 234
10 824
5 470
125 161
Marketing and Production and Research and
supply development
sales
General and
NBS 1 administration
6 563
4 477
7 095
1 305
6 803
1 680
557
726
471
18 665
20 412
10 173
19 005
6 970
3 883
2 469
56 622
1 154
34 398
48 710
35 782
21 416
10 869
4 820
121 597
Marketing and Production and Research and
supply development
sales
General and
NBS 1 administration
6 615
4 430
6 836
1 404
7 363
1 517
516
706
491
18 034
19 807
10 208
17 825
7 029
3 504
2 473
55 205
1 104
32 469
46 904
35 076
21 591
10 048
4 774
118 393
899
4 845
3 613
900
4 903
3 386
841
4 683
3 007
Total
22 867
7 710
Total
23 037
7 682
1 NBS relates to full-time equivalent employees from our Novartis Business Services organizational unit.
A significant number of our associates are represented by unions or works councils. We have not experienced any
material work stoppages in recent years, and we consider our employee relations to be good.
6.E Share ownership
The aggregate amount of our shares owned by our Direc-
tors and the members of our Executive Committee in
2018 (including persons closely linked to them) as of
December 31, 2018, was 1,295,974 shares. This excludes
certain unvested equity rights (such as restricted share
units, performance share units and similar instruments)
but includes unvested restricted shares because our
unvested restricted shares can be voted. With respect
to any Directors and members of our Executive Commit-
tee who stepped down during 2018, this information is
reported as of the date they stepped down.
For more information on the Novartis shares, share
options and other equity-based instruments owned by
individual members of our Executive Committee and by
our current Directors, see the information set forth under
“Item 6. Directors, Senior Management and Employees—
Item 6.B Compensation—Compensation Report—2018
Executive Committee compensation—Additional disclo-
sures—Shares, ADRs and other equity rights owned by
Executive Committee members at December 31, 2018”
and under “Item 6. Directors, Senior Management and
Employees—Item 6.B Compensation—Compensation
Report—2018 Board compensation—Additional disclo-
sures—Shares, ADRs and share options owned by Board
members,” which are incorporated by reference. For
more information on our equity-based participation
plans, see the information set forth under “Item 18. Finan-
cial Statements—Note 25. Equity-based participation
plans for associates,” which is incorporated by reference.
201
Item 7. Major Shareholders and Related Party Transactions
Item 7. Major Shareholders and Related Party
Transactions
7.A Major shareholders
Novartis shares are widely held. As of December 31,
2018, Novartis had approximately 163,000 shareholders
listed in the Novartis AG Share Register, representing
approximately 69.2% of issued shares. Based on the
Novartis AG Share Register and excluding treasury
shares, approximately 42.1% of the shares registered by
name were held in Switzerland, and approximately 26.8%
were held in the US. Approximately 12.9% of the shares
registered in our share register were held by individual
investors, while approximately 32.6% were held by legal
entities (excluding 4.6% of our share capital held as trea-
sury shares by Novartis AG and its subsidiaries), nomi-
nees, fiduciaries and the ADS depositary.
Based on our share register, we believe that we are
not directly or indirectly owned or controlled by another
corporation or government, or by any other natural or
legal persons. There are no arrangements that may result
in a change of control.
2018
According to our share register, as of December 31, 2018,
excluding 4.6% of our share capital held as treasury
shares by Novartis AG and its subsidiaries, the following
registered shareholders (including nominees and the
ADS depositary) held more than 2% of the total share
capital of Novartis with the right to vote all their Novartis
shares based on an exemption granted by the Board of
Directors:
• Shareholders: Novartis Foundation for Employee Par-
ticipation, with its registered office in Basel, Switzer-
land, holding 2.3%; Emasan AG, with its registered
office in Basel, Switzerland, holding 3.5%; and UBS
Fund Management (Switzerland) AG, with its registered
office in Basel, Switzerland, holding 2.2%;
• Nominees: Chase Nominees Ltd., London, England
(holding 9.8%); Nortrust Nominees Ltd., London,
England (holding 3.6%); and The Bank of New York
Mellon, New York, NY (holding 4.1%) through its nomi-
nees, The Bank of New York Mellon, Everett, MA (hold-
ing 2.1%), The Bank of New York Mellon, New York,
holding 1.3%, and The Bank of New York Mellon, SA/
NV, Brussels, Belgium (holding 0.7%); and
• ADS depositary: JPMorgan Chase Bank, N.A., New
York, NY (holding 13.3%).
According to a disclosure notification filed with Novartis
AG, Norges Bank (Central Bank of Norway), Oslo, Nor-
way, held 2.1% of the share capital of Novartis AG as of
December 31, 2018, with the right to vote all its Novartis
shares, but was not registered in our share register as
of December 31, 2018.
According to a disclosure notification filed with
Novartis AG and the SIX Swiss Exchange, each of Black-
Rock, Inc., New York, NY, and Capital Group Companies,
Inc., Los Angeles, CA, held between 3% and 5% of the
share capital of Novartis AG but was registered with less
than 2% of the share capital in our share register as of
December 31, 2018.
As of December 31, 2018, no other shareholder was
registered as owner of more than 2% of the registered
share capital.
The Articles of Incorporation provide that no share-
holder shall be registered with the right to vote shares
comprising more than 2% of the registered share capi-
tal. The Board of Directors may, upon request, grant an
exemption from this restriction. Considerations include
whether the shareholder supports the Novartis goal of
creating sustainable value and has a long-term invest-
ment horizon. Exemptions are in force for the registered
major shareholders as described above. Novartis has
not entered into any agreement with any shareholder
regarding the voting or holding of Novartis shares.
2017
According to our share register, as of December 31, 2017,
excluding 6.4% of our share capital held as treasury
shares by Novartis AG and its subsidiaries, the following
registered shareholders (including nominees and the
ADS depositary) held more than 2% of the total share
capital of Novartis with the right to vote all their Novartis
shares based on an exemption granted by the Board of
Directors:
• Shareholders: Novartis Foundation for Employee Par-
ticipation, with its registered office in Basel, Switzer-
land, holding 2.5%; Emasan AG, with its registered
office in Basel, Switzerland, holding 3.4%; and UBS
Fund Management (Switzerland) AG, with its registered
office in Basel, Switzerland, holding 2.0%;
• Nominees: Chase Nominees Ltd., London, England
(holding 7.8%); Nortrust Nominees Ltd., London,
England (holding 3.8%); and The Bank of New York
Mellon, New York, NY (holding 4.3%) through its nom-
inees, The Bank of New York Mellon, Everett, MA (hold-
ing 2.0%), and The Bank of New York Mellon, SA/NV,
Brussels, Belgium (holding 2.3%); and
• ADS depositary: JPMorgan Chase Bank, N.A., New
York, NY (holding 12.3%).
According to a disclosure notification filed with Novartis
AG, Norges Bank (Central Bank of Norway), Oslo, Nor-
202
Item 7. Major Shareholders and Related Party Transactions
way, held 2.1% of the share capital of Novartis AG as of
December 31, 2017, with the right to vote all its Novartis
shares, but was not registered in our share register as
of December 31, 2017.
According to a disclosure notification filed with
Novartis AG and the SIX Swiss Exchange, Black-
Rock, Inc., New York, NY, held between 3% and 5% of
the share capital of Novartis AG but was registered with
less than 2% of the share capital in our share register as
of December 31, 2017.
As of December 31, 2017, no other shareholder was
registered as owner of more than 2% of the registered
share capital.
The Articles of Incorporation provide that no share-
holder shall be registered with the right to vote shares
comprising more than 2% of the registered share capi-
tal. The Board of Directors may, upon request, grant an
exemption from this restriction. Considerations include
whether the shareholder supports the Novartis goal of
creating sustainable value and has a long-term invest-
ment horizon. Exemptions are in force for the registered
major shareholders as described above. Novartis has
not entered into any agreement with any shareholder
regarding the voting or holding of Novartis shares.
2016
According to our share register, as of December 31, 2016,
excluding 4.5% of our share capital held as treasury
shares by Novartis AG and its subsidiaries, the following
registered shareholders (including nominees and the
ADS depositary) held more than 2% of the total share
capital of Novartis with the right to vote these shares:
• Shareholders: Novartis Foundation for Employee Par-
ticipation, with its registered office in Basel, Switzer-
land, holding 2.6%; Emasan AG, with its registered
office in Basel, Switzerland, holding 3.4%; and UBS
Fund Management (Switzerland) AG, with its registered
office in Basel, Switzerland, holding 2.1%;
• Nominees: Chase Nominees Ltd., London, England
(holding 8.5%); Nortrust Nominees, London, England
(holding 3.9%); and The Bank of New York Mellon, New
York, NY (holding 4.4%) through its nominees, Mellon
Bank, Everett, MA (holding 1.8%) and The Bank of New
York Mellon, Brussels, Belgium (holding 2.6%); and
• ADS depositary: JPMorgan Chase Bank, New York, NY
(holding 12%).
According to a disclosure notification filed with Novartis
AG, Norges Bank (Central Bank of Norway), Oslo, Nor-
way, held 2.02% of the share capital of Novartis AG as
of December 31, 2016, with the right to vote all its Novartis
shares, but was not registered in our share register as
of December 31, 2016.
According to disclosure notifications filed with Novartis
AG and the SIX Swiss Exchange, each of the following
shareholders held between 3% and 5% of the share cap-
ital of Novartis AG as of December 31, 2016:
• Capital Group Companies, Inc., Los Angeles, CA; and
• BlackRock, Inc., New York, NY.
As of December 31, 2016, no other shareholder was reg-
istered as owner of more than 2% of the registered share
capital. Novartis has not entered into any agreement with
any shareholder regarding the voting or holding of
Novartis shares.
7.B Related party transactions
The information set forth under “Item 18. Financial Statements—Note 26. Transactions with related parties” is incor-
porated by reference.
7.C Interests of experts and counsel
Not applicable.
203
Item 8. Financial Information
Item 8. Financial Information
8.A Consolidated statements and other financial
information
See “Item 18. Financial Statements.”
Dividend policy
Subject to the dividend policy described below, our
Board of Directors expects to recommend the payment
of a dividend in respect of each financial year. If approved
by our shareholders at the relevant annual shareholders’
meeting, the dividends will be payable shortly following
such approval. Any shareholder who purchases our
shares before the ex-dividend date and holds the shares
until that date shall be deemed to be entitled to receive
the dividends approved at that meeting. Dividends are
reflected in our financial statements in the year in which
they are approved by our shareholders.
Our dividend policy is to pay a growing annual divi-
dend in Swiss francs. This policy is subject to our finan-
cial conditions and outlook at the time, the results of our
operations, and other factors.
The Board will propose a dividend of CHF 2.85 per
share to the shareholders for approval at the Annual
General Meeting to be held on February 28, 2019.
Because we pay dividends in Swiss francs, exchange
rate fluctuations will affect the US dollar amounts
received by holders of ADRs. For a summary of dividends
we paid in the past five years, see “Item 3. Key Informa-
tion—Item 3.A Selected financial data—Cash dividends
per share.” See also “Item 3. Key Information—Item 3.D
Risk factors—The price of our ADRs and the US dollar
value of any dividends may be negatively affected by fluc-
tuations in the US dollar/Swiss franc exchange rate.”
Disclosure pursuant to Section 219 of the Iran
Threat Reduction & Syria Human Rights Act (ITRA)
At Novartis, our purpose is to reimagine medicine to
improve and extend people’s lives, regardless of where
they live. This includes the compliant sale of medicines
and other healthcare products worldwide. To help us ful-
fill this mission, we have two representative offices
located in Iran.
As of October 18, 2010, a non-US affiliate within our
Innovative Medicines Division entered into a non-bind-
ing Memorandum of Understanding (MoU) with the Min-
istry of Health and Medical Education of the Islamic
Republic of Iran. Pursuant to the MoU, the Iranian Minis-
try of Health acknowledges certain benefits that may
apply to sales of certain Innovative Medicines Division
medicines by third-party distributors in Iran. These
include fast-track registration, market exclusivity,
end-user subsidies, and exemptions from customs tar-
iffs. Novartis receives no payments from the Iranian Min-
istry of Health under the MoU, and the MoU creates no
obligations on the part of either Novartis or the Iranian
Ministry of Health.
From time to time, including in 2018, non-US affiliates
in our Innovative Medicines and Sandoz Divisions made
payments to government entities in Iran related to pat-
ents, trademarks, exit fees and other transactions ordi-
narily incident to travel by doctors and other medical pro-
fessionals resident in Iran to attend conferences or other
events outside Iran.
From time to time, including in 2018, non-US affiliates
in our Innovative Medicines and Sandoz Divisions enter
into agreements with hospitals, research institutes, med-
ical associations and universities in Iran to provide grants
and sponsor congresses, seminars and symposia, and
with doctors and other healthcare professionals for con-
sulting services, including participation in advisory
boards and investigator services for observational
(non-interventional) studies. Some of these hospitals and
research institutes are owned or controlled by the gov-
ernment of Iran, and some of these doctors and health-
care professionals are employed by hospitals that may
be public or government-owned.
Because our Innovative Medicines and Sandoz Divi-
sions have operations in Iran, including employees, they
obtain services and have other dealings incidental to
their activities in that country, including paying taxes and
salaries either directly or indirectly through a service pro-
vider, and obtaining office rentals, insurance, electricity,
water and telecommunications services, office and sim-
ilar supplies, and customs-related services from Iranian
companies that may be owned or controlled by the gov-
ernment of Iran. In addition, from time to time, represen-
tatives of our non-US affiliates participate in meetings
with Iranian officials to discuss issues relevant to our
business and the pharmaceutical industry.
In 2018, a non-US affiliate in our Sandoz Division coor-
dinated a training of government pharmaceutical regu-
lators at a one-day workshop requested by the Iranian
Food and Drug Organization to discuss regulatory path-
ways for biosimilar medicines in Iran.
Non-US affiliates in our Innovative Medicines and
Sandoz Divisions maintain local accounts at banks that
are, as of November 5, 2018, on the Specially Designated
Nationals and Blocked Persons List (SDN List). These
non-US affiliates make local transactions for employee
payroll and local vendor payment purposes only with
SDN-listed Iranian banks that are not subject to second-
ary sanctions. Payments to employees and vendors are
only made to accounts in Iranian banks that are not sub-
ject to secondary sanctions.
204
Item 8. Financial Information
8.B Significant changes
None.
205
Item 9. The Offer and Listing
Item 9. The Offer and Listing
9.A Offer and listing details
Our shares are listed in Switzerland on the SIX Swiss
Exchange (SIX).
Stock Exchange (NYSE) since May 2000 and are traded
under the symbol NVS.
American Depositary Shares (ADSs), each repre-
senting one share, have been available in the US through
an American Depositary Receipt (ADR) program since
December 1996. This program was established pursu-
ant to a deposit agreement that we entered into with
JPMorgan Chase Bank, N.A., as depositary (Deposit
Agreement). Our ADRs have been listed on the New York
The depositary has informed us that as of January 22,
2019, there were 337 million ADRs outstanding, each
representing one Novartis share (approximately 13% of
total Novartis shares issued). On January 22, 2019, the
closing price per share on the SIX was CHF 88.14 and
USD 88.32 per ADR on the NYSE.
9.B Plan of distribution
Not applicable.
9.C Markets
See “—Item 9.A Offer and listing details.”
9.D Selling shareholders
Not applicable.
9.E Dilution
Not applicable.
9.F Expenses of the issue
Not applicable.
206
Item 10. Additional Information
Item 10. Additional Information
10.A Share capital
Not applicable.
10.B Memorandum and articles of association
The following is a summary of certain provisions of our
Articles of Incorporation (“Articles”), our Regulations of
the Board of Directors (“Board Regulations”) and of
Swiss law, particularly the Swiss Code of Obligations
(“Swiss CO”). This is not a summary of all the significant
provisions of the Articles, the Board Regulations or of
Swiss law and does not purport to be complete. This
description is qualified in its entirety by reference to the
Articles and the Board Regulations, which are an exhibit
to this Form 20-F, and to Swiss law.
10.B.1 Company purpose
Novartis AG is registered in the commercial register of
the canton of Basel-Stadt, Switzerland, under number
CHE-103.867.266. Our business purpose, as stated in
Article 2 of the Articles, is to hold interests in enterprises
in the area of healthcare or nutrition. We may also hold
interests in enterprises in the areas of biology, chemis-
try, physics, information technology or related areas. We
may acquire, mortgage, liquidate or sell real estate and
intellectual property rights in Switzerland or abroad. In
pursuing our business purpose, we strive to create sus-
tainable value.
10.B.2 Directors
(a) According to our Board Regulations, a member of our
Board (“Director”) may not participate in deliberations
or resolutions on matters that affect, or reasonably
might affect, the Director’s interests or the interests
of a person close to the Director. In addition, the Swiss
CO sets forth that if, in connection with the conclu-
sion of a contract, Novartis AG is represented by the
person with whom it is concluding the contract, such
contract shall be in writing. Furthermore, the Swiss
CO requires directors and members of senior man-
agement to safeguard the interests of the corpora-
tion and, in this connection, imposes a duty of care
and a duty of loyalty on such individuals. This rule is
generally interpreted to mean that directors and mem-
bers of senior management are disqualified from par-
ticipating in decisions that affect them personally.
(b) A Board resolution requires the affirmative majority
of the votes cast. As with any Board resolution, Direc-
tors may not vote on their own compensation unless
at least a majority of the Directors are present. The
compensation of the Directors is subject to the
approval of the aggregate amounts of such compen-
sation by a shareholders’ resolution under the Ordi-
nance against Excessive Compensation in Public
Companies of the Swiss Federal Council.
(c) The Articles prohibit the granting of loans or credits
to Directors.
(d) Directors who have turned 70 years of age at the date
of the General Meeting of Shareholders may no lon-
ger be elected as members of the Board. The Gen-
eral Meeting of Shareholders may, under special cir-
cumstances, grant an exemption from this rule.
(e) Our Directors are not required to be shareholders
under our Articles.
10.B.3 Shareholder rights
Because Novartis AG has only one class of registered
shares, the following information applies to all sharehold-
ers.
(a) The Swiss CO requires that, among other things, at
least 5% of our annual profit be retained as general
reserves, so long as these reserves amount to less
than 20% of our registered share capital. Swiss law
and the Articles permit us to accrue additional
reserves.
Under the Swiss CO, we may only pay dividends
out of balance sheet profits, out of reserves created
for this purpose, or out of free reserves. In any event,
under the Swiss CO, while the Board may propose
that a dividend be paid, we may only pay dividends
upon shareholders’ approval at a General Meeting of
Shareholders. Our auditors must confirm that the div-
idend proposal of our Board conforms with the Swiss
CO and the Articles. Our Board intends to propose a
dividend once each year. See “Item 3. Key Informa-
tion—Item 3.A. Selected financial data—Cash divi-
dends per share” and “Item 8. Financial Information—
Item 8.A. Consolidated statements and other financial
information—Dividend policy.”
Dividends are usually due and payable shortly after
the shareholders have passed a resolution approving
the payment. Dividends that have not been claimed
within five years after the due date revert to us, and
are allocated to our general reserves. For information
about deduction of the withholding tax or other duties
from dividend payments, see “—Item 10.E Taxation.”
(b) Each share is entitled to one vote at a General Meet-
ing of Shareholders. Voting rights may only be exer-
cised for shares registered with the right to vote on
207
Item 10. Additional Information
the record date for the applicable General Meeting
of Shareholders. In order to do so, the shareholder
must file a share registration form with us, setting
forth the shareholder’s name, address and citizenship
(or, in the case of a legal entity, its registered office).
If the shareholder has not timely filed the form, then
the shareholder may not vote at, or participate in, Gen-
eral Meetings of Shareholders.
To vote its shares, the shareholder must also
explicitly declare that it has acquired the shares in its
own name and for its own account. If the shareholder
refuses to make such a declaration, the shares may
not be voted unless the Board recognizes such share-
holder as a nominee.
The Articles provide that no shareholder shall be
registered with the right to vote shares comprising
more than 2% of the registered share capital. The
Board may, upon request, grant an exemption from
this restriction. Considerations include whether the
shareholder supports our goal of creating sustainable
value and has a long-term investment horizon. Fur-
thermore, the Articles provide that no nominee shall
be registered with the right to vote shares compris-
ing 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 number of shares of the per-
sons for whose account it holds more than 0.5% of
the registered share capital. The same restrictions
indirectly apply to holders of ADRs. We have in the
past granted exemptions from the 2% rule for share-
holders and the 0.5% rule for nominees. Under the
Articles, the Board may delegate the power to grant
such exemptions. The Board has delegated this
power to the Chairman of the Board.
For purposes of the 2% rule for shareholders and
the 0.5% rule for nominees, groups of companies and
groups of shareholders acting in concert are consid-
ered to be one shareholder. These rules also apply to
shares acquired or subscribed by the exercise of sub-
scription, option or conversion rights.
After hearing the registered shareholder or nom-
inee, the Board may cancel, with retroactive effect as
of the date of registration, the registration of the
shareholders if the registration was effected based
on false information.
Registration restrictions in the Articles may only
be removed upon a resolution carrying a two-thirds
majority of the votes represented at a General Meet-
ing of Shareholders.
Except as noted in the paragraph immediately
below, shareholders’ resolutions require the approval
of a majority of the votes present at a General Meet-
ing of Shareholders. As a result, abstentions have the
effect of votes against such resolutions. Some exam-
ples of shareholders’ resolutions requiring a vote by
such “absolute majority of the votes” are (1) amend-
ments to the Articles; (2) elections of Directors, the
Chairman, the Compensation Committee members,
the Independent Proxy and the statutory auditors;
(3) approval of the management report and the finan-
cial statements; (4) setting the annual dividend, if any;
(5) approval of the aggregate amounts of compensa-
tion of the Directors and the members of the Execu-
tive Committee; (6) decisions to discharge Directors
and management from liability for matters disclosed
to the General Meeting of Shareholders; and (7) the
ordering of an independent investigation into specific
matters proposed to the General Meeting of Share-
holders. As a matter of Swiss law, certain other mat-
ters require a supermajority as well, including certain
mergers, scissions and transformations under the
Swiss Merger Act.
According to the Articles and Swiss law, the fol-
lowing types of shareholders’ resolutions require the
approval of a “supermajority” of at least two-thirds of
the votes present at a General Meeting of Sharehold-
ers: (1) an alteration of our corporate purpose; (2) the
creation of shares with increased voting powers;
(3) an implementation of restrictions on the transfer
of registered shares and the removal of such restric-
tions; (4) an authorized or conditional increase of the
share capital; (5) an increase of the share capital by
conversion of equity, by contribution in kind, or for the
purpose of an acquisition of property or the grant of
special rights; (6) a restriction or an exclusion of
shareholders’ pre-emptive rights; (7) a change of our
registered office; (8) our dissolution; or (9) any amend-
ment to the Articles that would create or eliminate a
supermajority requirement.
Our shareholders are required to annually elect
all of the members of the Board, as well as the Chair-
man of the Board, the members of the Compensation
Committee, and the Independent Proxy. The Articles
do not provide for cumulative voting of shares.
At General Meetings of Shareholders, sharehold-
ers can be represented by proxy. However, a proxy
must either be: the shareholder’s legal representative,
another shareholder with the right to vote, or the Inde-
pendent Proxy. Votes are taken either by a show of
hands or by electronic voting, unless the General Meet-
ing of Shareholders resolves to have a ballot or where
a ballot is ordered by the chairman of the meeting.
American Depositary Shares (ADSs), each repre-
senting one Novartis AG share and evidenced by
American Depositary Receipts (ADRs), are issued by
our depositary JPMorgan Chase Bank, N.A., New
York, and not by us. The ADR is vested with rights
defined and enumerated in the Deposit Agreement
(such as the rights to vote, to receive a dividend and
to receive a share of Novartis AG in exchange for a
certain number of ADRs). The enumeration of rights,
including any limitations on those rights in the Deposit
Agreement, is final. There are no other rights given to
the ADR holders. Only the ADS depositary, holding
our shares underlying the ADRs, is registered as
shareholder in our share register. An ADR is not a
Novartis AG share and an ADR holder is not a Novartis
AG shareholder.
The Deposit Agreement between our depositary,
the ADR holder and us has granted certain indirect
rights to vote to the ADR holders. ADR holders may
not attend Novartis AG general meetings in person.
ADR holders exercise their voting rights by instruct-
ing JPMorgan Chase Bank, N.A., our depositary, to
exercise the voting rights attached to the registered
shares underlying the ADRs. Each ADR represents
one Novartis AG share. JPMorgan Chase Bank exer-
208
Item 10. Additional Information
cises the voting rights for registered shares underly-
ing ADRs for which no voting instructions have been
given by providing a discretionary proxy to an unin-
structed independent designee pursuant to para-
graph 13 of the form of ADR. Such designee has to
be a shareholder of Novartis AG. The same voting
restrictions apply to ADR holders as to those holding
Novartis AG shares (i.e., the right to vote up to 2% of
the Novartis AG registered share capital – unless oth-
erwise granted an exemption by the Board – and the
disclosure requirement for nominees).
(c) Shareholders have the right to allocate the profit
shown on our balance sheet and to distribute divi-
dends by vote taken at the General Meeting of Share-
holders, subject to the legal requirements described
in “Item 10.B.3(a) Shareholder rights.”
(d) Under the Swiss CO, any surplus arising out of a liq-
uidation of Novartis AG (i.e., after the settlement of all
claims of all creditors) would be distributed to the
shareholders in proportion to the paid-in nominal
value of their shares.
(e) The Swiss CO limits a corporation’s ability to hold or
repurchase its own shares. We and our subsidiaries
may only repurchase shares if we have freely dispos-
able equity, in the amount necessary for this purpose,
available. The aggregate nominal value of all Novartis
AG shares held by us and our subsidiaries may not
exceed 10% of our registered share capital. However,
it is accepted that a corporation may repurchase its
own shares beyond the statutory limit of 10%, if the
repurchased shares are clearly earmarked for can-
cellation. In addition, we are required to recognize a
negative position for own shares acquired by Novartis
AG or if our subsidiaries acquire our shares, to cre-
ate a special reserve on our balance sheet, in each
case in the amount of the purchase price of the
acquired shares. Repurchased shares held by us or
our subsidiaries do not carry any rights to vote at a
General Meeting of Shareholders, but are entitled to
the economic benefits generally connected with the
shares. The definition of subsidiaries, and therefore,
treasury shares, for purposes of the above described
reserves requirement and voting restrictions differs
from the definition of subsidiaries for purposes of
consolidation in our consolidated financial state-
ments. The definition in the consolidated financial
statements requires consolidation for financial report-
ing purposes of special purpose entities in instances
where we have the power to govern the financial and
operating policies of the entity so as to obtain bene-
fits from its activities. Therefore, our consolidated
financial statements include special purpose entities,
mainly foundations, which do not qualify as subsid-
iaries subject to the reserve requirements and voting
restrictions of the Swiss CO because we do not hold
a majority participation in these special purpose enti-
ties. Accordingly, no reserve requirements apply to
shares held by such special purpose entities, and
such entities are not restricted from independently
voting their shares.
Under the Swiss CO, we may not cancel treasury
shares without the approval of a capital reduction by
our shareholders.
(f) Not applicable.
(g) Since all of our issued and outstanding shares have
been fully paid in, we can make no further capital calls
on our shareholders.
(h) See “—Item 10.B.3(b) Shareholder rights” and “—
Item 10.B.7 Change in control.”
10.B.4 Changes to shareholder rights
Under the Swiss CO, we may not issue new shares with-
out the prior approval of a capital increase by our share-
holders. If a capital increase is approved, then our share-
holders would generally have certain pre-emptive rights
to obtain newly issued shares in an amount proportional
to the nominal value of the shares they already hold.
These pre-emptive rights could be modified in certain
limited circumstances with the approval of a resolution
adopted at a General Meeting of Shareholders by a
supermajority of two-thirds of the votes. In addition, we
may not create shares with increased voting powers or
place restrictions on the transfer of registered shares
without the approval of a resolution adopted at a Gen-
eral Meeting of Shareholders by a supermajority of votes.
In addition, see “—Item 10.B.3(b) Shareholder rights” with
regard to the Board’s ability to cancel the registration of
shares under limited circumstances.
10.B.5 Shareholder meetings
Under the Swiss CO and the Articles, we must hold an
annual ordinary General Meeting of Shareholders within
six months after the end of our financial year. General
Meetings of Shareholders may be convened by the
Board or, if necessary, by the statutory auditors. The
Board is further required to convene an extraordinary
General Meeting of Shareholders if so resolved by a Gen-
eral Meeting of Shareholders, or if so requested by
shareholders holding an aggregate of at least 10% of the
share capital, specifying the items for the agenda and
their proposals. Shareholders holding shares with an
aggregate nominal value of at least CHF 1 000 000 (i.e.,
2 000 000 Novartis AG shares) or at least 10% of the
share capital have the right to request that a specific pro-
posal be put on the agenda and voted upon at the next
General Meeting of Shareholders. A General Meeting of
Shareholders is convened by publishing a notice in the
Swiss Official Gazette of Commerce (Schweizerisches
Handelsamtsblatt) at least 20 days prior to such meet-
ing. Shareholders may also be informed by mail. There
is no provision in the Swiss CO or the Articles requiring
a quorum for the holding of a General Meeting of Share-
holders. In addition, see “—Item 10.B.3(b) Shareholder
rights” regarding conditions for exercising a sharehold-
er’s right to vote at a General Meeting of Shareholders.
10.B.6 Limitations
There are no limitations under the Swiss CO or our Arti-
cles on the right of non-Swiss residents or nationals to
own or vote shares other than the restrictions applica-
ble to all shareholders. But see “Item 10.B.3(b) Share-
209
Item 10. Additional Information
holder rights” regarding conditions for exercising an ADR
holder’s right to vote at a shareholder meeting.
10.B.7 Change in control
The Articles and the Board Regulations contain no pro-
vision that would have an effect of delaying, deferring or
preventing a change in control of Novartis AG and that
would operate only with respect to a merger, acquisition
or corporate restructuring involving us or any of our sub-
sidiaries.
According to the Swiss Merger Act, shareholders
may pass a resolution to merge with another corpora-
tion at any time. Such a resolution would require the con-
sent of at least two-thirds of all votes present at the nec-
essary General Meeting of Shareholders.
Under the Swiss Financial Market Infrastructure Act,
shareholders and groups of shareholders acting in con-
cert who acquire more than 331/3% of our shares would
be under an obligation to make an offer to acquire all
remaining Novartis AG shares. Novartis AG has neither
opted out from the mandatory takeover offer obligation
nor opted to increase the threshold for mandatory take-
over offers in its Articles.
rights relating to our shares are required to notify us and
SIX of the level of their holdings whenever such holdings
reach, exceed or fall below certain thresholds – 3%, 5%,
10%, 15%, 20%, 25%, 33 1/3%, 50% and 66 2/3% – of
the voting rights represented by our share capital
(whether exercisable or not). This also applies to anyone
who has discretionary power to exercise voting rights
associated with our shares. Following receipt of such
notification, we are required to inform the public by pub-
lishing the information via the electronic publication plat-
form operated by SIX.
An additional disclosure obligation exists under the
Swiss CO that requires us to disclose, once a year in the
notes to the financial statements published in our Annual
Report, the identity of all of our shareholders (or related
groups of shareholders) who have been granted exemp-
tion entitling them to vote more than 2% of our registered
share capital, as described in “—Item 10.B.3(b) Share-
holder rights.”
10.B.9 Differences in the law
See the references to Swiss law throughout this “—
Item 10.B Memorandum and articles of association.”
10.B.8 Disclosure of shareholdings
10.B.10 Changes in capital
Under the Swiss Financial Market Infrastructure Act, per-
sons who directly, indirectly or in concert with other par-
ties acquire or dispose of our shares or purchase or sale
The requirements of the Articles regarding changes in
capital are not more stringent than the requirements of
Swiss law.
10.C Material contracts
Consumer Healthcare Joint Venture
with GSK
On April 22, 2014 (and as amended from time to time),
we entered into a Contribution Agreement with GSK
under which GSK contributed its consumer healthcare
business (the “GSK Consumer Healthcare Business”)
and we contributed our OTC Division, with certain lim-
ited exceptions that included the over-the-counter busi-
ness of our Sandoz Division, into a newly created joint
venture that operated under the GSK Consumer Health-
care name (the “Consumer Healthcare Joint Venture”).
In consideration for those contributions, GSK owned
63.5% of the issued share capital of the Consumer
Healthcare Joint Venture, and we owned 36.5% of the
issued share capital of the Consumer Healthcare Joint
Venture. We had the right, exercisable from March 2,
2018, to March 2, 2035, to require GSK to purchase our
stake in the Consumer Healthcare Joint Venture.
On March 27, 2018, we entered into a Put Option
Implementation Agreement with GSK and with the Con-
sumer Healthcare Joint Venture. Under this agreement,
we agreed to the cancellation of our shares in the Con-
sumer Healthcare Joint Venture in consideration for a
payment to us of USD 13 billion in cash. On May 3, 2018,
GSK obtained the necessary shareholder approval, and
the transaction was completed on June 1, 2018. Follow-
ing cancellation of our shares, GSK acquired 100% con-
trol of the Consumer Healthcare Joint Venture.
Acquisition of AveXis
On April 9, 2018, we entered into an Agreement and Plan
of Merger with AveXis, Inc. (“AveXis”) to acquire AveXis
for USD 218 per share or a total of approximately USD
8.7 billion in cash. Pursuant to the Merger Agreement, on
April 17, 2018, we commenced a tender offer to acquire
all outstanding shares of AveXis. We completed the acqui-
sition on May 15, 2018. As a result of the merger, AveXis
became a wholly-owned subsidiary of Novartis AG.
210
Item 10. Additional Information
10.D Exchange controls
There are no Swiss governmental laws, decrees or reg-
ulations that restrict – in a manner material to Novartis
AG – the export or import of capital, including any for-
eign exchange controls, or that generally affect the remit-
tance of dividends or other payments to non-residents
or non-citizens of Switzerland who hold Novartis AG
shares.
10.E Taxation
The taxation discussion set forth below is intended only
as a descriptive summary and does not purport to be a
complete analysis or listing of all potential tax effects rel-
evant to the ownership or disposition of our shares or
ADRs. The statements of US and Swiss tax laws set forth
below are based on the laws and regulations in force as
of the date of this 20-F – including the current Conven-
tion Between the US and the Swiss Confederation for
the Avoidance of Double Taxation with Respect to Taxes
on Income, entered into force on December 19, 1997 (the
Treaty); the US Internal Revenue Code of 1986, as
amended (the Code); Treasury regulations; rulings; judi-
cial decisions; and administrative pronouncements – and
may be subject to any changes in US and Swiss law, and
in any double taxation convention or treaty between the
US and Switzerland occurring after that date, which
changes may have retroactive effect.
Swiss taxation
Swiss residents
Withholding Tax on dividends and distributions. Divi-
dends that we pay and similar cash or in-kind distribu-
tions that we may make to a holder of shares or ADRs
(including distributions of liquidation proceeds in excess
of the nominal value, stock dividends and, under certain
circumstances, proceeds from repurchases of shares
by us in excess of the nominal value) are generally sub-
ject to a Swiss federal withholding tax (the Withholding
Tax) at a current rate of 35%. Under certain circum-
stances, distributions out of capital contribution reserves
made by shareholders after December 31, 1996, are
exempt from the Withholding Tax. We are required to
withhold this Withholding Tax from the gross distribution
and to pay the Withholding Tax to the Swiss Federal Tax
Administration. The Withholding Tax is refundable in full
to Swiss residents who are the beneficial owners of the
taxable distribution at the time it is resolved and duly
report the gross distribution received on their personal
tax return or in their financial statements for tax pur-
poses, as the case may be.
Income tax on dividends. A Swiss resident who receives
dividends and similar distributions (including stock divi-
dends and liquidation surplus) on shares or ADRs is
required to include such amounts in the shareholder’s
personal income tax return. However, distributions out
of qualified capital contribution reserves are not subject
to income tax. A corporate shareholder may claim sub-
stantial relief from taxation of dividends and similar dis-
tributions received if the shares held represent a fair
market value of at least CHF 1 million.
Capital gains tax upon disposal of shares. Under current
Swiss tax law, the gain realized on shares held by a Swiss
resident who holds shares or ADRs as part of his private
property is generally not subject to any federal, cantonal
or municipal income taxation on gains realized on the
sale or other disposal of shares or ADRs. However, gains
realized upon a repurchase of shares by us may be char-
acterized as taxable dividend income if certain condi-
tions are met. Book gains realized on shares or ADRs
held by a Swiss corporate entity or by a Swiss resident
individual as part of the shareholder’s business property
are, in general, included in the taxable income of such
person. However, the Federal Law on the Direct Federal
Tax of December 14, 1990, and several cantonal laws on
direct cantonal taxes provide for exceptions for Swiss
corporate entities holding more than 10% of our voting
stock for more than one year.
Residents of other countries
Recipients of dividends and similar distributions on our
shares who are neither residents of Switzerland for tax
purposes nor holding shares as part of a business con-
ducted through a permanent establishment situated in
Switzerland (Non-Resident Holders) are not subject to
Swiss income taxes in respect of such distributions.
Moreover, gains realized by such recipients upon the dis-
posal of shares are not subject to Swiss income taxes.
Non-Resident Holders of shares are, however, sub-
ject to the Withholding Tax on dividends and similar dis-
tributions mentioned above and, under certain circum-
stances, to the Stamp Duty described below. Such
Non-Resident Holders may be entitled to a partial refund
of the Withholding Tax if the country in which they reside
has entered into a bilateral treaty for the avoidance of
double taxation with Switzerland. Non-Resident Holders
should be aware that the procedures for claiming treaty
refunds (and the timeframe required for obtaining a
refund) may differ from country to country. Non-Resident
Holders should consult their own tax advisors regarding
receipt, ownership, purchase, sale or other dispositions
of shares or ADRs, and the procedures for claiming a
refund of the Withholding Tax.
211
Item 10. Additional Information
As of January 1, 2019, Switzerland has entered into bilateral treaties for the avoidance of double taxation with
respect to income taxes with the following countries, whereby a part of the above-mentioned Withholding
Tax may be refunded (subject to the limitations set forth in such treaties):
Albania
Algeria
Argentina
Armenia
Australia
Austria
Azerbaijan
Bahrain
Bangladesh
Belarus
Belgium
Bulgaria
Canada
Chile
China
Colombia
Croatia
Cyprus
Czech Republic
Denmark
Ecuador
Egypt
Estonia
Finland
France
Germany
Georgia
Ghana
Greece
Hong Kong
Hungary
Iceland
India
Indonesia
Iran
Israel
Italy
Ivory Coast
Republic of Ireland
Jamaica
Japan
Kazakhstan
Republic of Korea
(South Korea)
Kosovo
Kuwait
Kyrgyzstan
Latvia
Liechtenstein
Lithuania
Luxembourg
Macedonia
Malaysia
Malta
Mexico
Moldova
Mongolia
Montenegro
Morocco
Netherlands
New Zealand
Norway
Oman
Pakistan
Peru
Philippines
Poland
Portugal
Qatar
Romania
Russia
Serbia
Singapore
Slovak Republic
Slovenia
South Africa
Spain
Sri Lanka
Sweden
Taiwan
Tajikistan
Thailand
Trinidad and Tobago
Tunisia
Turkey
Turkmenistan
Ukraine
United Arab Emirates
United Kingdom
United States of America
Uruguay
Uzbekistan
Venezuela
Vietnam
The tax treaty with Bahrain is not applicable to the healthcare industry. Tax treaty negotiations are underway, or
have been conducted, with Bosnia and Herzegovina, Brazil, Costa Rica, Ethiopia, Libya, North Korea, Saudi Arabia,
Senegal, Syria, Zambia and Zimbabwe. Tax treaty negotiations between Switzerland and some of the countries
listed in the immediately preceding sentence have been ongoing for an extended period of time, and we are not
certain when or if such negotiations will be completed, and when or if the corresponding treaties will come into
effect.
A Non-Resident Holder of shares or ADRs will not be lia-
ble for any Swiss taxes other than the Withholding Tax
described above and, if the transfer occurs through or
with a Swiss bank or other Swiss securities dealer, the
Stamp Duty described below. If, however, the shares or
ADRs of Non-Resident Holders can be attributed to a
permanent establishment or a fixed place of business
maintained by such person within Switzerland during the
relevant tax year, the shares or ADRs may be subject to
Swiss income taxes in respect of income and gains real-
ized on the shares or ADRs, and such person may qual-
ify for a full refund of the Withholding Tax based on Swiss
tax law.
Residents of the US. A Non-Resident Holder who is a
resident of the US for purposes of the Treaty is eligible
for a reduced rate of tax on dividends equal to 15% of
the dividend, provided that such holder (i) qualifies for
benefits under the Treaty, (ii) holds, directly and indi-
rectly, less than 10% of our voting stock, and (iii) does
not conduct business through a permanent establish-
ment or fixed base in Switzerland to which the shares or
ADRs are attributable. Such an eligible holder must apply
for a refund of the amount of the Withholding Tax in
excess of the 15% Treaty rate. A Non-Resident Holder
who is a resident of the US for purposes of the Treaty is
eligible for a reduced rate of tax on dividends equal to
5% of the dividend, provided that such holder (i) is a com-
pany, (ii) qualifies for benefits under the Treaty, (iii) holds
directly at least 10% of our voting stock, and (iv) does
not conduct business through a permanent establish-
ment or fixed place of business in Switzerland to which
the shares or ADRs are attributable. Such an eligible
holder must apply for a refund of the amount of the With-
holding Tax in excess of the 5% Treaty rate. Claims for
refunds must be filed on Swiss Tax Form 82 (82C for
corporations; 82I for individuals; 82E for other entities),
which may be obtained from any Swiss Consulate Gen-
eral in the US or from the Federal Tax Administration of
Switzerland at the address below, together with an
instruction form. Four copies of the form must be duly
completed, signed before a notary public of the US, and
sent to the Federal Tax Administration of Switzerland,
Eigerstrasse 65, CH-3003 Bern, Switzerland. The form
must be accompanied by suitable evidence of deduction
of Swiss tax withheld at source, such as certificates of
deduction, signed bank vouchers or credit slips. The form
may be filed on or after July 1 or January 1 following the
date the dividend was payable, but no later than Decem-
ber 31 of the third year following the calendar year in
which the dividend became payable. For US resident
holders of ADRs, JPMorgan Chase Bank, N.A., as depos-
212
Item 10. Additional Information
itary, will comply with these Swiss procedures on behalf
of the holders, and will remit the net amount to the hold-
ers.
Stamp Duty upon transfer of securities. The sale of
shares, whether by Swiss residents or Non-Resident
Holders, may be subject to federal securities transfer
Stamp Duty of 0.15%, calculated on the sale proceeds,
if the sale occurs through or with a Swiss bank or other
Swiss securities dealer, as defined in the Swiss Federal
Stamp Duty Act. The Stamp Duty has to be paid by the
securities dealer and may be charged to the parties in a
taxable transaction who are not securities dealers.
Stamp Duty may also be due if a sale of shares occurs
with or through a non-Swiss bank or securities dealer,
provided (i) such bank or dealer is a member of the SIX,
and (ii) the sale takes place on the SIX. In addition to this
Stamp Duty, the sale of shares by or through a member
of the SIX may be subject to a minor stock exchange
levy.
(i) subject to the primary supervision of a US court and
the control of one or more US persons, or (ii) that has a
valid election in place to be treated as a US person. If a
partnership (or other entity treated as a partnership for
US federal income tax purposes) holds shares or ADRs,
the tax treatment of a partner generally will depend upon
the status of the partner and the activities of the part-
nership. Partners in a partnership that holds shares or
ADRs are urged to consult their own tax advisor regard-
ing the specific tax consequences of the owning and
disposing of such shares or ADRs by the partnership.
For US federal income tax purposes, a US Holder of
ADRs generally will be treated as the beneficial owner
of our shares represented by the ADRs. However, see
the discussion below under “—Dividends” regarding cer-
tain statements made by the US Treasury concerning
depositary arrangements.
This discussion assumes that each obligation in the
Deposit Agreement and any related agreement will be
performed in accordance with its terms.
US federal income taxation
The following is a general discussion of the material US
federal income tax consequences of the ownership and
disposition of our shares or ADRs that may be relevant
to you if you are a US Holder (as defined below). Because
this discussion does not consider any specific circum-
stances of any particular holder of our shares or ADRs,
persons who are subject to US taxation are strongly
urged to consult their own tax advisors as to the overall
US federal, state and local tax consequences, as well as
to the overall Swiss and other foreign tax consequences,
of the ownership and disposition of our shares or ADRs.
In particular, additional or different rules may apply to US
expatriates; banks and other financial institutions; regu-
lated investment companies; traders in securities who
elect to apply a mark-to-market method of accounting;
dealers in securities or currencies; tax-exempt entities;
insurance companies; broker-dealers; investors liable for
alternative minimum tax; investors that hold shares or
ADRs as part of a straddle, hedging or conversion trans-
action; holders whose functional currency is not the US
dollar; partnerships or other pass-through entities; per-
sons who acquired our shares pursuant to the exercise
of employee stock options or otherwise as compensa-
tion; and persons who hold, directly, indirectly or by attri-
bution, 10% or more of our outstanding shares. This dis-
cussion generally applies only to US Holders who hold
the shares or ADRs as a capital asset (generally, for
investment purposes), and whose functional currency is
the US dollar. Investors are urged to consult their own
tax advisors concerning whether they are eligible for
benefits under the Treaty.
For purposes of this discussion, a US Holder is a ben-
eficial owner of our shares or ADRs who is (i) an individ-
ual who is a citizen or resident of the US for US federal
income tax purposes; (ii) a corporation (or other entity
taxable as a corporation for US federal income tax pur-
poses) created or organized in or under the laws of the
US or a state thereof or the District of Columbia; (iii) an
estate the income of which is subject to US federal
income taxation regardless of its source; or (iv) a trust
Dividends. US Holders will be required to include in gross
income, as an item of ordinary income, the full amount
(including the amount of any Withholding Tax) of a divi-
dend paid with respect to our shares or ADRs at the time
that such dividend is received by the US Holder, in the
case of shares, or by the depositary, in the case of ADRs.
For this purpose, a “dividend” will include any distribu-
tion paid by us with respect to our shares or ADRs (other
than certain pro rata distributions of our capital stock)
paid out of our current or accumulated earnings and prof-
its, as determined under US federal income tax princi-
ples. To the extent the amount of a distribution by us
exceeds our current and accumulated earnings and prof-
its, such excess will first be treated as a tax-free return
of capital to the extent of a US Holder’s tax basis in the
shares or ADRs (with a corresponding reduction in such
tax basis), and thereafter will be treated as capital gain,
which will be long-term capital gain if the US Holder held
our shares or ADRs for more than one year. Under the
Code, dividend payments by us on the shares or ADRs
are not eligible for the dividends received deduction gen-
erally allowed to corporate shareholders.
Dividend income in respect of our shares or ADRs
will constitute income from sources outside the US for
US foreign tax credit purposes. Subject to the limitations
and conditions provided in the Code, US Holders gener-
ally may claim as a credit against their US federal income
tax liability, any Withholding Tax withheld from a dividend.
The rules governing the foreign tax credit are complex.
Each US Holder is urged to consult its own tax advisor
concerning whether, and to what extent, a foreign tax
credit will be available with respect to dividends received
from us. Alternatively, a US Holder may claim the With-
holding Tax as a deduction for the taxable year within
which the Withholding Tax is paid or accrued, provided
a deduction is claimed for all of the foreign income taxes
the US Holder pays or accrues in the particular year. A
deduction does not reduce US tax on a dollar-for-dollar
basis like a tax credit. The deduction, however, is not
subject to the limitations applicable to foreign tax cred-
its, but may be subject to other limitations, and each US
Holder is urged to consult its own tax advisor.
213
Item 10. Additional Information
The US Treasury has expressed concern that parties
to whom ADRs are released may be taking actions incon-
sistent with the claiming of foreign tax credits for US
Holders of ADRs. Accordingly, the summary above of the
creditability of the Withholding Tax could be affected by
future actions that may be taken by the US Treasury.
In general, a US Holder will be required to determine
the amount of any dividend paid in Swiss francs, includ-
ing the amount of any Withholding Tax imposed thereon,
by translating the Swiss francs into US dollars at the spot
rate on the date the dividend is actually or constructively
received by a US Holder, in the case of shares, or by the
depositary, in the case of ADRs, regardless of whether
the Swiss francs are in fact converted into US dollars. If
a US Holder converts the Swiss francs so received into
US dollars on the date of receipt, the US Holder gener-
ally should not recognize foreign currency gain or loss
on such conversion. If a US Holder does not convert the
Swiss francs so received into US dollars on the date of
receipt, the US Holder will have a tax basis in the Swiss
francs equal to the US dollar value on such date. Any for-
eign currency gain or loss that a US Holder recognizes
on a subsequent conversion or other disposition of the
Swiss francs generally will be treated as US source ordi-
nary income or loss.
For a non-corporate US Holder, the US dollar amount
of any dividends paid that constitute qualified dividend
income generally will be taxable at a maximum rate of
15% (or 20% in the case of taxpayers with annual income
that exceeds certain thresholds), provided that the US
Holder meets certain holding period and other require-
ments. In addition, the dividends could be subject to a
3.8% net investment income tax. This tax is applied
against the lesser of the US Holder’s net investment
income or the amount by which modified adjusted gross
income exceeds a statutory threshold amount based on
filing status. We currently believe that dividends paid with
respect to our shares and ADRs will constitute qualified
dividend income for US federal income tax purposes. US
Holders of shares or ADRs are urged to consult their
own tax advisors regarding the availability to them of the
reduced dividend rate in light of their own particular sit-
uation and the computations of their foreign tax credit
limitation with respect to any qualified dividends paid to
them, as applicable.
Sale or other taxable disposition. Upon a sale or other
taxable disposition of shares or ADRs, US Holders gen-
erally will recognize capital gain or loss in an amount
equal to the difference between the US dollar value of
the amount realized on the disposition and the US Hold-
er’s tax basis (determined in US dollars) in the shares or
ADRs. This capital gain or loss generally will be US
source gain or loss and will be treated as long-term cap-
ital gain or loss if the holding period in the shares or ADRs
exceeds one year. In the case of a non-corporate US
Holder, any long-term capital gain generally will be sub-
ject to US federal income tax at preferential rates, with
a maximum rate of 15% (or 20% in the case of taxpayers
with annual income that exceeds certain thresholds). In
addition, the gains could be subject to a 3.8% investment
income tax. This tax is applied against the lesser of the
US Holder’s net investment income or the amount by
which modified adjusted gross income exceeds a stat-
utory threshold amount based on filing status. The
deductibility of capital losses is subject to significant lim-
itations under the Code. Deposits or withdrawals of our
shares by US Holders in exchanges for ADRs will not
result in the realization of gain or loss for US federal
income tax purposes.
US information reporting and backup withholding. Divi-
dend payments with respect to shares or ADRs and pro-
ceeds from the sale, exchange or other disposition of
shares or ADRs received in the United States or through
US-related financial intermediaries may be subject to
information reporting to the US Internal Revenue Service
(IRS) and possible US backup withholding. Certain
exempt recipients (such as corporations) are not subject
to these information reporting and backup withholding
requirements. Backup withholding will not apply to a US
Holder who furnishes a correct taxpayer identification
number and makes any other required certification or
who is otherwise exempt from backup withholding. Any
US Holders required to establish their exempt status
generally must provide a properly executed IRS Form W-9
(Request for Taxpayer Identification Number and Certi-
fication). Backup withholding is not an additional tax.
Amounts withheld as backup withholding may be cred-
ited against a US Holder’s US federal income tax liabil-
ity, and a US Holder may obtain a refund of any excess
amounts withheld under the backup withholding rules by
timely filing the appropriate claim for refund with the IRS
and furnishing any required information.
10.F Dividends and paying agents
Not applicable.
10.G Statement by experts
Not applicable.
214
Item 10. Additional Information
10.H Documents on display
Any statement in this Form 20-F about any of our con-
tracts or other documents is not necessarily complete.
If the contract or document is filed as an exhibit to the
Form 20-F, the contract or document is deemed to mod-
ify the description contained in this Form 20-F. You must
review the exhibits themselves for a complete descrip-
tion of the contract or document.
The SEC maintains an internet site at http://www.sec.
gov that contains reports and other information regard-
ing issuers that file electronically with the SEC. These
SEC filings are also available to the public from commer-
cial document retrieval services.
We are required to file or furnish reports and other
information with the SEC under the Securities Exchange
Act of 1934 and regulations under that act. As a foreign
private issuer, we are exempt from the rules under the
Exchange Act prescribing the form and content of proxy
statements, and our officers, directors and principal
shareholders are exempt from the reporting and short
swing profit recovery provisions contained in Section 16
of the Exchange Act.
10.I Subsidiary information
Not applicable.
215
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 11. Quantitative and Qualitative
Disclosures About Market Risk
The major financial risks facing the Group are managed
centrally by Group Treasury. We have a written Treasury
Directive and have implemented a strict segregation of
front-office and back-office controls. The Group does
regular reconciliations of its positions with its counter-
parties. In addition, the Treasury function is included in
management’s internal control assessment.
For information about the effects of currency fluctu-
ations and how we manage currency risk, see “Item 5.
Operating and Financial Review and Prospects—Item 5.B
Liquidity and capital resources.”
The information set forth under “Item 18. Financial
Statements—Note 28. Financial instruments—additional
disclosures” is incorporated by reference.
216
Item 12. Description of Securities Other Than Equity Securities
Item 12. Description of Securities Other Than
Equity Securities
12.A Debt securities
Not applicable.
12.B Warrants and rights
Not applicable.
12.C Other securities
Not applicable.
12.D American Depositary Shares
Fees payable by ADR holders
According to our Deposit Agreement with the ADS depositary, JPMorgan Chase Bank, N.A. (JPMorgan), holders
of our ADRs may have to pay to JPMorgan, either directly or indirectly, fees or charges up to the amounts set forth
below:
Category
Depositary actions
Depositing or substituting Acceptance of shares surrendered, and issuance of ADRs in exchange,
underlying shares
including surrenders and issuances in respect of:
— Share distributions
— Stock split
— Rights
— Merger
— Exchange of shares or any other transaction or event or other distribution
affecting the ADSs or the deposited shares
Acceptance of ADRs surrendered for withdrawal of deposited shares
Distribution or sale of shares, the fee being in an amount equal to the fee
for the execution and delivery of ADRs that would have been charged
as a result of the deposit of such shares
Associated fee
USD 5.00 for each 100 ADSs
(or portion thereof)
evidenced by the new
ADRs delivered
USD 5.00 for each 100 ADSs
(or portion thereof)
evidenced by the ADRs
surrendered
USD 5.00 for each 100 ADSs
(or portion thereof)
Transfers, combining or grouping of depositary receipts
USD 1.50 per ADR
Expenses incurred on behalf of holders in connection with:
— Compliance with foreign exchange control regulations or any law or
regulation relating to foreign investment
— The depositary’s or its custodian’s compliance with applicable law,
rule or regulation
— Stock transfer or other taxes and other governmental charges
— Cable, telex and facsimile transmission and delivery
— Expenses of the depositary in connection with the conversion of foreign
currency into US dollars (which are paid out of such foreign currency)
— Any other charge payable by any of the depositary or its agents
Expenses payable at the sole
discretion of the depositary
by billing holders or by
deducting charges from one
or more cash dividends or
other cash distributions
Advance tax relief
Tax relief/reclamation process for qualified holders
A depositary service charge
of USD 0.008 per ADS
217
Withdrawing
underlying shares
Selling or
exercising rights
Transferring,
splitting or
grouping receipts
Expenses of the
depositary
Item 12. Description of Securities Other Than Equity Securities
Fees payable by the depositary to the
issuer
Pursuant to an agreement effective as of May 11, 2017
(the Agreement), JPMorgan, as our ADS depositary, has
agreed to make an annual contribution payment to
Novartis at the end of each 12-month period beginning
on the effective date of the Agreement and on each sub-
sequent anniversary of the effective date of the Agree-
ment (each such 12-month period is a “Contract Year”).
This annual contribution payment will equal: (a)(1) USD
1.7 million less (a)(2) the custody costs, fees and expenses
(including, without limitation, any central securities
depository fees, charges and expenses) incurred during
the applicable Contract Year (the items in (a)(2) collec-
tively are the “Custody Costs”) plus (b) 70% of the gross
issuance and cancellation fees collected by JPMorgan
under the Deposit Agreement during such Contract Year
minus (c) that portion (if any) of JPMorgan’s legal fees,
charges and out-of-pocket expenses in excess of USD
50 000 for such Contract Year. To the extent that the
Custody Costs for a Contract Year exceed USD 1.7 mil-
lion, these costs would be capped at USD 1.7 million.
JPMorgan has further agreed to waive the USD 0.05
per ADS issuance fees that would normally be owed by
Novartis in connection with our deposits of shares as
part of our employee stock ownership and employee par-
ticipation plans. Novartis is responsible for reimbursing
JPMorgan for all taxes and governmental charges
required to have been withheld and/or paid, and not so
withheld and/or paid, arising from such waived fees.
218
Item 13. Defaults, Dividend Arrearages and Delinquencies
PART II
Item 13. Defaults, Dividend Arrearages and
Delinquencies
None.
219
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
Item 14. Material Modifications to the Rights
of Security Holders and Use of Proceeds
None.
220
Item 15. Controls and Procedures
Item 15. Controls and Procedures
Report of Novartis Management on Internal Control Over Financial Reporting
Novartis AG’s Chief Executive Officer and Chief Finan‑
cial Officer, after evaluating the effectiveness of our dis‑
closure controls and procedures (as defined in Exchange
Act Rule 13a‑15(e)) as of the end of the period covered
by this Annual Report, have concluded that, as of such
date, our disclosure controls and procedures were effec‑
tive.
The Board of Directors and management of the
Group are responsible for establishing and maintaining
adequate internal control over financial reporting. The
Group’s internal control system was designed to provide
reasonable assurance to the Group’s management and
Board of Directors regarding the reliability 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 pre‑
vent or detect misstatements and can provide only rea‑
sonable assurance with respect to financial statement
preparation and presentation. Also, projections of any
evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compli‑
ance with the policies or procedures may deteriorate.
Group management assessed the effectiveness of
the Group’s internal control over financial reporting as
of December 31, 2018. 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 our assessment, management concluded that,
as of December 31, 2018, the Group’s internal control
over financial reporting is effective based on those cri‑
teria.
PricewaterhouseCoopers AG, Switzerland, an inde‑
pendent registered public accounting firm, has issued
an unqualified opinion on the effectiveness of the Group’s
internal control over financial reporting, which is included
in this Annual Report under “Item 18. Financial State‑
ments—Report of
independent registered public
accounting firm.”
See the report of PwC, an independent registered
public accounting firm, included under “Item 18. Finan‑
cial Statements—Report of independent registered pub‑
lic accounting firm.”
There were no changes to our internal control over
financial reporting that occurred during the period cov‑
ered by this Annual Report that have materially affected,
or are reasonably likely to materially affect, our internal
control over financial reporting.
Vas Narasimhan
Chief Executive Officer
Harry Kirsch
Chief Financial Officer
Basel, January 29, 2019
221
Item 16A. Audit Committee Financial Expert
Item 16A. Audit Committee Financial Expert
Our Audit and Compliance Committee has determined
that Srikant Datar and Elizabeth Doherty each possess
specific accounting and financial management expertise
and that each is an Audit Committee Financial Expert as
defined by the US Securities and Exchange Commission
(SEC). The Board of Directors has also determined that
Srikant Datar and Elizabeth Doherty are each “indepen‑
dent” in accordance with the applicable requirements of
Rule 10A‑3 of the US Securities Exchange Act of 1934,
and that other members of the Audit and Compliance
Committee have sufficient experience and ability in
finance and compliance matters to enable them to ade‑
quately discharge their responsibilities.
222
Item 16B. Code of Ethics
Item 16B. Code of Ethics
In addition to our Code of Conduct and Professional
Practices Policy, which are applicable to all of our asso‑
ciates, we have adopted Ethical Conduct Requirements
that impose additional obligations on our principal exec‑
utive officer, principal financial officer, principal account‑
ing officer, and persons performing similar functions. This
document is accessible on our internet website at:
https://www.novartis.com/investors/company‑over‑
view/corporate‑governance
223
Item 16C. Principal Accountant Fees and Services
Item 16C. Principal Accountant Fees and
Services
The information set forth under “Item 6. Directors, Senior Management and Employees—Item 6.C Board practices—
Corporate governance—Our independent external auditors” is incorporated by reference.
224
Item 16D. Exemptions from the Listing Standards for Audit Committees
Item 16D. Exemptions from the Listing
Standards for Audit Committees
Not applicable.
225
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Item 16E. Purchases of Equity Securities by
the Issuer and Affiliated Purchasers
Total number
of shares
purchased
as part of
publicly
announced
plans or
programs
(c) 2
Average price
Total Number of paid per share
in USD
(b)
Shares Purchased
(a) 1
861 113
81 918
62 593
86.92
86.68
82.64
0
0
0
1 035 141
77.12 1 000 000
4 060 146
76.92 4 000 000
4 219 696
74.93 4 200 000
5 535 887
80.44 5 520 000
3 503 739
83.29 3 480 000
3 010 401
84.20 2 980 000
1 391 780
84.63 1 370 000
18 012
86.61
0
716 316
84.81
700 000
24 496 742
80.26 23 250 000
Maximum
approximate
value of
shares that
may yet be
purchased
under the
plans or
programs
(CHF millions)
(d)
Maximum
approximate
value of
shares that
may yet be
purchased
under the
plans or
programs
(USD millions)
(e) 3
4 045
4 045
4 045
3 970
3 663
3 351
2 910
2 623
2 380
2 265
2 265
2 207
4 340
4 300
4 227
4 018
3 705
3 369
2 947
2 711
2 437
2 254
2 274
2 237
2018
Jan. 1‑31
Feb. 1‑28
Mar. 1‑31
Apr. 1‑30
May 1‑31
Jun. 1‑30
Jul. 1‑31
Aug. 1‑31
Sep. 1‑30
Oct. 1‑31
Nov. 1‑30
Dec. 1‑31
Total
1 Column (a) shows shares we purchased as part of our seventh share repurchase program plus the following types of share purchases outside
of our publicly announced repurchase program: (1) shares which we purchased on the open market; and (2) shares which we purchased from
employees who had obtained the shares through a Novartis Employee Ownership Plan. See “Item 18. Financial Statements – Note 25
Equity‑based participation plans for associates.”
2 Column (c) shows shares purchased as part of our seventh share repurchase program which was approved by the shareholders February 23,
2016 for an amount of up to CHF 10.0 billion. See “Item 6. Directors, Senior Management and Employees – Item 6C. Board Practices – Our
capital structure – Changes in capital.”
3 Column (e) shows the Swiss franc amount from column (d) converted into US dollars as of the month‑end, using the Swiss franc/US dollar
exchange rate at the applicable month‑end.
226
Item 16F. Change in Registrant’s Certifying Accountant
Item 16F. Change in Registrant’s Certifying
Accountant
Not applicable.
227
Item 16G. Corporate Governance
Item 16G. Corporate Governance
The information set forth under “Item 6. Directors, Senior Management and Employees—Item 6.C Board practices—
Corporate governance—Our corporate governance framework” is incorporated by reference.
228
Item 16H. Mine Safety Disclosure
Item 16H. Mine Safety Disclosure
Not applicable.
229
Item 17. Financial Statements
PART III
Item 17. Financial Statements
See response to “Item 18. Financial Statements.”
230
Item 18. Financial Statements
Item 18. Financial Statements
The following financial statements are filed as part of this Annual Report.
Consolidated income statements
Consolidated statements of comprehensive income
Consolidated balance sheets
Consolidated statements of changes in equity
Consolidated statements of cash flows
Notes to the Novartis Group consolidated financial statements
1. Significant accounting policies
2. Significant transactions
3. Segmentation of key figures 2018, 2017 and 2016
4. Associated companies
5. Interest expense and other financial income and expense
6. Taxes
7. Earnings per share
8. Changes in consolidated statements of comprehensive income
9. Property, plant and equipment
10. Goodwill and intangible assets
11. Deferred tax assets and liabilities
12. Financial and other non‑current assets
13. Inventories
14. Trade receivables
15. Marketable securities, commodities, time deposits, derivative financial instruments,
and cash and cash equivalents
16. Other current assets
17. Equity
18. Non‑current financial debt
19. Provisions and other non‑current liabilities
20. Current financial debt and derivative financial instruments
21. Provisions and other current liabilities
22. Details to the consolidated statements of cash flows
23. Acquisitions of businesses
24. Post‑employment benefits for associates
25. Equity‑based participation plans for associates
26. Transactions with related parties
27. Commitments and contingencies
28. Financial instruments – additional disclosures
29. Impacts of adoption of new IFRS standards
30. Events subsequent to the December 31, 2018, consolidated balance sheet date
31. Principal Group subsidiaries and associated companies
Report of Independent Registered Public Accounting Firm
Report of the statutory auditor on the consolidated financial statements of Novartis AG
Financial statements of Novartis AG
Notes to the financial statements of Novartis AG
Appropriation of available earnings and reserves of Novartis AG
Report of the statutory auditor on the financial statements of Novartis AG
Page
F‑1
F‑2
F‑3
F‑4
F‑5
F‑6
F‑6
F‑16
F‑18
F‑29
F‑30
F‑31
F‑32
F‑32
F‑35
F‑37
F‑40
F‑42
F‑42
F‑43
F‑44
F‑44
F‑45
F‑47
F‑48
F‑53
F‑53
F‑55
F‑57
F‑58
F‑62
F‑65
F‑66
F‑68
F‑77
F‑79
F‑80
F‑82
F‑83
A‑1
A‑3
A‑11
A‑13
231
Item 19. Exhibits
Item 19. Exhibits
The SEC maintains an internet site at http://www.sec.gov that contains reports and other information regarding
issuers that file electronically with the SEC. These SEC filings are also available to the public from commercial doc‑
ument retrieval services.
1.1 Articles of Incorporation of Novartis AG, as amended March 2, 2018 (English translation).
1.2 Regulations of the Board of Directors, its Committees and the Executive Committee of Novartis AG, as
amended in relevant part January 1, 2014, March 1, 2015, January 1, 2018, and January 21, 2019.
2.1 Amended and Restated Deposit Agreement, dated as of May 11, 2000, among Novartis AG, JPMorgan
Chase Bank (fka Morgan Guaranty Trust Company of New York), as depositary, and all holders from time
to time of ADRs issued thereunder (incorporated by reference to Exhibit (a)(1) to Post‑Effective Amend‑
ment No. 1 to Novartis AG’s registration statement on Form F‑6 (File No. 333‑11758) as filed with the SEC
on September 8, 2000).
2.2 Amendment No. 1 to the Amended and Restated Deposit Agreement (incorporated by reference to
Exhibit (a)(2) to Post‑Effective Amendment No. 1 to Novartis AG’s registration statement on Form F‑6
(File No. 333‑11758) as filed with the SEC on September 8, 2000).
2.3 Amendment No. 2 to the Amended and Restated Deposit Agreement (incorporated by reference to
Exhibit (a)(3) to Novartis AG’s registration statement on Form F‑6 (File No. 333‑13446) as filed with the
SEC on May 3, 2001).
2.4 Restricted Issuance Agreement dated as of January 11, 2002, among Novartis AG, J.P. Morgan Chase
Bank, as depositary, and all holders from time to time of ADRs representing ADSs issued thereunder
(incorporated by reference to Exhibit 4 to the Registration Statement on Form F‑3, File No. 333‑81862,
as filed with the SEC on January 31, 2002).
2.5 Letter Agreement dated December 14, 2007, between Novartis AG and JPMorgan Chase Bank, as depos‑
itary (incorporated by reference to Exhibit 2.4 to the Form 20‑F for the year ended December 31, 2007,
as filed with the SEC on January 28, 2008).
2.6 Form of American Depositary Receipt (incorporated by reference to Exhibit (a)(7) to the Registration
Statement on Form F‑6, File No. 333‑198623, as filed with the SEC on September 8, 2014).
2.7 The total amount of long‑term debt securities authorized under any instrument does not exceed 10% of
the total assets of the Company and its subsidiaries on a consolidated basis. We hereby agree to furnish
to the SEC, upon its request, a copy of any instrument defining the rights of holders of long‑term debt of
the Company or of its subsidiaries for which consolidated or unconsolidated financial statements are
required to be filed.
4.1 Put Option Implementation Agreement relating to the cancellation of our shares in GlaxoSmithKline Con‑
sumer Healthcare Holdings Limited made on March 27, 2018, between GlaxoSmithKline PLC, Setfirst
Limited, Novartis AG, Novartis Holding AG, Novartis Finance Corporation and GlaxoSmithKline Consumer
Healthcare Holdings Limited.
4.2 Agreement and Plan of Merger dated as of April 6, 2018, among Novartis AG, Novartis AM Merger Cor‑
poration and Avexis, Inc. (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8‑K of
AveXis, Inc. as filed with the SEC on April 9, 2018).
8.1 For a list of all of our principal Group subsidiaries and associated companies, see “Item 18. Financial
Statements—Note 31. Principal Group subsidiaries and associated companies.”
232
Item 19. Exhibits
12.1 Certification of Vasant Narasimhan, Chief Executive Officer of Novartis AG, pursuant to Section 302 of
the Sarbanes‑Oxley Act of 2002.
12.2 Certification of Harry Kirsch, Chief Financial Officer of Novartis AG, pursuant to Section 302 of the Sar‑
banes‑Oxley Act of 2002.
13.1 Certification of Vasant Narasimhan, Chief Executive Officer of Novartis AG, pursuant to Section 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002.
13.2 Certification of Harry Kirsch, Chief Financial Officer of Novartis AG, pursuant to Section 18 U.S.C. Sec‑
tion 1350, as adopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002.
15.1 Consent of PricewaterhouseCoopers AG.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
233
(This page has been left blank intentionally.)
234
Novartis Group consolidated financial statements
Novartis Group
consolidated financial statements
Consolidated income statements
(For the years ended December 31, 2018, 2017 and 2016)
(USD millions unless indicated otherwise)
Net sales to third parties
Other revenues
Cost of goods sold
Gross profit
Selling, general and administration
Research and development
Other income
Other expense
Operating income
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)
Diluted earnings per share (USD)
The accompanying Notes form an integral part of the consolidated financial statements.
Note
2018
2017
2016
3
3
51 900
49 109
48 518
1 266
1 026
918
– 18 407
– 17 175
– 17 520
34 759
32 960
31 916
– 16 471
– 14 997
– 14 192
– 9 074
– 8 972
– 9 039
1 690
1 969
1 927
– 2 735
– 2 331
– 2 344
4
5
5
8 169
6 438
– 957
185
8 629
1 108
– 777
39
13 835
8 999
8 268
703
– 707
– 447
7 817
6
– 1 221
– 1 296
– 1 119
12 614
7 703
6 698
12 611
7 703
6 712
3
0
– 14
7
7
5.44
3.28
2.82
5.38
3.25
2.80
F-1
Novartis Group consolidated financial statements
Consolidated statements of comprehensive income
(For the years ended December 31, 2018, 2017 and 2016)
(USD millions)
Net income
Note
2018
2017
12 614
7 703
Other comprehensive income to be eventually recycled into the consolidated income statement:
2016
6 698
– 113
15
– 98
671
39
– 1
12
50
– 37
– 237
2 210
– 2 391
1 986
– 1 818
851
– 515
8.1
8.1
8.1
4
8
8.2
8.3
8.1
12
12
– 482
95
315
– 60
– 359
13
– 346
12 208
10 540
851
– 515
4 365
12 210
10 538
4 382
– 2
2
– 17
Fair value adjustments on marketable securities, net of taxes
Fair value adjustments on debt 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
Other comprehensive income never to be recycled into the consolidated income statement:
Actuarial (losses)/gains from defined benefit plans, net of taxes
Fair value adjustments on equity securities, net of taxes
Total of items never to be recycled
Total comprehensive income
Attributable to:
Shareholders of Novartis AG
Non-controlling interests
The accompanying Notes form an integral part of the consolidated financial statements.
F-2
Novartis Group consolidated financial statements
Consolidated balance sheets
(At December 31, 2018 and 2017)
(USD millions)
Assets
Non-current assets
Property, plant and 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 without disposal group
Assets of disposal group held for sale
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 without disposal group
Liabilities of disposal group held for sale
Total current liabilities
Total liabilities
Total equity and liabilities
The accompanying Notes form an integral part of the consolidated financial statements.
F-3
Note
2018
2017
9
10
10
4
11
12
12
13
14
15
15
16
15 696
16 464
35 294
31 750
38 719
29 997
8 352
15 370
8 699
2 345
895
8 229
2 243
818
110 000
104 871
6 956
8 727
248
2 693
13 271
2 861
6 867
8 600
202
625
8 860
3 054
34 756
28 208
2
807
35 563
28 208
145 563
133 079
17
17
944
– 69
969
– 100
77 739
73 299
78 614
74 168
78
59
78 692
74 227
18
11
19
20
22 470
23 224
7 475
7 319
5 168
7 057
37 264
35 449
5 556
9 678
2 038
5 169
5 308
1 723
21
12 284
11 203
29 556
23 403
2
51
29 607
23 403
66 871
58 852
145 563
133 079
Novartis Group consolidated financial statements
Consolidated statements of changes in equity
(For the years ended December 31, 2018, 2017 and 2016)
(USD millions)
Note
Share
capital
Treasury
shares
Issued share
capital and
reserves
attributable
Retained Total value
to Novartis
earnings adjustments shareholders
Non-
controlling
interests
Total
equity
Total equity at January 1, 2016
991
– 101
80 379
– 4 223
77 046
76
77 122
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
– 19
17.2
17.2
Impact of change in ownership of consolidated entities 17.5
Fair value adjustments related to divestments
8
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
Total of other equity movements
Total equity at December 31, 2016
– 19
972
25
– 6 614
12
– 6 596
– 6 596
– 76
81 148
– 7 212
74 832
59
74 891
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, as
previously reported
8
17.1
17.2
17
17.2
17.2
17.6
7 703
7 703
– 37
2 872
2 835
7 666
2 872
10 538
– 3
– 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
– 3
– 24 – 11 175
– 11 202
– 2 – 11 204
969
– 100
77 639
– 4 340
74 168
59
74 227
Impact of change in accounting policies
1, 29
237
– 177
60
60
Restated equity at January 1, 2018
969
– 100
77 876
– 4 517
74 228
59
74 287
Net income
Other comprehensive income
Total comprehensive income
Dividends
Purchase of treasury shares
Reduction of share capital
8
17.1
17.2
12 611
– 482
12 129
– 6 966
– 13
– 1 960
81
81
12 611
3
12 614
– 401
– 5
– 406
12 210
– 6 966
– 1 973
– 2
12 208
– 6 966
– 1 973
17
– 25
34
Exercise of options and employee transactions
Other share sales
Equity-based compensation
Increase of treasury share repurchase
obligation under a share buyback trading plan
Transaction costs
Fair value adjustments on financial assets sold
17.2
17.2
17.2
17.3
17.4
8
Impact of change in ownership of consolidated entities 17.5
Changes in non-controlling interests
Other movements
Total of other equity movements
Total equity at December 31, 2018
17.6
17.7
4
2
4
– 9
430
261
752
– 284
– 79
16
– 13
38
434
263
756
– 284
– 79
– 13
38
434
263
756
– 284
– 79
9
– 1
38
22
– 1
– 16
– 25
944
31
– 7 814
– 16
– 7 824
21
– 7 803
– 69
82 191
– 4 452
78 614
78
78 692
The accompanying Notes form an integral part of the consolidated financial statements.
F-4
Novartis Group consolidated financial statements
Consolidated statements of cash flows
(For the years ended December 31, 2018, 2017 and 2016)
(USD millions)
Net income
Note
2018
2017
12 614
7 703
2016
6 698
Adjustments to reconcile net income to net cash flows from operating activities
Reversal of non-cash items and other adjustments
22.1
3 171
7 058
8 437
Dividends received from associated companies and others
Interest received
Interest paid
Other financial receipts
Other financial payments
Taxes paid 1
719
243
987
97
899
43
– 826
– 708
– 723
218
– 32
– 272
– 155
– 1 670
– 1 611
– 2 111
Net cash flows from operating activities before working capital and provision changes
14 437
13 254
13 088
Payments out of provisions and other net cash movements in non-current liabilities
– 664
– 877
– 1 536
Change in net current assets and other operating cash flow items
22.2
499
244
– 77
Net cash flows from operating activities
Purchase of property, plant and equipment
Proceeds from sales of property, plant and 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 and acquisitions of interests in associated companies, net 1
Acquisitions and divestments of businesses, net
Purchase of marketable securities and commodities
Proceeds from sales of marketable securities and commodities
14 272
12 621
11 475
– 1 773
– 1 696
– 1 862
102
92
161
– 1 582
– 1 050
– 1 017
823
640
– 262
– 468
167
– 39
9
22.3
12 854
22.4
– 13 922
– 2 440
472
330
– 42
1
29
– 784
– 580
549
847
– 247
247
– 149
– 765
– 530
622
Net cash flows used in investing activities from continuing operations
– 5 591
– 2 979
– 2 693
Net cash flows used in investing activities from discontinued operations 1
22.5
– 140
– 748
Total net 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
Transaction costs payments 2
Dividends paid to non-controlling interests and other financing cash flows
Net 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.
22.6
22.6
22.6
– 5 591
– 3 119
– 3 441
– 6 966
– 6 495
– 6 475
– 2 036
– 5 490
– 1 109
700
2 856
– 366
1 681
– 19
– 57
– 37
252
214
4 933
1 935
– 188
– 1 696
– 755
1 816
0
– 6
10
7
– 4 244
– 7 733
– 5 314
– 26
4 411
8 860
13 271
84
1 853
7 007
8 860
– 387
2 333
4 674
7 007
1 In 2018, the total net tax payment amounted to USD 1 809 million, of which USD 139 million is included in the line “Divestments and acquisitions of interests in associated
companies, net.”
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.
2 Transaction costs payments directly attributable to the pending transaction of the distribution (spin-off) of the Alcon Division to Novartis AG shareholders (see Note 1)
F-5
Notes to the Novartis Group consolidated financial statements
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 cost-saving generic pharmaceuticals
and eye care products. The Group 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,
which affect the reported amounts of assets and liabili-
ties, including any contingent amounts, as well as of rev-
enues 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 hyperinflationary economies in which Novartis oper-
ates are Argentina and Venezuela. Venezuela was hyper-
inflationary for all years presented, and Argentina
became hyperinflationary effective July 1, 2018, requir-
ing retroactive implementation of hyperinflation account-
ing as of January 1, 2018.
The impact of the restatement of the non-monetary
assets and liabilities with the general price index at the
beginning of the period is recorded in retained earnings
in equity. The subsequent gains or losses resulting from
the restatement of non-monetary assets are recorded
in “Other financial income and expense” in the consoli-
dated income statement.
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 they
are 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
F-6
Notes to the Novartis Group consolidated financial statements
over their estimated useful lives. Leasehold land is depre-
ciated over the period of its lease, whereas freehold land
is not depreciated. The related depreciation expense is
included in the costs of the functions using the asset.
Property, plant and equipment are assessed for
impairment whenever there is an indication that the
balance sheet carrying amount may not be recoverable
using cash flow projections for the useful life.
The following table shows the respective useful lives
for property, plant and equipment:
Buildings
Machinery and other equipment
Machinery and equipment
Furniture and vehicles
Computer hardware
Useful life
20 to 40 years
7 to 20 years
5 to 10 years
3 to 7 years
Government grants obtained for construction activities,
including any related equipment, are deducted from the
gross acquisition cost to arrive at the balance sheet car-
rying value of the related assets.
Goodwill and intangible assets
Goodwill
Goodwill arises in a business combination and is the
excess of the consideration transferred to acquire a busi-
ness over the underlying fair value of the net identified
assets acquired. It is allocated to groups of cash-gener-
ating units (CGUs), which are usually represented by the
reported segments. Goodwill is tested for impairment
annually at the 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 are evaluated for
potential impairment whenever facts and circumstances
indicate that their carrying value may not be recoverable.
The Alcon brand name is not amortized, but evaluated
for potential impairment annually.
The following table shows the respective useful lives
for available-for-use intangible assets and the location
in the consolidated income statement in which the
respective amortization and any potential impairment
charge is recognized:
Income statement location
for amortization and
impairment charges
Useful life
Currently marketed products 5 to 20 years
“Cost of goods sold”
Marketing know-how
25 years
“Cost of goods sold”
Technologies
10 to 20 years
Other (including
computer software)
Alcon brand name
3 to 7 years
Not amortized,
indefinite useful life
“Cost of goods sold”
or “Research
and development”
In the respective
functional expense
“Other expense”
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 and 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 and
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
F-7
Notes to the Novartis Group consolidated financial statements
conditions that are expected to exist over the remaining
useful life of the asset.
The estimates used in calculating the net present val-
ues are highly sensitive and depend on assumptions spe-
cific to the nature of the Group’s activities with regard
to:
• Amount and timing of projected future cash flows
• Long-term sales forecasts
• 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 research and development activities (com-
pound 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
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, commodities
and non-current financial assets
Commodities, which include gold bullion or coins, 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.”
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 within current assets
on the consolidated balance sheet. The financial impacts
related to these financial assets are recorded in “Other
financial income and expense” in the consolidated
income statement. Marketable securities held for long-
term strategic purposes are classified as non-current
financial assets on the consolidated balance sheet. The
financial impacts related to these financial assets are
recorded in “Other income” and “Other expense” in the
consolidated income statement.
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 remeasured at each reporting date
to fair value based on current market prices. If the mar-
ket for a financial asset is not active or no market is avail-
able, fair values are established using valuation tech-
niques. The majority of non-quoted investments are
valued initially at fair value through the established pur-
chase price between a willing buyer and seller. Non-
quoted investments are subsequently adjusted based on
values derived from discounted cash flow analysis or
other pricing models. These investment values are clas-
sified as “Level 3” in the fair value hierarchy.
From January 1, 2018, with the adoption of IFRS 9
Financial Instruments, the Group classifies and accounts
for its marketable securities and non-current financial
assets in the following categories:
• Debt securities are valued at fair value through other
comprehensive income with subsequent recycling into
the consolidated income statement, as they meet the
“solely payment of principal and interest and business
model” criteria. Unrealized gains and losses, except
exchange gains and losses, are recorded as a fair value
adjustment in the consolidated statement of compre-
hensive income. They are recognized in the consoli-
dated income statement when the debt instrument is
sold, at which time the gain is transferred to “Other
financial income and expense.” Exchange gains and
losses related to debt instruments are immediately rec-
ognized in the consolidated income statement to
“Other financial income and expense.”
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
• Fund investments, equity securities of the Novartis
Venture Fund and derivative assets are valued at fair
value through profit and loss (FVPL). Unrealized gains
and losses, including exchange gains and losses, are
F-8
Notes to the Novartis Group consolidated financial statements
recognized in the consolidated income statement, for
marketable securities held for short-term purposes and
derivative assets to “Other financial income and
expense,” and for fund investments and equity securi-
ties valued at FVPL, held for strategic purposes, to
“Other income” for gains and “Other expense” for
losses.
• Equity securities held as strategic investments, typi-
cally held outside of the Novartis Venture Fund, are
generally designated at date of acquisition as financial
assets valued at fair value through other comprehen-
sive income with no subsequent recycling through
profit and loss. Unrealized gains and losses, including
exchange gains and losses, are recorded as a fair value
adjustment in the consolidated statement of compre-
hensive income. They are reclassified to retained earn-
ings when the equity security is sold. If these equity
securities are not designated at date of acquisition as
financial assets valued at fair value through other com-
prehensive income, they are valued at FVPL, as
described above.
• Other non-current financial assets, such as loans and
long-term receivables from customers, advances and
other deposits, are valued at amortized cost, which
reflects the time value of money less any allowances
for expected credit losses.
The Group assesses on a forward-looking basis the
expected credit losses associated with its debt securi-
ties valued at fair value through other comprehensive
income. Impairments on debt securities are recorded in
“Other financial income and expense.”
For other financial assets valued at amortized costs,
impairments, which are based on their expected credit
losses, and exchange rate losses are included in “Other
expense” in the consolidated income statement, and
exchange rate gains and interest income, using the effec-
tive interest rate method, are included in “Other income”
or “Other financial income” in the consolidated income
statement, depending on the nature of the item.
Prior to the adoption of IFRS 9, the Group classified and
accounted for its marketable securities and non-current
financial assets in the following categories:
The Group classified all its equity and quoted debt
securities as well as fund investments as available for
sale, as they were not acquired to generate profit from
short-term fluctuations in price. Unrealized gains, except
exchange gains related to quoted debt instruments, were
recorded as a fair value adjustment in the consolidated
statement of comprehensive income. They were recog-
nized in the consolidated income statement when the
financial asset was sold, at which time the gain was 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 were immediately recognized
in the consolidated income statement under “Other
financial income and expense.”
A security was assessed for impairment when its
market value at the balance sheet date was less than ini-
tial cost reduced by any previously recognized impair-
ment. Impairments on equity securities, quoted debt
securities and fund investments, and exchange rate
losses on quoted debt securities in a foreign currency
that were held for short-term non-strategic purposes
were recorded in “Other financial income and expense.”
Impairments were recorded for all other equity securi-
ties and other fund investments in “Other expense” in
the consolidated income statement.
Other non-current financial assets, including loans
held for long-term strategic purposes, were 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
were included in “Other expense” in the consolidated
income statement, and exchange rate gains and interest
income using the effective interest rate method were
included in “Other income” in the consolidated income
statement.
Section “Impact of adopting significant new IFRS stan-
dards in 2018” in this Note 1 and Note 29 provides addi-
tional disclosure on the impact of adoption of IFRS 9
Financial Instruments.
Derivative financial instruments
Derivative financial instruments are initially recognized
in the balance sheet at fair value and are remeasured 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-
F-9
Notes to the Novartis Group consolidated financial statements
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 consolidated income statement as
an adjustment to the gain or loss on disposal.
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.
Inventories
Contingent consideration
Inventory is valued at acquisition or production cost
determined on a first-in, first-out basis. This value is used
for the “Cost of goods sold” in the consolidated income
statement. Unsalable inventory is fully written off in the
consolidated income statement under “Cost of goods
sold.”
Trade receivables
Trade receivables are initially recognized at their invoiced
amounts, including any related sales taxes less adjust-
ments for estimated revenue deductions such as rebates,
chargebacks and cash discounts.
From January 1, 2018, with the adoption of IFRS 9
Financial Instruments, provisions for expected credit
losses are established using an expected credit loss
model (ECL). The provisions are based on a forward-look-
ing ECL, which includes possible default events on the
trade receivables over the entire holding period of the
trade receivable. These provisions represent the differ-
ence between the trade receivable’s carrying amount in
the consolidated balance sheet and the estimated col-
lectible amount. Charges for doubtful trade receivables
are recorded as marketing and selling costs recognized
in the consolidated income statement within “Selling,
general and administration” expenses.
Prior to the adoption of IFRS 9, the Group’s accounting
policy for provisions for doubtful trade receivables was
as follows:
Provisions for doubtful trade receivables were estab-
lished once there was an indication that it was likely that
a loss would be incurred. These provisions represent the
difference between the trade receivable’s carrying
amount in the consolidated balance sheet and the esti-
mated collectible amount. Significant financial difficulties
of a customer, such as probability of bankruptcy, finan-
cial reorganization, default or delinquency in payments,
were considered indicators that recovery of the trade
receivable was doubtful. Charges for doubtful trade
receivables, recorded as marketing and selling costs,
were recognized in the consolidated income statement
within “Selling, general and administration” expenses.
Section “Impact of adopting significant new IFRS stan-
dards in 2018” in this Note 1 and Note 29 provides addi-
tional disclosure on the impact of adoption of IFRS 9
Financial Instruments.
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 remeasured 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 and
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 as interest income recognized
in the consolidated income statement within “Other
financial income and expense.”
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-
F-10
Notes to the Novartis Group consolidated financial statements
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
From January 1, 2018, with the implementation of the new
standard IFRS 15 Revenue from Contracts with Custom-
ers, the Group accounting policy for revenue recognition
is as follows:
Revenue on the sale of Novartis Group products and
services, which is recorded as “Net sales” in the consol-
idated income statement, is recognized when a contrac-
tual promise to a customer (performance obligation) has
been fulfilled by transferring control over the promised
goods and services to the customer, substantially all of
which is at the point in time of shipment to or receipt of
the products by the customer or when the services are
performed. If contracts contain customer acceptance
provisions, revenue would be recognized upon the sat-
isfaction 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. The amount of rev-
enue to be recognized is based on the consideration
Novartis expects to receive in exchange for its goods
and services. If a contract contains more than one per-
formance obligation, the consideration is allocated
based on the standalone selling price of each perfor-
mance obligation.
Surgical equipment may be sold together with other
products and services under a single contract. Revenues
are recognized upon satisfaction of each of the perfor-
mance obligations in the contract and the consideration
is allocated based on the standalone selling price of each
performance obligation.
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
value of the equipment, which approximate the present
value 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 lon-
ger than 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.
The consideration Novartis receives in exchange for
its goods or services may be fixed or variable. Variable
consideration is only recognized when it is highly prob-
able that a significant reversal will not occur. The most
common elements of variable consideration are listed
below.
• Rebates and discounts granted to government agen-
cies, wholesalers, retail pharmacies, managed health-
care organizations and other customers are provi-
sioned and 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 historical experience and the specific terms in
the individual agreements.
• Refunds granted to healthcare providers under
innovative pay-for-performance agreements are pro-
visioned and recorded as a revenue deduction at the
time the related sales are recorded. They are calcu-
lated on the basis of historical experience and clinical
data available for the product, as well as the specific
terms in the individual agreements. In cases where his-
torical experience and clinical data are not sufficient
for a reliable estimation of the outcome, revenue rec-
ognition is deferred until the uncertainty is resolved or
until such history is available.
• Cash discounts offered to customers are to encourage
prompt payment and are provisioned and recorded as
revenue deductions at the time the related sales are
recorded.
• Shelf stock adjustments are generally granted to cus-
tomers, primarily of the Sandoz Division, to cover the
inventory held by them at a time the price decline
becomes effective. Revenue deduction provisions for
shelf stock adjustments are recorded when the price
decline is anticipated, based on the impact of the price
decline on the customer’s estimated inventory levels.
• Sales returns provisions are recognized and recorded
as revenue deductions when there is historical expe-
rience of Novartis agreeing to customer returns and
Novartis can reasonably estimate expected future
returns. In doing so, the estimated rate of return is
applied, determined on the basis of historical experi-
ence 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 resale or return basis, without sufficient historical
experience for estimating sales returns, revenue is only
recorded when there is evidence of consumption or
when the right of return has expired.
Provisions for revenue deductions are adjusted to actual
amounts as rebates, discounts and returns are pro-
cessed. The provision represents estimates of the
related obligations, requiring the use of judgment when
estimating the effect of these sales deductions.
“Other revenue” includes income from profit-sharing
arrangements with our collaboration partners, and roy-
alty and milestone income from the out-licensing of intel-
lectual property (IP) when Novartis retains an interest in
the IP through a license. Royalty income earned through
a license is recognized when the underlying sales have
occurred. Milestone income is recognized at the point in
time when it is highly probable that the respective mile-
stone event criteria is met, and the risk of reversal of rev-
enue recognition is remote. Other revenue also includes
revenue from activities such as manufacturing or other
services rendered, to the extent such revenue is not
F-11
Notes to the Novartis Group consolidated financial statements
recorded under net sales, and is recognized when con-
trol transfers to the third party and our performance obli-
gations are satisfied.
Cash discounts are offered to customers to encour-
age prompt payment and are recorded as revenue
deductions.
Prior to the adoption of IFRS 15 on January 1, 2018, the
Group accounting policy for revenue recognition was as
follows:
Revenue was recognized on the sale of Novartis
Group products and services, and was recorded as “Net
sales” in the consolidated income statement when there
was persuasive evidence that a sales arrangement
exists; title, risks and rewards for the products are trans-
ferred to the customer; the price was determinable; and
collectability was reasonably assured. If contracts con-
tain customer acceptance provisions, revenue would be
recognized upon the satisfaction of acceptance criteria.
If products are stockpiled at the request of the customer,
revenue was only recognized once the products have
been inspected and accepted by the customer, and there
was 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 was allocated to the separate elements
based on their relative fair values. Revenue was recog-
nized once the recognition criteria have been met for
each element of the contract.
For surgical equipment, in addition to cash and install-
ment sales, revenue was 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 was recognized at amounts equal to the
fair values of the equipment, which approximate the pres-
ent values of the minimum lease payments under the
arrangements. As interest rates embedded in lease
arrangements are approximately market rates, revenue
under finance lease arrangements was comparable to
revenue for outright sales. Finance income for arrange-
ments in excess of 12 months was deferred and subse-
quently 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 was 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 was deferred
until such history was available.
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 was historical experience of Novartis
agreeing to customer returns, and Novartis could rea-
sonably estimate expected future returns, a provision
was recorded for estimated sales returns. In doing so,
the estimated rate of return was applied, determined
based on historical experience of customer returns and
considering any other relevant factors. This was applied
to the amounts invoiced, also considering the amount of
returned products to be destroyed versus products that
could be placed back in inventory for resale. Where ship-
ments are made on a resale or return basis, without suf-
ficient historical experience for estimating sales returns,
revenue was only recorded when there was evidence of
consumption or when the right of return had expired.
Provisions for revenue deductions were adjusted to
actual amounts as rebates, discounts and returns were
processed. The provision represents estimates of the
related obligations, requiring the use of judgment when
estimating the effect of these sales deductions.
“Other revenue” includes royalty and profit-sharing
income, and revenue from activities such as manufac-
turing services or other services rendered, to the extent
such revenue was not recorded under net sales.
Section “Impact of adopting significant new IFRS stan-
dards in 2018” in this Note 1 and Note 29 provides addi-
tional disclosure on the impact of adoption.
Research and development
Internal research and development (R&D) costs are fully
charged to “Research and development” in the consol-
idated 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 are deemed to not
transfer 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.
F-12
Notes to the Novartis Group consolidated financial statements
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) perfor-
mance 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 ful-
fill the service conditions.
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.
If a plan participant leaves Novartis for reasons other
than retirement, disability or death, then unvested
restricted shares, restricted ADRs, RSUs and PSUs are
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.
F-13
Notes to the Novartis Group consolidated financial statements
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 interest and penalties incurred during the period.
Deferred taxes are determined using the comprehensive
liability method and are calculated on the temporary dif-
ferences that arise between the tax base of an asset or
liability and its carrying value in the balance sheet pre-
pared for consolidation purposes, except for those tem-
porary differences related to investments in subsidiaries
and associated companies, where the timing of their
reversal can be controlled and it is probable that the dif-
ference will not reverse in the foreseeable future. Since
the retained earnings are reinvested, withholding or other
taxes on eventual distribution of a subsidiary’s retained
earnings are only taken into account when a dividend
has been planned.
The estimated amounts for current and deferred tax
assets or liabilities, including any amounts related to any
uncertain tax positions, are based on currently known
facts and circumstances. Tax returns are based on an
interpretation of tax laws and regulations, and reflect
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.
Transaction costs recorded in equity
Transaction costs that are directly attributable to the
potential distribution (spin-off) of Alcon to the Novartis
shareholders, and that would otherwise have been
avoided, are recorded as a deduction from equity. If the
spin-off does not occur, the cost will be recycled into the
consolidated income statement.
Impact of adopting significant new
IFRS standards in 2018
The following new IFRS standards have been adopted
by Novartis from January 1, 2018:
IFRS 9 Financial Instruments
Novartis implemented IFRS 9 Financial Instruments as
of January 1, 2018, which substantially changes the
classification and measurement of financial instruments.
The new standard requires impairments to be based on
a forward-looking model, changes the approach to hedg-
ing financial exposures and related documentation,
changes the recognition of certain fair value changes,
and amends disclosure requirements.
The impairment of financial assets, including trade
and lease receivables, is now assessed using an expected
credit loss model; previously, the incurred loss model
was used. Given the nature of Novartis financial assets,
the Group had no significant impact to its provisions 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.
There was no impact upon adoption of the new standard,
as the Group’s existing hedge relationships continue to
be designated as such under the new hedge accounting
requirements.
The most significant impact to the Group upon adop-
tion of IFRS 9 relates to the treatment of the unrealized
gains and losses from changes in fair value on certain of
the Group’s financial instruments, which were previously
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 recognized previously in the consoli-
dated statement of other comprehensive income, are
from January 1, 2018, recognized in the consolidated
income statement. This approach is applied to equity
securities where the fair value through other compre-
hensive income irrevocable option is not applied.
F-14
Notes to the Novartis Group consolidated financial statements
The Group applied the modified retrospective method
upon adoption of IFRS 9 on January 1, 2018. This method
requires the recognition of the cumulative effect of ini-
tially applying IFRS 9 to retained earnings and not to
restate prior years. The cumulative effect recorded at
January 1, 2018, was an increase to retained earnings of
USD 177 million.
IFRS 15 Revenue from Contracts with Customers
Novartis implemented the new standard IFRS 15 Reve-
nue from Contracts with Customers as of January 1,
2018. The new standard amends revenue recognition
requirements and establishes principles for reporting
information about the nature, amount, timing and uncer-
tainty of revenue and cash flows arising from contracts
with customers. The standard replaces IAS 18 Revenue
and IAS 11 Construction contracts and related interpre-
tations.
The impacts of adoption of the new standard are
summarized below:
• The Group’s “Net sales” are derived from the sale of
drug substances, vision care products, surgical equip-
ment, and 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. The adoption of IFRS 15 did
not significantly change the timing or amount of reve-
nue 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 and other services, where revenue is recognized
when control transfers to the third party and our per-
formance obligations are satisfied. The adoption of
IFRS 15 did not significantly change the timing or
amount of revenue recognized from these manufactur-
ing and other services arrangements, nor did it change
accounting for these royalty arrangements, as the
standard’s royalty exception is applied for IP licenses.
“Other revenue” also includes revenue from profit-shar-
ing arrangements with our collaboration partners. Fur-
thermore, the Group receives milestone payments
related to the out-licensing of IP. The adoption of IFRS
15 did not significantly change the timing or amount of
revenue recognized under these arrangements.
The Group applied the modified retrospective method
upon adoption of IFRS 15 on January 1, 2018. This method
requires the recognition of the cumulative effect of ini-
tially applying IFRS 15 to retained earnings and not to
restate prior years. The cumulative effect recorded at
January 1, 2018, was an increase to retained earnings of
USD 60 million.
For further information on the impact of adoption of IFRS
9 Financial Instruments and IFRS 15 Revenue from Con-
tracts with Customers, see Note 29.
New IFRS standards effective as of
January 1, 2019
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 lease liability reflects the net present value of the
remaining lease payments, and the right-of-use asset
corresponds to the lease liability, adjusted for payments
made before the commencement date, lease incentives
and other items related to the lease agreement. The stan-
dard replaces IAS 17 Leases.
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 is
fully recognized as an outflow from operating activities.
Given the leases involved and the current low interest
rate environment, the Group does not expect these
effects to be significant.
The Group will implement the new standard on Jan-
uary 1, 2019, and will apply the modified retrospective
method, with right-of-use assets measured at an amount
equal to the lease liability, adjusted by the amount of the
prepaid or accrued lease payments relating to those
leases recognized in the balance sheet immediately
before the date of initial application and will not restate
prior years.
Results of our impact assessment:
The undiscounted operating lease commitments as of
December 31, 2018 disclosed in Note 27, amounted to
USD 3.6 billion. This includes approximately USD 0.3 bil-
lion of leases with a commencement date in 2019 and
short-term leases as well as low-value leases that will be
recognized on a straight-line basis as expense in profit
and loss. For the remaining lease commitments of USD
3.3 billion, the Group expects to recognize on January 1,
2019, lease liabilities in the range of USD 1.9 billion and
right-of-use assets in the range of USD 1.7 billion (after
adjustments for the approximately USD 0.2 billion pre-
payments and accrued lease payments recognized as
at December 31, 2018). This does not include the right
to use assets and lease liability on finance lease agree-
ments of USD 79 million and USD 92 million, respectively.
We expect an insignificant impact to retained earnings
upon adoption of IFRS 16 to arise from subleases that
were accounted for as operating lease agreements
under IAS 17 and are accounted for as finance leases
under IFRS 16.
As a lessor, the Group does not expect any signifi-
cant impact upon adoption.
There are no other IFRS standards or interpretations not
yet effective that would be expected to have a material
impact on the Group.
F-15
Notes to the Novartis Group consolidated financial statements
2. Significant transactions
Significant transactions in 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 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 conditions. Novartis
commenced the tender offer on December 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 valued AAA’s equity at USD 3.9 billion, on a fully
diluted basis.
As of January 19, 2018, the expiration date of the ten-
der offer, approximately 97% of the then-outstanding
fully diluted ordinary shares, including ordinary shares
represented by ADSs (hereinafter collectively referred
to as “the outstanding shares”), were validly tendered.
On January 22, 2018, Novartis accepted and paid USD
3.9 billion for the outstanding shares tendered in the
offer. On January 22, 2018, Novartis commenced a sub-
sequent offering period that expired on January 31, 2018.
As of the expiration of the subsequent offering period,
an additional 1.8% of the outstanding shares were validly
tendered. Novartis accepted and paid approximately
USD 60 million, resulting in an increase in Novartis own-
ership in AAA to 98.7%.
The fair value of the total purchase consideration was
USD 3.9 billion. The purchase price allocation resulted
in net identifiable assets of approximately USD 1.9 bil-
lion, consisting of USD 2.5 billion intangible assets, USD
0.6 billion net deferred tax liabilities, and goodwill of
approximately USD 2.0 billion. In 2018, from the date of
the acquisition the business generated net sales of USD
0.4 billion. Management estimates net sales for the entire
year 2018 would have amounted to USD 0.4 billion had
AAA been acquired at the beginning of 2018. The 2018
results from operations since the acquisition were not
material.
As of December 31, 2018, Novartis held 99.1% of the
then-outstanding fully diluted ordinary shares, including
ordinary shares represented by ADSs.
AAA is a radiopharmaceutical company that devel-
ops, produces and commercializes molecular nuclear
medicines – including Lutathera (USAN: lutetium Lu 177
dotatate/INN: lutetium (177Lu) oxodotreotide), a first-in-
class radioligand therapy product for neuroendocrine
tumors – and a portfolio of diagnostic products. Radio-
pharmaceuticals, such as Lutathera, are unique medici-
nal formulations containing radioisotopes, which are
used clinically for both diagnosis and therapy.
Innovative Medicines – acquisition of AveXis, Inc.
On April 6, 2018, Novartis entered into an agreement and
plan of merger with AveXis, Inc., a US-based clinical
stage gene therapy company, under which Novartis com-
menced on April 17, 2018, a tender offer to purchase all
outstanding common stock of AveXis, Inc. for USD 218
per share in cash. On May 15, 2018, Novartis completed
the acquisition of the common stock of AveXis, Inc. and
paid a total of USD 8.7 billion.
The fair value of the total purchase consideration was
USD 8.7 billion. The purchase price allocation resulted
in net identifiable assets of approximately USD 7.2 bil-
lion, consisting of USD 8.5 billion intangible assets, USD
1.6 billion net deferred tax liabilities and other net assets
of USD 0.3 billion, and goodwill of approximately USD
1.5 billion. Results of operations since the date of acqui-
sition were not material.
AveXis, Inc. is focused on developing and commer-
cializing novel treatments for patients suffering from rare
and life-threatening neurological genetic diseases.
AveXis, Inc.’s initial product candidate, AVXS-101, is a pro-
prietary gene therapy currently in development for the
treatment of spinal muscular atrophy (SMA) type 1 – the
leading genetic cause of infant mortality – and SMA
types 2 and 3. In addition, AveXis, Inc. has a pipeline of
other novel treatments for rare neurological diseases,
including Rett syndrome (RTT) and a genetic form of
amyotrophic lateral sclerosis (ALS) caused by mutations
in the superoxide dismutase 1 (SOD1) gene.
Innovative Medicines – acquisition of Endocyte, Inc.
On October 18, 2018, Novartis entered into an agree-
ment and plan of merger with Endocyte, a US-based bio-
pharmaceutical company focused on developing tar-
geted therapeutics for cancer treatment. The transaction
was completed on December 21, 2018. Under the terms
of the agreement, Novartis acquired all outstanding
shares of Endocyte common stock for USD 24 per share.
The total consideration amounted to USD 2.1 billion.
The fair value of the total purchase consideration was
USD 2.1 billion. The preliminary purchase price allocation
resulted in net identifiable assets of approximately USD
1.5 billion, consisting of USD 1.5 billion intangible assets,
USD 0.3 billion net deferred tax liabilities and other net
assets of USD 0.3 billion, and goodwill of approximately
USD 0.6 billion. The purchase price allocation is prelim-
inary as the transaction closed on December 21, 2018,
which is close to the Group’s year-end and therefore not
providing sufficient time to complete the valuation of the
intangible assets, deferred taxes, assumed liabilities and
goodwill. If new information obtained within 12 months
from December 21, 2018, about facts and circumstances
that existed at the date of the acquisition identifies
adjustments to the above amounts, or any additional pro-
visions that existed at the date of acquisition, then the
accounting for the acquisition will be revised. The Group
currently does not expect such potential revisions to be
material.
Endocyte uses drug conjugation technology to
develop targeted therapies with companion imaging
agents, including 177Lu-PSMA-617, a potential first-in-
class investigational radioligand therapy for the treat-
F-16
Notes to the Novartis Group consolidated financial statements
ment of metastatic castration-resistant prostate cancer
(mCRPC).
(USD millions)
Corporate – divestment of 36.5% stake in
GlaxoSmithKline Consumer Healthcare Holdings
Ltd.
On March 27, 2018, Novartis entered into an agreement
with GlaxoSmithKline plc (GSK) to divest its 36.5% stake
in GlaxoSmithKline Consumer Healthcare Holdings Ltd.
to GSK for USD 13.0 billion in cash. As a result, Novartis
discontinued the use of equity method accounting start-
ing from April 1, 2018.
On June 1, 2018, the transaction closed and Novartis
realized a pre-tax gain of USD 5.8 billion, recorded in
income from associated companies.
Significant pending transaction
Sandoz – divestment of US dermatology business
and generic US oral solids portfolio
On September 6, 2018, Novartis announced it has agreed
to sell selected portions of its Sandoz US portfolio, spe-
cifically the Sandoz US dermatology business and
generic US oral solids portfolio, to Aurobindo Pharma
USA Inc. (Aurobindo), for USD 0.8 billion in cash and
potential earn-outs.
The Sandoz US portfolios to be sold to Aurobindo
include approximately 300 products as well as additional
development projects. The sale includes the Sandoz US
generic and branded dermatology businesses as well as
its dermatology development center. As part of the trans-
action, Aurobindo will acquire the manufacturing facili-
ties in Wilson, North Carolina, and in Hicksville and Mel-
ville, New York.
The transaction is expected to close in the course of
2019, following the completion of customary closing con-
ditions. As the fair value of the consideration (USD 0.8
billion) less costs to sell is below the carrying value of
the divested business (USD 1.0 billion, which includes an
allocation of Sandoz goodwill of USD 0.2 billion), an
impairment of the net assets to be divested in the amount
of USD 0.2 billion was recognized as a reduction to good-
will.
In the Group’s consolidated balance sheet at Decem-
ber 31, 2018, the business assets and liabilities are sep-
arately shown as assets and liabilities of disposal group
held for sale.
The disposal group, assets and liabilities classified
as held for sale consist of the following:
(USD millions)
Assets of disposal group
classified as held for sale
Property, plant and equipment
Intangible assets other than goodwill
Deferred tax assets
Other non-current assets
Inventories
Other current assets
Total
December 31,
2018
148
478
8
1
165
7
807
Liabilities of disposal group
classified as held for sale
Deferred tax liabilities
Provisions and other non-current
liabilities
Provisions and other current liabilities
Total
December 31,
2018
2
4
45
51
There are no cumulative income or expenses included
in other comprehensive income relating to the disposal
group.
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 that focuses 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. The 2017 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, that focuses on the devel-
opment 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
consideration of USD 90 million, due to Encore share-
holders, 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 389 million and good-
will of USD 67 million. The 2017 results of operations
since the date of acquisition were not material.
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
F-17
Notes to the Novartis Group consolidated financial statements
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
Pharmaceuticals 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 remeasure-
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.
3. Segmentation of key figures 2018, 2017 and 2016
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.
Effective January 1, 2018, following an internal reor-
ganization, the reporting of the financial results of the
reporting segments Innovative Medicines and Alcon
have been adapted. The restatements reflect, in all years
presented, the transfer of the Innovative Medicine Divi-
sion ophthalmic over-the-counter products together with
a small portfolio of surgical diagnostics products to the
Alcon Division. In the prior year, the Alcon brand name
intangible asset was reported in Corporate, as it was
used to market products of the Alcon Division and prod-
ucts within the Ophthalmology business franchise of the
Innovative Medicines Division. In connection with the
planned spin-off of the Alcon Division (see Note 30), it is
the intention of the Group to transfer the full rights of the
Alcon brand name to the Alcon Division. As a result, the
Innovative Medicines Division started the process to
rebrand the products within its Ophthalmology business
franchise and will no longer use the Alcon brand name.
As a result, the Alcon brand name intangible asset is
reported in the Alcon Division. To comply with IFRS,
Novartis has restated its consolidated income statement
and balance sheet disclosures by segment to reflect the
internal reorganization and the reclassification of the
Alcon brand name. This restatement had no impact on
the reported financial results of the Sandoz Division or
the total Group.
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
and Novartis Pharmaceuticals. Novartis Oncology con-
sists of the global business franchise Oncology, and
Novartis Pharmaceuticals consists of the global business
franchises Ophthalmology; Neuroscience; Immunology,
Hepatology and Dermatology; Respiratory; Cardio-Met-
abolic; 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 into three franchises: Retail Generics,
Anti-Infectives and Biopharmaceuticals. In Retail Gener-
ics, Sandoz develops, manufactures and markets active
ingredients and finished dosage forms of pharmaceuticals
to third parties. Retail Generics includes the areas of car-
diovascular, central nervous system, dermatology, gas-
trointestinal 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 a broad range of eye care
products. Alcon is the leading eye care devices company
globally. Alcon is organized into two global business fran-
chises: Surgical and Vision Care. Surgical researches,
develops, manufactures, distributes and sells ophthal-
F-18
Notes to the Novartis Group consolidated financial statements
mic products for cataract surgery, vitreoretinal surgery,
refractive laser surgery and glaucoma surgery. The Sur-
gical portfolio also includes implantables, consumables
and surgical equipment required for these procedures
and supports the end-to-end procedure needs of the
ophthalmic surgeon. Vision Care researches, develops,
manufactures, distributes and sells daily disposable,
reusable, and color-enhancing contact lenses and a
comprehensive portfolio of ocular health products,
including products for dry eye, contact lens care and
ocular allergies, as well as ocular vitamins and redness
relievers. Alcon also provides services, training, educa-
tion and technical support for both the Surgical and
Vision Care businesses.
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.
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 for the Innovative
Medicines Division and also collaborates with Sandoz.
• The 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.
• The Novartis Technical Operations organization was
established 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.
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.
F-19
Notes to the Novartis Group consolidated financial statements
Segmentation – consolidated income statements
Innovative Medicines
Sandoz
Alcon
Corporate
(including eliminations)
Group
(USD millions)
2018
2017
restated 1
2018
2017
2018
2017
restated 1
2018
2017
2018
2017
Net sales to third parties
34 892 32 278
9 859 10 060
7 149
6 771
51 900 49 109
Sales to other segments
741
668
177
118
4
3
– 922
– 789
Net sales
Other revenues
Cost of goods sold
Gross profit
35 633 32 946 10 036 10 178
7 153
6 774
– 922
– 789 51 900 49 109
1 188
898
62
37
3
16
88
1 266
1 026
– 9 870 – 8 650 – 5 530 – 5 800 – 3 983 – 3 588
976
863 – 18 407 – 17 175
26 951 25 194
4 568
4 415
3 170
3 189
70
162 34 759 32 960
Selling, general and administration
– 10 907 – 9 887 – 2 305 – 2 126 – 2 754 – 2 532
– 505
– 452 – 16 471 – 14 997
Research and development
– 7 675 – 7 615
– 814
– 774
– 585
– 583
– 9 074 – 8 972
Other income
Other expense
Operating income
977
1 027
505
204
58
47
150
691
1 690
1 969
– 1 475 – 1 124
– 622
– 351
– 83
– 124
– 555
– 732 – 2 735 – 2 331
7 871
7 595
1 332
1 368
– 194
– 3
– 840
– 331
8 169
8 629
Income from associated companies
1
– 1
5
23
6 432
1 086
6 438
1 108
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 and equipment
– 957
– 777
185
39
13 835
8 999
– 1 221 – 1 296
12 614
7 703
12 611
7 703
3
0
294
110
– 1 075
– 916
– 285
– 270
– 235
– 217
– 122
– 117 – 1 717 – 1 520
Amortization of intangible assets
– 2 214 – 2 167
– 366
– 447 – 1 052 – 1 066
– 7
– 10 – 3 639 – 3 690
Impairment charges on property,
plant and equipment, net
Impairment charges on intangible
assets, net
Impairment charges and fair value
gains on financial assets, net
– 239
– 84
– 60
– 73
– 3
– 2
– 304
– 157
– 592
– 591
– 249
– 61
– 391
– 57
– 1 232
– 709
107
– 42
17
– 29
– 113
– 185
11
– 256
Additions to restructuring provisions
– 395
– 122
– 32
– 61
– 13
– 8
– 94
– 3
– 534
– 194
Equity-based compensation of
Novartis equity plans
– 645
– 593
– 53
– 52
– 93
– 71
– 220
– 208 – 1 011
– 924
1 Restated to reflect the product transfers between the Innovative Medicines and Alcon Divisions that was effective as of January 1, 2018
F-20
Notes to the Novartis Group consolidated financial statements
Innovative Medicines
Sandoz
Alcon
Corporate
(including eliminations)
Group
(USD millions)
2017
restated 1
2016
restated 1
2017
2016
2017
restated 1
2016
restated 1
2017
2016
2017
2016
Net sales to third parties
32 278 31 831 10 060 10 144
6 771
6 543
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
32 946 32 455 10 178 10 248
6 774
6 543
– 789
– 728 49 109 48 518
898
815
37
37
3
4
– 8 650 – 8 976 – 5 800 – 5 971 – 3 588 – 3 447
25 194 24 294
4 415
4 314
3 189
3 100
88
863
162
62
1 026
918
874 – 17 175 – 17 520
208 32 960 31 916
Selling, general and administration
– 9 887 – 9 225 – 2 126 – 1 981 – 2 532 – 2 480
– 452
– 506 – 14 997 – 14 192
Research and development
– 7 615 – 7 696
– 774
– 814
– 583
– 529
– 8 972 – 9 039
Other income
Other expense
Operating income
1 027
1 091
204
185
47
48
691
603
1 969
1 927
– 1 124 – 1 209
– 351
– 259
– 124
– 100
– 732
– 776 – 2 331 – 2 344
7 595
7 255
1 368
1 445
– 3
39
– 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 and 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
– 2 167 – 2 346
– 447
– 450 – 1 066 – 1 053
– 10
– 12 – 3 690 – 3 861
Impairment charges on property,
plant and 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
– 524
– 61
– 65
– 57
– 2
– 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
1 Restated to reflect the product transfers between the Innovative Medicines and Alcon Divisions that was effective as of January 1, 2018
F-21
Notes to the Novartis Group consolidated financial statements
Segmentation – consolidated balance sheets
(USD millions)
Total assets 1
Total liabilities
Total equity
Net debt
Innovative Medicines
Sandoz
Alcon
Corporate
(including eliminations)
Group
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
67 055 52 657 17 328 18 231 25 971 26 412 35 209 35 779 145 563 133 079
– 13 056 – 11 457 – 3 377 – 3 459 – 1 964 – 1 893 – 48 474 – 42 043 – 66 871 – 58 852
78 692 74 227
16 184 19 047
94 876 93 274
Net operating assets
53 999 41 200 13 951 14 772 24 007 24 519
Included in assets and liabilities are:
Total property, plant and equipment
10 098 10 857
2 159
2 525
2 878
2 403
561
679 15 696 16 464
Additions to property,
plant and equipment 2
822
877
294
326
519
431
Total goodwill and intangible assets 1
44 593 30 154
9 712 10 993 19 578 20 573
139
130
94
1 774
1 728
27 74 013 61 747
Additions to goodwill and
intangible assets 2
Total investment in associated
companies
1 265
984
107
64
196
82
24
16
1 592
1 146
81
41
7
7
8 264 15 322
8 352 15 370
Additions to investment in associated
companies
18
6
11
40
29
46
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
15 964
9 485 15 964
9 485
32 148 28 532 32 148 28 532
9 513
6 891
9 513
6 891
1 2017 restated to reflect the product transfers between the Innovative Medicines and Alcon Divisions that was effective as of January 1, 2018, and the Alcon brand name
reclassification from Corporate to the Alcon Division. These restatements had no impact on Sandoz or the total Group.
2 Excluding the impact of business combinations
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, 2018, 2017 and 2016, and for selected
non-current assets for the years ended December 31, 2018 and 2017:
2018
%
2017
%
2016
%
2018
%
2017
Net sales1
Total of selected non-current assets2
United States
17 560
34
16 935
34
17 117
35
39 082
852
2
836
2
830
2
41 972
(USD millions)
Country
Switzerland
France
Germany
United Kingdom
Japan
Other
Group
Region
Europe
Americas
2 705
4 184
1 261
3 169
22 169
51 900
19 064
21 595
Asia/Africa/Australasia
11 241
43
40
43 920
28 476
4
3
1
284
3 128
7 957
148
5
8
2
6
2 490
3 690
1 160
3 177
5
8
2
6
2 390
3 634
1 182
3 267
5
7
2
7
3 976
3 124
758
144
43
20 821
43
20 098
42
9 005
9
9 668
100
49 109
100
48 518
100
98 061
100
93 581
37
41
22
17 492
20 899
10 718
36
42
22
17 079
20 998
10 441
35
43
22
55 913
39 082
3 066
57
40
3
61 699
29 113
2 769
%
47
30
3
9
11
100
66
31
3
Group
51 900
100
49 109
100
48 518
100
98 061
100
93 581
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 16%, 13% and 7%
of net sales, respectively (2017: 17%, 12% and 7%, respec-
tively; 2016: 16%, 12% and 6%, respectively). All seg-
ments had sales to these customers in 2018, 2017 and
F-22
Notes to the Novartis Group consolidated financial statements
2016. 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 12%, 10% and 6%, respectively, of the trade receiv-
ables at December 31, 2018 (2017: 14%, 9% and 5%,
respectively).
Segmentation – net sales by region1
Innovative Medicines
Europe
US
Asia/Africa/Australasia
Canada and Latin America
Total
Of which in Established Markets
Of which in Emerging Growth Markets
Sandoz
Europe
US
Asia/Africa/Australasia
Canada and Latin America
Total
Of which in Established Markets
Of which in Emerging Growth Markets
Alcon
Europe
US
Asia/Africa/Australasia
Canada and Latin America
Total
Of which in Established Markets
Of which in Emerging Growth Markets
Group
Europe
US
Asia/Africa/Australasia
Canada and Latin America
Total
Of which in Established Markets
Of which in Emerging Growth Markets
2018
USD m
2017
restated
USD m 2
Change
(2017
to 2018)
USD %
2016
restated
USD m 2
Change
(2016
to 2017)
USD %
12 296
11 127
11
11 041
11 864
10 857
8 097
2 635
7 702
2 592
34 892
32 278
26 258
24 174
8 634
8 104
4 963
2 754
1 363
779
4 633
3 278
1 391
758
9 859
10 060
7 233
2 626
7 383
2 677
1 805
2 942
1 781
621
7 149
5 395
1 754
1 732
2 800
1 625
614
6 771
5 153
1 618
19 064
17 492
17 560
16 935
11 241
10 718
4 035
3 964
51 900
49 109
38 886
36 710
13 014
12 399
9
5
2
8
9
7
7
– 16
– 2
3
– 2
– 2
– 2
4
5
10
1
6
5
8
9
4
5
2
6
6
5
10 644
7 540
2 606
31 831
23 954
7 877
4 354
3 708
1 418
664
10 144
7 580
2 564
1 684
2 765
1 483
611
6 543
5 092
1 451
17 079
17 117
10 441
3 881
48 518
36 626
11 892
1
2
2
– 1
1
1
3
6
– 12
– 2
14
– 1
– 3
4
3
1
10
0
3
1
12
2
– 1
3
2
1
0
4
1 Net sales from operations by location of third-party customer. Emerging Growth Markets comprise all markets other than the Established Markets of the US, Canada, Western
Europe, Japan, Australia and New Zealand.
2 Restated to reflect the product transfers between the Innovative Medicines and Alcon Divisions that was effective as of January 1, 2018. This restatement had no impact on Sandoz
or the total Group.
F-23
Notes to the Novartis Group consolidated financial statements
Innovative Medicines net sales by business franchise
2018
USD
restated
USD
millions millions 1
2017 Change
(2017 restated
2016 Change
(2016
USD to 2017)
USD % millions 1 USD %
to 2018)
2018
USD
restated
USD
millions millions 1
2017 Change
(2017 restated
2016 Change
(2016
USD to 2017)
USD % millions 1 USD %
to 2018)
Oncology
Tasigna
1 874
1 841
2 1 739
Sandostatin
1 587
1 612
– 2 1 646
6
– 2
Respiratory
Ultibro Breezhaler
Gleevec/Glivec
1 561
1 943
– 20 3 323
– 42
Seebri Breezhaler
Afinitor/Votubia
1 556
1 525
2 1 516
Promacta/Revolade
Tafinlar + Mekinist
1 174
1 155
867
873
35
32
635
672
Exjade/Jadenu
1 099
1 059
4
956
Onbrez Breezhaler
Subtotal COPD2 portfolio 703
Xolair 3
Other
1 039
25
454
148
101
411
151
112
674
920
23
10
363
– 2
149
13
1
– 10
143
– 22
4
655
13
835
3
10
9
31
– 26
Jakavi
Votrient
Kisqali
Lutathera
Kymriah
Other
Total Oncology
business unit
Ophthalmology
977
828
235
167
76
777
808
26
581
2
729
76
209
0
6
nm
nm
0
0
0
Total Respiratory
1 767
1 617
9 1 521
6
Cardio-Metabolic
Entresto
Other
1 028
507
103
170
198
22
17
29
14
21
1 139
887
28
993
– 11
Total Cardio-Metabolic 1 050
524
100
184
185
13 428 12 274
9 12 790
– 4
Lucentis
2 046
1 888
8 1 835
Travoprost Group
517
Topical Olopatadine Group 247
589
284
– 12
619
– 13
335
– 15
Other
1 748
1 860
– 6 1 944
Total Ophthalmology
4 558
4 621
– 1 4 733
– 4
– 2
Neuroscience
Gilenya
Other
3 341
3 185
5 3 109
2
88
102
– 14
124
– 18
Total Neuroscience
3 429
3 287
4 3 233
2
Immunology, Hepatology and Dermatology
Cosentyx
2 837
2 071
37 1 128
554
402
38
283
1
1
0
1
Ilaris
Other
Total Immunology,
Hepatology and
Dermatology
Established Medicines
Galvus Group
Diovan Group
Exforge Group
Zortress/Certican
Neoral/Sandimmun(e)
Voltaren/Cataflam
1 284
1 233
4 1 193
3
1 023
1 002
464
463
445
957
960
414
488
465
7 1 073
– 11
4
926
12
398
4
4
– 5
515
– 5
– 4
525
– 11
Other
2 587
2 964
– 13 3 328
– 11
Total Established
Medicines
7 268
7 481
– 3 7 958
– 6
Total Pharmaceutical
business unit
21 464 20 004
7 19 041
Total division
net sales
34 892 32 278
8 31 831
5
1
84
42
0
1 Restated to reflect the product transfers between the Innovative Medicines and Alcon
Divisions that was effective as of January 1, 2018
2 Chronic obstructive pulmonary disease
3 Net sales reflect Xolair sales for all indications (e.g., including Xolair SAA and Xolair
CSU, which is managed by the Immunology, Hepatology and Dermatology franchise).
1
37
30
11
34
11
nm
nm
nm
3
– 5
3 392
2 474
37 1 412
75
nm = not meaningful
F-24
Business franchise
Neuroscience
Indication
US
USD m
Rest of
world
USD m
Total
USD m
Relapsing multiple sclerosis
1 765
1 576
3 341
Notes to the Novartis Group consolidated financial statements
Top 20 Innovative Medicines Division product net sales – 2018
Brands
Gilenya
Cosentyx
Lucentis
Tasigna
Sandostatin
Gleevec/Glivec
Afinitor/Votubia
Galvus Group
Promacta/Revolade
Tafinlar + Mekinist
Exjade/Jadenu
Xolair 1
Entresto
Diovan Group
Exforge Group
Jakavi
Votrient
Ilaris
Immunology, Hepatology
and Dermatology
Psoriasis, ankylosing
spondylitis and psoriatic arthritis
Ophthalmology
Age-related macular degeneration
Oncology
Oncology
Oncology
Oncology
Chronic myeloid leukemia
Carcinoid tumors and acromegaly
Chronic myeloid leukemia and GIST
Breast cancer/TSC
Established Medicines
Diabetes
Oncology
Oncology
Oncology
Respiratory
Immune thrombocytopenic purpura
Melanoma
Chronic iron overload
Asthma
Cardio-Metabolic
Chronic heart failure
Established Medicines
Established Medicines
Oncology
Oncology
Immunology, Hepatology
and Dermatology
Hypertension
Hypertension
Myelofibrosis
Renal cell carcinoma
Auto-inflammatory (CAPS,
TRAPS, HIDS/MKD, FMF, SJIA,
AOSD and gout)
Reduction of elevated intraocular
pressure
1 674
1 163
2 046
1 068
770
1 121
627
1 284
593
698
578
1 039
472
939
983
977
424
806
817
440
929
581
457
521
556
84
19
404
2 837
2 046
1 874
1 587
1 561
1 556
1 284
1 174
1 155
1 099
1 039
1 028
1 023
1 002
977
828
262
292
554
194
145
323
319
517
464
9 654
17 292
26 946
2 210
5 736
7 946
11 864
23 028
34 892
Travoprost Group
Ophthalmology
Zortress/Certican
Established Medicines
Transplantation
Top 20 products total
Rest of portfolio
Total division sales
1 Net sales reflect Xolair sales for all indications (e.g., including Xolair SAA and Xolair CSU, which are managed by the Immunology, Hepatology and Dermatology franchise).
F-25
Notes to the Novartis Group consolidated financial statements
Top 20 Innovative Medicines Division product net sales – 2017
Business franchise
Neuroscience
Indication
US
USD m
Rest of
world
USD m
Total
USD m
Relapsing multiple sclerosis
1 709
1 476
3 185
Gleevec/Glivec
Oncology
Chronic myeloid leukemia and GIST
Immunology, Hepatology
and Dermatology
Psoriasis, ankylosing
spondylitis and psoriatic arthritis
Brands
Gilenya
Cosentyx
Lucentis
Tasigna
Sandostatin
Afinitor/Votubia
Galvus Group
Exjade/Jadenu
Exforge Group
Diovan Group
Xolair 1
Tafinlar + Mekinist
Promacta/Revolade
Votrient
Jakavi
Ophthalmology
Age-related macular degeneration
Oncology
Oncology
Oncology
Chronic myeloid leukemia
Carcinoid tumors and acromegaly
Breast cancer/TSC
Cardio-Metabolic
Diabetes
Oncology
Chronic iron overload
Established Medicines
Established Medicines
Respiratory
Oncology
Oncology
Oncology
Oncology
Hypertension
Hypertension
Asthma
Melanoma
Immune thrombocytopenic purpura
Renal cell carcinoma
Myelofibrosis
Reduction of elevated
intraocular pressure
Travoprost Group
Ophthalmology
Entresto
Cardio-Metabolic
Chronic heart failure
Neoral/Sandimmun(e)
Immunology, Hepatology
and Dermatology
Transplantation
Voltaren/Cataflam
Established Medicines
Inflammation/pain
Top 20 products total
Rest of portfolio2
Total division sales2
1 275
796
627
1 316
810
832
819
515
28
87
339
446
407
216
297
38
1 888
1 031
780
706
1 233
544
932
870
920
534
421
401
777
373
210
450
465
2 071
1 943
1 888
1 841
1 612
1 525
1 233
1 059
960
957
920
873
867
808
777
589
507
488
465
8 445
16 123
24 568
2 412
5 298
7 710
10 857
21 421
32 278
1 Net sales reflect Xolair sales for all indications (e.g., including Xolair SAA and Xolair CSU, which are managed by the Immunology, Hepatology and Dermatology franchise).
2 Restated to reflect the product transfers between the Innovative Medicines and Alcon Divisions that was effective as of January 1, 2018
F-26
Notes to the Novartis Group consolidated financial statements
Top 20 Innovative Medicines Division product net sales – 2016
Brands
Business franchise
Indication
Gleevec/Glivec
Oncology
Chronic myeloid leukemia and GIST
Gilenya
Lucentis
Tasigna
Sandostatin
Afinitor/Votubia
Galvus Group
Cosentyx
Diovan Group
Exjade/Jadenu
Exforge Group
Xolair 1
Votrient
Tafinlar + Mekinist
Promacta/Revolade
Neuroscience
Ophthalmology
Oncology
Oncology
Oncology
Relapsing multiple sclerosis
Age-related macular degeneration
Chronic myeloid leukemia
Carcinoid tumors and acromegaly
Breast cancer/TSC
Cardio-Metabolic
Diabetes
Immunology, Hepatology
and Dermatology
Psoriasis, ankylosing
spondylitis and psoriatic arthritis
Established Medicines
Hypertension
Oncology
Chronic iron overload
Established Medicines
Hypertension
Respiratory
Oncology
Oncology
Oncology
Asthma
Renal cell carcinoma
Melanoma
Immune thrombocytopenic purpura
Reduction of elevated
intraocular pressure
Travoprost Group
Ophthalmology
Jakavi
Oncology
Myelofibrosis
Voltaren/Cataflam
Established Medicines
Inflammation/pain
Neoral/Sandimmun(e)
Immunology, Hepatology
and Dermatology
Transplantation
Exelon/Exelon Patch
Established Medicines
Alzheimer’s disease
Top 20 products total
Rest of portfolio2
Total division sales2
US
USD m
Rest of
world
USD m
1 214
2 109
1 683
1 426
1 835
1 017
793
741
1 193
363
926
509
916
835
372
374
325
408
581
525
474
354
722
853
775
765
147
447
10
357
298
310
211
41
90
Total
USD m
3 323
3 109
1 835
1 739
1 646
1 516
1 193
1 128
1 073
956
926
835
729
672
635
619
581
525
515
444
7 923
16 076
23 999
2 721
5 111
7 832
10 644
21 187
31 831
1 Net sales reflect Xolair sales for all indications (e.g., including Xolair SAA and Xolair CSU, which is managed by the Immunology, Hepatology and Dermatology franchise).
2 Restated to reflect the product transfers between the Innovative Medicines and Alcon Divisions that was effective as of January 1, 2018
F-27
Notes to the Novartis Group consolidated financial statements
Sandoz net sales by business franchise
Alcon net sales by business franchise
Change
(2017
to 2018)
Change
(2016
2016 to 2017)
USD % USD m USD %
2017
USD m
2018
USD m
2018
USD m
Change
(2017
Change
(2016
to 2018) restated to 2017)
USD % USD m 1 USD %
2016
2017
restated
USD m 1
Retail Generics 1
7 880
8 409
– 6 8 623
Biopharmaceuticals
1 436
1 135
27 1 002
Anti-Infectives
543
516
5
519
Total division net sales 9 859 10 060
– 2 10 144
– 2
13
– 1
– 1
1 Of which USD 826 million (2017: USD 880 million) represents anti-infectives sold
under the Sandoz name
Surgical
Consumables
Implantables
2 227
2 097
6 2 007
1 136
1 034
10 1 007
Equipment/other
636
594
7
565
Total Surgical
3 999
3 725
7 3 579
Vision Care
Contact lenses
1 928
1 833
5 1 762
Ocular health
1 222
1 213
1 1 202
Total Vision Care
3 150
3 046
3 2 964
Total division net sales 7 149
6 771
6 6 543
4
3
5
4
4
1
3
3
1 Restated to reflect the product transfers between the Innovative Medicines and Alcon
Divisions that was effective as of January 1, 2018
The product portfolio of Sandoz and Alcon is widely
spread in 2018, 2017 and 2016.
Segmentation – other revenue
Innovative Medicines
Sandoz
Alcon
Corporate
(including eliminations)
Group
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
874
162
128
24
648
186
28
36
3
10
45
4
62
4
24
9
37
3
16
88
877
188
173
28
652
301
28
45
3
16
88
1 266
1 026
Total other revenues
1 188
898
1 Other includes revenue from activities such as manufacturing or other services rendered, to the extent such revenue is not recorded under net sales.
Innovative Medicines
Sandoz
Alcon
Corporate
(including eliminations)
Group
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
648
186
28
36
558
167
65
25
4
24
9
37
6
24
7
37
3
4
88
62
652
301
28
45
564
257
65
32
3
4
88
62
1 026
918
(USD millions)
Profit-sharing income
Royalty income
Milestone income
Other 1
(USD millions)
Profit-sharing income
Royalty income
Milestone income
Other 1
Total other revenues
898
815
1 Other includes revenue from activities such as manufacturing or other services rendered, to the extent such revenue is not recorded under net sales.
F-28
Notes to the Novartis Group consolidated financial statements
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 1
Total comprehensive income effect
2018
526
5 910
2
2017
456
629
23
2016
464
2018
75
2017
108
2016
– 39
2018
601
234
– 557
– 145
710
5 353
5
2
2017
564
484
23
2016
425
944
5
6 438
1 108
703
– 482
– 37
671
5 956
1 071
1 374
1 In 2018, Novartis share of other comprehensive income recognized by associated companies, net of taxes of USD 511 million was recycled into the consolidated income statement
as a result of the divestment of the investment in GSK Consumer Healthcare Holdings Ltd. No Novartis share of other comprehensive income recognized by associated companies,
net of taxes was recycled into the consolidated income statement in 2017 and 2016.
Novartis has significant investments in Roche Holding AG,
Basel (Roche) as well as certain other smaller invest-
ments that are accounted for as associated companies.
The investment in GlaxoSmithKline Consumer Health-
care Holdings Ltd, Brentford, Middlesex, UK, was
divested on June 1, 2018, to GlaxoSmithKline plc, Great
Britain.
(USD millions)
Balance sheet value
December 31, December 31,
2017
2018
Roche Holding AG, Switzerland
8 195
8 121
(CHF billions)
Total
comprehen- comprehen-
Revenue Net income sive income sive income
Other
December 31, 2017
June 30, 2018
53.3
28.1
6.6
6.4
0.7
0.8
7.3
7.2
A purchase price allocation was performed on the basis
of publicly available information at the time of acquisition
of the investment. The December 31, 2018, balance sheet
value allocation is as follows:
GlaxoSmithKline Consumer
Healthcare Holdings Ltd., UK
Others
Total
Roche Holding AG
(USD millions)
157
7 020
229
Novartis share of Roche’s estimated net assets
Novartis share of re-appraised intangible assets
8 352
15 370
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,
2018
2 466
521
2 887
5 874
2 321
8 195
The Group’s holding in Roche voting shares was 33.3%
at December 31, 2018, 2017 and 2016. This investment
represents approximately 6.2% of Roche’s total out-
standing voting and non-voting equity instruments at
December 31, 2018, 2017 and 2016.
Since full-year 2018 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 2019 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, 2017, and for
the six months ended June 30, 2018 (since full-year 2018
data is not yet available):
(CHF billions)
Current assets
Non-current
assets
Current Non-current
liabilities
liabilities
December 31, 2017
June 30, 2018
31.6
29.6
55.4
57.8
22.2
23.0
25.5
25.0
The identified intangible assets principally relate to the
value of currently marketed products and are amortized
on a straight-line basis over their estimated average use-
ful life of 20 years.
In 2018, dividends received from Roche in relation to
the distribution of its 2017 net income amounted to
USD 464 million (2017: USD 438 million in relation to the
distribution of its 2016 net income).
The consolidated income statement effects from
applying Novartis accounting principles for this invest-
ment in 2018, 2017 and 2016 are as follows:
(USD millions)
2018
2017
2016
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 40 million (2017: USD 42
million; 2016: USD 42 million)
Net income effect
799
– 125
669
– 67
678
– 68
– 148
– 146
526
456
– 146
464
F-29
Notes to the Novartis Group consolidated financial statements
The publicly quoted market value of the Novartis inter-
est in Roche (SIX symbol: RO) at December 31, 2018,
was USD 13.2 billion (2017: USD 13.4 billion).
tors. Furthermore, Novartis had customary minority
rights and also exit rights at a pre-defined, market-based
pricing mechanism.
GlaxoSmithKline Consumer
Healthcare Holdings Ltd.
On March 27, 2018, Novartis entered into an agreement
with GlaxoSmithKline plc, Great Britain (GSK) to divest
its 36.5% stake in GSK Consumer Healthcare Holdings
Ltd. (GSK Consumer Healthcare) to GSK for USD 13.0
billion in cash. As a result, Novartis discontinued the use
of equity method accounting starting from April 1, 2018.
The divestment transaction closed on June 1, 2018, and
Novartis realized a pre-tax gain of USD 5.8 billion,
recorded in income from associated companies. See
Note 2.
GSK Consumer Healthcare was formed in March,
2015, via contribution of businesses from both Novartis
and GSK.
At December 31, 2017 and 2016, Novartis had a 36.5%
interest in GSK Consumer Healthcare and had four of 11
seats on the GSK Consumer Healthcare board of direc-
In 2018, dividends received from GSK Consumer
Healthcare amounted to USD 252 million (2017: USD 544
million).
The consolidated income statement effects from
applying Novartis accounting principles for this invest-
ment in 2018, 2017 and 2016 are as follows:
(USD millions)
2018
2017
2016
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
(2017: USD 1 million;
2016: USD 2 million)
Pre-tax gain on divestment of
GSK Consumer Healthcare
Net income effect
119
4
589
47
268
– 22
– 3
– 7
– 12
5 790
5 910
629
234
5. Interest expense
and other financial income and expense
Interest expense
Other financial income and expense
(USD millions)
Interest expense
2018
– 892
2017
– 758
2016
(USD millions)
– 709
Interest income
(Expense)/ income arising from
discounting long-term liabilities
– 65
– 19
2
Total interest expense
– 957
– 777
– 707
Dividend income
Net capital losses on
available-for-sale securities
Impairment of commodities
and available-for-sale securities, net
Other financial expense
Monetary loss from hyperinflation
accounting
Currency result, net
Total other financial income
and expense
2018
294
1
– 2
– 33
– 10
– 65
2017
110
1
– 1
12
– 25
2016
43
1
– 1
7
– 20
– 58
– 477
185
39
– 447
F-30
Notes to the Novartis Group consolidated financial statements
6. Taxes
Income before taxes
(USD millions)
Switzerland
Foreign
Total income before taxes
2018
11 686
2 149
13 835
2017
5 289
3 710
8 999
2016
3 110
4 707
7 817
(As a percentage)
Applicable tax rate
2018
2017
2016
14.0 14.5 13.2
Effect of disallowed expenditures
2.0
3.4
3.5
Effect of utilization of tax losses
brought forward from prior periods
– 0.1 – 0.1 – 0.2
Effect of income taxed at reduced rates
– 0.4 – 0.2 – 0.2
Effect of income not subject to tax 1
– 3.7
0.0
0.0
Effect of tax credits and allowances
– 2.4 – 2.2 – 2.8
Current and deferred income tax expense
Effect of release of
contingent consideration liability
– 0.2 – 1.2
0.0
(USD millions)
Switzerland
Foreign
2018
– 671
2017
– 462
2016
– 709
– 1 132
– 1 594
– 1 418
Current income tax expense
– 1 803
– 2 056
– 2 127
Switzerland
Foreign
Deferred tax income
23
559
582
– 298
1 058
765
243
760
1 008
Total income tax expense
– 1 221
– 1 296
– 1 119
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 the pre-tax income
of each subsidiary) and the effective tax rate are:
Effect of tax rate change
on current and deferred
tax assets and liabilities 2
Effect of write-off of deferred tax assets
Effect of write down and reversal of
write-down of investments in subsidiaries
– 0.5
0.2
0.7
0.0
0.2
0.5
– 0.1 – 1.1 – 1.0
Effect of tax benefits expiring in 2017
0.0 – 0.8 – 0.5
Effect of non-deductible losses in Venezuela
0.0
Effect of prior year items
Effect of other items 3
Effective tax rate
0.0
1.2
0.2
1.3
0.2
0.1
– 0.6
0.6
8.8 14.4 14.3
1 Included in 2018 is the effect of income not subject to tax (-3.7%) arising from the
portion of the non-taxable gain on the divestment of the Group’s investment in GSK
Consumer Healthcare Holdings Ltd. attributable to Switzerland.
2 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.
3 In 2018, other items (+0.6%) include changes in uncertain tax positions (+1.0%) and
other items (-0.4%).
In 2016, other items (+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%).
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 19 million in 2018, by USD 7 million in
2017 and by USD 18 million in 2016.
F-31
Notes to the Novartis Group consolidated financial statements
7. Earnings per share
Net income attributable to shareholders of Novartis AG (USD millions)
Number of shares (in millions)
2018
2017
12 611
7 703
2016
6 712
Weighted average number of shares outstanding used in basic earnings per share
2 319
2 346
2 378
Adjustment for vesting of restricted shares, restricted share units and dilutive shares from options
25
25
22
Weighted average number of shares in diluted earnings per share
2 344
2 371
2 400
Basic earnings per share (USD)
Diluted earnings per share (USD)
5.44
3.28
2.82
5.38
3.25
2.80
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 2018, 2017 or 2016, as all options were
dilutive in all years.
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 that 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.
F-32
Notes to the Novartis Group consolidated financial statements
The following table summarizes these value adjustments and currency translation effects attributable to Novartis
shareholders:
(USD millions)
Value adjustments at January 1, 2016
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 losses from defined benefit plans
Currency translation effects
Total value adjustments in 2017
Value adjustments at December 31, 2017,
as previously reported
Impact of adoption of IFRS 9 on retained
earnings and OCI 1
Reclassification to presentation required
under IFRS 9
Fair value
adjustments
on marketable
securities
462
– 113
– 113
349
39
39
388
– 177
– 211
Fair value
Fair value
adjustments adjustments on
on debt deferred cash
flow hedges
securities
– 1
– 18
15
Fair value
Actuarial
adjustments gains/(losses)
on equity
from defined
securities benefit plans
Cumulative
currency
translation
effects
Total value
adjustments
– 5 413
747
– 4 223
– 1
– 1
– 1
– 2
15
– 3
12
12
9
9
12
211
211
13
– 16
– 514
– 98
– 514
– 2 389
– 2 389
– 514
– 2 389
– 3 001
12
12
– 5 915
– 1 642
– 7 212
851
851
– 237
2 208
1 971
50
– 237
851
2 208
2 872
– 5 064
329
– 4 340
– 177
– 5 064
329
– 4 517
25
– 16
95
– 359
320
65
– 4 452
95
320
415
744
Restated value adjustments at January 1, 2018
– 2
Fair value adjustments on financial instruments
Fair value adjustments on financial assets sold
Net investment hedge
Net actuarial gains from defined benefit plans
Currency translation effects
Total value adjustments in 2018
Value adjustments at December 31, 2018
– 2
– 359
12
21
– 3
– 359
208
– 5 423
1 Notes 1 and 29 provide additional disclosures related to the impact of adoption of IFRS 9 Financial Instruments. OCI: other comprehensive income
8.1) The 2018, 2017 and 2016 changes in the fair value of financial instruments were as follows:
(USD millions)
Fair value adjustments at January 1, 2018, as previously reported
Impact of adoption of IFRS 9 on retained earnings and
other comprehensive income 2
Reclassification to presentation required under IFRS 9
Restated fair value adjustments at January 1, 2018
Changes in fair value:
– Equity securities
Amortized net losses on cash flow hedges transferred
to the consolidated income statement
Deferred tax on above items
Realized net gains reclassified to the retained earnings:
– Other financial assets sold
Fair value adjustments during the year
Fair value adjustments at December 31, 2018
Fair value
adjustments
on marketable
securities
Fair value
adjustments
on equity
securities 1
Fair value
Fair value
adjustments adjustments on
on debt deferred cash
flow hedges
securities
– 2
9
388
– 177
– 211
Total
395
– 177
211
211
18
– 5
– 16
– 3
208
– 2
9
218
18
13
– 6
– 16
9
227
13
– 1
12
21
– 2
1 Includes fair value adjustments on equity securities designated as financial assets valued at fair value through other comprehensive income with no subsequent recycling into the
consolidated income statement.
2 Notes 1 and 29 provide aditional disclosures on impact of adoption of IFRS 9 Financial Instruments.
F-33
Notes to the Novartis Group consolidated financial statements
(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
adjustments
on marketable
securities
Fair value
Fair value
adjustments adjustments on
on debt deferred cash
flow hedges
securities
349
– 1
– 3
12
47
– 109
102
– 13
39
388
– 1
– 1
– 2
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.
(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
8.2) In 2018, cumulative currency translation losses of
USD 946 million were recycled through the income state-
ment as a result of the divestment of the investment in
GSK Consumer Healthcare Holdings Ltd. See Notes 2
and 4. No currency translation losses or gains were recy-
cled 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
adjustments
on marketable
securities
Fair value
Fair value
adjustments adjustments on
on debt deferred cash
flow hedges
securities
462
– 1
– 18
1
– 87
– 1
– 154
131
– 3
– 113
349
16
– 1
15
– 3
– 1
Total
443
1
– 87
– 1
– 154
16
131
– 4
– 98
345
2018
2017
– 482
1 367
54
69
76
– 592
2016
– 667
12
140
– 359
851
– 515
– 359
851
– 514
– 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.
F-34
Notes to the Novartis Group consolidated financial statements
9. Property, plant and equipment
The following table summarizes the movements of property, plant and equipment during 2018:
(USD millions)
Cost
January 1, 2018
Cost of assets related to disposal group held for sale 1
Impact of business combinations
Reclassifications 2
Additions 3
Disposals and derecognitions 4
Currency translation effects
December 31, 2018
Accumulated depreciation
January 1, 2018
Buildings
Construction
in progress
Machinery
and other
equipment
Total
14 064
2 368
16 858
34 010
– 114
40
538
110
– 212
– 291
– 24
15
– 1 470
1 250
– 21
– 76
– 160
80
931
407
– 457
– 504
– 309
137
1 774
– 697
– 887
14 135
2 042
17 155
34 028
Land
720
– 11
2
1
7
– 7
– 16
696
– 40
– 5 983
– 38
– 11 485
– 17 546
Accumulated depreciation on assets related to disposal group held for sale 1
56
Depreciation charge 5
Accumulated depreciation on disposals and derecognitions 4
– 3
– 574
180
4
3
101
161
– 1 140
– 1 717
412
Impairment charge
Reversal of impairment charge
Currency translation effects
December 31, 2018
Net book value at December 31, 2018
– 1
– 122
– 16
– 185
1
115
8
2
12
361
– 43
– 6 328
– 37
– 11 924
– 18 332
653
7 807
2 005
5 231
15 696
595
– 324
20
479
Net book value of property, plant and equipment under finance lease contracts
79
Commitments for purchases of property, plant and equipment
Capitalized borrowing costs
79
289
6
1 Note 2 provides additional disclosures related to disposal group held for sale.
2 Reclassifications between various asset categories due to completion of plant and other equipment under construction.
3 Additions in the disposal group held for sale for the period from January 1, 2018, to the date of reclassification to assets held for sale were USD 21 million
4 Derecognition of assets that are no longer used and are not considered to have a significant disposal value or other alternative use.
5 Depreciation charge in the disposal group held for sale for the period from January 1, 2018, to the date of reclassification to assets held for sale was USD 15 million
F-35
Notes to the Novartis Group consolidated financial statements
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
Land
Buildings
Construction
in progress
Machinery
and 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
Net book value of property, plant and equipment under finance lease contracts
78
Commitments for purchases of property, plant and equipment
Capitalized borrowing costs
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
78
318
9
F-36
Notes to the Novartis Group consolidated financial statements
10. Goodwill and intangible assets
The following table summarizes the movements of goodwill and intangible assets in 2018:
Goodwill
Intangible assets other than goodwill
(USD millions)
Cost
January 1, 2018
In-process
research and
Alcon
Total development brand name Technologies
Currently
marketed Marketing
know-how
products
Other
intangible
assets
Total
32 179
6 462
2 980
6 638
34 105
5 960
1 852
57 997
Cost of assets related to disposal group
held for sale 1
– 9
– 276
– 1 116
Impact of business combinations
4 084
10 224
2 531
479
728
2
– 2
– 1 403
1
12 756
218
385
1 592
– 697
477
– 214
– 70
– 928
– 183
– 1 395
– 183
– 380
– 76
– 41
– 387
– 18
– 522
35 700
16 167
2 980
6 253
35 412
5 960
2 253
69 025
– 429
– 1 170
– 4 268 – 19 631
– 1 668
– 1 263 – 28 000
Reclassifications 2
Additions 3
Disposals and derecognitions 4
Impairment charge 5
Currency translation effects
December 31, 2018
Accumulated amortization
January 1, 2018
Accumulated amortization / impairments on assets
related to disposal group held for sale 1
Amortization charge 5
Accumulated impairments on disposals
and derecognitions4
Impairment charge 5
Currency translation effects
23
2
107
816
925
– 570
– 2 521
– 238
– 310
– 3 639
209
– 167
6
791
– 53
– 825
26
152
257
1 257
– 4
– 1 049
16
200
December 31, 2018
– 406
– 1 120
– 4 758 – 21 218
– 1 906
– 1 304 – 30 306
Net book value at December 31, 2018
35 294
15 047
2 980
1 495
14 194
4 054
949
38 719
1 Note 2 provides additional disclosures related to assets of disposal group held for sale.
2 Reclassifications between various asset categories as a result of product launches of acquired In-Process Research & Development and completion of software development
3 No addition in the disposal group held for sale for the period from January 1, 2018, to the date of reclassification to assets held for sale.
4 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
5 Amortization related to the disposal group held for sale for the period from January 1, 2018, to the date of reclassification to assets held for sale was USD 45 million
Impairment charges related to the disposal group held for sale for the write-down of the allocated goodwill were USD 183 million and for the currently marketed products were
USD 37 million (thereof USD 9 million recognized for the period from January 1, 2018, to the date of reclassification to assets held for sale)
F-37
Notes to the Novartis Group consolidated financial statements
The following table summarizes the movements of goodwill and intangible assets in 2017:
Goodwill
Intangible assets other than goodwill
(USD millions)
Cost
January 1, 2017
In-process
research and
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
Reclassifications 1
Additions
Disposals and derecognitions 2
Currency translation effects
704
1 223
– 389
697
– 353
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
– 27
– 6
– 577
– 2 571
– 238
– 304
– 3 690
317
– 92
– 54
– 416
61
– 2
– 37
730
– 709
– 534
Currency translation effects
– 28
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 allocation of the net book values of goodwill and intangible assets by report-
ing segment at December 31, 2018:
Goodwill
Intangible assets other than goodwill
(USD millions)
Innovative Medicines
Sandoz (excluding assets of
disposal group held for sale)
Alcon
Corporate
In-process
research and
Alcon
Total development brand name Technologies
Currently
marketed Marketing
know-how
products
Other
intangible
assets
Total
18 551
14 377
6
11 228
431
26 042
7 837
8 899
7
419
246
5
304
1 115
37
1 875
2 980
1 185
1 851
4 054
363
10 679
118
123
Net book value at December 31, 2018
35 294
15 047
2 980
1 495
14 194
4 054
949
38 719
The following table summarizes the allocation of the net book values of goodwill and intangible assets by report-
ing segment at December 31, 2017: 1
Goodwill
Intangible assets other than goodwill
(USD millions)
Innovative Medicines
Sandoz
Alcon
Corporate
In-process
research and
Alcon
Total development brand name Technologies
Currently
marketed Marketing
know-how
products
9
10 786
539
1 589
Other
intangible
assets
Total
354
15 517
30
2 783
2 980
1 822
2 099
4 292
194
11 678
11
19
14 637
4 368
8 210
8 895
8
625
291
8
Net book value at December 31, 2017
31 750
5 292
2 980
2 370
14 474
4 292
589
29 997
1 Restated to reflect the product transfers between the Innovative Medicines and the Alcon Division that was effective January 1, 2018, and the Alcon brand name reclassification
from Corporate to the Alcon Division. These restatements had no impact on Sandoz or the total Group. See Note 3.
The Innovative Medicines, Sandoz and Alcon Divisions’
cash generating units, to which goodwill is 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.
F-38
Notes to the Novartis Group consolidated financial statements
In the prior year, the Alcon brand name indefinite life
intangible asset was reported in Corporate, as it was
used to market products of the Alcon Division and prod-
ucts within the Ophthalmology business franchise of the
Innovative Medicines Division. In connection with the
planned spin-off of the Alcon Division (see Note 30), it is
the intention of the Novartis Group to transfer the full
rights of the Alcon brand name to the Alcon Division. As
a result, the Innovative Medicines Division started the
process to rebrand the products within its Ophthalmol-
ogy business franchise and will no longer use the Alcon
brand name. As a result, the Alcon brand name indefinite
life intangible asset is reported in the Alcon Division in
all years presented. In 2018, net sales of the Alcon Divi-
sion products together are the grouping of cash-gener-
ating units, which are used to determine the recoverable
amount. In the prior year, net sales of products within
Innovative Medicines, Ophthalmology business fran-
chise and Alcon Division products, which used the Alcon
brand name, together were the grouping of cash-gener-
ating units, which were used to determine the recover-
able amounts. The valuation method is based on the fair
value less costs of disposal.
tions:
(As a percentage)
Terminal growth rate
Discount rate (post-tax)
Innovative
Medicines
Sandoz
Alcon
1.5
7.5
2.0
7.5
3.0
7.5
The Alcon terminal growth rate assumption of 3% is
higher than the expected inflation rate of the medical
device industry, and more specifically the ophthalmic
sub-segment of the industry. The growth rates are
expected to exceed this long-term inflation rate, as the
aging population to which Alcon’s products are pre-
scribed is growing 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 indefi-
nite life intangible assets, is reviewed for the impact of
reasonably possible changes in key assumptions. In par-
ticular, we considered an increase in the discount rate,
a decrease in the terminal growth rate, and certain neg-
ative 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
disclosures on how the Group performs goodwill and
intangible asset impairment testing.
The following table shows the intangible asset and
goodwill impairment charges for 2018 and 2017:
(USD millions)
Sandoz 2
Alcon 3
Total
2018
– 592
– 249
– 391
2017
– 591
– 61
– 57
– 1 232
– 709
1 2018 includes an impairment of USD 400 million related to a partial write-down of the
Votrient currently marketed product; 2017 includes an impairment of USD 465 million
related to the write-down of the Serelaxin IPR&D
2 2018 includes impairments of USD 220 million related to the write-down of the
allocated goodwill (USD 183 million) and the currently marketed products (USD 37
million) related to the pending divestment of the Sandoz US dermatology business
and generic US oral solids portfolio. (see Note 2)
3 2018 includes an impairment of USD 337 million related to the write-down of the
CyPass currently marketed product, which was acquired with the Alcon Division 2016
acquisition of Transcend Medical, Inc. (see Note 2)
The following assumptions are used in the calcula-
Innovative Medicines 1
F-39
Notes to the Novartis Group consolidated financial statements
11. Deferred tax assets and liabilities
(USD millions)
Property,
plant &
equipment
Pensions and
other benefit
Intangible obligations
assets of associates
Tax loss Other assets,
provisions
forwards and accruals
carry-
Total
Inventories
Gross deferred tax assets at January 1, 2018
137
1 287
1 090
3 786
97
1 983
8 380
Gross deferred tax liabilities at January 1, 2018
– 613
– 2 985
– 254
– 455
– 9
– 1 003
– 5 319
Net deferred tax balance at January 1, 2018
– 476
– 1 698
836
3 331
88
980
3 061
At January 1, 2018
– 476
– 1 698
836
3 331
Net deferred tax balance related to disposal group held for sale
Credited/(charged) to income
Charged to equity
Charged to other comprehensive income
Impact of business combinations
1
31
1
378
– 6
88
– 1
4
– 86
– 113
69
980
3 061
– 1
368
– 17
8
– 6
582
– 17
77
– 2 874
298
83
– 2 493
Other movements
13
42
6
9
1
– 51
20
Net deferred tax balance at December 31, 2018
– 431
– 4 151
915
3 248
273
1 370
1 224
Gross deferred tax assets at December 31, 2018
without disposal group
Gross deferred tax liabilities at December 31, 2018
without disposal group
Net deferred tax balance at December 31, 2018
without disposal group
191
1 233
1 188
3 722
273
2 175
8 782
– 622
– 5 384
– 273
– 474
– 805
– 7 558
– 431
– 4 151
915
3 248
273
1 370
1 224
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, 2018
Deferred tax liabilities at December 31, 2018
Net deferred tax balance at December 31, 2018
83
8 699
– 7 475
1 224
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
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 12
months:
(USD billions)
2018
2017
Expected to have an impact on current tax
payable after more than 12 months
– Deferred tax assets
– Deferred tax liabilities
3.9
6.7
3.5
4.4
F-40
Notes to the Novartis Group consolidated financial statements
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)
2018
2017
Unremitted earnings that have been retained
by consolidated entities for reinvestment
73
66
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
2018
3
– 33
2017
3
– 29
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
2018 total
23
14
27
65
345
522
996
4
0
12
5
36
2 288
2 345
27
14
39
70
381
2 810
3 341
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
(USD millions)
2018
2017
2016
Tax losses carried forward
that expired
8
1
19
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
provisions – reduced the US corporate tax rate from 35%
to 21%, effective January 1, 2018. This required a reval-
uation 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 at December 31, 2017:
(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 companies,
and as a result, USD 70 million of deferred tax liabilities
related to these entities’ unremitted earnings, the major-
ity of which were recognized in 2016, were reclassified
to current income tax liabilities at December 31, 2017.
F-41
Notes to the Novartis Group consolidated financial statements
12. Financial and other non-current assets
Financial assets
Other non-current assets
(USD millions)
Equity securities
Debt securities
Fund investments
2018
2017
(USD millions)
2018
2017
1 155
1 073
Deferred compensation plans
31
251
36
166
Prepaid post-employment benefit plans
Other non-current assets
468
137
290
895
484
133
201
818
Total financial investments
1 437
1 275
Total other non-current assets
Long-term receivables from customers
Minimum lease payments
from finance lease agreements
Contingent consideration receivables 1
164
91
396
Long-term loans, advances and security deposits 257
197
122
394
255
Total financial assets
2 345
2 243
1 Note 28 provides additional disclosures related to contingent considerations.
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.”
2018
2017
(USD millions)
Total
future
payments
Unearned
finance
income
Present
value
Provision
Net
book
value
Total
future
payments
Unearned
finance
income
Present
value
Provision
Not later than one year 1
64
Between one and five years
117
Later than five years
Total
48
229
– 5
– 9
– 2
– 16
59
108
46
213
– 2
– 28
– 35
– 65
57
80
11
148
83
180
31
294
– 7
– 14
– 2
– 23
76
166
29
271
– 3
– 59
– 14
– 76
Net
book
value
73
107
15
195
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
2018
931
3 087
2 938
6 956
2017
841
2 957
3 069
6 867
The following table shows the recognized amount of
inventory provision and reversals of inventory provision:
(USD millions)
Inventory provisions
2018
– 751
Reversals of inventory provisions
272
2017
– 470
189
2016
– 283
67
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)
2018
2017
2016
Cost of goods sold
– 10.4
– 10.3
– 10.3
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.
F-42
Notes to the Novartis Group consolidated financial statements
14. Trade receivables
(USD millions)
Total gross trade receivables
Provisions for doubtful trade receivables
Total trade receivables, net
2018
8 853
– 126
8 727
2017
8 790
– 190
8 600
The following table summarizes the movement in the provision for expected credit losses:
(USD millions)
January 1
Impact of divestments
Impact of business combination
Provisions for doubtful trade receivables charged to the consolidated income statement
Utilization provisions for doubtful trade receivables
Reversal of provisions for doubtful trade receivables
Currency translation effects
December 31
2018
– 190
– 1
– 47
39
61
12
2017
– 162
12
2016
– 142
– 119
– 76
12
76
– 9
17
37
2
– 126
– 190
– 162
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 receivable:
(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
2018
7 916
296
2017
7 758
279
194
136
98
213
230
137
137
249
Provisions for doubtful trade receivables
Total trade receivables, net
– 126
8 727
– 190
8 600
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, Tur-
key, and Argentina, which has been included in 2018, and
evaluates trade receivables in these countries for poten-
tial collection risks. The majority of the outstanding trade
receivables from Greece, Portugal, Saudi Arabia and
Spain are due directly from local governments or from
government-funded 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 the Group to re-evaluate the estimated
collectible amount 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, 2018 and 2017, 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
2018
2017
1 729
1 733
97
44
124
95
At December 31, 2018, 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
2018
3 510
1 551
2017
3 451
1 533
658
282
247
206
183
161
100
136
600
312
268
237
208
165
127
73
1 693
8 727
1 626
8 600
F-43
Notes to the Novartis Group consolidated financial statements
15. Marketable securities, commodities, time deposits,
derivative financial instruments, and cash and cash
equivalents
Marketable securities, commodities, time deposits and derivative financial instruments
2018
325
35
360
104
2 087
130
12
2 693
2018
302
12
11
325
2017
328
34
362
106
125
31
1
625
2017
303
14
11
328
2018
3 121
10 150
13 271
2017
2 970
5 890
8 860
2018
588
99
2017
717
93
811
753
1
2
1 360
2 861
3
8
450
1 030
3 054
(USD millions)
Debt securities
Fund investments
Total marketable securities
Commodities
Time deposits and short-term investments with original maturity more than 90 days
Derivative financial instruments
Accrued interest on debt securities, time deposits and short-term investments
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.
F-44
Notes to the Novartis Group consolidated financial statements
17. Equity
The following table shows the movement in the share capital:
(USD millions)
Share capital
Treasury shares
Outstanding share capital
Jan 1, 2016
Movement
in year
Dec 31, 2016
Movement
in year
Dec 31, 2017
Movement
in year
Dec 31, 2018
991
– 101
890
– 19
25
6
972
– 76
896
– 3
– 24
– 27
969
– 100
869
– 25
31
6
944
– 69
875
The following table shows the movement in the shares:
2018
2017
2016
Number of outstanding shares
(in millions)
Note
Total
Novartis
shares
Total
Total
treasury outstanding
shares
shares 1
Total
Novartis
shares
Total
Total
treasury outstanding
shares
shares 1
Total
Novartis
shares
Total
Total
treasury outstanding
shares
shares 1
Balance at beginning 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
– 66.2
66.2
– 10.3
10.3
– 49.9
49.9
Shares canceled for capital
reduction 2
Shares acquired to be
canceled 3
Other share purchases 4
Other share sales
Exercise of options
and employee transactions 5 17.8
Equity-based compensation 5
– 23.3
– 23.3
– 1.2
– 1.2
3.0
3.0
7.8
7.4
7.8
7.4
– 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
4.1
9.0
0.2
Total movements
– 66.2
59.9
– 6.3
– 10.3
– 46.3
– 56.6
– 49.9
50.1
Balance at end of year
2 550.6
– 239.4 2 311.2 2 616.8
– 299.3 2 317.5 2 627.1
– 253.0 2 374.1
1 Approximately 121.6 million treasury shares (2017: 131.3 million; 2016: 134.6 million) are held in Novartis entities that restrict their availability for use.
2 Novartis reduced its share capital by canceling shares that were repurchased on the SIX Swiss Exchange second trading line during previous years.
3 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)
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)
2018
2.80
2017
2.75
2016
2.70
7.0
6.5
6.5
F-45
Notes to the Novartis Group consolidated financial statements
17.2) The following table summarizes the treasury shares movements:
2018
2017
2016
Number of
outstanding
Number of
outstanding
Number of
outstanding
Note
shares Equity impact
USD m
(in millions)
shares Equity impact
USD m
(in millions)
shares Equity impact
USD m
(in millions)
Shares acquired to be canceled 1
– 23.3
– 1 859
– 66.2
– 5 270
– 10.3
Other share purchases 2
Purchase of treasury shares
Other share sales
Exercise of options and employee transactions 3
17.8
Equity-based compensation 4,5
Total
– 1.2
– 114
– 3.8
– 304
– 2.6
– 24.5
– 1 973
– 70.0
– 5 574
– 12.9
3.0
7.8
7.4
263
434
756
4.6
8.8
255
612
– 6.3
– 520
– 56.6
– 4 707
4.1
9.0
0.2
– 784
– 208
– 992
214
664
– 114
1 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)
2 Shares acquired from employees, which were previously granted to them under the respective programs
3 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.
4 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.
5 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) In 2018, Novartis entered into an irrevocable,
non-discretionary arrangement with a bank to repur-
chase Novartis shares on the second trading line under
its up-to USD 5 billion share buyback. Novartis can can-
cel this arrangement at any time but may be subject to
a 90-day waiting period. The commitment under this
arrangement therefore reflects the obligated purchases
by the bank under such trading plan over a rolling 90-day
period, or if shorter, until the maturity date of such trad-
ing plan. The commitment under this arrangement
amounted to USD 284 million as of December 31, 2018.
In 2017, 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. 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.
17.4) Transaction costs of USD 79 million, net of tax, that
are directly attributable to the potential distribution (spin-
off) of Alcon to Novartis shareholders and that would
otherwise have been avoided, are recorded as a deduc-
tion from equity. See Note 1.
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) 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.
17.7) Other movements includes, for subsidiaries in
hyperinflationary economies, the impact of the restate-
ment of the non-monetary assets and liabilities with the
general price index at the beginning of the period as well
as the restatement of the equity balances of the current
year. In 2018, the amount recorded in equity related to
hyperinflation accounting was USD 38 million (2017: USD
nil, 2016: USD nil). See Note 1.
17.8) At December 31, 2018, the market maker held 11 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 62.70 and they have contractual
lives of 10 years, with remaining lives up to five years. In
December 2018, Novartis entered into an agreement with
the market maker for its employee options to repurchase
a portion of the outstanding written call options that are
not exercised in exchange for treasury shares.
F-46
Notes to the Novartis Group consolidated financial statements
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% (2017: 0.3%)
2018
2017
25 283
22 957
285
92
539
87
25 660
23 583
– 3 190
– 359
22 470
23 224
All bonds are initially recorded at the amount of proceeds
received, net of transaction costs. They are subsequently
carried at amortized cost, with the difference between
the proceeds, net of transaction costs, and the amount
due on redemption being recognized as a charge to the
consolidated income statement over the period of the
relevant bond. Financial debts, including current finan-
cial debts, contain only general default covenants. The
Group is in compliance with these covenants.
The percentage of fixed-rate financial debt to total
financial debt was 80% at December 31, 2018, and 82%
at December 31, 2017.
The average interest rate on total financial debt in
2018 was 2.7% (2017: 2.6%).
The following table provides a breakdown of straight bonds:
Nominal
Currency amount
Issuance
year
Maturity
year
Issuer
2017
(USD
Issue price millions) millions)
2018
(USD
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%
0.500%
1.375%
1.700%
USD
USD
USD
USD
USD
USD
EUR
EUR
CHF
CHF
CHF
USD
USD
EUR
EUR
USD
USD
USD
EUR
EUR
EUR
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
750
750
750
2009
2010
2012
2012
2014
2014
2014
2014
2015
2015
2015
2015
2015
2016
2016
2017
2017
2017
2017
2017
2018
2018
2018
Total straight bonds
2019 Novartis Securities Investment Ltd., Hamilton, Bermuda
99.822% 3 000 2 997
2020 Novartis Capital Corporation, New York, United States
99.237%
998
997
2022 Novartis Capital Corporation, New York, United States
99.225% 1 493 1 491
2042 Novartis Capital Corporation, New York, United States
98.325%
489
489
2024 Novartis Capital Corporation, New York, United States
99.287% 2 137 2 134
2044 Novartis Capital Corporation, New York, United States
99.196% 1 825 1 824
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%
683
684
508
558
330
713
714
513
564
333
2025 Novartis Capital Corporation, New York, United States
99.010% 1 732 1 730
2045 Novartis Capital Corporation, New York, United States
98.029% 1 219 1 218
2023 Novartis Finance S.A., Luxembourg, Luxembourg
99.127% 1 419 1 480
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%
563
998
995
989
588
996
993
988
2021 Novartis Finance S.A., Luxembourg, Luxembourg
99.133% 1 421 1 480
2027 Novartis Finance S.A., Luxembourg, Luxembourg
2023 Novartis Finance S.A., Luxembourg, Luxembourg
2030 Novartis Finance S.A., Luxembourg, Luxembourg
2038 Novartis Finance S.A., Luxembourg, Luxembourg
715
99.874%
99.655%
99.957%
99.217%
684
853
856
849
25 283 22 957
F-47
Notes to the Novartis Group consolidated financial statements
The following tables provide a breakdown of total non-current financial debt, including current portion by maturity
and currency:
Breakdown by maturity:
(USD millions)
2018
2019
2020
2021
2022
2023
After 2023
Total
Breakdown by currency:
(USD millions)
US dollar (USD)
Euro (EUR)
Japanese yen (JPY)
Swiss franc (CHF)
Total
The following table shows the comparison of balance
sheet and fair value of total non-current financial debt,
including current portion:
(USD millions)
2018
Balance
sheet
2018
Fair
values
2017
Balance
sheet
2017
Fair
values
Straight bonds
25 283
25 438
22 957
23 835
Others
Total
377
377
626
626
25 660
25 815
23 583
24 461
The fair values of straight bonds are determined by
quoted market prices. Other financial debts are recorded
at notional amounts, which are a reasonable approxima-
tion of the fair values.
The following table shows the pledged assets:
2018
3 190
2 006
2 111
2 585
2 278
2017
359
3 173
1 997
2 194
2 485
1 480
13 490
11 895
25 660
23 583
2018
2017
15 964
15 945
8 028
5 695
(USD millions)
272
533
1 396
1 410
25 660
23 583
Total net book value of property,
plant & equipment pledged as
collateral for non-current financial debts
2018
2017
96
84
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
2018
2017
3 546
3 157
600
954
634
214
874
497
625
953
706
230
809
577
Total provisions and other non-current liabilities
7 319
7 057
1 Note 24 provides additional disclosures related to post-employment benefits.
2 Note 28 provides additional disclosures related to contingent consideration.
Novartis believes that its total provisions are adequate
based upon currently available information. However,
given the inherent difficulties in estimating liabilities in
this area, Novartis may incur additional costs beyond the
amounts provided. Management believes that such addi-
tional amounts, if any, would not be material to the
Group’s financial condition but could be material to the
results of operations or cash flows in a given period.
F-48
Notes to the Novartis Group consolidated financial statements
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
2018
761
– 48
– 21
7
– 7
692
– 58
2017
773
– 46
– 153
154
33
761
– 55
2016
871
– 75
1
– 24
773
– 65
634
706
708
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 continue surveillance at sites where the environmen-
tal 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 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 cleanup activities at the sites in which it
is a PRP. The provision takes into consideration the num-
ber of other PRPs at each site as well as the identity 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, 2018, is currently projected as follows:
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 2 000 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-
Expected
cash outflows
gencies.
(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
150
185
297
60
692
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
F-49
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 2018.
Alcon pending spin-off (see Note 30): In case of
approval of the Alcon spin-off, under the Separation and
Distribution Agreement Novartis will enter into with Alcon
in connection with the separation and the spin-off,
Novartis and Alcon will each agree, subject to certain
conditions and except to the extent otherwise described
below with respect to any matter, to indemnify the other
party and its directors, officers, employees and other
representatives against any pending or future liabilities
or claims that constitute either a Novartis Group liability,
in the case of Novartis, or an Alcon liability, in the case
of Alcon, under the terms of the Separation and Distri-
bution Agreement, based on whether such claim or lia-
Notes to the Novartis Group consolidated financial statements
bility relates to the Novartis or the Alcon business and
products.
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 Val-
turna) allegedly serving as mechanisms to provide kick-
backs to healthcare professionals (HCPs). It seeks dam-
ages, which according to the complaint are “substantial”,
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 assert-
ing similar claims. Neither government complaint in inter-
vention 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. A trial in the
S.D.N.Y. matter is currently scheduled in 2019. The claims
are being vigorously contested.
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, including potential off-label
promotion of certain products. The subpoena requests
the production of documents relating to marketing prac-
tices, including the remuneration of healthcare provid-
ers, in connection with surgical equipment and certain
Novartis products (Vigamox, Nevanac, Omnipred, Econo-
pred). ALI is cooperating with this investigation.
S.D.N.Y. Gilenya marketing practices investigation
and litigation
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 in a qui tam complaint, which continue to
be vigorously contested.
Government generic pricing antitrust investigations,
antitrust class actions
Since 2016, Sandoz Inc. received grand jury subpoenas
and a civil investigative demand and interrogatories from
the Antitrust and Civil Divisions of the US Department of
Justice (DoJ), and a subpoena and interrogatories from
the Attorney General of the State of Connecticut in con-
nection with alleged price fixing and market allocation
of generic drugs in the US market as well as alleged FCA
violations. The requests are for documents related to the
marketing and pricing of generic pharmaceutical prod-
ucts sold by Sandoz Inc. and its subsidiaries, including
Fougera Pharmaceuticals Inc. (Fougera), and related
communications with competitors. Sandoz Inc. is coop-
erating with these investigations, which it believes to be
part of a broader inquiry into industry practice.
Since the third quarter of 2016, Sandoz Inc. and Foug-
era have been sued alongside other generic pharmaceu-
tical companies in more than 20 individual and putative
class action complaints by direct and indirect purchas-
ers and Attorneys General for 45 states, the District of
Columbia and Puerto Rico. Plaintiffs claim that defen-
dants, including Sandoz, engaged in price fixing and mar-
ket allocation of generic drugs in the US market and seek
damages and injunctive relief. The actions contain prod-
uct-specific complaints as well as complaints alleging
the existence of an over-arching industry conspiracy, and
assert violations of federal and state antitrust laws as
well as consumer protection laws. The cases have been
consolidated for pretrial purposes in the USDC for the
Eastern District of Pennsylvania (E.D. Pa.) and the claims
are being vigorously contested.
Asia/Russia investigation
In 2017 and 2018, Alcon and Novartis Group companies,
as well as certain present and former executives and
associates of Alcon and Novartis, received document
requests and subpoenas from the DoJ and the US Secu-
rities and Exchange Commission (SEC) requesting infor-
mation concerning Alcon accounting, internal controls
and business practices in Asia and Russia, including rev-
enue recognition for surgical equipment and related
products and services, as well as relationships with third-
party distributors, both before and after Alcon became
part of the Novartis Group. Alcon and Novartis are coop-
erating with this investigation. In case of approval of the
Alcon spin-off, Novartis will indemnify Alcon in respect
of defined direct monetary liabilities relating to the cur-
rent scope of the ongoing investigation by the DoJ and
the SEC relating to certain business practices in Asia
and Russia and related accounting treatment.
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 1.3 billion in damages from Novartis and Roche enti-
ties based on the above allegations. In 2019, the French
Competition Authority issued a Statement of Objections
against Novartis entities alleging anti-competitive prac-
tices on the French market for anti-vascular endothelial
growth factor treatments for wet age-related macular
degeneration from 2008 to 2013. Novartis continues to
vigorously contest all claims in Italy and France. Also,
Novartis is challenging policies and regulations allowing
F-50
Notes to the Novartis Group consolidated financial statements
off-label/unlicensed use and reimbursement for eco-
nomic reasons in various countries, including in Italy, the
UK, and Brazil.
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 for alleged
manipulation of data in sub-analysis publications of the
Kyoto Heart Study regarding valsartan. The charges
against NPKK are subject to a maximum total fine of JPY
4 million. In 2018, the Tokyo High Court upheld a not-
guilty ruling of the Tokyo District Court for both the for-
mer NPKK employee and NPKK. A further appeal by the
Tokyo District Public Prosecutor Office remains pend-
ing.
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.
Greece investigation
Novartis is investigating allegations of potentially inap-
propriate economic benefits to HCPs, government offi-
cials and others in Greece. Novartis is providing informa-
tion to the Greek authorities investigating these
allegations, including the Greek Coordinating Body for
Inspection and Control and the Greek Body of Prosecu-
tion of Financial Crime, from which it received a sum-
mons in 2018. 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 alle-
gations and is cooperating with their investigation.
Antitrust class actions
Contact lenses
Since the first quarter of 2015, more than 50 class action
complaints have been filed in several courts across the
US naming as defendants contact-lens manufacturers,
including ALI, and alleging violations of federal antitrust
law as well as the antitrust, consumer protection and
unfair competition laws of various states, in connection
with the implementation of unilateral price policies by the
defendants in the sale of contact lenses. The cases have
been consolidated in the Middle District of Florida by the
Judicial Panel on Multidistrict Litigation and the claims
are being 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 Massachusetts (Sandoz, Momenta
Pharmaceuticals and Amphastar are currently engaged
in patent litigation concerning enoxaparin). The claims
are being vigorously contested.
Exforge
Since 2018, Novartis Group companies as well as other
pharmaceutical companies were sued by various direct
and indirect purchasers of Exforge in multiple US indi-
vidual and putative class action complaints. They claim
that Novartis made a reverse payment in the form of an
agreement not to launch an authorized generic, alleging
violations of federal antitrust law and state antitrust, con-
sumer protection and common laws and seeking dam-
ages as well as injunctive relief. The cases have been
consolidated in the S.D.N.Y. and the claims are being vig-
orously contested.
Product liability litigation
Reclast
NPC is a defendant in more than 20 US product liability
actions involving Reclast and alleging atypical femur
fracture injuries, all of which are in New Jersey state or
federal court and in California state court coordinated
with claims against other bisphosphonate manufactur-
ers. The claims are being vigorously contested.
Taxotere® (docetaxel)
Sandoz is a defendant in more than 2 000 US product
liability actions involving Taxotere® (docetaxel), an
oncology product, many of which have been transferred
to Multidistrict Litigation in the Eastern District of Loui-
siana. The complaints allege misleading marketing and
that Sanofi, as innovator, and several 505(b)(2) NDA hold-
ers (including Sandoz) failed to warn of the risk of per-
manent alopecia/hair loss. The claims are being vigor-
ously contested.
Amiodarone
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. The claims are being vigorously contested.
Valsartan
Since 2018, claims have been brought against Sandoz
and other pharmaceutical companies alleging injury from
carcinogenic impurities found in valsartan and valsartan
/ HCT film-coated tablets marketed or manufactured by
Sandoz, including several putative class actions in Can-
ada. The claims are being vigorously contested.
Other matters
Average Wholesale Price (AWP) litigation
Lawsuits have been brought, the latest in February 2016,
by various US state governmental entities and private
parties against various pharmaceutical companies,
including certain Sandoz entities and NPC, alleging that
they fraudulently overstated the AWP that is or has been
used by payors, including state Medicaid agencies, to
calculate reimbursements to healthcare providers. 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 for declaratory judgment in Penn-
F-51
Notes to the Novartis Group consolidated financial statements
sylvania, which is considered concluded for reporting
purposes. The claims are being vigorously contested.
IP matters
MIVS platform patent infringement litigation
In 2015, Johns Hopkins University filed a patent infringe-
ment lawsuit against certain Alcon entities alleging that
the use of certain Alcon surgical products, principally by
third parties, infringes a patent directed to certain meth-
ods of ocular surgery. The claims are being vigorously
contested.
Concluded legal matters
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.
In 2018, NPC agreed to a settlement in principle to pay
USD 23 million to resolve the investigation into potential
violations of federal health care laws, including the
Anti-Kickback Statute and FCA. This settlement is sub-
ject to mutually agreeable terms and finalization of the
documentation. Novartis considers this matter con-
cluded for the purpose of reporting legal proceedings.
Gleevec
In 2015 and 2016, Novartis Group companies were sued
in putative antitrust class actions in the D. Mass. alleg-
ing delayed generic entry of Gleevec and seeking dam-
ages on behalf of direct and indirect purchasers of
Gleevec. The motion to dismiss those actions was
granted and was finally affirmed on appeal by the US
Court of Appeals for the First Circuit in 2018. A similar
class action that was filed in 2018 in E.D. Pa. on behalf
of direct purchasers of Gleevec was voluntarily dis-
missed in the same year. The matters are therefore con-
cluded.
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. In
2018, the remaining case was resolved through settle-
ment, the payment of which was not material to Novartis.
Eye drop products consumer class actions
Plaintiffs alleged that Alcon’s and Sandoz’s eye drop
products for glaucoma 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 consumers. In 2018, the remaining cases
against Alcon and Sandoz in New Jersey and Missouri
were voluntarily dismissed with prejudice by plaintiffs, in
exchange for defendants’ agreement not to pursue stat-
utory costs, and the Massachusetts case was finally dis-
missed upon appeal by the Court of Appeals for the First
Circuit.
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
2018
351
– 118
– 107
220
– 6
340
2017
395
– 69
– 70
93
2
351
2016
1 194
– 811
– 239
243
8
395
Less current portion
– 126
– 121
– 131
Non-current product
liabilities, governmental
investigations and other
legal matters provisions
at December 31
214
230
264
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.
F-52
Notes to the Novartis Group consolidated financial statements
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
2018
2017
1 778
1 822
701
3 951
3 190
58
692
2 328
359
107
Total current financial debt and derivative
financial instruments
9 678
5 308
1 Weighted average interest rate 0.5% (2017: 0.5%)
2 Weighted average interest rate 9.6% (2017: 7.0%)
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 under
“Liquidity risk” in Note 28.
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
Accrued interests on financial debt
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
Commitment for repurchase of own shares 3
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.
3 Note 17 provides additional disclosures related to commitment for repurchase of own shares.
Provisions are based upon management’s best estimate
and adjusted for actual experience. Such adjustments
to the historic estimates have not been material.
2018
2017
528
507
970
651
156
660
153
977
586
145
5 262
2 527
4 672
2 327
58
236
126
273
33
284
673
55
305
121
261
44
897
12 284
11 203
F-53
Notes to the Novartis Group consolidated financial statements
Provisions for deductions from revenue
The following table shows the movement of the provisions for deductions from revenue:
Income statement charge
(USD millions)
2018
Revenue
deductions
Effect of
currency
translation
provisions at and business
January 1 combinations
Payments/ Adjustments
utilizations of prior years Current year
Change in
provisions
offset against
Revenue
deductions
gross trade provisions at
receivables December 31
US-specific healthcare plans and program rebates
1 590
– 4 158
Non-US-specific healthcare plans and program rebates 1 356
– 78
– 2 182
Non-healthcare plans and program-related rebates,
returns and other deductions
Total 2018
2017
1 726
4 672
– 51
– 12 227
– 129
– 18 567
– 90
83
– 91
– 98
4 541
2 555
11 956
19 052
US-specific healthcare plans and program rebates
1 461
– 3 684
Non-US-specific healthcare plans and program rebates 1 020
131
– 1 954
– 62
80
3 875
2 186
Non-healthcare plans and program-related rebates,
returns and other deductions
Total 2017
2016
1 702
4 183
65
– 11 814
– 127
12 045
196
– 17 452
– 109
18 106
US-specific healthcare plans and program rebates
1 165
– 3 203
Non-US-specific healthcare plans and program rebates 1 024
– 31
– 1 844
7
– 26
3 492
1 883
Non-healthcare plans and program-related rebates,
returns and other deductions
Total 2016
1 601
3 790
– 19
– 11 142
– 117
11 383
– 50
– 16 189
– 136
16 758
– 109
441
332
– 107
– 145
– 252
14
– 4
10
1 883
1 625
1 754
5 262
1 590
1 356
1 726
4 672
1 461
1 020
1 702
4 183
Restructuring provisions movements
(USD millions)
January 1
Additions
Cash payments
Releases
Transfers
Currency translation effects
December 31
2018
153
534
– 145
– 33
– 2
507
2017
222
194
– 200
– 64
– 7
8
153
2016
260
343
– 260
– 66
– 76
21
222
In 2018, additions to provisions of USD 534 million were
mainly related to the following reorganizations:
• The Innovative Medicines Division’s Oncology business
unit initiative to streamline its organizational structure.
The objective was to enhance agility and efficiency,
resulting in an acceleration of operational execution.
In addition, a program to reorganize the Japanese busi-
ness model was launched. Region Europe transformed
its approach to market in light of the changing product
portfolio. The objective is to speed up patient access.
• Novartis Business Services launched an initiative to
reorganize its organizational structure to achieve cost
efficiencies by shifting activities to global service cen-
ters.
• Group-wide initiatives to streamline Novartis Technical
Operations and implement new technologies, mainly
in the Innovative Medicines Division but also in the
Sandoz Division, continued.
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
businesses after the Ophthalmic Pharmaceuticals
business 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
F-54
Notes to the Novartis Group consolidated financial statements
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 the
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 organiza-
tional structure, including the consolidation of manu-
facturing sites and support services.
22. Details to the consolidated statements of cash
flows
22.1) Reversal of non-cash items and other adjustments
(USD millions)
Depreciation, amortization and impairments on:
Property, plant and equipment
Intangible assets
Financial assets 1
Non-cash change in provisions and other non-current liabilities
Gains on disposal and other adjustments on property, plant and equipment; intangible assets;
financial assets; and other non-current assets, net
Equity-settled compensation expense
Income from associated companies 2
Taxes
Net financial expense
Total
2018
2017
2016
2 021
4 871
– 11
876
1 677
4 399
256
160
– 900
– 1 043
759
683
– 6 438
– 1 108
1 221
1 296
772
738
3 171
7 058
1 591
4 452
132
956
– 935
671
– 703
1 119
1 154
8 437
1 Includes fair value adjustments
2 2018 includes a reversal of a pre-tax gain (USD 5.8 billion) recognized from the divestment of the investment in GSK Consumer Healthcare Holdings Ltd. (see Note 2). The net cash
proceed of USD 13.0 billion from the divestment is included in the consolidated statements of cash flows in line “Divestments and acquisitions of interests in associated companies,
net.”
22.2) Cash flows from changes in working capital and other operating items included in
the net cash flows from operating activities
(USD millions)
(Increase) in inventories
(Increase) in trade receivables
Increase/(decrease) in trade payables
Change in other current assets
Change in other current liabilities
Other adjustments, net
Total
2018
– 533
– 569
309
403
891
– 2
499
2017
– 247
– 204
58
– 180
816
1
244
2016
– 235
– 229
– 587
460
505
9
– 77
22.3) Cash flows arising from divestments and acquisitions of interests in associated
companies
In 2018, divestments and acquisitions of interests in associated companies included USD 12 855 million net of taxes
(USD 12 994 million before taxes) from the divestment of the investment in GSK Consumer Healthcare Holdings
Ltd. (see Note 2).
F-55
Notes to the Novartis Group consolidated financial statements
22.4) 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.
(USD millions)
Net assets recognized as a result of business combinations
Fair value of previously held equity interests
Receivables and payables contingent consideration, net 1
Other payments and deferred consideration, net
Cash flows used for acquisitions of businesses
Cash flows from divestments of businesses 2
Note
2018
23
– 13 946
2017
– 999
41
– 35
206
– 36
– 13 940
– 829
18
45
2016
– 869
64
84
– 44
– 765
Cash flows used for acquisitions and divestments of businesses, net
– 13 922
– 784
– 765
1 The contingent consideration of the 2016 Transcend Medical, Inc. acquisition amounted to USD 92 million. Of this amount, USD 60 million was paid in 2016.
2 In 2018, USD 18 million represents the net cash inflows from previous years divestments. In 2017, the USD 45 million primarily relates to the net identifiable assets of a divested
business of USD 48 million, comprised of non-current assets of USD 29 million, current assets of USD 34 million partly offset by current liabilities of USD 15 million.
Notes 2 and 23 provide further information regarding
acquisitions and divestments of businesses. All acquisi-
tions were for cash.
22.5) Cash flows used in investing activities from discontinued operations
In 2015, Novartis completed a series of portfolio trans-
formation transactions, including the divestments of its
Animal Health and Vaccines businesses. In addition, a
combined consumer healthcare business was created
through the combination of the Novartis OTC and
GlaxoSmithKline (GSK) Consumer Healthcare busi-
nesses. On March 2, 2015, a new entity, GlaxoSmithKline
Consumer Healthcare Holdings Ltd. (GSK Consumer
Healthcare), was formed via the contribution of busi-
nesses from both Novartis and GSK. Novartis had a
36.5% interest in the newly created entity. To reflect
these transactions, Novartis reported the Group’s finan-
cial results in 2015 as “continuing operations” and “dis-
continued operations.” The net cash outflows used in
discontinued operations in the years 2017 (USD 140 mil-
lion) and 2016 (USD 748 million) includes portfolio trans-
formation transactional payments related to the divested
businesses. The Group’s interest in GSK Consumer
Healthcare was sold to GSK on June 1, 2018 (see Notes
2 and 4).
22.6) Reconciliation of liabilities arising from financing activities
(USD millions)
January 1, 2018
Increase in non-current financial debts
Repayment of non-current financial debts
Change in current financial debts
Impact of business combinations
Changes in fair values, and other changes
Amortization of bonds discount
Currency translation effects
Current portion of non-current financial debt
December 31, 2018
Current
financial
debts and
derivative
financial
instruments
Non-current
financial
debts
Total
23 224
5 308
28 532
2 856
10
5
27
– 366
1 681
4
– 48
2
2 856
– 366
1 681
14
– 43
29
– 462
– 93
– 555
– 3 190
3 190
22 470
9 678
32 148
F-56
Notes to the Novartis Group consolidated financial statements
(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
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
23. Acquisitions of businesses
Fair value of assets and liabilities arising from acquisitions
(USD millions)
Property, plant and equipment
Currently marketed products
Acquired research and development
Other intangible assets
Deferred tax assets
Financial and other assets
Inventories
Trade receivables and other current assets
Cash and cash equivalents
Deferred tax liabilities
Current and non-current financial debts
Trade payables and other liabilities
Net identifiable assets acquired
Acquired liquidity
Non-controlling interests
Goodwill
Net assets recognized as a result of business combinations
2017
2016
10 224
1 223
8
39
2018
137
2 531
1
381
19
20
90
451
690
4
1
1
1 112
20
– 2 874
– 325
– 372
– 14
– 627
11 000
– 1 112
– 26
4 084
13 946
– 1
925
– 20
94
999
814
– 1
56
869
Note 2 details significant acquisitions of businesses, spe-
cifically, AAA, AveXis and Endocyte in 2018, Ziarco and
Encore in 2017, and Transcend and Reprixys in 2016. The
goodwill arising out of these acquisitions is attributable
to the growth platform, the assembled workforce, and
the accounting for deferred tax liabilities on the acquired
assets. No goodwill from 2018 and 2017 is tax-deduct-
ible. Goodwill of USD 18 million from 2016 is tax deduct-
ible.
F-57
Notes to the Novartis Group consolidated financial statements
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,
which represent 80%of the Group’s total DBO for
post-employment benefit plans, 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 pen-
sion, 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.
Furthermore, in certain countries, associates are cov-
ered under other post-employment benefit plans and
post-retirement medical plans.
In the US, other post-employment benefit plans con-
sist primarily of post-employment healthcare benefits,
which have been closed to new members since 2015.
Part of the costs of these plans is reimbursable under
the Medicare Prescription Drug, Improvement, and Mod-
ernization Act of 2003. There is no statutory funding
requirement for these plans. The Group is funding these
plans to the extent that it is tax efficient.
F-58
Notes to the Novartis Group consolidated financial statements
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, 2018 and 2017:
(USD millions)
Benefit obligation at January 1
Current service cost
Interest cost
Past service costs and settlements
Administrative expenses
Remeasurement (gains)/losses arising from changes in financial assumptions
Remeasurement losses/(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
2018
2017
2018
23 210
23 614
1 115
2017
1 158
378
321
– 1
26
– 567
5
264
422
330
– 1 226
27
11
– 26
47
– 374
1 138
– 1 263
– 1 300
169
11
207
– 34
34
39
– 31
1
– 32
– 7
– 46
34
44
– 10
32
– 9
– 87
5
– 51
– 1
22 179
23 210
1 073
1 115
20 275
19 225
249
– 805
– 310
520
169
– 3
236
1 429
909
579
207
– 995
162
5
– 8
153
5
12
6
43
– 1 263
– 1 300
– 46
– 51
6
– 15
18 838
20 275
119
– 3 341
– 2 935
– 954
162
– 953
– 89
25
– 4
– 68
– 54
– 30
– 5
– 89
Net liability in the balance sheet at December 31
– 3 409
– 3 024
– 954
– 953
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
F-59
Pension plans
Other post-employment
benefit plans
2018
2017
2018
2017
– 3 024
– 4 443
– 953
– 1 005
– 378
– 422
– 76
– 26
– 2
– 507
64
520
– 5
25
– 99
– 27
231
1 397
– 229
579
19
– 30
– 34
– 34
– 34
– 39
54
7
6
10
76
– 5
43
1
– 3 409
– 3 024
– 954
– 953
137
133
– 3 546
– 3 157
– 954
– 953
Notes to the Novartis Group consolidated financial statements
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
14 263
3 348
4 568
22 179
14 606
3 788
4 816
23 210
2018
2017
Thereof unfunded
By type of member
Active
Deferred pensioners
Pensioners
649
491
1 140
728
499
1 227
5 618
653
1 616
7 887
5 627
796
1 646
8 069
1 131
1 531
2 662
1 258
1 646
2 904
8 645
1 564
1 421
11 630
8 979
1 734
1 524
12 237
Fair value of plan assets at December 31
13 470
2 160
3 208
18 838
14 445
2 400
3 430
20 275
Funded status
– 793
– 1 188
– 1 360
– 3 341
– 161
– 1 388
– 1 386
– 2 935
The following table shows a breakdown of the DBO for other post-employment benefit plans by geography and
type of member, and the breakdown of plan assets into the geographical locations in which they are held:
(USD millions)
Benefit obligation at December 31
Thereof unfunded
By type of member
Active
Deferred pensioners
Pensioners
Fair value of plan assets at December 31
United
States
1 001
882
270
18
713
119
2018
Rest of
the world
2017
Total
United
States
Rest of
the world
72
72
25
0
47
0
1 073
1 036
954
874
295
18
760
119
310
20
706
162
79
79
26
0
53
0
Total
1 115
953
336
20
759
162
Funded status
– 882
– 72
– 954
– 874
– 79
– 953
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
2018
2017
2016
2018
2017
2016
1.6%
0.4%
2.8%
0.8%
22
24
1.5%
0.5%
2.8%
0.6%
22
24
1.4%
0.4%
2.2%
0.5%
22
24
4.4%
3.7%
4.2%
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-
F-60
Notes to the Novartis Group consolidated financial statements
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:
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, pri-
vate equity, infrastructure and commodity investments,
usually have a quoted market price or a regularly updated
net asset value.
The strategic allocation of assets of the different pen-
sion plans is determined with the objective of achieving
an investment return that, together with the contributions
paid by the Group and its associates, is sufficient to main-
tain reasonable control over the various funding risks of
the plans. Based upon the market and economic envi-
ronments, actual asset allocations may temporarily be
permitted to deviate from policy targets. The asset allo-
cation currently includes investments in shares of
Novartis AG 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,
2017
2018
11.0
0.9
11.0
0.9
Change in 2018 year-end
defined benefit pension obligation
(USD millions)
25 basis point increase in discount rate
25 basis point decrease in discount rate
1 year increase in life expectancy
25 basis point increase in rate of pension increase
25 basis point decrease in rate of pension increase
25 basis point increase of interest on savings account
25 basis point decrease of interest on savings account
25 basis point increase in rate of salary increase
25 basis point decrease in rate of salary increase
The healthcare cost trend rate assumptions used for
other post- employment benefits are as follows:
– 718
762
803
502
– 133
56
– 55
46
– 47
The weighted average duration of the defined benefit
obligation is 14.6 years (2017: 14.6 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 predetermined 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, 2018, were 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
2018
2017
2016
(USD millions)
Pension plans
7.0% 6.5% 7.0%
Novartis Group contributions
2019 (estimated)
4.5% 4.5% 5.0%
Expected future benefit payments
2028 2025 2022
The following table shows the weighted average plan
asset allocation of funded defined benefit pension plans
at December 31, 2018 and 2017:
2019
2020
2021
2022
2023
2024–2028
Other post-
employment
benefit plans
65
66
69
71
73
74
366
436
1 146
1 135
1 130
1 119
1 109
5 444
(as a percentage)
Equity securities
Debt securities
Real estate
Alternative investments
Cash and other investments
Total
Pension plans
Long-term Long-term
target
minimum maximum
target
15
20
5
0
0
40
60
20
20
15
2018
2017
28
35
17
16
4
31
35
15
15
4
Defined contribution plans
In many subsidiaries, associates are covered by defined
contribution plans. Contributions charged to the consol-
idated income statement for the defined contribution
plans were:
100
100
(USD millions)
2018
2017
2016
Contributions for defined contribution plans
547
406
338
F-61
Notes to the Novartis Group consolidated financial statements
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)
2018
2017
2016
Expense related to equity-based
participation plans
1 011
924
Liabilities arising from equity-based
payment transactions
273
261
846
199
Equity-based participation plans can be separated into
the following plans:
Annual Incentive
The Annual Incentive for the Novartis Group CEO and
other Executive Committee members is paid 50% in cash
and 50% in Novartis restricted shares (RSs) or restricted
share units (RSUs). For the Novartis Top Leaders (NTLs),
the Annual Incentive is paid 70% in cash and 30% in RSs
or RSUs. Cash is paid out during February or March in
the year following the end of the performance period,
and the shares are granted during January in the year
following the end of the performance period.
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,
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 eli-
gible 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 onward, the NTLs are also no lon-
ger eligible to participate in the share savings plans.
Share savings plans
Novartis equity plan “Select”
Associates in certain countries and certain key execu-
tives worldwide are encouraged to invest their Annual
Incentive, and in the United Kingdom specifically, also
their base salary in a share savings plan.
Under the share savings plan, participants may elect
to receive their relevant compensation 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 participant, Novartis matches their invest-
ments 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.
• In the United Kingdom, associates can invest up to 10%
of their monthly salary in shares (up to a maximum of
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 10th anniver-
sary from the grant date. Each tradable share option enti-
tles the holder to purchase after vesting (and before the
10th anniversary from the grant date) one Novartis share
at a stated exercise price that equals the closing market
price of the underlying share at the grant date.
Options under Novartis equity plan “Select”
outside North America
The following table shows the activity associated with
the share options during the period. The weighted aver-
F-62
Notes to the Novartis Group consolidated financial statements
age prices in the table below are translated from Swiss
francs into USD at historical rates.
Long-Term Performance Plan
price (USD)
Options outstanding
at January 1
2018
2017
Weighted
average
Weighted
average
Options exercise Options exercise
(millions) price (USD)
(millions)
7.4
59.5
9.5
59.4
Sold or exercised
– 1.8
58.2
– 2.1
59.2
Outstanding at December 31
5.6
59.9
7.4
59.5
Exercisable at December 31
5.6
59.9
7.4
59.5
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 73.1.
The following table summarizes information about
share options outstanding at December 31, 2018:
Options outstanding
Total/
Weighted
averagee
Number outstanding (millions)
0.3 0.9 0.8 1.3 2.3 5.6
Remaining contractual life (years)
0
1
2
3
4
2
Exercise price (USD)
46.7 54.5 57.0 57.6 66.0 59.9
Options under Novartis equity plan “Select” for
North America
The following table shows the activity associated with
the American Depositary Receipt (ADR) options during
the period:
price (USD)
Options outstanding
at January 1
2018
2017
Weighted
ADR average
Weighted
ADR average
options exercise options exercise
(millions) price (USD)
(millions)
20.3
59.9
25.9
59.9
Sold or exercised
– 5.1
57.4
– 5.6
59.9
Outstanding at December 31
15.2
60.7
20.3
59.9
Exercisable at December 31
15.2
60.7
20.3
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 86.7.
The following table summarizes information about
ADR options outstanding at December 31, 2018:
ADR options outstanding
Total/
Weighted
averagee
Number outstanding (millions)
0.5 1.7 1.8 4.5 6.7 15.2
Remaining contractual life (years)
0
1
2
3
4
3
Exercise price (USD)
46.4 53.7 57.1 58.3 66.1 60.7
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 2018 grant, the target
incentive is 200% of base salary for the Novartis Group
CEO, and ranges from 130% to 170% of base salary for
other Executive Committee members. For the NTLs, the
target incentive ranges from 20% to 160% of base salary.
The LTPP awards are based on three-year perfor-
mance 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 Group-wide innovation targets
are set at the beginning of the cycle, representing the
most important research and development project mile-
stones across the Group. The weighting of this measure
is 25%. At the end of the performance period, the
Research & Development Committee assists the Board
of Directors and the Compensation Committee in eval-
uating performance against the innovation targets at the
end of the cycle.
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 Executive
Committee members and NTLs. For the 2018 grant, the
target incentive is 125% of base compensation for the
Novartis Group CEO, and ranges from 30% to 80% for
other Executive Committee members. For the NTLs, the
target incentive range is from 10% to 40% of base com-
pensation. The LTRPP is based on a ranking of the Novartis
total shareholder return (TSR) relative to a global health-
care peer group of twelve companies until 2016, and 15
companies from 2017, over rolling three-year performance
periods.
TSR for Novartis and the peer companies is calcu-
lated as the change in the company share price, which
is translated to USD at the respective exchange rate,
including the reinvestment return of dividends, over the
three-year performance period. The calculation is based
on Bloomberg standard published TSR data, which is pub-
licly available. The position of Novartis 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 performance
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.
F-63
Notes to the Novartis Group consolidated financial statements
Worldwide, associates at different levels in the orga-
nization were awarded RSs and RSUs in 2018.
In addition, in 2018, Board members received
unrestricted shares as part of their regular compensation.
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 to the organization. These
grants are consistent with market practice and the
Novartis philosophy to attract, retain and motivate best-
in-class talents around the world.
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
23.9
80.6
1 926
21.0
89.5
1 880
2018
Number
Weighted
Fair value at
average fair
of shares value at grant grant date in
date in USD USD millions
in millions
2017
Weighted
Number
average fair Fair value at
of shares value at grant grant date in
date in USD USD millions
in 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
4.1
3.9
2.1
1.5
0.3
1.2
– 10.7
– 1.9
25.7
83.9
84.9
77.8
79.7
85.8
52.0
77.9
90.2
76.4
77.1
109
348
303
167
129
16
93
1.3
4.5
4.5
2.0
1.4
0.4
1.3
– 965
– 145
1 981
– 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
– 837
– 145
1 926
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 SSARs expire on their 10th anniver-
sary. The last grant was made in 2009, so that only a
small residual number of instruments is outstanding as
per the end of December 2018.
F-64
Notes to the Novartis Group consolidated financial statements
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 (see
Note 4).
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 2018,
Lucentis sales of USD 2.0 billion (2017: USD 1.9 billion,
2016: USD 1.8 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 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 2018, Novartis recognized
total sales of Xolair of USD 1 billion (2017: USD 920 mil-
lion, 2016: USD 835 million), including sales to them for
the United States market.
The net income for royalties, cost sharing and profit
sharing arising out of the Lucentis and Xolair agreements
with Genentech/Roche totaled USD 34 million in 2018
(net expense in 2017: USD 33 million, net expense in
2016: USD 217 million).
Furthermore, Novartis has several patent license,
supply and distribution agreements with Roche.
Executive Officers and Non-Executive Directors compensation
During 2018, there were 17 Executive Committee
members (“Executive Officers”), including those who
stepped down during the year (11 members in 2017 and
14 members in 2016, also including those who stepped
down).
The total compensation for members of the Executive Committee and the 13 Non-Executive Directors (13 in 2017
and 2016), using the Group’s accounting policies for equity-based compensation and pension benefits was as fol-
lows:
(USD millions)
Cash and other compensation
Post-employment benefits
Equity-based compensation
Total
Executive Officers
Non-Executive Directors
Total
2018
22.5
2.5
42.5
67.5
2017
18.4
2.0
49.9
70.3
2016
20.8
2.2
46.2
69.2
2018
4.0
2017
2016
4.0
4.0
4.8
8.8
4.8
8.8
4.6
8.6
2018
26.5
2.5
47.3
76.3
2017
22.4
2.0
54.7
79.1
2016
24.8
2.2
50.8
77.8
During 2018, there was a decrease in the IFRS compen-
sation expense for Executive Officers mainly due to the
higher pro-rata accelerated vesting of equity compen-
sation in 2017, required by IFRS, in accordance with the
plan rules. This was partially offset by the cash portion
of buyout payments for new Executive Officers. The
decrease in the IFRS compensation expense for Non-Ex-
ecutive Directors was due to one less Non-Executive
Director following the 2018 Annual General Meeting.
During 2017, there was an increase in the IFRS com-
pensation expense for Executive Officers, mainly due to
the pro-rata accelerated vesting of equity-based com-
pensation, required by IFRS, for an ECN member who
stepped down on December 31, 2017, in accordance with
the plan rules. This was partially offset by the reduction
in the number of Executive Officers compared to 2016.
The increase in the IFRS compensation expense for
Non-Executive Directors was due to one additional
Non-Executive Director appointed at the 2017 Annual
General Meeting.
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
F-65
Notes to the Novartis Group consolidated financial statements
Compensation in Stock Exchange Listed Companies are
shown in the compensation report of the Group.
Transactions with former members of the Board of
Directors
During 2018, 2017 and 2016, the following payments (or
waivers of claims) were made to former Board members
or to “persons closely” linked to them:
Currency
2018
2017
2016
Prof. Dr. Brody
CHF
Prof. Dr. Zinkernagel CHF
0
0
0
0
25 000
50 000
Dr. Krauer
Dr. Vasella
CHF
CHF
USD
60 000
60 000
60 000
18 228
26 279
0
0
0
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 2018 and 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.
Dr. Daniel Vasella, Honorary Chairman, was paid CHF
18 228 in 2018, and CHF 26 279 in 2017, for reimburs-
able costs under his agreement with the Company. In
2016, Dr. Daniel Vasella received the contractual mini-
mum compensation under an agreement that 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 min-
imum fee of USD 250 000. This amount was in line with
compensation practices at other large companies when
retired chairmen or CEOs were retained in consulting
agreements after leaving the board of directors.
Novartis Pension Fund
A Group subsidiary has provided an uncommitted over-
night credit facility to the Novartis Pension Fund, Swit-
zerland, for up to USD 500 million with interest at the US
Federal Funds Rate. This credit facility was not utilized
during the year and there are no outstanding balances.
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, 2018, the Group’s commitments with
respect to these leases, including estimated payment
dates, were as follows:
(USD millions)
2019
2020
2021
2022
2023
Thereafter
Total
Expense of current year
2018
372
275
225
195
182
2 363
3 612
383
Research and development
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, 2018, the Group’s
commitments to make payments under those agree-
ments, and their estimated timing, were as follows:
(USD millions)
2019
2020
2021
2022
2023
Thereafter
Total
2018
228
850
782
604
1 059
894
4 417
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. For disclosure
of Property, Plant end Equipment purchase commit-
ments see Note 9.
Contingencies
Group companies have to observe the laws, government
orders and regulations of the country in which they
operate.
F-66
Notes to the Novartis Group consolidated financial statements
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; and 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
lead to (or arise from) litigation. These factors have con-
tributed 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.
F-67
Notes to the Novartis Group consolidated financial statements
28. Financial instruments – additional disclosures
(USD millions)
Cash and cash equivalents
Financial assets – measured at fair value through other comprehensive income
Marketable securities
Debt securities
Fund investments
Total marketable securities – fair value through other comprehensive income
Total marketable securities – available-for-sale marketable securities
Long-term financial investments
Equity securities
Debt securities
Fund investments
Total long-term financial investments – fair value through other comprehensive income
Total available-for-sale long-term financial investments
Note
15
2018 1
2017 1
13 271
8 860
15
15
12
12
12
325
325
802
31
833
328
34
362
1 073
36
166
1 275
Total financial assets – measured at fair value through other comprehensive income
1 158
1 637
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 and short term investments 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
Equity securities
Fund investments
Associated companies at fair value through profit and loss
Derivative financial instruments
Contingent consideration receivables
14/16
11 024
10 650
15
15
12
12
2 087
512
1
125
574
13 635
11 350
12
12/15
15
12/16
353
286
145
130
396
216
31
844
Total financial assets – measured at fair value through the consolidated income statement
1 310
1 091
Total financial assets
29 374
22 938
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 and commitment for repurchase of own shares 2
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.
2 Note 17 and Note 21 provide additional disclosures related to commitment for repurchase of own shares.
F-68
20
20
20
20
18
18
18
18
1 778
701
3 951
3 190
9 620
1 822
692
2 328
359
5 201
25 283
22 957
285
92
539
87
– 3 190
– 359
22 470
23 224
5 840
5 169
37 930
33 594
20
917
58
975
924
107
1 031
38 905
34 625
Notes to the Novartis Group consolidated financial statements
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, 2018 and 2017. 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, 2018 and 2017.
(USD millions)
Currency-related instruments
Contract or underlying
principal amount
Positive fair values
Negative fair values
2018
2017
2018
2017
2018
2017
Forward foreign exchange rate contracts
10 823
8 410
130
Total derivative financial instruments included in
marketable securities and in current financial debts
10 823
8 410
130
31
31
– 58
– 107
– 58
– 107
The following table shows by currency contract or underlying principal amount the derivative financial instruments
at December 31, 2018 and 2017:
(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
2018
USD
Other
Total
2 989
2 989
6 558
6 558
1 276
10 823
1 276
10 823
EUR
2017
USD
Other
Total
2 768
2 768
4 361
4 361
1 281
1 281
8 410
8 410
Derivative financial instruments effective for hedge
accounting purposes
At the end of 2018 and 2017, 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.
F-69
Notes to the Novartis Group consolidated financial statements
2 087
2 087
Level 1
Level 2
2018
Valued at
Level 3 amortized cost
302
35
337
337
698
698
23
23
130
153
– 58
– 58
12
2 099
512
512
488
251
396
1 135
145
– 907
– 10
– 917
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
Total
325
35
360
130
12
2 589
1 186
251
396
512
2 345
145
0
– 907
– 10
– 58
– 975
Total
328
34
362
125
31
1
519
1 109
166
394
574
2 243
216
450
– 852
– 72
– 107
– 1 031
(USD millions)
Financial assets
Debt securities
Fund investments
Total marketable securities
Time deposits and short term investments with original maturity more than 90 days
Derivative financial instruments
Accrued interest on debt securities, time deposits and short term investments
Total marketable securities, time deposits and derivative financial instruments
Long term 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
Contingent consideration receivables short-term
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.
F-70
Notes to the Novartis Group consolidated financial statements
The change in carrying values associated with Level 3 financial instruments using significant unobservable inputs
during the year ended December 31 is set forth below:
2018
(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
Associated
companies at
fair value through
Fund
profit and loss investments investments receivables
Long term Contingent Contingent
financial consideration consideration
payables
Other
financial
liabilities
188
166
437
844
– 852
– 72
93
36
213
– 22
24
22
– 5
– 10
123
– 6
– 30
– 25
– 100
– 182
– 484
11
62
Contingent consideration payable related to disposal group held for sale
3
Reclassification
December 31
– 39
145
251
– 32
488
396
– 907
– 10
Total of fair value gains and losses recognized
in the consolidated income statement for assets
and liabilities held at December 31, 2018
– 22
93
– 5
36
113
0
(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
2017
Available-
Associated
companies at
fair value through
Fund
profit and loss investments investments receivables
for-sale Contingent Contingent
financial consideration consideration
payables
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
During 2018, there were several individually non-signifi-
cant transfers of financial investments from Level 3 to
Level 1 for USD 78 million (2017: USD 73 million), mainly
due to initial public offerings of the invested companies.
Realized gains and losses associated with Level 3
marketable securities are recorded in the consolidated
income statement under “Other financial income and
expense,” and realized gains and losses associated with
Level 3 long-term financial investments measured at fair
value through the consolidated income statement are
recorded in the consolidated income statement under
“Other income” or “Other expense,” respectively. Real-
ized gains and losses associated with Level 3 long-term
financial investments measured at fair value through
other comprehensive income are not recycled through
the consolidated income statement but reclassified to
retained earnings instead.
During the year, the net loss and net gain recorded
on equity securities and fund investments at fair value
through the consolidated income statement is USD 56
million and USD 93 million, respectively.
If the pricing parameters for the Level 3 input were
to change for associated companies at fair value through
profit and loss, fund investments and financial invest-
F-71
Notes to the Novartis Group consolidated financial statements
ments by 10% positively or negatively, this would change
the amounts recorded in the 2018 consolidated state-
ment of comprehensive income by USD 88 million.
For the determination of the fair value of a contingent
consideration, various unobservable inputs are used. A
change in these inputs might result in a significantly
higher or lower fair value measurement. The 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 2018 consolidated income
statement by USD 341 million and USD 330 million,
respectively.
Equity securities measured at fair
value through other comprehensive
income
Equity securities held as strategic investments, typically
held outside the Novartis Venture Fund, are generally
designated at date of acquisition as financial assets val-
ued at fair value through other comprehensive income
with no subsequent recycling through profit and loss.
These are made up of individually non-significant invest-
ments. At December 31, 2018, the Group holds 41 non-
listed equity securities and 26 listed equity securities in
this category with the following fair values:
(USD millions)
Listed equity securities
Non-listed equity securities
Total equity securities
2018 1
597
205
802
1 These investments were classified as available-for-sale in 2017, prior to the adoption
of IFRS 9 Financial Instruments, see Note 1.
There were no dividends recognized during 2018 from
these equity securities. In 2018, equity securities that
were no longer considered strategic, with a fair value of
USD 21 million, were sold, and the USD 16 million gain
was transferred from other comprehensive income to
retained earnings during 2018 (see Note 8.)
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, 2018, and at December 31, 2017, 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-
F-72
Notes to the Novartis Group consolidated financial statements
rency. As of December 31, 2018, long-term financial debt
with a carrying amount of EUR 1.8 billion (USD 2.1 billion)
(2017: USD 2.2 billion) has been designated as a hedge
instrument. During 2018, USD 95 million (unrealized loss
in 2017: USD 237 million) of unrealized income was rec-
ognized in other comprehensive income and accumu-
lated in currency translation effects in relation with this
net investment hedge. The hedge remained effective
since inception, and no amount was recognized in the
consolidated income statement in 2018 and 2017. During
2016, the Group did not apply net investment hedge
accounting.
The Group’s largest customer accounted for approx-
imately 16% of net sales, and the second largest and third
largest customers accounted for 13% and 7% of net
sales, respectively (2017: 17%, 12% and 7%, respectively;
2016: 16%, 12% and 6%, 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 12%, 10% and 6%, respectively, of the Group’s trade
receivables at December 31, 2018 (2017: 14%, 9% and
5%, respectively). There is no other significant concen-
tration of customer credit risk.
Commodity price risk
The Group has only a very limited exposure to price risk
related to anticipated purchases of certain commodities
used as raw materials by the Group’s businesses. A
change in those prices may alter the gross margin of a
specific business, but generally by not more than 10% of
the margin and thus below the Group’s risk management
tolerance levels. Accordingly, the Group does not enter
into significant commodity futures, forward and option
contracts to manage fluctuations in prices of anticipated
purchases.
Interest rate risk
The Group addresses its net exposure to interest rate
risk mainly through the ratio of its fixed-rate financial
debt to variable-rate financial debt contained in its total
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 provisions for expected credit losses for cus-
tomers are based on a forward-looking expected credit
loss, which includes possible default events on the trade
receivables over the entire holding period of the trade
receivable.
In measuring the expected credit losses, trade receiv-
ables are grouped based on shared credit risk charac-
teristics (such as private versus public receivables) and
days past due. In determining the expected credit loss
rates, the Group considers current and forward-looking
macroeconomic factors that may affect the ability of the
customers to settle the receivables, and historical loss
rates for each category of customers.
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 9.4%, 7.6% and 7.0%, respec-
tively (2017: 20.2%, 15.0% and 12.7%, 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 and tax, capital or regulatory con-
siderations, if applicable, through numerous sources of
financing in order to maintain flexibility. Management
monitors the Group’s net debt or liquidity position through
rolling forecasts on the basis of expected cash flows.
Novartis has two US commercial paper programs
under which it can issue up to USD 9.0 billion in the
aggregate of unsecured commercial paper notes.
Novartis also has a Japanese commercial paper program
under which it can issue up to JPY 150 billion (approxi-
mately USD 1.4 billion) of unsecured commercial paper
notes. Commercial paper notes totaling USD 4.0 billion
under these three programs were outstanding as per
December 31, 2018 (2017: USD 2.3 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
F-73
Notes to the Novartis Group consolidated financial statements
used as a backstop for the US commercial paper pro-
grams. It matures in September 2020 and was undrawn
as per December 31, 2018, and December 31, 2017.
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, 2018, and December 31, 2017:
2018
(USD millions)
Current assets
Marketable securities, time deposits and short-term
investments with original maturity more than 90 days
Commodities
Derivative financial instruments and accrued interest
Cash and cash equivalents
Total current financial assets
Non-current liabilities
Financial debt
Financial debt – undiscounted
Total non-current financial debt
Current liabilities
Financial debt
Financial debt – undiscounted
Derivative financial instruments
Total current financial debt
Due later than Due later than Due later than
one year
Due within but less than but less than but less than
five years
one month
three months
three months
one month
one year
39
56
2 091
198
40
3 571
3 650
75
9 700
9 831
27
Due after
five years
Total
63
104
2 447
104
142
13 271
2 118
198
167
15 964
– 8 980
– 13 490
– 22 470
– 9 025
– 13 623
– 22 648
– 8 980
– 13 490
– 22 470
– 5 217
– 4 084
– 5 217
– 4 084
– 16
– 34
– 319
– 319
– 8
– 5 233
– 4 118
– 327
– 9 620
– 9 620
– 58
– 9 678
Net debt
– 1 583
5 713
1 791
– 8 782
– 13 323
– 16 184
2017
(USD millions)
Current assets
Due later than Due later than Due later than
one year
Due within but less than but less than but less than
five years
one month
three months
three months
one month
one year
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
F-74
Notes to the Novartis Group consolidated financial statements
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.
The Group’s contractual undiscounted potential cash flows from derivative financial instruments to be settled
on a gross basis are as follows:
(USD millions)
Derivative financial instruments and accrued interest on derivative
financial instruments
2018
Due later than Due later than
one month
three months
Due within but less than but less than
one month
one year
three months
Total
Potential outflows in various currencies – from financial derivative liabilities
– 1 305
– 2 949
– 598
– 4 852
Potential inflows in various currencies – from financial derivative assets
1 328
2 974
593
4 895
(USD millions)
Derivative financial instruments and accrued interest on derivative
financial instruments
2017
Due later than Due later than
one month
three months
Due within but less than but less than
one month
one year
three months
Total
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
Other contractual liabilities that are not part of management’s monitoring of the net debt or liquidity consist of the
following items:
2018
(USD millions)
one month
Due later than Due later than Due later than
one year
three months
but less than but less than but less than
five years
three months
one year
Due after
five years
Total
Contractual interest on non-current liabilities
– 113
– 459
– 1 667
– 3 755
– 5 994
Trade payables
– 5 556
– 5 556
2017
(USD millions)
one month
Due later than Due later than Due later than
one year
three months
but less than but less than but less than
five years
three months
one year
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
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. As of December 31, 2018, Moody’s
Investor Service rated the Company A1 for long-term
maturities and P-1 for short-term maturities and S&P
Global Ratings had a rating of AA- for long-term matur-
ities and A-1+ for short-term maturities.
The debt/equity ratio increased to 0.41:1 at December
31, 2018, compared to 0.38:1 at the beginning of the year.
The Group uses a value at risk (VAR) computation to esti-
mate the potential 10-day loss in the fair value of its finan-
cial instruments.
A 10-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 F-68, 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.
F-75
Notes to the Novartis Group consolidated financial statements
The VAR computation is a risk analysis tool designed to
statistically estimate the potential 10-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 represen-
tative of any actual impact that future changes in market
rates may have on the Group’s future results of opera-
tions 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 20 years in each category. For
2018 and 2017, the worst case loss scenario was calcu-
lated 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
2018
7
2017
7
7
7
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 60-day period for the cal-
culation of VAR amounts.
The estimated potential 10-day loss in the fair value
of the Group’s foreign currency positions (including for-
eign exchange translation risk), the estimated potential
10-day loss of its equity holdings, and the estimated
potential 10-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
2018
337
2017
498
217
122
221
184
27
242
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
443
2018
High
553
Low
337
324
473
217
60
122
22
253
361
169
(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
F-76
Notes to the Novartis Group consolidated financial statements
29. Impacts of adoption of new IFRS standards
Note 1 explains the changes and new accounting poli-
cies introduced on January 1, 2018, resulting from the
adoption of the new accounting standards IFRS 9 Finan-
cial Instruments and IFRS 15 Revenue from Contracts
with Customers.
The most significant impact from the adoption of
IFRS 15 Revenue from Contracts with Customers relates
to the timing of the recognition of income from upfront
and milestone payments received under co-marketing
and co-promotion agreements. Under IFRS 15, as these
agreements are accounted for as a right to use license
of intellectual property (IP), and the performance obliga-
tion to transfer the licenses to the counterparty to the
agreement (the licensee) has been satisfied, revenue is
recognized at the point in time when the upfront payment
is received and when the milestone criteria is highly prob-
able to be met. Under IAS 18, upfront and milestone pay-
ments received under co-marketing and co-promotion
agreements were deferred and amortized to other rev-
enue over the term of the agreements. Therefore, upon
adoption of IFRS 15, the deferred revenue and related
deferred taxes, in relation to the upfront payments and
milestone payments received, have been derecognized
and the impact to retained earnings has been accord-
ingly recognized in the amount of USD 60 million.
The following table shows the changes to the line
items of the January 1, 2018, consolidated balance sheet
by the adoption of IFRS 15:
January
1, 2018
Adjustment
IFRS 15
Adjusted
January
1, 2018
8 229
104 871
133 079
– 4
– 4
– 4
8 225
104 867
133 075
73 299
74 227
60
60
73 359
74 287
(USD millions)
Assets
Non-current assets
Deferred tax assets
Total non-current assets
Total assets
Equity and liabilities
Equity
Reserves
Total equity
Non-current liabilities
Deferred tax liabilities
5 168
12
5 180
Provision and
other non-current liabilities
7 057
Total non-current liabilities
35 449
– 69
– 57
6 988
35 392
Current liabilities
Provision and
other current liabilities
Total current liabilities
11 203
23 403
– 7
– 7
11 196
23 396
Total equity and liabilities
133 079
– 4
133 075
The amount by which the line items in the December 31,
2018, consolidated income statement and consolidated
statement of cash flow were affected by the application
of IFRS 15 Revenue from Contracts with Customers, as
compared to IAS 18 Revenues and related interpreta-
tions, was not significant.
The adoption of IFRS 9 Financial Instruments had no
impact to the line items of the January 1, 2018, consoli-
dated balance sheet.
The transition impact of IFRS 9 Financial Instruments
was from the previously recognized unrealized gains
accumulated in “Other comprehensive income” (OCI) in
equity related to fund investments (USD 75 million) and
on equity securities held by the Novartis Venture Fund
(USD 102 million). The total amount of USD 177 million
was transferred from OCI reserves into retained earn-
ings on January 1, 2018. With the adoption of IFRS 9,
from January 1, 2018, these investments are measured
at fair value through profit and loss (formerly under IAS
39 measured at fair value through OCI (FVOCI), with
impairments recognized in profit and loss and gains recy-
cled out of OCI to profit and loss at the date the finan-
cial instrument was divested).
There was no transition impact on financial instru-
ments held for long-term purposes, recorded as long-
term financial assets on the consolidated balance sheet,
where the irrevocable FVOCI option was applied, as they
continue to be measured at fair value through OCI. In
subsequent periods, upon a divestment of these invest-
ments, the OCI reserves amount will be transferred
directly to retained earnings. Prior to the adoption of
IFRS 9, unrealized gains recognized in OCI reserves were
recycled to profit and loss.
There is no significant impact from the new expected
credit loss (ECL) impairment model under IFRS 9 to the
Group’s allowances and provisions for trade receivable,
finance lease receivables and other short- and long-term
receivables.
The following table shows the changes to the line
items of the January 1, 2018, consolidated statement of
changes in equity by the adoption of IFRS 9 and IFRS
15:
(USD millions)
January
1, 2018
Adjustment
IFRS 9
Adjustment
IFRS 15
Adjusted
January
1, 2018
Retained earnings 77 639
177
60
77 876
Total fair value
adjustments
– 4 340
– 177
– 4 517
Total equity
74 227
60
74 287
F-77
Notes to the Novartis Group consolidated financial statements
The following condensed table shows the changes to the line items of the January 1, 2018, financial instruments
additional disclosures table by the adoption of IFRS 9:
(USD millions)
Cash and cash equivalents
Financial assets – measured at fair value
through other comprehensive income
Marketable securities
Debt securities
Fund investments
Total marketable securities
Long-term financial investments
Equity securities
Debt securities
Fund investments
Total long-term financial investments
Total financial assets – measured at fair value
through other comprehensive income
Financial assets –
measured at amortized costs
Financial assets – measured at fair value
through the consolidated income statement
Carrying
value
January
1, 2018
8 860
Reclassi-
fications
Adjusted
carrying
value
January
1, 2018
8 860
Retained
earnings
effect
January
1, 2018
OCI
reserves
effect
January
1, 2018
328
34
362
– 34
– 34
1 073
– 386
36
166
1 275
– 166
– 552
328
328
687
36
723
102
– 102
75
177
– 75
– 177
1 637
– 586
1 051
177
– 177
11 350
11 350
1 091
586
1 677
Total financial assets
22 938
22 938
177
– 177
Financial liabilities –
measured at amortized costs
Financial liabilities – measured at fair value
through the consolidated income statement
33 594
1 031
33 594
1 031
Total financial liabilities
34 625
34 625
F-78
Notes to the Novartis Group consolidated financial statements
30. Events subsequent to the December 31, 2018,
consolidated balance sheet date
Dividend proposal for 2018 and approval of the
Group’s 2018 consolidated financial statements
On January 29, 2019, the Novartis AG Board of Direc-
tors proposed the acceptance of the 2018 consolidated
financial statements of the Novartis Group for approval
by the Annual General Meeting on February 28, 2019.
Furthermore, also on January 29, 2019, the Board pro-
posed a dividend of CHF 2.85 per share to be approved
at the Annual General Meeting on February 28, 2019. If
approved, total dividend payments would amount to
approximately USD 6.7 billion (2017: USD 7.0 billion),
using the CHF/USD December 31, 2018, exchange rate.
Corporate – proposal to the Annual General
Meeting of Shareholders to approve a spin-off
transaction of the Alcon Division
On June 29, 2018, Novartis announced its intention to
seek shareholder approval for the spin-off of the Alcon
business into a separately traded standalone company,
following the complete and structural separation of the
Alcon business into a standalone company. If the spin-
off is approved at the 2019 AGM and the conditions prec-
edent for the distribution are met, Novartis will effect the
spin-off and distribute to its shareholders and ADR hold-
ers, by way of a dividend in kind, 1 Alcon share for every
5 dividend bearing share of Novartis AG (the Distribu-
tion). No dividend in kind will be declared on treasury
shares held by Novartis AG or its fully owned subsidiar-
ies.
Completion of the Distribution is subject to shareholder
approval at the 2019 AGM in line with Swiss corporate
law and the following conditions precedent:
(i) The Alcon Shares shall have been admitted to listing
on the SIX Swiss Exchange and the New York Stock
Exchange as from the ex-dividend date (subject to
technical deliverables only);
(ii) The U.S. Securities and Exchange Commission
(“SEC”) shall have declared effective the registration
statement on Form 20-F for the Alcon Shares under
the U.S. Securities Exchange Act of 1934, as
amended, and no stop order suspending the effec-
tiveness of this registration statement shall be in
effect and no proceedings for that purpose shall be
pending before or threatened by the SEC;
(iii) No order, injunction or decree issued by any govern-
mental authority of competent jurisdiction or other
legal restraint or prohibition preventing consumma-
tion of the spin-off of Alcon shall be in effect, and no
other event outside the control of Novartis shall have
occurred or failed to occur that prevents the con-
summation of the spin-off of Alcon (including, but not
limited to, Novartis not being able to complete the
internal transactions to separate the businesses cur-
rently constituting the eye care devices business of
Novartis, comprising its Surgical and Vision Care
operations, from the other businesses, due to ele-
ments outside of its reasonable control); and
(iv) No other events or developments shall have occurred
prior to the ex-dividend date of the Distribution that,
in the judgment of the Novartis Board of Directors,
would result in the spin-off of Alcon having a mate-
rial adverse effect (including, but not limited to, mate-
rial adverse tax consequences or risks) on Novartis
or its shareholders.
The Board of Directors shall (i) determine whether these
conditions precedent are satisfied and, to the extent
legally permissible, have authority to waive any condi-
tions precedent if such waiver is, in the judgment of the
Board of Directors, in the best interest of Novartis and
its shareholders; and (ii) set the record, ex-dividend and
settlement dates of the Distribution, which shall occur
as soon as practicable following the satisfaction (or
waiver) of these conditions precedent.
The Group expects the fair value of the distribution
liability of the Alcon business, which will be recognized
upon shareholders’ approval, to be in excess of the car-
rying value of the net assets of the Alcon business at the
date of the Distribution to the Novartis AG shareholders,
assuming no significant changes in market conditions or
Alcon’s business performance outlook.
F-79
Notes to the Novartis Group consolidated financial statements
31. Principal Group subsidiaries
and associated companies
The following table lists the principal subsidiaries controlled by Novartis, associated companies in which Novartis
is deemed to have significant influence and foundations required to be consolidated under IFRS. It includes all sub-
sidiaries, associated companies and consolidated foundations with total assets or net sales to third parties in excess
of USD 25 million. The equity interest percentage shown in the table also represents the share in voting rights in
those entities, except where explicitly noted.
As at December 31, 2018
Algeria
Société par actions SANDOZ, Algiers
Argentina
Novartis Argentina S.A., Buenos Aires
Share
capital
Equity
1 interest
As at December 31, 2018
Share
capital
Equity
1 interest
DZD
650.0 m
100%
ARS
906.1 m
100%
France
Novartis Groupe France S.A., Rueil-Malmaison
Novartis Pharma S.A.S., Rueil-Malmaison
Advanced Accelerator Applications S.A., Saint-Genis-Pouilly
Sandoz S.A.S., Levallois-Perret
Laboratoires Alcon S.A.S., Rueil-Malmaison
EUR
EUR
EUR
EUR
EUR
903.0 m
43.4 m
100%
100%
9.6 m 99.07%
100%
5.4 m
100%
12.9 m
Australia
Novartis Australia Pty Ltd, Macquarie Park, NSW
Novartis Pharmaceuticals
AUD
Australia Pty Ltd, Macquarie Park, NSW
Sandoz Pty Ltd, Macquarie Park, NSW
AUD
Alcon Laboratories (Australia) Pty Ltd, Macquarie Park, NSW AUD
AUD
2
100%
3.8 m
11.6 m
2.6 m
100%
100%
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
Novartis Pharma NV, Vilvoorde
Sandoz NV, Vilvoorde
Alcon – Couvreur NV, Puurs
Alcon Laboratories Belgium BVBA, Puurs
Alcon NV, Vilvoorde
Bermuda
Novartis Investment Ltd., Hamilton 3
Novartis Securities Investment Ltd., Hamilton
Novartis Finance Services Ltd., Hamilton
Triangle International Reinsurance Limited, Hamilton
Trinity River Insurance Co Ltd., Hamilton
Germany
Novartis Deutschland GmbH, Nuremberg
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
EUR
EUR
EUR
EUR
1.0 m
1.1 m
32.7 m
1.0 m
100%
100%
100%
100%
BDT
162.5 m
60%
EUR
EUR
EUR
EUR
EUR
7.1 m
19.2 m
110.6 m
18 550
141 856
12 000
30 000
20 000
USD
CHF
CHF
CHF
USD 370 000
1.0 m
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Greece
Novartis (Hellas) S.A.C.I., Metamorphosis / 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
Brazil
Novartis Biociências S.A., São Paulo
Sandoz do Brasil Indústria Farmacêutica Ltda., Cambé, PR
BRL
BRL
265.0 m
190.0 m
100%
100%
Indonesia
PT. Novartis Indonesia, Jakarta
PT. CIBA Vision Batam, Batam
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
CAD
CLP
CLP
USD
HKD
USD
USD
USD
USD
HKD
USD
COP
COP
1.2 m
80.8 m
2 500
82 886
100%
100%
100%
100%
2.0 bn
2.0 bn
100%
100%
30.0 m
200
100%
100%
320.0 m
109.4 m
3.2 m
57.6 m
77 000
60.0 m
100%
100%
100%
100%
100%
100%
7.9 bn
20.9 m
100%
100%
HRK
25.6 m
100%
CZK
CZK
CZK
51.5 m
44.7 m
31.0 m
100%
100%
100%
DKK
DKK
DKK 501 000
14.0 m
12.0 m
100%
100%
100%
USD
4.0 m
100%
EGP
EGP 250 000
193.8 m 99.77%
100%
EUR 459 000
100%
Ireland
Novartis Ireland Limited, Dublin
Novartis Ringaskiddy Limited, Ringaskiddy, County Cork
Alcon Laboratories Ireland Limited, Cork City
Israel
Novartis Israel Ltd., Petach Tikva
Italy
Novartis Farma S.p.A., Origgio
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
Latvia
Novartis Baltics SIA, Riga
Luxembourg
Novartis Investments S.à r.l., Luxembourg City 3
Novartis Finance S.A., Luxembourg City
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
Morocco
Novartis Pharma Maroc SA, Casablanca
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
F-80
155.5 m
25.6 m
2.0 m
25 000
EUR
EUR
EUR
EUR
EUR 100 000
EUR
26 000
EUR
EUR
EUR
26 000
EUR 512 000
EUR
EUR
93.7 m
42.1 m
15.4 m
6.6 m
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
EUR
23.4 m
100%
HUF
HUF
545.6 m
883.0 m
100%
100%
INR
INR
INR
INR
IDR
IDR
123.5 m 70.68%
100%
60.0 m
100%
32.0 m
100%
1.1 bn
7.7 bn
11.9 bn
100%
100%
EUR
EUR
EUR
25 000
2.0 m
541 251
100%
100%
100%
ILS
1 000
100%
EUR
EUR
EUR
EUR
JPY
JPY
JPY
JPY
JPY
18.2 m
1.7 m
2.6 m
3.7 m
10.0 m
6.0 bn
8.5 m
100.0 m
500.0 m
100%
100%
100%
100%
100%
100%
100%
100%
100%
EUR
3.0 m
100%
USD
USD 100 000
100.0 m
100%
100%
MYR
MYR
MYR
MXN
MXN
MXN
3.3 m
1.0 m
10.0 m
100%
100%
100%
205.0 m
468.2 m
5.9 m
100%
100%
100%
MAD
80.0 m
100%
1.4 m
4.5 m
EUR
EUR
EUR 907 560
18 151
EUR
100%
100%
100%
100%
NZD 820 000
100%
Notes to the Novartis Group consolidated financial statements
As at December 31, 2018
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 Grup Saglik Ürünleri
Ilaçlari Sanayi ve Ticaret A.S., Gebze – Kocaeli
Alcon Laboratuvarlari Ticaret A.S., Istanbul
Ukraine
Sandoz Ukraine LLC, Kiev
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
Share
capital
Equity
1 interest
TWD
170.0 m
100%
THB
THB
302.0 m
228.1 m
100%
100%
TRY
TRY
TRY
TRY
TRY
98.0 m
6.7 m
100%
100%
165.2 m 99.99%
50.0 m
25.2 m
100%
100%
UAH
8.0 m
100%
AED
7.0 m
100%
25.5 m
5.4 m
250.0 m
3 904
GBP
GBP
GBP
GBP
GBP
GBP 550 000
2.0 m
USD
USD
USD
USD
--
USD
United States of America
Novartis Corporation, East Hanover, NJ 3
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 3
Novartis Institutes for BioMedical
USD
Research, Inc., Cambridge, MA
USD
CoStim Pharmaceuticals Inc., Cambridge, MA
USD
Encore Vision, Inc., New York, NY
USD
Endocyte, Inc., Lafayette, IN
USD
Navigate BioPharma Services, Inc., Carlsbad, CA
USD
Reprixys Pharmaceuticals Corporation, East Hanover, NJ
Spinifex Pharmaceuticals, Inc., Wilmington, NC
USD
Novartis Institute for Functional Genomics, Inc., San Diego, CA USD
USD
Advanced Accelerator Applications USA, Inc., New York, NY
USD
AveXis, Inc., Bannockburn, IL
USD
Sandoz Inc., Princeton, NJ
USD
Oriel Therapeutics, Inc., Durham, NC
USD
Fougera Pharmaceuticals Inc., Melville, NY
USD
Eon Labs, Inc., Princeton, NJ
Alcon Laboratories, Inc., Fort Worth, TX 3
USD
USD
Alcon Refractivehorizons, LLC, Fort Worth, TX
Alcon Research, Ltd., Fort Worth, TX 3
USD
USD
Alcon Lensx, Inc., Fort Worth, TX
USD
Alcon Laboratories Holding Corporation, Fort Worth, TX
USD
WaveLight, Inc., Sterling, VA
USD
Tear Film Innovations, Inc., Fort Worth, TX
USD
TrueVision Systems, Inc., Fort Worth, TX
CIBA Vision Corporation LLC, Duluth, GA 3
USD
USD
Novartis Vaccines and Diagnostics, Inc., Cambridge, MA
USD
ClarVista Medical, Inc., Aliso Viejo, CA
USD
Transcend Medical, Inc., Lake Forest, IL
72.2 m
1 000
1
1
--
5.2 m
1
1
1
1
100
1
1
1 000
1
1
25 000
1
1
1
1 000
10
12.5
1
10
1
1
1
1.3 m
3
1
1
Venezuela
Novartis de Venezuela, S.A., Caracas
Alcon Pharmaceutical, C.A., Caracas
VES
VES
14
55
100%
100%
In addition, the Group is represented by subsidiaries and associated companies in the
following countries: Bosnia/Herzegovina, Bulgaria, Dominican Republic, Guatemala,
Kenya, the Former Yugoslav Republic of Macedonia, Nigeria, Puerto Rico 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
attributable to Novartis
3 Significant subsidiary under SEC Regulation S-X Rule 1-02(w)
m = million; bn = billion
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
99%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
As at December 31, 2018
Norway
Novartis Norge AS, Oslo
Pakistan
Novartis Pharma (Pakistan) Limited, Karachi
Panama
Novartis Pharma (Logistics), Inc., Panama City
Alcon Centroamerica S.A., Panama City
Peru
Novartis Biosciences Perú S.A., Lima
Philippines
Novartis Healthcare Philippines, Inc., Manila
Sandoz Philippines Corporation, Manila
Poland
Novartis Poland Sp. z o.o., Warsaw
Sandoz Polska Sp. z o.o., Warsaw
Lek S.A., Strykow
Alcon Polska Sp. z o.o., Warsaw
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
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
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., Ljubljana
Sandoz Pharmaceuticals d.d., Ljubljana
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
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, Stockholm
Share
capital
Equity
1 interest
NOK
1.5 m
100%
PKR
3.9 bn 99.99%
USD
PAB
10 000
1 000
100%
100%
PEN
6.1 m
100%
PHP
PHP
298.8 m
30.0 m
100%
100%
PLN
PLN
PLN
PLN 750 000
44.2 m
25.6 m
11.4 m
100%
100%
100%
100%
EUR 500 000
EUR
EUR 499 900
2.4 m
100%
100%
100%
EUR
4.5 m
100%
RON
RON
3.0 m
105.2 m
100%
100%
RUB
RUB
RUB
RUB
20.0 m
500.0 m
57.4 m
44.1 m
100%
100%
100%
100%
SAR
26.8 m
75%
SGD 100 000
100%
SGD
SGD
SGD
45.0 m
39.0 m
101 000
100%
100%
100%
SGD
1.0 m
100%
EUR
2.0 m
100%
EUR
EUR
48.4 m
1.5 m
100%
100%
ZAR
ZAR
ZAR 201 820
86.3 m
3.0 m
100%
100%
100%
KRW
KRW
24.5 bn 98.55%
100%
33.8 bn
EUR
EUR 270 450
63.0 m
100%
100%
EUR
EUR
EUR
9.3 m
10.1 m
6.0 m
100%
100%
100%
SEK
5.0 m
100%
1.0 m
10 m
100.2 m
50 000
--
--
--
--
CHF
CHF
CHF
CHF
Switzerland
Novartis Overseas Investments AG, Basel
Japat AG, Basel
Novartis International AG, Basel
Novartis Holding AG, Basel 3
Novartis International Pharmaceutical Investment AG, Basel 3 CHF 100 000
CHF 100 000
Novartis Ophthalmics AG, Fribourg
CHF 100 000
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 3
CHF
Novartis International Pharmaceutical AG, Basel 3
CHF 100 000
CHF
Novartis Pharma Services AG, Basel
CHF
Novartis Pharma Schweizerhalle AG, Muttenz
CHF 251 000
Novartis Pharma Stein AG, Stein
Novartis Pharma Schweiz AG, Risch
CHF
Advanced Accelerator Applications International SA, Geneva CHF
Advanced Accelerator Applications Switzerland SA, Geneva
Sandoz AG, Basel
Sandoz Pharmaceuticals AG, Risch
Alcon AG, Fribourg
Alcon Management SA, Geneva
Alcon Switzerland SA, Risch
Alcon Pharmaceuticals Ltd., Fribourg 3
Roche Holding AG, Basel
CHF 200 000
CHF
CHF 100 000
CHF 100 000
CHF 100 000
CHF 100 000
CHF 200 000
CHF
--
350.0 m
20.0 m
18.9 m
5.0 m
9.3 m
5.0 m
160.0 m
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
99%
99%
100%
100%
100%
100%
100%
100%
33/6
2
F-81
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
To the shareholders and Board of Directors of
Novartis AG
Opinions on the Financial Statements and Internal
Control over Financial Reporting
We have audited the accompanying consolidated balance
sheets of Novartis AG and its subsidiaries (the “Company”)
as of December 31, 2018 and December 31, 2017, and the
related consolidated income statements, consolidated
statements of comprehensive income, consolidated state-
ments of changes in equity, and consolidated statements
of cash flow for each of the three years in the period ended
December 31, 2018, including the related notes (collectively
referred to as the “consolidated financial statements”). We
also have audited the Company’s internal control over finan-
cial reporting as of December 31, 2018, based on criteria
established in Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organiza-
tions 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, 2018
and December 31, 2017, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 2018 in conformity with International
Financial Reporting Standards (“IFRS”) as issued by the
International Accounting Standards Board. Also in our opin-
ion, the Company maintained, in all material respects, effec-
tive internal control over financial reporting as of Decem-
ber 31, 2018, based on criteria established in Internal Control
– Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company’s management is responsible for these con-
solidated financial statements, for maintaining effective inter-
nal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting,
included in the “Report of Novartis Management on Internal
Control Over Financial Reporting” appearing under Item 15(b).
The Board of Directors is also responsible for the preparation
of the consolidated financial statements in accordance with
IFRS, and for such internal control as the Board of Directors
determines is necessary to enable the preparation of consol-
idated financial statements that are free from material mis-
statement, whether due to fraud or error. Our responsibility
is to express opinions on the Company’s consolidated finan-
cial statements and on the Company’s internal control over
financial reporting based on our audits. We are a public
accounting firm registered with the Public Company Account-
ing Oversight Board (United States) (PCAOB) and are required
to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission
and the PCAOB.
free of material misstatement, whether due to error or fraud,
and whether effective internal control over financial report-
ing was maintained in all material respects.
Our audits of the consolidated financial statements included
performing procedures to assess the risks of material misstate-
ment of the consolidated financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis, evi-
dence 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 under-
standing of internal 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 perform-
ing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reason-
able 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 regard-
ing 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 procedures that
(i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dis-
positions of the assets of the company; (ii) provide reason-
able assurance that transactions are recorded as neces-
sary 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 management and directors of the com-
pany; and (iii) provide reasonable assurance regarding pre-
vention or timely detection 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 misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inad-
equate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers AG
Basel, Switzerland
January 29, 2019
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 assurance
about whether the consolidated financial statements are
We have served as the Company’s or its predecessors’
auditor since at least 1940. We have not been able to
determine the specific year we began serving as auditor
of the Company’s predecessors.
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.
F-82
Report of the statutory auditor on the consolidated financial statements of Novartis AG
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 statements of cash
flow, and notes to the consolidated financial statements
(pages F-1 to F-81), including a summary of significant
accounting policies, for the year ended December 31,
2018.
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, 2018, 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 5% of income before taxes, adjusted by the
USD 5.8 billion gain on divestment of GSK Consumer
Healthcare.
• We conducted full scope audit work at the Group’s
three operating divisions and at 13 reporting entities,
including reporting entities of the Corporate division,
in six countries.
• In addition, full scope audit work on account balances
was performed at 21 reporting entities in 13 countries.
• Our audit scope addressed 69% of the Group’s net
sales and 85% 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 the Innovative Medicines division
intangible assets other than goodwill, including newly
acquired intangible assets
• Governmental investigations and litigation
• Rebates, discounts and sales returns
Context of our audit 2018
The context of our audit is set by the Group’s major activ-
ities in the reporting period during which the acquisitions
of AveXis, Inc., Advanced Accelerator Applications S.A.
(AAA) and Endocyte, Inc. have been significant events. As
each of these three acquisitions included a primary prod-
uct candidate and therefore substantial intangible assets,
during the audit process we placed appropriate additional
focus on the purchase price allocation. The rest of the audit
process was largely unchanged as compared to prior year.
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 – consider-
ation of whether there was evidence of bias that repre-
sented 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 13 reporting enti-
ties that, in our view, required an audit of their complete finan-
cial information due to their size or risk characteristics. 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 business with head-
quarters based in Switzerland, the United States of Amer-
ica, 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 mate-
rial balances. None of the reporting entities excluded from
our Group audit scope individually contributed more than
5% to net sales or total assets. Audit procedures were also
performed by the Group audit team over the Group’s Cor-
porate segment, certain Group functions (including account-
ing for associated companies, taxation, treasury, certain
employee benefits, government investigations and litigation)
and Group consolidation.
F-83
Report of the statutory auditor on the consolidated financial statements of Novartis AG
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 manage-
ment and divisional audit teams. In addition, we hosted a
planning workshop in May 2018 for audit partners and man-
agers responsible for divisional and reporting entities.
Materiality
The scope of our audit was influenced by our applica-
tion of materiality. Our audit opinion aims to provide rea-
sonable assurance that the consolidated financial state-
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 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 misstate-
ments, if any, both individually and in aggregate, on the
consolidated financial statements as a whole.
Overall Group materiality
USD 400 million
How we determined it
Provisionally as 5% of estimated 2018 income before
taxes, adjusted by the gain on divestment of GSK Con-
sumer Healthcare. This level was reassessed and con-
firmed as part of our completion procedures.
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 adjusted for the
exceptional gain on the divestment to use a measure of
underlying profit as the basis of our calculation.
We agreed with the Audit and Compliance Committee
that we would report to them misstatements identified
during our audit above USD 20 million as well as any mis-
statements below that amount which, in our view, war-
ranted reporting for qualitative reasons.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the
consolidated financial statements of the current period. These matters were addressed in the context of our audit
of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a
separate opinion on these matters.
Key audit matter
How our audit addressed the key audit matter
Carrying value of Alcon goodwill
The Group has goodwill of USD 35.3 billion at December
31, 2018, of which USD 8.9 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 allocated to
the Alcon Division were critical, given the performance of
the business in prior years, which led the Group to initiate
a turnaround plan, followed by the ongoing strategic review.
Refer to “Note 1. Significant accounting policies” (pages
F-6 to F-15) and “Note 10. Goodwill and intangible assets”
(pages F-37 to F-39).
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 specialists,
the Alcon goodwill carrying value as at December 31, 2018.
We also challenged management to substantiate their key
assumptions including growth rate in the cash flow projec-
tions during the forecast period and the terminal growth
rate assumption. We also evaluated management’s inten-
tion and ability to execute their strategic initiatives and eval-
uated 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 assump-
tions that could result in an impairment and the disclosures
included in “Note 10. Goodwill and intangible assets” (pages
F-37 to F-39) of the Annual Report.
In conjunction with the intended spin-off of Alcon, man-
agement provided a range of estimate for the valuation of
the business that indicates the value of the goodwill is not
impaired.
Finally, we did not identify any material differences
between management cash flow forecasts from last year
and the actual results reached this year.
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 sup-
portable.
F-84
Report of the statutory auditor on the consolidated financial statements of Novartis AG
Key audit matter
How our audit addressed the key audit matter
Carrying value of the Innovative Medicines division intan-
gible assets other than goodwill, including newly acquired
intangible assets
The Group has intangible assets in its Innovative Medicines
division other than goodwill totaling USD 26.0 billion at
December 31, 2018, comprising research and development
acquired, currently marketed products, and other intangi-
ble assets. The Group recognized specific impairments of
intangible assets in its Innovative Medicines division other
than goodwill of USD 592 million during the year.
In 2018, the Group entered into significant transactions,
including the acquisitions of Advanced Accelerator Appli-
cations S.A., AveXis, Inc. and Endocyte, Inc. The related pur-
chase price allocations resulted in the identification and rec-
ognition of a fair value of USD 12.5 billion in newly acquired
intangible assets, excluding goodwill. The assessment of
the carrying values of intangible assets is dependent on
future cash flows. The assessments of carrying values per-
formed by the Group contain a number of significant judg-
ments and estimates such as scientific success, revenue
growth, the success of new product launches, profit mar-
gins and discount rates.
The carrying value assessments of the following intan-
gible assets include the most significant risk and highest
level of judgment:
• Certain currently marketed products that have per-
formed below management’s expectation or were, in our
view, at a greater risk of impairment
• Currently marketed products recognized as intangible
assets in the purchase price allocation
• Products in development, as the assessment of their
carrying value is challenging due to management being
required to make judgments both as to the probability of
scientific success and regulatory approval of the devel-
opments across indications, as well as the probability of
commercial success of the subsequent product launches
Refer to “Note 1. Significant accounting policies” (pages F-6
to F-15), “Note 10. Goodwill and intangible assets” (pages
F-37 to F-39), “Note 2. Significant transactions in 2018”
(pages F-16 to F-18) and “Note 23. Acquisitions of business”
(page F-57).
We assessed and tested the design and operating effec-
tiveness of the Group’s controls over the assessment of the
carrying value of intangible assets other than goodwill and
concluded that these operate effectively, specifically in
respect to the identification of impairment triggering events.
We assessed and tested the design and operating effec-
tiveness of the Group’s controls over the identification and
the valuation of intangible assets acquired in a business
combination.
We utilized a risk-based approach to select certain sig-
nificant intangible assets to test the carrying value calcula-
tions and assess the key assumptions. For the currently
marketed products, these assumptions specifically included
pricing, market size and share, and competitive environment
assumptions.
Finally, we did not identify any material differences
between management cash flow forecasts from last year
and the actual results reached this year.
For selected currently marketed products and products
in development, with the support of our valuation special-
ists, we considered third-party sources to challenge
expected future revenues due to actions by competitors or
due to changes in relevant markets.
Furthermore, for products in development, we also con-
sidered key scientific developments. We performed our own
sensitivity analysis around these key estimates to ascertain
the extent of change in those assumptions that either indi-
vidually 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
2018 or to the value of intangible assets recognized in the
purchase price allocations. 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, con-
sistently 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 historic and ongoing
government investigations, of which the most significant are
disclosed in “Note 19. Provisions and other non-current lia-
bilities.”
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
F-6 to F-15), and “Note 19. Provisions and other non-current
liabilities” (pages F-48 to F-52).
We assessed and tested the design and operating effec-
tiveness of the Group’s controls over the completeness,
assessment for recognition, measurement and disclosures
of provisions for governmental investigations and other legal
matters and concluded that these operate effectively.
We evaluated management’s judgments in connection
with the investigations and related litigation in the US, read
the respective court filings and minutes of Board of Direc-
tors and management meetings, and inquired with manage-
ment as well as internal and external legal counsel.
We concluded that the judgments made by management
were in accordance with the accounting policies described
in Note 1.
F-85
Report of the statutory auditor on the consolidated financial statements of Novartis AG
Key audit matter
How our audit addressed the key audit matter
We performed procedures to assess the design and oper-
ating 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 respec-
tive 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 reasonableness of the
recorded reserve balances, performed retrospective
reviews, and assessed subsequent events. We also per-
formed testing of credits issued and payments made
throughout the year, reviewed related contracts, and per-
formed procedures to validate contractual terms and inven-
tory levels of significant customers and wholesalers.
We did not identify any material differences between our
expectations and the accruals, and we found the judgments
made by management to be reasonable.
Rebates, discounts and sales returns
Commencing in 2018, the Group has applied IFRS 15 “Rev-
enue from Contracts with Customers”. The Group distrib-
utes its products primarily through wholesale distributors.
In many cases the ultimate net selling prices are determined
based on government mandated rebates as well as contrac-
tual arrangements that the Group has with the ultimate
patient’s insurer or other payment program.
Under IFRS 15, revenue is recognized when control has
passed to the customer, which is usually upon shipment to
the distributor. The transaction price is the amount of con-
sideration an entity expects to be entitled to from a cus-
tomer in exchange for providing the goods or services. IFRS
15 requires an entity to estimate the amount of variable con-
sideration to which it will be entitled to the extent that such
amount is not highly probable to reverse. Variable consid-
eration may include rebates, discounts and sales returns.
The estimate depends on contract terms and regulation,
historical experience, as well as forecasts of sales volumes
by sales channel. Additionally, the dispensing of the prod-
uct to the patient and the final determination of the net sell-
ing price may be several months later.
This key audit matter is focused on the valuation and
accuracy of the accruals for rebates, discounts and sales
returns recognized at the year-end because, specifically for
US Medicaid and Medicare or similar programs, the estima-
tion processes involves large volumes of data, requires sig-
nificant judgment, and contains risk of management bias.
The provision reported as of December 31, 2018, for rev-
enue deductions related to rebates, discounts, allowances
and sales returns amounted to USD 5.3 billion.
Refer to “Note 21. Provisions and other current liabili-
ties” (pages F-53 and F-55).
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
conclusion thereon.
In connection with our audit of the consolidated finan-
cial statements, our responsibility is to read the other
information in the Annual Report and, in doing so, con-
sider whether the other information is materially incon-
sistent with the consolidated financial statements or our
knowledge obtained in the audit, or otherwise appears
to be materially misstated. If, based on the work we have
performed, we conclude that there is a material misstate-
ment of this other information, we are required to report
that fact. We have nothing to report in this regard.
Responsibilities of the Board of
Directors for the consolidated
financial statements
The Board of Directors is responsible for the prepara-
tion of the consolidated financial statements that give a
true and fair view in accordance with 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
F-86
Report of the statutory auditor on the consolidated financial statements of Novartis AG
to influence the economic decisions of users taken on
the basis of these consolidated financial statements.
As part of an audit in accordance with Swiss law, ISAs
and Swiss Auditing Standards, we exercise professional
judgment and maintain professional skepticism through-
out the audit. We also:
• Identify and assess the risks of material misstatement
of the consolidated financial statements, whether due
to fraud or error; design and perform audit procedures
responsive to those risks; and obtain audit evidence
that is sufficient and appropriate to provide a basis for
our opinion. The risk of not detecting a material 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 tim-
ing of the audit and significant audit findings, including
any significant deficiencies in internal control that we
identify during our audit.
We also provide the Board of Directors 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
disclosure about the matter or when, in extremely rare
circumstances, we determine that a matter should not
be communicated in our report because the adverse
consequences of doing so would reasonably be expected
to outweigh the public interest benefits of such commu-
nication.
Report on other legal and regulatory
requirements
In accordance with article 728a paragraph 1 item 3 CO
and Swiss Auditing Standard 890, we confirm that an
internal control system exists, which has been designed
for the preparation of 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
Luc Schulthess
Audit expert
Auditor in charge
Stephen Johnson
Global relationship
partner
Basel, January 29, 2019
The report set out on pages F-83 to F-87 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 F-82.
F-87
Financial statements of Novartis AG
Financial statements of Novartis AG
Income statements
(For the years ended December 31, 2018 and 2017)
(CHF millions)
Income from investment in Group subsidiaries
License income
Gain from disposal of intangible assets
Other income
Total income
Amortization of goodwill and other intangible assets
Impairment of investment in Group subsidiaries
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
2018
10 761
1 475
91
8
2017
7 633
1 588
274
5
3
4
5
5
12 335
9 500
– 1 140
– 1 141
– 263
– 23
– 2
– 23
– 2
– 1 428
– 1 166
10 907
8 334
488
– 231
11 164
– 197
10 967
449
– 180
8 603
– 176
8 427
A-1
Financial statements of Novartis AG
Balance sheets
(At December 31, 2018 and 2017)
(CHF millions)
Assets
Current assets
Cash and cash equivalents
Interest-bearing current receivables
Group subsidiaries
Other current receivables
Group subsidiaries
Third parties
Total current assets
Non-current assets
Financial assets
Group subsidiaries
Investments
Group subsidiaries
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 and free reserves
Treasury shares held by Novartis AG
Total equity
Total liabilities and equity
The accompanying Notes form an integral part of these financial statements.
A-2
Note
2018
2017
3
60
4 574
1 777
102
7
120
6
4 686
1 963
14 966
14 965
6
3
13 011
12 398
13 226
14 366
41 203
41 729
45 889
43 692
37
30
201
268
36
84
186
16
322
7
1 377
1 378
486
488
1 863
1 866
8
1 275
1 308
198
320
2 596
2 916
198
320
3 005
3 325
9
10
25 433
30 178
4 833
10 967
3 281
8 427
15 800
11 708
41 233
41 886
9
– 1 864
– 5 213
43 758
41 504
45 889
43 692
Notes to the financial statements of Novartis AG
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, Novartis AG
has applied the exemption included in Art. 961d SCO and
has not included additional disclosures, a cash flow
statement or a management report in its financial state-
ments.
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 recover-
able 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.
A-3
Notes to the financial statements of Novartis AG
3. Goodwill and other intangible asset movements
(CHF millions)
Goodwill
Gross cost 1
Accumulated amortization
January 1
Amortization charges
December 31
Net book value at December 31
Other intangible assets
Cost
January 1 1
Transfer to Group subsidiaries
December 31
Accumulated amortization
January 1 1
Transfer to Group subsidiaries
Net book value at December 31
Goodwill and other intangible assets
Net book value at December 31
1 There was no change during 2017.
2018
2017
22 350
22 350
– 7 984
– 6 843
– 1 140
– 1 141
– 9 124
– 7 984
13 226
14 366
11
– 11
– 11
11
11
11
– 11
13 226
14 366
4. Impairment of investment in Group subsidiaries
Novartis AG impaired certain Group participations in conjunction with the separation of the Alcon business as
described in Note 6.
5. Financial income and expenses
(CHF millions)
Interest
Foreign exchange
Others
Total
2018
2017
Income
Expenses
Income
Expenses
488
– 114
– 116
– 1
449
– 111
– 68
– 1
488
– 231
449
– 180
6. 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.
During the year, Alcon Pharmaceuticals Ltd. (APL), a
wholly owned subsidiary of the Company, was separated
into two distinct entities (Novartis Ophthalmics AG
(NOAG) and APL) in preparation for the anticipated spin-
off of Alcon (see Note 14). The transaction consisted of
a contribution of the net assets of APL, unrelated to the
Alcon business to NOAG, with a subsequent distribution
of the participation in NOAG to Novartis AG. To reflect
the economics of the transaction, the dividend income
and the related NOAG investment value (with an approx-
imate book value of CHF 4.3 billion) were offset ensur-
ing that Novartis AG’s combined carrying value of NOAG
and APL equals the previous carrying value of APL.
A-4
Notes to the financial statements of Novartis AG
7. 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 2023
Total
2017
(CHF
Issue price millions) millions)
2018
(CHF
100.640%
100.502%
100.479%
501
551
325
501
551
326
1 377 1 378
2018
1 377
1 377
2017
1 378
1 378
Comparison of balance sheet and fair value
(CHF millions)
Straight bonds
Total
2018
Balance sheet
2018
2017
Fair value Balance sheet
2017
Fair values
1 377
1 377
1 373
1 373
1 378
1 378
1 408
1 408
8. Share capital
January 1
2 616 844 820
1 308.4
2 627 114 820
Number of shares canceled/capital reduced during the period
– 66 220 000
– 33.1
– 10 270 000
December 31
2 550 624 820
1 275.3
2 616 844 820
2018
Number
of shares
Share capital
CHF millions
2017
Number
of shares
Share capital
CHF millions
1 313.6
– 5.2
1 308.4
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 1 308.4
million at December 31, 2017, to CHF 1 275.3 million at
December 31, 2018, due to a share capital reduction as
a result of the cancellation of 66.2 million repurchased
shares with a nominal value of CHF 33.1 million. The
cancellation was approved at the Annual General Meeting
of March 2, 2018, and became effective on May 9, 2018.
During 2017, 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 mil-
lion. The cancellation was approved at the Annual Gen-
eral Meeting of February 28, 2017, and became effective
on May 9, 2017.
A-5
Notes to the financial statements of Novartis AG
9. Reserve for treasury shares
Treasury shares held by subsidiaries 1
January 1
Number of shares purchased/sold; reserves transferred
December 31
1 Excluding foundations
2018
2017
Reserve for
treasury shares
held by subsidiaries
CHF millions
Number
of shares
Reserve for
treasury shares
held by subsidiaries
CHF millions
Number
of shares
50 506 375
– 7 276 905
43 229 470
3 005
– 409
2 596
56 847 803
– 6 341 428
50 506 375
3 417
– 412
3 005
2018
2017
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
117 527 458
5 213
61 577 458
Number of shares purchased/canceled; reserves transferred
– 42 970 000
– 3 349
55 950 000
December 31
74 557 458
1 864
117 527 458
792
4 421
5 213
Total treasury shares 1
January 1
Total number of shares purchased/sold or canceled;
reserves transferred
December 31
1 Excluding foundations
2018
Number of
shares
Total reserve for
treasury shares
CHF millions
2017
Number
of shares
Total reserve for
treasury shares
CHF millions
168 033 833
8 218
118 425 261
– 50 246 905
117 786 928
– 3 758
49 608 572
4 460
168 033 833
4 209
4 009
8 218
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 2018 totaled 24.4
million (2017: 70.6 million), with an average purchase
price of CHF 79 (2017: CHF 78). Treasury share sales
totaled 0.8 million (2017: 1.8 million), with an average sale
price of CHF 67 (2017: CHF 61), and share-based
compensation transactions totaled 7.6 million shares
(2017: 9.0 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, 2018,
treasury shares held by Novartis AG and its subsidiaries
totaled 117 786 928. As per the dividend payment date,
Novartis AG and its subsidiaries are expected to hold
107 251 448 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.
A-6
Notes to the financial statements of Novartis AG
10. Free reserves
(CHF millions)
January 1
Reduction due to cancellation of treasury shares (CHF 5 188 million / CHF 767 million of repurchased shares
less their nominal value of CHF 33 million / CHF 5 million)
Transfer from reserve for treasury shares
December 31
2018
2017
30 178
30 527
– 5 154
409
– 761
412
25 433
30 178
11. Contingent liabilities
(CHF millions)
Dec 31, 2018 Dec 31, 2017
Guarantees in favor of subsidiaries to cover capital and interest of bonds, credit facilities and commercial paper programs –
total maximum amount CHF 45 768 million (2017: CHF 43 195 million)
27 635
23 512
Other guarantees in favor of subsidiaries, associated companies and others –
total maximum amount CHF 3 379 million (2017: CHF 4 010 million)
Total contingent liabilities
1 649
1 592
29 284
25 104
Novartis AG is part of the Swiss Novartis value-added tax (VAT) group and is therefore jointly liable for existing and
future VAT claims from the Swiss Federal Tax Administration.
12. Registration, voting restrictions
and major shareholders
The Company’s Articles of Incorporation state that no
person or entity shall be registered with the right to vote
for more than 2% of the share capital, as set forth in the
commercial register. In particular cases, the Board of
Directors may allow exemptions from the limitation for
registration in the Novartis Share Register.
According to the Novartis Share Register, sharehold-
ers owning 2% or more of the Company’s capital at
December 31, 2018 and being entitled to voting rights on
all of their shares, excluding treasury shares held by
Novartis AG or its fully owned subsidiaries, are as fol-
lows:
% Holding of
share capital
Dec 31, 2018
% Holding of
share capital
Dec 31, 2017
Emasan AG, Basel
Novartis Foundation for Employee
Participation, Basel
UBS Fund Management
(Switzerland) AG, Basel
3.5
2.3
2.2
3.4
2.5
2.0
Furthermore, there are the following other significant
share holders:
Shareholders registered as nominees:
Chase Nominees Ltd., London
The Bank of New York Mellon, New York
Through The Bank of New York Mellon, Everett
Through The Bank of New York Mellon, New York 1.3%
Through The Bank of New York Mellon,
SA/NV, Brussels
Nortrust Nominees Ltd., London
0.7%
3.6%
2018
2017
9.8%
4.1%
2.1%
7.8%
4.3%
2.0%
2.3%
3.8%
Shareholder acting as American Depositary Share (ADS) depositary:
JPMorgan Chase Bank, N.A., New York
13.3%
12.3%
The following shareholder is disclosed through a notifi-
cation filed with Novartis AG, but not registered as of
December 31, 2018 in the Novartis Share Register:
• Norges Bank (Central Bank of Norway), Oslo, holds
2.1% (2017: 2.1%).
The following shareholders are disclosed through
notifications filed with Novartis AG and the SIX Swiss
Exchange, but not registered or registered with less than
2% of the share capital as of December 31, 2018 in the
Novartis Share Register:
• BlackRock, Inc., New York, holds between 3% and 5%;
• The Capital Group Companies, Inc., Los Angeles, holds
between 3% and 5%.
A-7
Notes to the financial statements of Novartis AG
13. Equity instrument disclosures for the Board of
Directors and Executive Committee members
Share ownership requirements for Board members
The Chairman is required to own a minimum of 30 000
Novartis shares, and other members of the Board of
Directors are required to own at least 5 000 Novartis
shares within five years after joining the Board of Direc-
tors, to ensure their interests are aligned with those of
shareholders.
Board members are prohibited from hedging or
pledging their ownership positions in Novartis shares
that are part of their guideline share ownership require-
ment, and are required to hold these shares for 12 months
after retiring from the Board of Directors. As at Decem-
ber 31, 2018, all current and former members of the
Board of Directors who were required to meet the mini-
mum share ownership requirements did so.
Shares, ADRs and share options owned by Board
members
As at December 31, 2018, 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,
2018 is shown in the table below.
Shares and ADRs owned by Board members1
Number of shares 1,2
At
At
December 31, December 31,
2017
2018
Joerg Reinhardt
Enrico Vanni
Nancy Andrews
Dimitri Azar
Ton Buechner
Srikant Datar
Elizabeth Doherty
Ann Fudge
Frans van Houten (from February 28, 2017)
Andreas von Planta
Charles L. Sawyers
William T. Winters
Total 3
542 199
518 310
23 500
5 739
20 101
4 042
14 863
13 094
8 069
4 428
39 383
37 239
4 882
14 818
2 728
2 761
15 457
978
133 493
130 634
9 460
15 371
7 763
12 397
814 505
767 204
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 Pierre Landolt stepped down from the Board of Directors on March 2, 2018. On March
2, 2018, Mr. Landolt owned 62 520 shares. According to Mr. 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) and any unvested
Performance Share Units (PSUs) are excluded. The
determination also includes other shares as well as
vested options of Novartis shares or ADRs that are
owned directly or indirectly by “persons closely linked”1
to an Executive Committee member. The Compensation
Committee reviews compliance with the share owner-
ship guideline on an annual basis.
As at December 31, 2018, 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, 2018, 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.
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, 2018.
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.
A-8
Notes to the financial statements of Novartis AG
Shares, ADRs and other equity rights owned by Executive Committee members1
Vested
shares
and ADRs
Unvested
shares
Total at
and other December 31,
2018
equity rights 2
Vested
shares
Unvested
shares
Total at
and other December 31,
2017
and ADRs equity rights 2
Vasant Narasimhan
(CEO from February 1, 2018)
Steven Baert
Elizabeth Barrett
(from February 1, 2018) 3
Bertrand Bodson
(from April 1, 2018)
James Bradner
Richard Francis
Paul Hudson
Harry Kirsch
Shannon Thyme Klinger
(from April 1, 2018)
Steffen Lang
(from April 1, 2018)
Klaus Moosmayer
(from December 1, 2018)
John Tsai
(from May 1, 2018)
Robert Weltevreden
(from June 1, 2018)
Total 4
25 240
117 855
143 095
16 279
85 726
102 005
23 365
62 059
85 424
10 955
55 125
66 080
0
0
0
0
8 514
8 514
924
90 190
91 114
NA
NA
0
NA
NA
NA
NA
47 364
47 364
48 079
67 015
115 094
35 117
57 758
92 875
16 756
63 174
79 930
6 616
36 193
42 809
97 081
100 302
197 383
64 769
95 378
160 147
14 007
40 111
54 118
23 793
33 577
57 370
0
3 274
3 274
6 429
18 634
25 063
150
3 690
3 840
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
255 824
608 395
864 219
133 736
377 544
511 280
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.
3 Elizabeth Barrett stepped down from the role of CEO, Novartis Oncology and from the Executive Committee as at the end of the 2018 business year. The LTPP and LTRPP grants
(16 284 and 6 107 PSUs, respectively) for the 2018-2020 performance cycle, and the 2018 buyout award of 21 267 performance shares were forfeited in full upon her departure on
December 31, 2018.
4 Joseph Jimenez, F. Michael Ball, Felix Ehrat and André Wyss stepped down from the Executive Committee in 2018. At the time they stepped down from the Executive Committee,
Mr. Jimenez owned 4 750 vested shares, and 244 297 unvested shares and other equity rights; Mr. Ball owned no vested shares, and 165 810 unvested shares and other equity
rights; Mr. Ehrat owned 236 886 vested shares, and 114 038 unvested shares and other equity rights; and Mr. Wyss owned 81 347 vested shares and 49 344 unvested shares and
other equity rights.
A-9
Notes to the financial statements of Novartis AG
14. Event subsequent to December 31, 2018
In preparation for the proposed spin-off of Alcon, which
will contain the Novartis eye care devices business, from
Novartis, Novartis AG will contribute certain participa-
tions in Alcon subsidiaries from Novartis AG to Alcon Inc.
Furthermore, Alcon Inc. will increase its capital to create
the shares necessary for the distribution of Alcon Inc.
shares to the Novartis AG shareholders (such distribu-
tion subject to approval by the Annual General Meeting
of Novartis AG). On January 29, 2019, the Board pro-
posed to distribute, by way of a dividend in kind, 1 share
in Alcon Inc. for every 5 dividend bearing shares of
Novartis AG (treasury shares owned by Novartis AG or
its fully owned subsidiaries will not receive shares of
Alcon Inc.). No dividend in kind will be declared on trea-
sury shares held by Novartis AG or its fully owned sub-
sidiaries.
A-10
Appropriation of available earnings and reserves of Novartis AG
Appropriation of available earnings and
reserves of Novartis AG
1. 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 (cash dividend)
Payment of a gross dividend (before taxes and duties) of CHF 2.85 (2017: CHF 2.80) on 2 443 373 372
(2017: 2 460 329 729) dividend-bearing shares1 with a nominal value of CHF 0.50 each
Total available earnings after appopriation of cash dividends
Dividend waived for additional treasury shares held by the Company
Balance to be carried forward after cash dividends
1 No dividend will be declared on treasury shares held by Novartis AG or its fully owned subsidiaries
2018
2017
4 833 109 672 3 281 006 904
10 966 901 239 8 427 115 178
15 800 010 911 11 708 122 082
– 6 963 614 110 – 6 888 923 241
8 836 396 801 4 819 198 841
13 910 831
8 836 396 801 4 833 109 672
Assuming that this proposal by the Board of Directors is
approved by the Annual General Meeting of Sharehold-
ers, payment of the dividend will be made as from March
6, 2019. The last trading day with entitlement to receive
the dividend is March 1, 2019. As from March 4, 2019, the
shares will be traded ex-dividend.
The Distribution is subject to the following conditions
precedent:
(i) The Alcon Shares shall have been admitted to listing
on the SIX Swiss Exchange and the New York Stock
Exchange as from the ex-dividend date (subject to
technical deliverables only);
2. Special Distribution by Way of a Dividend in Kind to
Effect the Spin-off of Alcon Inc.
The Board of Directors proposes to distribute, by way of
a dividend in kind, 1 share in Alcon Inc. (an “Alcon Share”)
for every 5 dividend-bearing shares of Novartis AG1 (the
“Distribution”). On Novartis AG’s stand-alone balance
sheet, the Distribution shall be made at the book value
of Alcon Inc., amounting immediately prior to the Distri-
bution to a total of approximately CHF 17 bn2 (estimated),
but in any case not exceeding the free reserves of
Novartis AG amounting to CHF 25.4 bn (as of December
31, 2018), and be booked against (i) CHF 19’548’000.- of
capital contribution reserves and (ii) for the remaining
part, against free reserves. The Board of Directors shall
determine in its discretion the treatment of fractions and
holders of physical share certificates (“Heimverwahrer”)
that do not timely provide the necessary details to receive
Alcon Shares (it being understood that respective Alcon
Shares shall generally be sold, and cash proceeds shall
be delivered in lieu of fractions or Alcon Shares of such
holders).
1. No dividend in kind will be declared on treasury shares held by Novartis AG or its fully
(ii) The U.S. Securities and Exchange Commission
(“SEC”) shall have declared effective the registration
statement on Form 20-F for the Alcon Shares under
the U.S. Securities Exchange Act of 1934, as amended,
and no stop order suspending the effectiveness of this
registration statement shall be in effect and no pro-
ceedings for that purpose shall be pending before or
threatened by the SEC;
(iii) No order, injunction or decree issued by any govern-
mental authority of competent jurisdiction or other
legal restraint or prohibition preventing consummation
of the spin-off of Alcon shall be in effect, and no other
event outside the control of Novartis shall have occurred
or failed to occur that prevents the consummation of
the spin-off of Alcon (including, but not limited to,
Novartis not being able to complete the internal trans-
actions to separate the businesses currently constitut-
ing the eye care devices business of Novartis, compris-
owned subsidiaries.
2. The distribution amount represents the Novartis AG estimated statutory book values
of the participation in Alcon Inc. immediately before the Distribution. This amount does
not represent the expected fair market value of the Alcon business to be distributed to
the Novartis AG shareholders.
A-11
Appropriation of available earnings and reserves of Novartis AG
ing its Surgical and Vision Care operations, from the
other businesses, due to elements outside of its rea-
sonable control); and
(iv) No other events or developments shall have occurred
prior to the ex-dividend date of the Distribution that, in
the judgment of the Novartis Board of Directors, would
result in the spin-off of Alcon having a material adverse
effect (including, but not limited to, material adverse
tax consequences or risks) on Novartis or its share-
holders.
The Board of Directors shall (i) determine whether these
conditions precedent are satisfied and, to the extent
legally permissible, have authority to waive any condi-
tions precedent if such waiver is, in the judgment of the
Board of Directors, in the best interest of Novartis and
its shareholders; and (ii) set the record, ex-dividend and
settlement dates of the Distribution, which shall occur
as soon as practicable following the satisfaction (or
waiver) of these conditions precedent.
A-12
Report of the statutory auditor on the financial statements of Novartis AG
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, 2018, income statement, and notes
to the financial statements (pages A-1 to A-10) for the
year then ended, including a summary of significant
accounting policies.
In our opinion, the accompanying financial state-
ments as at December 31, 2018, 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 require-
ments.
We believe that the audit evidence we have obtained
is sufficient and appropriate to provide a basis for our
opinion.
Our audit approach
Audit scope
We designed our audit by determining materiality and
assessing the risks of material misstatement in the finan-
cial statements. In particular, we considered 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 pro-
cedures, and to evaluate the effect of misstatements,
both individually and in aggregate, on the financial state-
ments as a whole.
• Overall materiality: CHF 400 million
• How we determined it: With reference to our bench-
mark of 5% and for consistency with the Novartis Group
consolidated financial statements, we determined
materiality at CHF 400 million which is 3.6% 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 applica-
ble, matters related to going concern and using the going
concern basis of accounting unless the Board of Direc-
tors either intends to liquidate the entity or to cease oper-
ations, or has no realistic alternative but to do so.
A-13
Report of the statutory auditor on the financial statements of Novartis AG
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 mat-
ters. We describe these matters in our auditor’s report,
unless law or regulation precludes public disclosure
about the matter or when, in extremely rare circum-
stances, we determine that a matter should not be com-
municated in our report because the adverse conse-
quences of doing so would reasonably be expected to
outweigh the public interest benefits of such communi-
cation.
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 and reserves complies with Swiss
law and the Company’s Articles of Incorporation. We rec-
ommend that the financial statements submitted to you
be approved.
PricewaterhouseCoopers AG
Luc Schulthess
Audit expert
Auditor in charge
Stephen Johnson
Global relationship
partner
Basel, January 29, 2019
Auditor’s responsibilities for the audit
of the financial statements
Our objectives are to obtain reasonable assurance about
whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, and
to issue an auditor’s report that includes our opinion.
Reasonable assurance is a high level of assurance but
is not a guarantee that an audit conducted in accordance
with Swiss law and Swiss Auditing Standards will always
detect a material misstatement when it exists. Misstate-
ments can arise from fraud or error and are considered
material if, individually or in the aggregate, they could
reasonably be expected to influence the economic deci-
sions of users taken on the basis of these financial state-
ments.
As part of an audit in accordance with Swiss law and
Swiss Auditing Standards, we exercise professional
judgment and maintain professional skepticism 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 tim-
ing of the audit and significant audit findings, including
any significant deficiencies in internal control that we
identify during our audit.
A-14