Annual Report
2019
Annual Report
2019
Chairman’s letter
Novartis delivered strong performance in 2019. New
product launches together with a disciplined focus on
costs and operational efficiency helped us in crease
sales, operating income and operating profit margin.
Looking ahead, we are well positioned to continue our
growth trajectory as we pursue our goal of driving sci-
ence-based medical innovation.
With the successful spin-off of our former eye care divi-
sion, Alcon, in early 2019, we concluded a major step in
our portfolio transformation to create a more focused
medicines company. We are active in disease areas with
high un met needs and have a leading portfolio of highly
innovative drugs, including recent ly launched breast can-
cer therapy Piqray, eye care treatment Beovu, multiple
sclerosis drug Mayzent, and our gene therapy Zolgensma
for spinal muscular atrophy.
Going forward, we continue to strive for business excel-
lence across all our divisions and functions. We are con-
tinually streamlining our business services and produc-
tion platforms. We are also introducing innovative digital
technologies to support our research, development and
production efforts. As the digitization of our operations
and the overall healthcare industry gains pace, we are
also taking action to minimize cyber risks and protect
patient data.
As a global healthcare leader, we are working to spear-
head cutting-edge medical development. Our recent
moves in the areas of gene therapies, radioligand thera-
pies and digital health reflect our position at the forefront
of scientific discovery. To develop breakthrough thera-
pies that can help change the practice of medicine, we
are intent on attracting the best industry talent, collabo-
rating with leading technology partners, and pursuing
acquisitions to strengthen and expand high-tech therapy
platforms.
We have also established clear environmental, social and
governance (ESG) targets for our management. With a
view to reaching the highest international environmental
standards, we aim to become carbon neutral by 2025,
and plastic and water neutral by 2030, and have put pro-
cesses in place to minimize the carbon footprint of our
supply chain. Likewise, the implementation of our Access
Principles is gaining pace with the approval of innovative
medicines in low- and middle-income countries, includ-
ing migraine treatment Aimovig and cancer drug Kisqali.
I
Although we still have work to do, we are also making good
progress in efforts to enhance our integrity standards as
part of a broader cultural transformation. In our strength-
ened governance framework, our Ethics, Risk & Compli-
ance (ERC) function is developing a principles-based
Code of Ethics to support our employees in navigating
the increasingly complex healthcare landscape and man-
aging associated risks. The Board of Directors and the
Executive Committee are fully committed to further
improving our business ethics principles to become one
of the most trusted healthcare partners in the industry.
I thank you for the confidence you have placed in our com-
pany and am pleased to be able to propose a dividend
increase of 4% to CHF 2.95 at the next Annual General
Meeting.
Sincerely,
Joerg Reinhardt
Chairman of the Board of Directors
CEO’s letter
The Novartis team works tirelessly to bring life-changing
medical innovation to the world. We had a strong year in
2019 – delivering on our strategy, producing strong finan-
cial results, and making a significant impact on society
by improving and extending the lives of people across
the globe.
In April, we took an important step with the spin-off of
our former Alcon eye care devices division, further trans-
forming Novartis into a focused medicines company.
Our research and development teams launched five all-
new medicines in 2019, from our groundbreaking gene
therapy Zolgensma, to the first target ed biologic medi-
cine for sickle cell disease patients. We also advanced
the development of more than 25 potential blockbuster
treatments that we hope to launch in the coming years.
This progress shows the power of our innovation engine,
and of our people.
We are taking steps to make our treatments available to
more people worldwide by integrating access strategies
into the core of our business. Our work to tackle sickle
cell disease is one example. Adakveo, our new treatment
for this life-threatening, inherited blood disorder, was
approved for use in the US last November. At the same
time, we launched a collaboration in Ghana to expand
diagnosis and treatment of the disease and to strengthen
the broader healthcare system – an approach that could
become a model for other African countries.
We are increasingly recognized as a leader in our indus-
try in integrating data science and digital technologies
into all aspects of our work – from discovering new
medicines in the lab to improving manufacturing effi-
ciency and serving our customers more effectively. We
are making progress on 12 major projects to deploy key
digital technologies and data analytics at scale, and we’re
colla borating with other companies to accelerate our
efforts in areas such as artificial intelligence.
There’s significant work underway to transform how we
operate, expand our capabilities and make us more effi-
cient. In our manufacturing operations, we are adding
capabilities in areas such as cell therapies, where we now
have processing capacity in place on every major conti-
nent. In business services, we’re getting smarter at pro-
curement and redesigning our work to get at the root of
inefficiencies, such as how we prepare marketing mate-
rials across the company.
Delivering on our strategy supported our financial per-
formance in 2019. Strength in key products helped us
post net sales of USD 47.4 billion, up 9%, measured in
constant currencies (cc). Our core operating income rose
17% (cc) to USD 14.1 billion, increasing core margin by 1.9
percentage points (cc) to 29.7%.
I’m incredibly grateful for the hard work of our employ-
ees, whose passion and commitment is driving our
momentum on every front. They are helping us
trans form our company culture, which I believe will be a
core performance driver for Novartis. It will take time, but
after visiting Novartis sites in nearly 40 countries since I
took over as CEO two years ago and seeing the results
from our internal surveys, I’m confident our culture
change is taking hold.
The progress we made this past year is helping set the
foundation for a remarkable future for our company as
we strive to create long-term value for patients, for soci-
ety and for our shareholders. Thank you for your support
as we continue reimagining medicine together.
Sincerely,
Vas Narasimhan
Chief Executive Officer
II
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 ..........................................................................................................................................................23
4.A History and development of Novartis ........................................................................................................................................23
4.B Business overview ...............................................................................................................................................................................28
Innovative Medicines ..........................................................................................................................................................................29
Sandoz .......................................................................................................................................................................................................55
4.C Organizational structure ...................................................................................................................................................................60
4.D Property, plants and equipment ...................................................................................................................................................60
Item 4A. Unresolved Staff Comments ......................................................................................................................................................... 63
Item 5. Operating and Financial Review and Prospects ..................................................................................................................64
5.A Operating results..................................................................................................................................................................................64
5.B Liquidity and capital resources ...................................................................................................................................................111
5.C Research and development, patents and licenses ..........................................................................................................122
5.D Trend information ..............................................................................................................................................................................122
5.E Off-balance sheet arrangements .............................................................................................................................................123
5.F Tabular disclosure of contractual obligations ....................................................................................................................123
Item 6. Directors, Senior Management and Employees ............................................................................................................... 124
6.A Directors and senior management .......................................................................................................................................... 124
6.B Compensation ....................................................................................................................................................................................125
6.C Board practices..................................................................................................................................................................................163
6.D Employees ............................................................................................................................................................................................194
6.E Share ownership................................................................................................................................................................................195
Item 7. Major Shareholders and Related Party Transactions ....................................................................................................196
7.A Major shareholders ..........................................................................................................................................................................196
7.B Related party transactions ...........................................................................................................................................................197
Interests of experts and counsel ..............................................................................................................................................197
7.C
Financial Information .......................................................................................................................................................................198
8.A Consolidated statements and other financial information ...........................................................................................198
8.B Significant changes .........................................................................................................................................................................199
The Offer and Listing ......................................................................................................................................................................200
9.A Offer and listing details ..................................................................................................................................................................200
9.B Plan of distribution ............................................................................................................................................................................200
9.C Markets ...................................................................................................................................................................................................200
9.D Selling shareholders ........................................................................................................................................................................200
9.E Dilution ....................................................................................................................................................................................................200
9.F Expenses of the issue ....................................................................................................................................................................200
Item 10. Additional Information .....................................................................................................................................................................201
10.A Share capital ........................................................................................................................................................................................201
10.B Memorandum and articles of association ............................................................................................................................201
10.C Material contracts .............................................................................................................................................................................204
10.D Exchange controls............................................................................................................................................................................205
10.E Taxation ..................................................................................................................................................................................................205
10.F Dividends and paying agents ......................................................................................................................................................210
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.G Statement by experts .....................................................................................................................................................................210
10.H Documents on display ....................................................................................................................................................................210
10.I Subsidiary information ....................................................................................................................................................................210
Item 11. Quantitative and Qualitative Disclosures About Market Risk .................................................................................... 211
Item 12. Description of Securities Other Than Equity Securities............................................................................................... 212
12.A Debt securities ................................................................................................................................................................................... 212
12.B Warrants and rights.......................................................................................................................................................................... 212
12.C Other securities ................................................................................................................................................................................. 212
12.D American Depositary Shares ...................................................................................................................................................... 212
214
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies .......................................................................................................... 214
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds .............................................215
Item 15. Controls and Procedures ..............................................................................................................................................................216
Item 16A. Audit Committee Financial Expert ........................................................................................................................................... 217
Item 16B. Code of Ethics ....................................................................................................................................................................................218
Item 16C. Principal Accountant Fees and Services ..............................................................................................................................219
Item 16D. Exemptions from the Listing Standards for Audit Committees ................................................................................220
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers .............................................................221
Item 16F. Change in Registrant’s Certifying Accountant ..................................................................................................................222
Item 16G. Corporate Governance ..................................................................................................................................................................223
Item 16H. Mine Safety Disclosure ..................................................................................................................................................................224
225
PART III
Item 17. Financial Statements.......................................................................................................................................................................225
Item 18. Financial Statements.......................................................................................................................................................................226
Item 19. Exhibits ...................................................................................................................................................................................................227
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 the “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 Com-
mittee of Novartis; references to “GSK” are to GlaxoSmithKline plc, references to “AAA” are to Advanced Acceler-
ator Applications S.A., references to “AveXis” are to AveXis, Inc., references to “Endocyte” are to Endocyte, Inc.,
and references to “Takeda” are to Takeda Pharmaceutical Company Limited.
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, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), and the United States Private Securities Litigation Reform Act of 1995, as amended. 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 forward-looking statements. Forward-looking statements can be identified by words such as “poten-
tial,” “expected,” “will,” “planned,” “pipeline,” “outlook,” “may,” “could,” “would,” “anticipate,” “seek,” or similar terms,
or by express or implied discussions regarding potential new products, potential new indications for existing prod-
ucts, or regarding potential future revenues from any such products; or regarding the potential outcome, or finan-
cial or other impact on Novartis, of the acquisition of The Medicines Company, the proposed divestiture of certain
portions of our Sandoz Division business in the US, and other transactions described; or regarding the potential
impact of share buybacks; 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 strat-
egy, plans, expectations or intentions. Such forward-looking statements are based on the current beliefs and expec-
tations of management regarding future events, and are subject to significant known and unknown risks and uncer-
tainties. 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;
• Uncertainties regarding potential significant breaches of information security or disruptions of our information
technology systems;
• Uncertainties regarding the success of key products and commercial priorities;
• 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 is expected to continue this year;
• Uncertainties in the research and development of new healthcare products, including clinical trial results and
additional analysis of existing clinical data;
• 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;
• Uncertainties regarding actual or potential legal proceedings, including, among others, litigation and other legal
disputes with respect to the proposed transactions, product liability litigation, litigation and investigations regard-
ing sales and marketing practices, intellectual property disputes and government investigations generally;
• Our reliance on outsourcing key business functions to third parties;
• Our ability to comply with data privacy laws and regulations, and uncertainties regarding potential significant
breaches of data privacy;
• Safety, quality, data integrity or manufacturing issues;
• Uncertainties in the development or adoption of potentially transformational technologies and business models;
• The potential that the strategic benefits, synergies or opportunities expected from our recent and proposed future
transactions may not be realized or may take longer to realize than expected;
• Uncertainties involved in predicting shareholder returns;
• Our performance on environmental, social and governance measures;
5
Forward-looking statements
• Political, economic and trade conditions, including uncertainties regarding the effects of ongoing instability in var-
ious parts of the world;
• Uncertainties regarding the effects of recent and anticipated future changes in tax laws and their application to
us;
• Uncertainties regarding future global exchange rates; and
• Uncertainties regarding future demand for our products.
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, 2019, 2018 and 2017, 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 DATA1
Year ended December 31,
2019
2018
2017
2016
2015
Net sales to third parties from continuing operations
47 445
44 751
42 338
41 975
42 641
Operating income from continuing operations
Income from associated companies
Interest expense
Other financial income and expense
9 086
659
– 850
45
8 403
6 438
– 932
186
8 702
1 108
– 750
42
Income before taxes from continuing operations
8 940
14 095
9 102
8 248
8 522
703
– 675
– 385
7 891
266
– 637
– 433
7 718
Taxes
– 1 793
– 1 295
– 1 603
– 1 095
– 1 066
Net income from continuing operations
7 147
12 800
7 499
6 796
6 652
Net (loss) / income from discontinued operations before gain
on distribution of Alcon Inc. to Novartis shareholders
Gain on distribution of Alcon Inc. to Novartis AG shareholders
Net income related to portfolio transformation transactions
– 101
4 691
– 186
204
– 98
376
10 766
Net income from discontinued operations
4 590
– 186
204
– 98
11 142
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
11 737
12 614
7 703
6 698
17 794
11 732
12 611
7 703
6 712
17 783
5
3
0
– 14
11
3.12
2.00
5.12
3.08
1.98
5.06
5.52
– 0.08
5.44
5.46
– 0.08
5.38
3.20
0.08
3.28
3.17
0.08
3.25
2.86
– 0.04
2.82
2.84
– 0.04
2.80
6 645
6 966
6 495
6 475
2.95
2.85
2.80
2.75
2.77
4.63
7.40
2.72
4.57
7.29
6 643
2.70
Personnel cost from continuing operations4, 5
13 843
13 515
12 009
11 950
11 336
Full-time equivalent associates of continuing operations at year-end5
103 914
104 780
102 467
99 747
99 624
1 Continuing operations include the businesses of the Innovative Medicines and Sandoz Divisions and Corporate activities. Discontinued operations include the Alcon business,
which was divested in 2019; the Animal Health and Vaccines businesses divested in 2015; and the Consumer Health business, which was contributed also in 2015 into a new entity,
GlaxoSmithKline Consumer Healthcare Holdings Ltd. (GSK Consumer Healthcare), where Novartis had a 36.5% interest. This newly created entity was sold during 2018 to GSK. To
reflect these transactions, Novartis reported the Group’s financial results for 2019 to 2015 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 2015 through 2018 were approved at the respective AGMs, and
dividends for 2019 will be proposed to the Annual General Meeting on February 28, 2020, 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
and derivative financial instruments
Inventories
Other current assets
Non-current assets
Year ended December 31,
2019
2018
2017
2016
2015
11 446
15 964
5 982
6 956
9 485
6 867
7 777
6 255
5 447
6 226
11 235
11 836
11 856
10 899
11 172
88 866
110 000
104 871
105 193
108 711
Assets of disposal group held for sale1
841
807
Total assets
Trade accounts payable
Other current liabilities
Non-current liabilities
118 370
145 563
133 079
130 124
131 556
5 424
5 556
5 169
4 873
5 668
22 809
24 000
18 234
17 336
18 040
34 555
37 264
35 449
33 024
30 726
Liabilities of disposal group held for sale1
31
51
Total liabilities
62 819
66 871
58 852
55 233
54 434
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)
55 474
78 614
74 168
74 832
77 046
77
78
59
59
76
55 551
78 692
74 227
74 891
77 122
118 370
145 563
133 079
130 124
131 556
55 551
78 692
74 227
74 891
77 122
856
875
869
896
890
2 265
2 311
2 317
2 374
2 374
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”).
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
2015
2016
2017
2018
2019 1
Month and
year paid
Total dividend Total dividend
per share
(USD)
per share
(CHF)
March 2016
March 2017
March 2018
March 2019
March 2020
2.70
2.75
2.80
2.85
2.95
2.70
2.72
2.94
2.84
3.04 2
1 Dividend to be proposed at the Annual General Meeting on February 28, 2020, and to be distributed March 5, 2020.
2 Translated into US dollars at the December 31, 2019, rate of USD 1.032 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 following risk
factors, before deciding to invest in or to maintain an
investment in any Novartis securities. Our business, as
well as our financial condition or results of operations,
could be materially adversely affected by any of these
risks, as well as other risks and uncertainties not cur-
rently known to us or not currently considered material.
Pressures on pricing and reimbursement for our
products affect our business and may impact our
future financial results.
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. Global pressures on pricing may neg-
atively impact, in parallel, both our product pricing and
our market access.
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 gov-
ernments and other payers, including government-im-
posed industrywide price reductions, mandatory pricing
systems, reference pricing systems, payers limiting
access to treatments based on cost-benefit analyses,
imports of drugs from lower-cost countries to high-
er-cost countries, shifting of the payment burden to
patients through higher co-payments and co-pay accu-
mulator programs, limiting physicians’ ability to choose
among competing medicines, mandatory substitution of
generic drugs for the patented equivalent, pressure on
physicians to reduce the prescribing of patented pre-
scription medicines, increasing pressure on intellectual
property protections, and growing requirements for
increased transparency on pricing. For more information
on such price controls, see “Item 4. Information on the
Company—Item 4.B Business overview—Innovative
Medicines—Price controls.”
We expect these challenges to continue and to
increase in 2020 and beyond, as political pressures
mount and healthcare payers around the globe, includ-
ing government-controlled health authorities, insurance
companies and managed care organizations, step up ini-
tiatives to reduce the overall cost of healthcare, 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 develop-
ment 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 operations, as well as on
our reputation.
Significant breaches of information security or
disruptions of our information technology systems
could adversely affect our business.
We are heavily dependent on critical, complex and inter-
dependent information technology systems, including
internet-based systems, some of which are managed by
third-party service providers, to support our business
processes. We routinely experience cybersecurity
attacks and incidents on such networks and systems,
and while to date none of these incidents have been
material to us, like many companies, we expect to con-
tinue to experience similar cybersecurity threats and
attacks in the future. Cybersecurity threats and attacks
take many forms and the size, age and complexity of our
information technology systems make them potentially
vulnerable to external and internal security threats; out-
ages; malicious intrusions and attacks; cybercrimes,
including state-sponsored cybercrimes; malware; mis-
placed or lost data; programming or human errors; or
other similar events. While we have devoted and continue
to devote significant resources and management atten-
tion to cybersecurity, information management and busi-
ness continuity efforts, 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 event, such
as a disruption or loss of availability of one or more of
our information technology systems, could negatively
impact important business processes, such as the con-
duct of scientific research and clinical trials, the submis-
sion of data and information to health authorities, our
manufacturing and supply chain processes, our ship-
ments to customers, our compliance with legal obliga-
tions, and communication between employees and with
third parties. Information technology issues could also
lead to the compromise of trade secrets or other intel-
lectual property that could be sold and used by compet-
itors to accelerate the development or manufacturing of
competing products; to the compromise of personal
financial and health information; and to the compromise
of information technology security data such as user-
names, passwords and encryption keys, as well as secu-
rity strategies and information about network infrastruc-
ture, which could allow unauthorized parties to gain
access to additional systems or data. In addition, mal-
11
Item 3. Key Information
functions in software or other medical devices that make
significant use of information technology could lead to a
risk of direct harm to patients.
For business reasons we have outsourced significant
parts of our IT infrastructure to third-party providers, and
we currently use these providers to perform busi-
ness-critical IT services for us. We are therefore vulner-
able to service interruptions by these providers and we
may experience interruptions, delays or outages in IT
service availability in the future due to a variety of fac-
tors outside of our control. Outages and capacity con-
straints could arise from a number of causes such as
technical failures, natural disasters, fraud or security
attacks. Interruptions in the service provided by these
third parties could affect our ability to perform critical
tasks.
In addition, we face potential difficulties in integrat-
ing the IT systems of the businesses that we acquire,
including replacing, integrating or working with separate
IT systems used by such companies, and transferring
relevant data from such separate systems and their third-
party providers. See also “—We may not successfully
achieve our goals in transactions or reorganizations,”
below.
Our dependence upon information technology,
breaches of data security, technology disruptions, or
other impacts from the use of interconnected technolo-
gies, could disrupt our business operations and result in
enforcement actions or liability, including potential gov-
ernment fines and penalties, 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 dam-
age, to further modify or enhance our protective mea-
sures, 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.
Our financial performance depends on the
commercial success of key products and
commercial priorities.
Our financial performance, including our ability to replace
revenue and income lost to generic, biosimilar and other
competition and to grow our business, depends heavily
on the commercial success of our key products. If any
of our major products were to become subject to prob-
lems such as changes in prescription growth rates, unex-
pected side effects, loss of intellectual property protec-
tion, data integrity issues, supply chain issues or other
product shortages, regulatory proceedings, changes in
labeling, publicity affecting doctor or patient confidence
in the product, material product liability litigation, or pres-
sure from new or existing competitive products, the
adverse impact on our revenue and profit could be sig-
nificant. In addition, our revenue and profit could be sig-
nificantly impacted by the timing and rate of commercial
acceptance of key new products. The commercial suc-
cess of our key products and launches in the face of
increasing competition and pressures on pricing requires
significant attention and focus from members of our key
management. See also “—Pressures on pricing and reim-
bursement for our products affect our business and may
impact our future financial results,” above, 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. We cannot predict with accuracy the tim-
ing of the introduction of products that compete with
ours or the related effect on our sales. However, prod-
ucts significantly competitive to our major products –
including Cosentyx, Lucentis, Gilenya, Tasigna, Kisqali,
Kymriah, Entresto and Beovu – are on the market, and
others are in development. In addition, numerous com-
panies 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 tech-
nologies 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 research and development, or
in marketing and sales.
Our products face losses of intellectual property
protection.
Major products of our Innovative Medicines Division, as
well as certain products of our Sandoz Division, are pro-
tected by patent and other intellectual property rights,
which provide us with exclusive rights to market those
products for a limited time 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. The resulting 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 or biosimilar competition
for a patented branded medicine typically results in a
significant and rapid reduction in net sales and operat-
ing income for the branded product because generic or
biosimilar manufacturers typically offer their versions at
sharply lower prices. Such competition can occur after
successful challenges to intellectual property rights or
the regular expiration of the patent term or other intel-
lectual property rights. Such competition can also result
from the entry of generic or biosimilar versions of another
medicine in the same therapeutic class as one of our
drugs or in a competing therapeutic class, from a Dec-
laration of Public Interest or the compulsory licensing of
our drugs by governments, or from a general weakening
of intellectual property and governing laws in certain
countries around the world. In addition, generic or bio-
similar manufacturers may sometimes conduct so-called
“launches at risk” of products that are still under legal
challenge for infringement, or whose patents are still
under legal challenge for validity, before final resolution
of legal proceedings.
12
Item 3. Key Information
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, or from success-
ful or otherwise resolved challenges to patent protec-
tion.
• Our former top-selling product Gleevec/Glivec contin-
ues to face generic competition in major markets.
• Patent protection for Exjade in the US has expired.
Generic versions of Exjade are available in the US.
• In the US, for Afinitor, we have resolved patent litiga-
tion. Generic versions of the three lower dosage
strengths of Afinitor are available in the US; additional
generic competition may start in mid-2020. We have
resolved patent litigation relating to Afinitor Disperz.
• 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 or Japan for Sandostatin LAR, the long-act-
ing version of Sandostatin that represents the majority
of our Sandostatin sales, such generic competition may
arise in the future. Generic versions of Sandostatin LAR
are available in some EU markets.
• Intellectual property protection for a number of addi-
tional major products is either being challenged or will
expire at various times in the coming years, raising the
possibility of generic or biosimilar competition. Among
these products that may begin to face generic or bio-
similar competition in one or more major markets during
the next three years are our remaining everolimus prod-
ucts or their remaining dosage strengths (Afinitor/
Votubia and Zortress/Certican), Jadenu, Lucentis and
potentially Gilenya. For more information on the patent
and generic competition status of our Innovative
Medicines Division’s products, see “Item 4. Information
on the Company—Item 4.B Business overview—
Innovative Medicines—Intellectual property.”
In 2020, 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 may
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 operating income for
that year in an amount corresponding to a significant
portion of the product’s lost sales. The magnitude of the
impact of generic or biosimilar competition on our income
could depend on a number of factors, including the time
of year at which the generic or biosimilar competitor is
launched; the ease or difficulty of manufacturing a com-
petitor product and obtaining regulatory approval to mar-
ket it; the number of generic or biosimilar competitor
products approved, including whether, in the US, a sin-
gle competitor is granted an exclusive marketing period;
whether an authorized generic is launched; the geogra-
phies in which generic or biosimilar competitor products
are approved, including the strength of the market for
generic or biosimilar pharmaceutical products in such
geographies, and the comparative profitability of branded
pharmaceutical products in such geographies; and our
ability to successfully develop and launch profitable new
products to replace the income lost to generic or bio-
similar competition.
With respect to major products for which the patents
are expiring or are successfully challenged, 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 unexpect-
edly 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 con-
dition, or results of operations, both due to the loss of
revenue and earnings, and the difficulties in planning for
such losses.
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 develop new products that
address unmet and changing medical needs, are
accepted by patients and physicians, are reimbursed by
payers, and are commercially successful. Our ability to
grow our business; to replace sales lost due to branded
competition, entry of generics, or other reasons; and to
bring to market products and medical advances that take
advantage of new and potentially disruptive technolo-
gies, depends in significant part upon the success of
these efforts. However, developing new healthcare prod-
ucts and bringing them to market is a costly, lengthy and
uncertain process. In spite of our significant investments,
there can be no guarantee that our research and devel-
opment activities will produce commercially successful
new products that will enable us to replace revenue and
income lost to generic and other competition and to grow
our business.
Research and development of new products of our
Innovative Medicines Division can take approximately 10
to 15 years, from discovery to commercial product
launch. Failure can occur at any point in the process,
including in later stages after substantial investment.
With limited available intellectual property protections,
the longer it takes to develop a product, the less time
there may be for us to recoup our research and devel-
opment costs. New products must undergo intensive
preclinical and clinical testing, and must be approved by
means of highly complex, lengthy and expensive approval
processes that can vary from country to country.
13
Item 3. Key Information
Further, to achieve approvals of new products and
new indications, regulatory authorities continue to estab-
lish new and increasingly rigorous requirements in the
already lengthy and expensive process of obtaining reg-
ulatory approvals and reimbursement for pharmaceuti-
cal products.
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 potential new innovations.
Our Sandoz Division has made, and expects to con-
tinue to make, significant investments in the development
of biotechnology-based, “biologic” medicines intended
for sale as bioequivalent or “biosimilar” versions of cur-
rently marketed biotechnology products. While the
development of such products typically is significantly
less costly and complex than the development of the
equivalent originator medicines, it is nonetheless signifi-
cantly more costly and complex than that for typical
small-molecule generic products. In addition, many
countries do not yet have fully developed legislative or
regulatory pathways to facilitate the development of bio-
similars and permit their sale in a manner in which they
are readily substitutable for the originator product. Fur-
ther delays or difficulties that may arise in the develop-
ment or marketing of biosimilars could put at risk the sig-
nificant investments that Sandoz has made, and will
continue to make, in its Biopharmaceuticals business.
Sandoz also achieves significant revenue opportunities
when it secures and maintains exclusivity periods
granted for generic products in certain markets – par-
ticularly the 180-day exclusivity period granted in the US
by the Hatch Waxman Act for first-to-file generics. Fail-
ure to obtain and maintain such exclusivity periods or to
successfully develop and market biosimilars could have
a material adverse effect on the success of the Sandoz
Division and the Group as a whole.
Further, our research and development activities
must be conducted in an ethical and compliant manner.
Among other things, we must be concerned with patient
safety, data privacy, Current Good Clinical Practices
(cGCP) requirements, data integrity, the fair treatment
of patients, and animal welfare requirements. Should we
fail to properly manage such issues, we risk injury to third
parties, damage to our reputation, negative financial con-
sequences as a result of potential claims for damages,
sanctions and fines, and the potential that our invest-
ments in research and development activities could have
no benefit 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 Innovative Medicines and Sandoz Divisions
under “Item 4. Information on the Company—Item 4.B
Business overview.”
We could be impacted by new laws and regulations;
failures to comply with laws; legal proceedings; and
government investigations.
We are obligated to comply with the laws of all of the
countries in which we operate and sell products with
respect to an extremely wide and growing range of activ-
ities. Such legal requirements are extensive and com-
plex. New requirements may be imposed on us as a result
of changing government and public expectations regard-
ing the healthcare industry, and acceptable corporate
behavior generally.
For example, we are faced with new laws and regu-
lations requiring more transparency in how we do busi-
ness, including with respect to our interactions with
healthcare professionals and organizations. These laws
and regulations include requirements that we disclose
payments or other transfers of value made to healthcare
professionals and organizations, as well as information
relating to the costs and 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
worldwide, and various US, federal and state, and inter-
national laws and regulations, including those pertaining
to government benefit programs, reimbursement,
rebates, price reporting and regulation, and healthcare
fraud and abuse. Such activities can involve criminal pro-
ceedings, and can retroactively challenge practices pre-
viously considered to be legal. There is also a risk that
governance for our medical and patient support activi-
ties, and our interactions with patient organizations, may
be inadequate or fail, or that we may undertake activities
based on improper or inadequate scientific justification.
Our failure to comply with applicable requirements for
such activities could result in adverse regulatory or legal
action, damage our reputation, and have a significant
negative impact on our financial results.
The laws and regulations relevant to the healthcare
industry are broad in scope and are subject to change
and evolving interpretations, which could require us to
incur substantial costs associated with compliance or to
alter one or more of our sales or marketing practices. In
addition, violations of these laws, or allegations of such
violations, could disrupt our business and result in a
material adverse effect on our business and results of
operations. A number of our subsidiaries across each of
our divisions are, or may in the future be, subject to var-
14
Item 3. Key Information
ious investigations and legal proceedings, including pro-
ceedings regarding sales and marketing practices, pric-
ing, corruption, trade regulation and embargo legislation,
product liability, commercial disputes, employment and
wrongful discharge, antitrust matters, securities, insider
trading, occupational health and safety, environmental
matters, tax, cybersecurity, data privacy and intellectual
property.
In addition, our use of the internet, social media and
mobile tools also carries risks related to potential viola-
tions of rules regulating the promotion of prescription
medicines and the potential loss of confidential informa-
tion, trade secrets or other intellectual property. There
continue to be significant uncertainties as to the rules
that apply to such communications and as to the inter-
pretations that health authorities will apply in this con-
text, and as a result, despite our efforts to comply with
applicable rules, there is a risk that our use of the inter-
net, social media and mobile technologies may cause us
to be found in violation of applicable regulations.
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 make the
business decision to market a generic product even
though patent infringement actions are still pending.
Should we elect to do so and conduct a so-called “launch
at risk,” we could face substantial damages if the final
court decision is adverse to us.
For information on significant legal matters pending
against us, see “Item 18. Financial Statements—Note 20.
Provisions and other non-current liabilities” and “Item 18.
Financial Statements—Note 28. Commitments and con-
tingencies.”
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. 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 significant
losses, and could affect our business, financial position
and reputation.
Legal proceedings and investigations are inherently
unpredictable, and large judgments sometimes occur.
As a consequence, we may in the future incur judgments
that could involve large payments, including the poten-
tial repayment of amounts allegedly obtained improperly,
and other penalties, including treble damages. In addi-
tion, such legal proceedings and investigations, even if
meritless, may affect our reputation, may create a risk of
potential exclusion 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 bodies, despite having potentially signifi-
cant defenses against them, in order to limit the risks
they pose to our business and reputation. Such settle-
ments may require us to pay significant sums of money
and to enter into corporate integrity or similar agree-
ments, which are intended to regulate company behav-
ior 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.
Our reliance on outsourcing key business functions
to third parties heightens the risks faced by our
businesses.
For business reasons, we outsource the performance of
certain key business functions to third parties, and invest
a significant amount of effort and resources into doing
so, including to manage and oversee such third parties.
Such outsourced functions can include research and
development collaborations, manufacturing operations,
warehousing and distribution activities, certain finance
functions, marketing activities, data management and
others. We may particularly rely on third parties in devel-
oping countries, including for the sales, marketing and
distribution of our products, and to obtain the interme-
diate and raw materials used in the manufacture of our
products. Some of these third parties do not have inter-
nal compliance resources comparable to those within
our organization.
Our reliance on outsourcing and third parties for the
research and development or the manufacturing of our
products poses certain risks, including misappropriation
of our intellectual property, failure of the third party to
comply with regulatory and quality assurance require-
ments, unexpected supply disruptions, breach of the
research and development or manufacturing agreement
by the third party, and the unexpected termination or
nonrenewal of the agreement by the third party.
In addition, governments and the public expect major
corporations, including Novartis, to take responsibility
for and report on compliance with various human rights,
responsible sourcing and environmental practices, as
well as other actions of their third-party contractors
around the world. Examples of this include the conflict
minerals disclosure requirements in the US, and the UK
Modern Slavery Act.
Ultimately, if third parties fail to meet their obligations
to us, we may lose our investment in the collaborations
or fail to receive the expected benefits of our agreements
with such third parties. In addition, should any of these
third parties fail to comply with the law or our standards,
or should they otherwise 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.
Compliance with data privacy laws and regulations
is complex and could expose us to a variety of risks.
We operate in an environment that relies on the collec-
tion, processing, analysis and interpretation of large sets
15
Item 3. Key Information
of patients’ and other individuals’ personal information,
including via social media and mobile technologies, and
that also, in many situations, requires that data to freely
flow across borders of numerous countries in which
there are different, and potentially conflicting, data pri-
vacy laws in effect. For example, the EU General Data
Protection Regulation (GDPR), which took effect in May
2018, and the California Consumer Privacy Act, which
took effect in January 2020, impose stringent require-
ments on how we and third parties with whom we con-
tract collect, share, export or otherwise process per-
sonal information, and provide for significant penalties
for noncompliance. Breaches of our systems or those of
our third-party contractors, or other failures to protect
the data we collect from misuse or breach by third par-
ties, could expose such personal information to unau-
thorized persons.
Any event involving the substantial loss of personal
information or other privacy violations could give rise to
significant liability, reputational harm, damaged relation-
ships with business partners, and potentially substantial
monetary penalties under laws enacted or being enacted
around the world. Such events could also lead to restric-
tions on our ability to use personal information and/or
transfer personal information across country borders.
The manufacture of our products is complex and
highly regulated.
The manufacture of our products relies on technically
complex processes and, in some cases, highly special-
ized raw materials, and is highly regulated. Deviations,
difficulties or delays in production, or failure to obtain
specialized raw materials, have in the past resulted in
some of the following, and may in the future result in:
shut-downs, work stoppages, approval delays, voluntary
market withdrawals, product recalls, penalties, supply
disruptions or shortages, increased costs, product lia-
bility or reputational harm. In addition, whether our prod-
ucts 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 current Good Manufacturing Practices
(cGMP) and other applicable regulations. Failure to com-
ply with cGMP requirements have in the past resulted in
some of the following legal or regulatory actions, and
may in the future result in possible legal or regulatory
actions, such as warning letters, suspension of manu-
facturing, seizure of products, injunctions, voluntary
recall of products, failure to secure product approvals,
or debarment. Any of these events could have a material
adverse effect on our business, financial condition and
results of operations.
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, such as cell lines, tissue samples, bacteria,
viral strains and radioisotopes. For some of our products
and raw materials, we rely on a single source of supply
for ingredients or relevant components. 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 therapies and
radioligand therapies, 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 processes or in material used may
lead to production failures or recalls. See also “—We may
not successfully achieve our goals in transactions or
reorganizations,” below, with regard to our efforts to reor-
ganize our product manufacturing organization, and “—
Climate change, extreme weather events, earthquakes
and other natural disasters could adversely affect our
business,” below.
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. We expect to invest substantial 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 stakeholders; and to auto-
mate business processes. Our success in these efforts
will depend on many factors, including a cultural change
among our employees, attracting and retaining employ-
ees with appropriate skills and mindsets, and success-
fully innovating across a variety of technology fields.
However, there is no guarantee that these efforts will
succeed, that we will successfully transform our busi-
ness model, or that we will be able to do so at any par-
ticular cost or in the necessary time frame.
At the same time, other companies with specialized
expertise or business models and substantial resources
are entering the healthcare field, from research and
development to pharmaceutical distribution, potentially
disrupting our relationships with patients, healthcare pro-
fessionals, customers, distributors and suppliers, with
unknown potential consequences for us. In addition, we
face new competitors from different regions of the world,
including China, which is aggressively expanding its role
in the sciences and in many industries. Such new com-
petitors may successfully impact our share of the health-
care value chain, or even develop products or technolo-
gies that could make our products uncompetitive or
obsolete.
If our digital transformation efforts, or our efforts to
bring advanced therapy platforms to market, should fail,
then there is a risk that we may fail to create the innovative
new products, tools or techniques that the new medical
and digital technologies may make possible, or that we
may fail to create them as quickly and efficiently as such
technologies may enable. We may also lose opportuni-
ties to engage with our stakeholders and to profit from
improved business processes, and we may lose the
16
Item 3. Key Information
resources devoted to these efforts to transform our busi-
ness. At the same time, should third parties successfully
enter the healthcare field with disruptive new technolo-
gies 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 material adverse
effect on our business, financial condition, or results of
operations.
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, and enter into stra-
tegic alliances and collaborations. For example, we pre-
viously announced plans to divest the Sandoz US der-
matology business and US oral solids portfolio, and we
recently completed the spin-off of our Alcon Division, the
acquisition of the assets associated with Xiidra, and the
acquisition of The Medicines Company.
Our alliances and acquisitions are a significant source
of our growth, yet our efforts may be impacted by our
ability to identify products or businesses that are suit-
able for acquisition; by governmental regulation, includ-
ing market concentration limitations; and by overtures
from competitors that may increase the prices of poten-
tial targets. Once an acquisition is agreed upon with a
third party, we may not be able to complete the acquisi-
tion in a timely manner or at all, nor can there be assur-
ance that pre-acquisition due diligence will have identi-
fied all possible issues that might arise with regard to an
acquisition. Our efforts on acquisitions and divestments
can also divert management’s attention from our exist-
ing businesses.
Further, after an acquisition, efforts to develop and
market acquired products, to integrate the acquired busi-
ness or to achieve expected synergies may not meet
expectations, or may otherwise not be successful, as a
result of difficulties in retaining key personnel, custom-
ers and suppliers, or differences in corporate culture,
standards, controls, processes and policies. Acquisitions
can also result in liabilities being incurred that were not
known at the time of acquisition, or the creation of tax
or accounting issues. Acquired businesses are not
always in full compliance with legal, regulatory or Com-
pany standards, including, for example, cGMP or cGCP
standards, requiring remediation efforts that could be
costly and time-consuming. Also, our strategic alliances
and collaborations with third parties may not achieve
their intended goals and objectives in any particular time
frame, or at all.
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, or that any com-
pleted divestment or spin-off will achieve the expected
strategic benefits, operational efficiencies or opportuni-
ties, or that the divestment or spin-off will ultimately max-
imize 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.
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, that key personnel will be retained,
or that we will be able to attract talent during ongoing
transformations and reorganizations. Disruption from
reorganizations may make it more difficult to maintain
relationships with customers, employees or suppliers;
could result in shortfalls in program oversight; could neg-
atively impact our reputation; and may result in the Group
not achieving the expected productivity and financial
benefits.
If we fail to successfully 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 realize the intended ben-
efits of the acquisition, divestiture, strategic alliance,
spin-off or reorganization.
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. In addition,
investment in funds that specialize in companies that
perform well in such assessments are increasingly pop-
ular, and major institutional investors have publicly
emphasized the importance of such ESG measures to
their investment decisions. Topics taken into account in
such assessments include, among others, the compa-
ny’s efforts and impacts on climate change and human
rights, ethics and compliance 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 the
potential impact of our business on society and the envi-
ronment. However, in light of investors’ increased focus
on ESG matters, there can be no certainty that we will
manage such issues successfully, or that we will suc-
cessfully 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 reputation
and on our business, share price, 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,” above, and “—Climate change, extreme
weather events, earthquakes and other natural disasters
could adversely affect our business,” below.
Falsified products could harm our patients and
reputation.
Our industry continues to be challenged by the vulnera-
bility of distribution channels to falsified medicines
17
Item 3. Key Information
(which includes counterfeit and stolen medicines under
the definition of the World Health Organization). The
presence of falsified medicines is growing in terms of
the markets affected and on the internet. Falsified
medicines pose patient safety risks and can be seriously
harmful or life-threatening. They are often visually indis-
tinguishable from genuine medicines and usually require
a forensic authentication process of the packaging and/
or the actual medicine to ascertain their falsified nature
and determine their likely impact on patient safety.
Reports of adverse events related to falsified medicines
and increased levels of falsified medicines in the health-
care system affect patient confidence in our genuine
medicines and in healthcare systems in general. These
events could also cause us substantial reputational and
financial harm, and potentially lead to litigation if the
adverse event from the falsified medicine is mistakenly
attributed to the genuine one. Thefts of our genuine
products from warehouses or plants, or while in-transit,
which are then not properly stored and are later sold
through unauthorized channels, could adversely impact
patient safety, our reputation and our business. Further,
there is a direct financial loss when, for example, falsi-
fied medicines replace sales of genuine medicines, or
genuine medicines are recalled following discovery of
falsified products.
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,
anti-corporatist sentiment, social unrest, fears of terror-
ism, and the risk of direct conflicts between nations. In
the US, for example, the presidential administration’s
imposition of tariffs and opposition to free-trade agree-
ments, including the recent tariffs imposed by the US
and China, and the possibility of additional tariffs or other
trade restrictions relating to trade between the US and
other countries, could have a negative impact on inter-
national trade in general and our business in particular.
Given that the status of trade negotiations remains sub-
ject to change, we cannot be certain of the nature or
extent of the potential impact on our business. For exam-
ple, if tariffs on pharmaceutical products or active phar-
maceutical ingredients (APIs) were increased, this could
impact the profitability of our products. Furthermore, sig-
nificant conflicts continue in certain parts of the world.
Collectively, such unstable conditions could, among
other things, disturb the international flow of goods and
increase the costs and difficulties of international trans-
actions, which could significantly impact time to market
and our ability to supply our products to patients in an
un-disrupted fashion, and further erode reimbursement
levels for innovative therapies.
As a result of the UK’s Brexit vote, the British govern-
ment has been in the process of negotiating the terms
of the UK’s future relationship with the EU, requiring us
to make certain contingency plans for scenarios in which
the UK and the EU do not reach a mutually satisfactory
understanding as to that relationship. We cannot predict
whether there will be any such understanding, or if such
an understanding is reached, whether its terms will vary
in ways that result in greater restrictions on imports and
exports between the UK and EU countries, and increased
regulatory complexities that could materially adversely
impact our business operations in the UK.
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.
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 and other post-employment obligations
could substantially
increase our pension-related
expenses,” below. See also “Item 5. Operating and Finan-
cial Review and Prospects—Item 5.B Liquidity and cap-
ital resources—Effects of currency fluctuations,”
“Item 5. Operating and Financial Review and Prospects—
Item 5.B Liquidity and capital resources—Condensed
consolidated balance sheets,” “Item 18. Financial State-
ments—Note 15. Trade receivables” and “Item 18. Finan-
cial Statements—Note 29. Financial instruments—addi-
tional 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 financial results” and “—
An inability to attract and retain qualified personnel could
adversely affect our business,” below.
Our business may be impacted by economic and
financial conditions directly affecting consumers. Given
the requirements in certain countries that patients
directly pay an increasingly large portion of their own
healthcare costs, there is a risk that consumers may cut
back on prescription drugs to help cope with rising costs.
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
18
Item 3. Key Information
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 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, 2019, we had USD 20.4 billion of
non-current financial debt and USD 7.0 billion of current
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.
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 including Xiidra, Endocyte,
AveXis, AAA, and 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 good-
will 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 2019,
for example, we recorded intangible asset impairment
charges of USD 1.1 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 esti-
mates—Impairment of goodwill, intangible assets and
property, plant and equipment,” “Item 18. Financial State-
ments—Note 1. Significant accounting policies” and “Item
18. Financial Statements—Note 11. Goodwill and intangi-
ble assets.”
Competition, failure to adapt to changing business
conditions, and complexities in the development of
biosimilars may impact the success of our Sandoz
Division.
Sandoz faces intense competition from companies that
market patented pharmaceutical products as well as
strong competition from other generic and biosimilar
pharmaceutical companies, which aggressively compete
for market share, including through significant price com-
petition. Such competitive actions may increase the
costs and risks associated with our efforts to introduce
and market such products, may delay the introduction
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 past years, industrywide price competition among
generic pharmaceutical companies and consolidation of
buyers caused significant declines in sales and profits
of Sandoz. In light of this, we agreed to sell the Sandoz
US dermatology business and generic US oral solids
portfolio to Aurobindo Pharma USA Inc. This transaction
is expected to be completed in the first quarter of 2020
pending regulatory approval. There is no certainty that
the remaining Sandoz US business will be commercially
successful. Sandoz has also announced a refined strat-
egy, with the objective of being an industry leader as a
focused generics company, which bears risk in a com-
petitive environment in which other generics companies
strive to also launch first and in which originators rigor-
ously defend the exclusivity of their products. The refined
strategy touches many fundamental areas of the Sandoz
organization, including portfolio strategy, resource allo-
cation, production, development, sales and governance.
These changes may fail to achieve their intended goals,
and may negatively affect the motivation of employees
in certain parts of Sandoz.
In addition, Sandoz has invested heavily in the devel-
opment of biosimilar drugs, with the expectation that
such products offer the potential for higher profitability.
If Sandoz should fail in its efforts to develop and market
biosimilars, due to the fact that their development is more
difficult and expensive than the development of standard
generic drugs, or if the developing biosimilars regulations
do not ultimately favor the development and sale of such
products, or if we are unable to sell our biosimilar prod-
ucts 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 biosimilars.
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
19
Item 3. Key Information
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.
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 2015 Agenda) Action Plans to
address issues of transparency, coherence and sub-
stance. In addition, in 2019 the OECD launched a new
initiative on behalf of the G20 to minimize profit shifting
by working toward a global tax framework that ensures
that corporate income taxes are paid where consump-
tion takes place and also introduces a global standard
on minimum taxation combined with new tax dispute res-
olution processes. The respective principles are cur-
rently being evaluated.
Most of the rules of the EU Anti-Tax Avoidance Direc-
tive, 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 busi-
ness is effectively performed, apply as of January 1, 2019.
The EU also adopted a new Directive on Administrative
Cooperation (DAC6) in 2018, which seeks additional
reporting. In addition, the European Commission contin-
ues 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’ prac-
tices regarding the issuance of rulings on tax matters
relating to individual companies.
These OECD and EU tax reform initiatives also need
local country implementation, including in our home
country of Switzerland, which may result in significant
changes to established tax principles. Although we have
taken steps to be in compliance with the evolving OECD
and EU tax initiatives, and will continue to do so, signifi-
cant uncertainties remain as to the outcome of these
efforts.
In Switzerland, the Basel-Stadt Cantonal Tax Reform
was approved by voters in February 2019, with parts ret-
roactive from January 1, 2019. In May 2019, Swiss voters
approved the Swiss Federal Tax Reform. With the enact-
ment of this tax reform, new elements were introduced
into law as of January 1, 2020. These include the abol-
ishment of special taxed regimes, notional interest
deduction, and an implementation of a Patent-Box, which
provides tax advantages on income generated from intel-
lectual property rights. Some of the new elements as
well as the transition rules for the Swiss tax reform might
be regarded as not completely aligned with OECD and
EU regulations, and might require subsequent amend-
ments, the need for and impact of which are difficult to
predict.
In the US, the Tax Cuts and Jobs Act, enacted at the
end of 2017, included significant changes to US corpo-
rate income tax law. Though we continue to monitor reg-
ulations and other guidance issued by the US Depart-
ment of the Treasury, it is uncertain whether the
application of new guidance, particularly with respect to
the tax limitation of interest deductions and qualification
of base erosion payments, will have a material effect on
our financial position and results of operations.
In general, such tax reform efforts 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.
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. In Argentina, for example, where we have subsid-
iary operations, the government authorized currency
exchange controls in 2019. Currency 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 impact our results,” above.
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
20
Item 3. Key Information
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” and “Item 18. Financial Statements—Note 29.
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 23%,
17% and 10%, respectively, of net sales in 2019. The larg-
est trade receivables outstanding were for these three
customers, amounting to 14%, 12% and 7%, respectively,
of the Group’s trade receivables at December 31, 2019.
The trend has been toward further consolidation among
distributors and retailers, particularly in the US. As a
result, we may be affected by fluctuations in the buying
patterns of such customers, and these customers are
gaining additional purchasing leverage, increasing the
pricing pressures facing our businesses. These pres-
sures can particularly impact our Sandoz Division, 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 concentra-
tion 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 con-
dition, 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 personnel – including
senior members of our scientific and management
teams, high-quality researchers and development spe-
cialists, and skilled personnel in developing countries –
could delay or prevent the achievement of major busi-
ness objectives.
Our future growth will demand talented associates
and leaders, yet the market for talent has become
increasingly competitive. Emerging Growth Markets, in
particular China and India, 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 international experience needed to work
successfully in a global organization like Novartis. In addi-
tion, we are undertaking a cultural transformation to an
“inspired, curious and unbossed” organization, which is
a core organizational imperative. Inability to successfully
implement this cultural change may result in cynicism
and disengagement of our associates, as well as impede
our ability to retain key talent in strategically important
areas. This risk is augmented by ongoing organizational
changes, as well as changes to our culture and leader-
ship expectations that may conflict with some leaders’
preferred leadership styles. Consequently, we may fail
to retain key talent, who may possess capabilities that
are rare and highly sought in the marketplace, unless
they are appropriately engaged, motivated and incentiv-
ized. The departure of key talent could have a material
adverse effect on our business performance, results of
operations and reputation.
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 near future. 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. Recruit-
ment is increasingly regional or global in specialized
fields such as clinical development, biosciences, chem-
istry and information technology. In addition, the geo-
graphic mobility of talent is expected to decrease in the
future, with talented individuals in developed and devel-
oping countries anticipating ample career opportunities
closer to home than in the past. This decrease in mobil-
ity may be worsened by anti-immigrant sentiments in
many countries, and laws discouraging immigration. See
“—Political and economic instability may impact our
results,” above.
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, including in connection with activities in
the past by businesses that are no longer part of Novartis.
In some cases, these remediation efforts may take many
years. While we have set aside substantial provisions for
worldwide environmental liabilities, there is no guaran-
tee that additional costs will not be incurred beyond the
amounts for which we have provided in the Group con-
solidated financial statements. If environmental contam-
21
Item 3. Key Information
ination related to our facilities or products adversely
impacts third parties, if we fail to properly manage the
safety of our facilities and the environmental risks, or if
we are required to further increase our provisions for
environmental liabilities in the future, this could have a
material adverse effect on our business, financial condi-
tion, results of operations, 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 20.
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 cer-
tain of our major Innovative Medicines Division produc-
tion and research facilities are located near earthquake
fault lines in Basel, Switzerland. Other major facilities are
located near major earthquake fault lines in various loca-
tions around the world. In the event of a major earth-
quake, 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.
The potential impacts of climate change may also
include increased operating costs associated with addi-
tional regulatory requirements and investments in reduc-
ing energy, water use and greenhouse gas emissions.
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
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 2019, 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 95% 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 25. Post-em-
ployment benefits for associates.”
Holders of ADRs may not be able to exercise pre-
emptive rights attached to shares underlying ADRs.
If a capital increase is approved, then our shareholders
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 excluded 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. Pre-emptive rights, if not
excluded, 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 liabil-
ities, as well as the benefits of enabling the exercise by
ADR holders of the pre-emptive rights associated with
the shares underlying their ADRs. We cannot guarantee
that a registration statement would be filed or that, if filed,
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 hold-
er’s pre-emptive rights and distribute the net proceeds
of the sale to the holder. If the depositary determines, in
its discretion, that the rights could not be sold, the depos-
itary might allow such rights to lapse. In either case, the
interest 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.
22
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: +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 healthcare products led by innovative
pharmaceuticals and also including high-quality generic
pharmaceuticals. Novartis AG, our Swiss holding com-
pany, owns, directly or indirectly, all of our significant
operating companies. For a list of our significant oper-
ating subsidiaries, see “Item 18. Financial Statements—
Note 32. Principal 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 2017‑January
2020
The following timeline includes all important corporate developments in 2019 and January 2020, and only signifi-
cant acquisitions, divestments, alliances and related corporate activities in 2018 and 2017.
2020
January
Novartis announces that its Board of Directors is nominating Bridgette Heller for election to the Board at our Annual
General Meeting on February 28, 2020. Bridgette Heller brings more than 35 years of experience at Fortune 100
companies and held several executive positions in the consumer goods and healthcare industry among others at
Danone, Merck & Co as well as Johnson & Johnson.
On January 6 Novartis completed its previously announced acquisition of The Medicines Company for USD 85
per share, or a total consideration of approximately USD 9.7 billion in cash on a fully diluted basis. The acquisition
broadened the Novartis cardiovascular portfolio by adding inclisiran, an investigational cholesterol-lowering ther-
apy.
2019
November
Novartis announces that its Sandoz Division has entered into an agreement for the acquisition of the Japanese
business of Aspen Global Incorporated (AGI). Under the agreement, Sandoz will acquire the shares in Aspen Japan
K.K. and associated assets held by AGI. Pursuant to the agreed terms of the transaction, on closing we will pay an
initial cash consideration of EUR 300 million (approximately USD 336 million). In addition, deferred consideration
is due to AGI, upon fulfillment of certain conditions after closing, currently estimated at approximately EUR 100 mil-
lion (approximately USD 112 million). We have received all relevant approvals and this transaction is expected to be
completed in the first quarter of 2020.
October
Novartis announces that its Board of Directors is nominating Dr. Simon Moroney for election to the Board at our
Annual General Meeting on February 28, 2020. Dr. Moroney is one of the co-founders of the Germany-based bio-
technology company MorphoSys AG and served as its CEO until September 1, 2019.
Novartis announces that the previously announced share buyback of up to USD 5 billion was completed in the
third quarter of 2019, with a total of 55.8 million shares for USD 5.0 billion repurchased since the announcement in
June 2018.
23
Item 4. Information on the Company
September
Novartis announces that its Sandoz Division has entered into a worldwide commercialization agreement with Pol-
pharma Biologics to commercialize and distribute a proposed natalizumab biosimilar that is in Phase III clinical
development for the treatment of relapsing-remitting multiple sclerosis (RRMS).
July
Novartis announces that it has completed the previously announced acquisition of the assets associated with Xiidra
worldwide from Takeda Pharmaceutical Company Limited as of July 1, 2019. The purchase price consists of a USD
3.4 billion upfront payment, customary purchase price adjustments of USD 0.1 billion, and the potential milestone
payments of up to USD 1.9 billion, which Takeda is eligible to receive upon the achievement of specified commer-
cialization milestones.
June
Novartis announces the appointment of Marie-France Tschudin as President, Novartis Pharmaceuticals, and a
member of the ECN, reporting to the CEO of Novartis, effective June 7, 2019. Marie-France Tschudin succeeds
Paul Hudson, who left Novartis to take the CEO position of a multinational pharmaceuticals company.
May
Novartis announces the completion of the previously announced acquisition of IFM Tre, Inc., a privately held,
US-based biopharmaceutical company focused on developing anti-inflammatory medicines targeting the NLRP3
inflammasome. The acquisition gives Novartis full rights to IFM Tre’s portfolio of NLRP3 antagonists.
April
Novartis announces that Sandoz has entered into an agreement with EirGenix, Inc., to commercialize in all markets,
excluding China and Taiwan, a proposed trastuzumab biosimilar, currently in Phase III clinical development for treat-
ment of human epidermal growth factor receptor 2-positive (HER2+) breast and specific gastric cancer tumors.
Novartis announces the appointment of Richard Saynor as CEO of Sandoz and a member of the ECN, report-
ing to the CEO of Novartis. Richard Saynor became CEO of Sandoz effective July 15, 2019, following the March
2019 announcement that Richard Francis would step down as CEO of Sandoz, effective on March 31, 2019.
Novartis announces the completion of the spin-off of its Alcon eye care devices business through a dividend in
kind distribution to holders of Novartis shares and ADRs, with each holder receiving one Alcon share for every five
Novartis shares or ADRs held on April 8, 2019, at the close of business.
Novartis announces that AveXis has signed an agreement to purchase an advanced biologics therapy manu-
facturing campus in Longmont, Colorado, for USD 30 million.
March
Novartis announces that on March 22, 2019, certain important conditions precedent for the 100% spin-off of the
Alcon eye care business have been met, including receipt of certain necessary authorizations and rulings, and that
the completion of the transaction, by way of a distribution of a dividend in kind to Novartis shareholders and ADR
holders, is expected to occur on April 9, 2019.
Novartis announces that it is joining the Global Chagas Disease Coalition.
February
Novartis announces that on February 28, 2019, Novartis shareholders approved the proposed 100% spin-off of the
Alcon eye care division, as previously endorsed by the Novartis Board of Directors, subject to certain conditions
precedent, such as no material adverse events and receipt of necessary authorizations.
Novartis announces that shareholders authorized share buybacks within the framework of an eighth share repur-
chase program to repurchase shares for cancellation up to a maximum of CHF 10 billion until the Annual General
Meeting of Novartis in 2022.
January
Novartis announces that its Board of Directors is nominating Patrice Bula for election to the Board at our Annual
General Meeting on February 28, 2019. As executive vice president and head of strategic business units, market-
ing, sales and Nespresso, Mr. Bula is a member of the executive board of Nestlé SA, a position he took up in 2011.
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 radioligand and CAR-T therapies for cancer treat-
ment, in a transaction valued at approximately USD 2.1 billion.
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.
24
Item 4. Information on the Company
The acquisition was completed in March 2019 and CellforCure became a wholly owned Novartis manufacturing
site managed by NTO.
November
Novartis announces that Alcon had filed an initial Form 20-F registration statement with the SEC in relation to the
previously announced intention of Novartis to spin off the Alcon Division as an independent, publicly traded com-
pany.
October
Novartis announces that it has entered into a clinical development agreement with Pfizer Inc. (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.
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 0.8 billion in
cash and potential earn-outs. This transaction is expected to be completed in the first quarter of 2020 pending
regulatory approval.
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.
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. In October 2019, we announced the end of the clinical development pro-
gram for MOR106 in atopic dermatitis.
June
Novartis announces its intention to seek shareholder approval for a 100% spin-off of its Alcon Division into a stand-
alone public company.
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 the completion of its previously announced cash tender offer to purchase all the outstanding
shares of common stock of AveXis, a US-based clinical stage gene therapy company. This acquisition was com-
pleted on May 15, 2018.
April
Novartis announces that its Sandoz Division has entered into a collaboration with Pear Therapeutics to commer-
cialize and continue development of novel prescription digital therapeutics, including reSET® for patients with sub-
stance use disorder and reSET-O® for patients with opioid use disorder who are currently receiving buprenorphine.
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. In October 2019, we announced that Pear will assume sole responsibility for commercializing both
reSET® and reSET-O®.
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
25
Item 4. Information on the Company
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.
March
Novartis announces that it has entered into a collaboration and licensing agreement with the Wyss Institute for Bio-
logically Inspired Engineering at Harvard University and the Dana-Farber Cancer Institute, both in the US, to develop
biomaterial systems for its portfolio of immuno-oncology therapies.
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 successful completion of its previously announced tender offer and subsequent offering period
for all of the then-outstanding ordinary shares, including ordinary shares represented by American Depositary
Shares (ADSs), of AAA, a radiopharmaceutical company that develops, produces and commercializes molecular
nuclear medicines – including Lutathera (lutetium Lu 177 dotatate/lutetium (177Lu) oxodotreotide), a first-in-class
radioligand therapy product for neuroendocrine tumors – and diagnostic products. Following completion of the
tender offer and subsequent offering period, Novartis ownership in AAA was 98.7% of all outstanding ordinary
shares.
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.
2017
November
Novartis announces an expanded collaboration with Amgen and the US-based Banner Alzheimer’s Institute to col-
laborate 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. In July 2019, we announced the decision to
discontinue the investigation of CNP520 in two Phase II/III studies.
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).
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 the University of California, Berkeley to establish the Novartis-Berkeley
Center for Proteomics and Chemistry Technologies.
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.
26
Item 4. Information on the Company
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 totaling EUR 1.85 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 best to 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.
27
Item 4. Information on the Company
4.B Business overview
Overview
Our purpose 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 also aim to reward those
who invest their money, time and ideas in our company.
Our vision is to be a trusted leader in changing the prac-
tice of medicine. Our strategy is to build a leading,
focused medicines company powered by advanced ther-
apy platforms and data science. As we implement our
strategy, we have five priorities to shape our future and
help us continue to create value for our company, our
shareholders and society: unleash the power of our peo-
ple; deliver transformative innovation; embrace opera-
tional excellence; go big on data and digital; and build
trust with society.
In 2019, Novartis achieved net sales from continuing
operations of USD 47.4 billion, while net income from con-
tinuing operations amounted to USD 7.1 billion and total
net income to USD 11.7 billion. Headquartered in Basel,
Switzerland, our Group companies employed 104 000
full-time equivalent associates as of December 31, 2019.
Our products are sold in approximately 155 countries
around the world.
The Group comprises two global operating divisions:
• Innovative Medicines: innovative patent-protected pre-
scription medicines
• Sandoz: generic pharmaceuticals and biosimilars
In April 2019, we completed the previously announced
spin-off of Alcon into a separately traded standalone
company. To comply with IFRS, Novartis has separated
the Group’s reported financial data for the current and
prior years into “continuing” and “discontinued” opera-
tions. Discontinued operations include the Alcon eye
care devices business and certain Corporate activities
attributable to the Alcon business prior to the spin-off,
the gain on distribution of Alcon to Novartis AG share-
holders and certain other expenses related to the spin-
off. Except where noted, this Annual Report focuses on
continuing operations that includes the businesses of
our Innovative Medicines and Sandoz Divisions, as well
as continuing Corporate activities.
Our divisions are supported by the following organi-
zational units: the Novartis Institutes for BioMedical
Research, Global Drug Development, Novartis Technical
Operations and Novartis Business Services. The finan-
cial results of these organizational units are included in
the results of the divisions for which their work is per-
formed. 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.
Approximately 5 600 full time equivalent scientists, phy-
sicians and business professionals at NIBR are working
to discover new medicines for various diseases at sites
located in the US, Switzerland and China. For more infor-
mation about NIBR, see “—Innovative Medicines—
Research and development—Research program” below.
Our Global Drug Development (GDD) organization
oversees drug development activities for our Innovative
Medicines Division and collaborates with our Sandoz
Division on development of its biosimilars portfolio. GDD
works collaboratively with NIBR and with the Innovative
Medicines and Sandoz Divisions to execute our overall
pipeline strategy. The GDD organization includes cen-
tralized global functions such as Regulatory Affairs and
Global Development Operations, as well as Global Devel-
opment units aligned with our business franchises. GDD
includes approximately 11 000 full-time equivalent asso-
ciates worldwide.
Novartis Technical Operations (NTO) manages man-
ufacturing operations, supply chain, and quality across
our Innovative Medicines and Sandoz Divisions. As the
Novartis portfolio evolves, we continue to transform our
operations to help ensure we can deliver the innovation
and expertise needed to enable the production of new
medical technologies, while increasing efficiency. NTO
is expected to enhance capacity planning and adher-
ence to quality standards, and to lower costs through
simplification, standardization and external spend opti-
mization. NTO includes approximately 25 100 full-time
equivalent associates and 60 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
10 000 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, our
SpeakUp Office (formerly Business Practices Office) and
Global Security were combined into one function called
Novartis Business Assurance & Advisory (NBAA).
In 2019 we created a new Global Health and Corpo-
rate Responsibility (GH&CR) function to support the inte-
gration of our activities in the areas of ethics, pricing and
access, global health and corporate responsibility into
our core business strategy, and to help align our initia-
tives, funding and communications in these areas.
28
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 following global business franchises:
Ophthalmology; Neuroscience; Immunology, Hepatology
and Dermatology; Respiratory; Cardiovascular, Renal
and Metabolism; and Established 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 small molecule
pharmaceuticals to third parties across a broad range
of therapeutic areas, as well as finished dosage form
anti-infectives sold to third parties. In Anti-Infectives,
Sandoz manufactures and supplies active pharmaceuti-
cal 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
Innovative Medicines
biotechnology-based products, including biosimilars,
and provides biotechnology manufacturing services to
other companies.
Alcon Division (discontinued
operations)
Prior to the April 9, 2019 completion of the spin-off, our
Alcon Division re searched, developed, manufactured,
distributed and sold a broad range of eye care products.
Alcon was organized into two global business fran-
chises; Surgical and Vision Care. Alcon also provided
services, training, education and technical support for
both the Surgical and Vision Care businesses.
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.
Overview
Our Innovative Medicines Division is a world leader in
offering patent-protected medicines to patients and phy-
sicians. The Innovative Medicines Division researches,
develops, manufactures, distributes and sells patented
pharmaceuticals, and is composed of two global busi-
ness units: Novartis Oncology and Novartis
Pharmaceuticals.
The Novartis Oncology business unit is responsible
for the commercialization of products in the areas of can-
cer 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;
Cardiovascular, Renal and Metabolism; and Established
Medicines.
The Innovative Medicines Division is the larger of our
two divisions in terms of consolidated net sales. It
reported consolidated net sales of USD 37.7 billion in
2019, which represented 79% of the Group’s net sales.
The product portfolio of the Innovative Medicines
Division includes a significant number of key marketed
products, many of which are among the leaders in their
respective therapeutic areas.
Innovative Medicines Division
products
The following summaries describe certain key marketed
products in our Innovative Medicines Division, listed
according to year-end net sales within each franchise.
While we typically seek to sell our marketed products
throughout the world, not all products and indications
are available in every country. Therefore, the indications
described in these summaries may vary by country. In
addition, a product may be available under different
brand names depending on country and indication. Some
of the products described below have lost patent pro-
tection or are otherwise subject to generic competition.
Others are subject to patent challenges by potential
generic competitors. Please see “—Intellectual property”
for general information on intellectual property and reg-
ulatory data protection, and for further information on
the status of patents and exclusivity for Innovative
Medicines Division products.
29
Item 4. Information on the Company
Key marketed products
Novartis Oncology business unit
Oncology
• Tasigna (nilotinib) is an oral signal transduction inhibi-
tor of the BCR-ABL tyrosine kinase. Tasigna is approved
in the US, the EU, Japan and other countries for the
treatment of:
• Adults and children with Philadelphia chromo-
some-positive chronic myeloid leukemia (Ph+ CML)
in the chronic and/or accelerated phase who are
resistant or intolerant to existing treatment
• Newly diagnosed adults and children with Ph+ CML
in the chronic phase
• Sandostatin SC (octreotide acetate for injection) and
Sandostatin LAR (octreotide acetate for injectable sus-
pension) are somatostatin analogs approved in the US,
the EU, Japan and other countries for the treatment of:
• Adults with acromegaly, a chronic disease caused
by the oversecretion of growth hormone, whose con-
dition is not adequately controlled by surgery or
radiotherapy
• Adults and children who have TSC and a brain tumor
called subependymal giant cell astrocytoma (SEGA)
when the tumor cannot be removed completely by
surgery
• Adults and children aged 2 years and older who have
TSC and certain types of seizures (epilepsy), as an
added treatment to other antiepileptic medicines
(dispersible tablet formulation only)
Everolimus is available under the trade names Zortress/
Certican for use in transplantation. It is exclusively
licensed to Abbott Laboratories 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
approved in the US, the EU, Japan and other countries
for the treatment of:
• A bleeding disorder called chronic immune (idio-
pathic) thrombocytopenia in patients who have had
an inadequate response or are intolerant to other
treatments
• Patients with certain symptoms associated with car-
cinoid tumors and other types of functional gastro-
intestinal and pancreatic neuroendocrine tumors
• Thrombocytopenia in patients with chronic hepatitis
C to allow them to initiate and maintain interfer-
on-based therapy
Sandostatin LAR is also approved in:
• The EU and other countries for the treatment of
patients with advanced neuroendocrine tumors of
the midgut or of unknown primary tumor origin
• Japan for the treatment of patients with neuroendo-
crine tumors of the gastrointestinal tract
Promacta/Revolade is also approved in:
• The US and other countries as first-line therapy for
adults and children aged 2 years and older with
severe aplastic anemia (SAA)
• Japan as first-line therapy for adults with SAA
• The EU and other countries for adults with SAA who
are resistant to other treatments
• Afinitor/Votubia (everolimus) is an oral inhibitor of the
mTOR pathway. Afinitor is approved in the US, the EU,
Japan and other countries for oncology indications that
vary by country. It is approved for the treatment of:
• Postmenopausal women with advanced hormone
receptor-positive (HR+)/human epidermal growth
factor receptor 2-negative (HER2-) breast cancer, in
combination with the medicine exemestane, when
certain other medicines have not worked
• Adults with renal cell carcinoma (advanced kidney
cancer) when certain other medicines have not
worked
• Adults with a type of cancer known as neuroendo-
crine tumor (NET) of the pancreas, and non-symp-
tomatic NET of the stomach, intestine (gastrointes-
tinal) or lung that has progressed and cannot be
treated with surgery (Afinitor is not indicated for use
in people with carcinoid tumors that actively produce
hormones)
Everolimus is approved for additional indications as
Afinitor/Afinitor Disperz in the US, Japan and other
countries, and as Votubia (tablets and dispersible tab-
lets) in the EU. The following indications vary by coun-
try:
• Adults with a kidney tumor called angiomyolipoma,
which occurs with a genetic condition called tuber-
ous sclerosis complex (TSC), when the tumor does
not require immediate surgery (tablet formulation
only)
Promacta/Revolade is marketed under a research,
development and license agreement between Novartis
and RPI Finance Trust (dba Royalty Pharma), as
assignee of Ligand Pharmaceuticals.
• Tafinlar + Mekinist (dabrafenib + trametinib) is an oral
combination therapy. Tafinlar and Mekinist are kinase
inhibitors of the BRAF and MEK1/2 proteins, respec-
tively, approved in combination in the US, the EU, Japan
and other countries for the treatment of:
• Adults with unresectable (not removable through sur-
gery) or metastatic melanoma with a BRAF V600
mutation
• Adults with stage III melanoma with a BRAF V600
mutation as an adjuvant treatment
• Adults with advanced non-small cell lung cancer with
a BRAF V600 mutation
Additionally, the combination is approved in the US and
other countries for the treatment of:
• Adults with locally advanced or metastatic anaplas-
tic thyroid cancer with a BRAF V600 mutation
Tafinlar and Mekinist are also indicated as single agents
to treat patients with unresectable or metastatic mel-
anoma with a BRAF V600 mutation. Novartis has
worldwide exclusive rights to develop, manufacture and
commercialize trametinib granted by Japan Tobacco
Inc.
30
Item 4. Information on the Company
• Gleevec/Glivec (imatinib mesylate/imatinib) is an oral
kinase inhibitor. Gleevec is approved in the US for the
treatment of:
• Newly diagnosed adults and children with Ph+ CML
• Adults with myelofibrosis, including primary myelofi-
brosis, post-polycythemia vera myelofibrosis and
post-essential thrombocythemia myelofibrosis
• Adults with polycythemia vera who are resistant or
in the chronic phase
intolerant to a medication called hydroxyurea
• Adults in the chronic, accelerated or blast crisis
phase of Ph+ CML after failure of interferon-alpha
therapy
• Adults with relapsed or refractory Philadelphia chro-
mosome-positive acute lymphoblastic leukemia (Ph+
ALL)
• Newly diagnosed children with Ph+ ALL, in combina-
tion with chemotherapy
• Adults with KIT (CD117)-positive gastrointestinal
stromal tumors (GISTs) that cannot be surgically
removed and/or have spread to other parts of the
body
• Adults who have had their KIT (CD117)-positive GIST
completely surgically removed
• Adults with advanced hypereosinophilic syndrome
(HES) and/or chronic eosinophilic leukemia (CEL)
who have a rearrangement of two genes called
FIP1L1 and PDGFR-alpha
Glivec is approved in the EU, Japan and other coun-
tries for the treatment of:
• Newly diagnosed adults and children with Ph+ CML
for whom bone marrow transplantation is not con-
sidered as the first line of treatment
• Adults and children in the chronic phase of Ph+ CML
after failure of interferon-alpha therapy, or in the
accelerated or blast crisis phase of Ph+ CML
• Adults with relapsed or refractory Ph+ ALL, as mono-
therapy
• Newly diagnosed adults and children with Ph+ ALL,
in combination with chemotherapy
• Adults with KIT (CD117)-positive GISTs that cannot
be surgically removed and/or have spread to other
parts of the body
• Adults with advanced HES and/or chronic CEL with
the FIP1L1-PDGFR-alpha rearrangement
• Adults who have had their KIT (CD117)-positive GIST
completely surgically removed and who are at signif-
icant risk of relapse
Gleevec/Glivec is also approved in other rare cancers,
including:
• In the US and the EU for the treatment of adults with
myelodysplastic/myeloproliferative diseases, a
group of diseases of the blood and bone marrow
• In the US for the treatment of adults with aggressive
systemic mastocytosis (a form of mast cell disease),
and adults with dermatofibrosarcoma protuberans
(a rare skin cancer) when surgery is not possible or
the disease has spread
• Jakavi (ruxolitinib) is an oral inhibitor of the JAK1 and
JAK2 tyrosine kinases that is the first therapy approved
in the EU, Japan and other countries to treat two kinds
of myeloproliferative neoplasms, a group of related and
rare blood cancers characterized by the overproduc-
tion of blood cells in the bone marrow. It is approved
for the treatment of:
Novartis licensed ruxolitinib from Incyte Corporation
for development and commercialization in the indica-
tions of oncology, hematology and graft-versus-host
disease outside the US. Incyte Corporation markets
ruxolitinib as Jakafi® in the US.
• Exjade and Jadenu (deferasirox) are oral iron chelators
approved in the US, the EU, Japan and other countries
for the treatment of:
• Adults and children aged 2 years and older who have
chronic iron overload due to blood transfusions
• Adults and children aged 10 years and older who have
chronic iron overload with non-transfusion-depen-
dent thalassemia (a group of blood disorders that do
not require regular blood transfusions)
• Votrient (pazopanib) is an oral tyrosine kinase inhibitor
that targets a number of growth factors to limit new
blood vessel and tumor growth. Votrient is approved in
the US and Japan for the treatment of:
• Adults with advanced renal cell carcinoma (RCC)
• Adults with advanced soft tissue sarcoma (STS) who
have received chemotherapy (it is not known if
Votrient is effective in treating adipocytic STS or cer-
tain gastrointestinal tumors)
Votrient is also approved in the EU for the treatment of:
• Adults with advanced RCC as first-line therapy, and
adults with advanced RCC who have received cyto-
kine therapy for advanced disease
• Adults with certain subtypes of advanced STS who
have received chemotherapy for metastatic disease
or whose cancer has progressed within 12 months
after neoadjuvant therapy
• Kisqali (ribociclib) is an oral cyclin-dependent kinase
inhibitor. It is approved in the US, the EU and other
countries for the treatment of:
• Pre-, peri- and postmenopausal women with HR+/
HER2- advanced or metastatic breast cancer, in
combination with an aromatase inhibitor as initial
endocrine-based therapy
• Postmenopausal women with HR+/HER2- locally
advanced or metastatic breast cancer, in combina-
tion with fulvestrant as initial endocrine based-ther-
apy or following disease progression on endocrine
therapy
Kisqali was developed by the Novartis Institutes for
BioMedical Research under a research collaboration
with Astex Pharmaceuticals.
• Lutathera (lutetium Lu 177 dotatate/lutetium (177Lu) oxo-
dotreotide) is an intravenous radioligand therapy
approved in the US for the treatment of:
• Adults with somatostatin receptor-positive gastro-
enteropancreatic neuroendocrine tumors (GEP-
31
Item 4. Information on the Company
NETs), including foregut, midgut and hindgut neuro-
endocrine tumors
• Adults with CNV secondary to pathologic myopia
• Adults with visual impairment due to diabetic macu-
Lutathera is also approved in the EU and other coun-
tries for the treatment of:
• Adults with unresectable or metastatic, progressive,
well-differentiated (G1 and G2), somatostatin recep-
tor-positive GEP-NETs
• Kymriah (tisagenlecleucel) suspension for intravenous
infusion is a CD19-directed genetically modified autol-
ogous chimeric antigen receptor T-cell (CAR-T) ther-
apy. Kymriah is approved in the US, the EU, Japan and
other countries for the treatment of:
• Patients up to 25 years old with B-cell acute lympho-
blastic leukemia that is refractory or in second or
later relapse
• Adults with relapsed or refractory diffuse large B-cell
lymphoma after two or more lines of systemic ther-
apy
• Piqray (alpelisib) is an oral kinase inhibitor. It is approved
in the US and other countries for the treatment of:
• Postmenopausal women, and men, with HR+/HER2-
advanced or metastatic breast cancer with a PIK3CA
mutation, in combination with fulvestrant following
disease progression on or after an endocrine-based
regimen
Piqray received US approval in May 2019.
• Adakveo (crizanlizumab) is a humanized monoclonal
antibody that binds to P-selectin, a cell adhesion pro-
tein that plays a central role in the multicellular inter-
actions that can lead to vaso-occlusion in sickle cell
disease. Delivered as an intravenous infusion, Adakveo
is approved in the US to:
• Reduce the frequency of vaso-occlusive crises
(VOCs), or pain crises, in patients aged 16 years and
older with sickle cell disease
lar edema
• Adults with visual impairment due to macular edema
secondary to retinal vein occlusion (branch and cen-
tral retinal vein occlusion)
• Adults with moderately severe to severe non-prolif-
erative diabetic retinopathy and proliferative diabetic
retinopathy
• Preterm infants with retinopathy of prematurity (ROP)
in zone I (stage 1+, 2+, 3 or 3+) or zone II (stage 3+),
or aggressive posterior ROP
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. Financial Statements—Note 27. Transactions with
related parties—Genentech/Roche.”
• Xiidra (lifitegrast) is a prescription eye drop designed
to block the interaction between LFA-1 and ICAM-1,
inhibiting the formation of the immunological synapse
and reducing inflammation. Xiidra is approved in the US
and other countries for the treatment of:
• The signs and symptoms of dry eye disease in
patients over 17 years old
Novartis acquired Xiidra from Takeda Pharmaceutical
Company Limited and began recording sales as of July
1, 2019. Xiidra is marketed in the US. It is not currently
marketed in the EU or Japan.
• Beovu (brolucizumab) is an injectable, humanized sin-
gle-chain antibody fragment that acts as an anti-VEGF
agent. It is approved in the US for the treatment of:
• Patients with neovascular (wet) age-related macular
degeneration
Beovu received US approval in October 2019.
Adakveo received US approval in November 2019.
Immunology, Hepatology and Dermatology1
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 protein that
causes the growth of blood vessels in the eye, which
can lead to vision loss. Lucentis is an injectable
anti-VEGF therapy specifically designed for the eye,
minimizing systemic exposure. It is approved in the EU,
Japan and other countries. Approvals and indications
vary by country:
• Adults with neovascular (wet) age-related macular
degeneration (AMD)
• Adults with visual impairment due to choroidal neo-
vascularization (CNV)
• Cosentyx (secukinumab) is an injectable fully human
monoclonal antibody that specifically inhibits interleu-
kin-17A (IL-17A), a cytokine involved in the pathogene-
sis of psoriasis, ankylosing spondylitis and psoriatic
arthritis. It is approved in the US, the EU, Japan and
other countries for the treatment of:
• Adults with moderate-to-severe plaque psoriasis
• Adults with active ankylosing spondylitis
• Adults with active psoriatic arthritis
Cosentyx is also approved in Japan for the treatment of:
• Adults with pustular psoriasis
1 Xolair sales for all indications are reported in the Respiratory franchise.
32
Item 4. Information on the Company
• Ilaris (canakinumab) is an injectable, selective, high-af-
finity, fully human monoclonal antibody that inhibits
interleukin-1 beta (IL-1 beta), a key cytokine (a type of
protein) in the inflammatory pathway. Ilaris is approved
in the US, the EU, Japan and other countries for the
treatment of:
• Adults and children with cryopyrin-associated peri-
odic syndromes
• Adults and children with tumor necrosis factor recep-
tor-associated periodic syndrome
• Adults and children with hyperimmunoglobulin D syn-
drome/mevalonate kinase deficiency
• Adults and children with familial Mediterranean fever
• Adults and children with systemic juvenile idiopathic
arthritis
Ilaris is also approved in the EU for the treatment of:
• Adults with Still’s disease
• Adults with refractory acute gouty arthritis
Neuroscience
• Gilenya (fingolimod) is an oral sphingosine-1-phos-
phate (S1P) receptor modulator that has a reversible
lymphocyte redistribution effect and readily crosses
the blood-brain barrier to bind to the S1P receptors
based in the central nervous system. It is approved in
the US for the treatment of:
• Adults and children aged 10 years and older with
relapsing forms of multiple sclerosis, including clini-
cally isolated syndrome, relapsing-remitting multiple
sclerosis (RRMS) and active secondary progressive
multiple sclerosis (SPMS)
Gilenya is also approved in the EU for the treatment of:
• Adults and children aged 10 years and older who have
highly active RRMS despite treatment with at least
one disease-modifying agent, or who have rapidly
evolving severe RRMS
Gilenya is licensed from Mitsubishi Tanabe Pharma
Corporation.
• Zolgensma (onasemnogene abeparvovec-xioi) is a
gene therapy delivered as a single-dose intravenous
infusion. It is designed to provide a functional copy of
the human survival motor neuron (SMN) gene to halt
disease progression through sustained SMN protein
expression. Zolgensma is approved in the US for the
treatment of:
• Children less than 2 years old who have spinal mus-
cular atrophy with biallelic mutations in the SMN1
gene
• In the EU for the prevention of migraine in adults who
have at least four migraine days per month
Aimovig is launched in 38 countries. Novartis and Amgen
co-commercialize Aimovig in the US, where Amgen records
sales. Novartis has exclusive commercialization rights for
all ex-US territories, excluding Japan. The collaboration
continues during the previously announced litigation
between the companies and will remain in force until
and unless a final court decision terminates the agree-
ments.
• Mayzent (siponimod) is an oral, selective S1P receptor
modulator. It binds selectively to the S1P receptor sub-
types 1 and 5, and penetrates the central nervous sys-
tem, where it may impact central nervous system
inflammation and repair mechanisms. Mayzent is
approved:
• In the US for the treatment of adults with relapsing
forms of multiple sclerosis, including clinically iso-
lated syndrome, relapsing-remitting multiple sclero-
sis (RRMS) and active secondary progressive multi-
ple sclerosis (SPMS)
• In the EU for the treatment of adults with SPMS with
active disease
Mayzent received US approval in March 2019 and EU
approval in January 2020.
Respiratory
• Xolair (omalizumab) is an injectable prescription medicine
and the only approved antibody designed to target and
block immunoglobulin E (IgE). It is approved in the US, the
EU, Japan and other countries for the treatment of:
• Adults and children aged 6 years and older with mod-
erate-to-severe, or severe, persistent allergic asthma
• Adults and children aged 12 years and older with
chronic spontaneous urticaria/chronic idiopathic
urticaria (hives)
Xolair is also approved in Japan for the treatment of:
• Patients with severe seasonal allergic rhinitis (hay
fever)
Xolair is provided as lyophilized powder for reconstitu-
tion, and as liquid formulation in a pre-filled syringe.
Novartis co-promotes Xolair with Genentech in the US
and shares a portion of operating income, but Novartis
does not record any US sales. Novartis records all sales
of Xolair outside the US. For further information, see
“Item 18. Financial Statements—Note 27. Transactions
with related parties—Genentech/Roche.”
Zolgensma received US approval in May 2019 and is
marketed by AveXis, a Novartis company.
Cardiovascular, Renal and Metabolism
• Aimovig (erenumab-aooe/erenumab) is a once-monthly
injection that can be self-administered or administered by
another trained person. It is specifically designed to block
the calcitonin gene-related peptide receptor (CGRP-R),
which plays a critical role in migraine. It is approved:
• In the US for the prevention of migraine in adults
• Entresto (sacubitril/valsartan) is an oral, first-in-class
angiotensin receptor/neprilysin inhibitor. It enhances
the protective neurohormonal systems of the heart (the
neprilysin system) while simultaneously suppressing
the harmful system (the renin-angiotensin-aldosterone
system). Entresto is approved in the US, the EU and
other countries for the treatment of:
33
Item 4. Information on the Company
• Adults who have symptomatic chronic heart failure
with reduced ejection fraction (HFrEF)
• Organ rejection in adults at low to moderate immu-
nological risk receiving an allogeneic kidney or liver
transplant
Entresto is also approved in the US for the treatment of:
• Children aged 1 year and older who have symptom-
atic heart failure with systemic left ventricular sys-
tolic dysfunction
Entresto is approved in 112 countries.
Established Medicines
• Galvus/Equa (vildagliptin) is an oral inhibitor of the
DPP-4 enzyme. It is approved in the EU, Japan and
other countries for the treatment of:
• Adults with type 2 diabetes when used as monother-
apy; in dual combination with metformin, a sulfony-
lurea or a thiazolidinedione; in triple combination with
a sulfonylurea and metformin; and as an add-on to
insulin (with or without metformin)
An oral single-pill combination of vildagliptin and met-
formin, marketed as Eucreas/EquMet/GalvusMet, is
also approved in the EU, Japan and other countries for
the treatment of type 2 diabetes. Sumitomo Dainippon
Pharma Co. Ltd. promotes Equa and EquMet in Japan.
• Diovan (valsartan) is an oral angiotensin II receptor
blocker (ARB). It is approved in the US, the EU, Japan
and other countries for the treatment of:
• Adults and children with hypertension (high blood
pressure)
• Patients with heart failure
• Patients with left ventricular failure and/or left ven-
tricular systolic dysfunction following a myocardial
infarction (heart attack)
• Hypertensive patients who have impaired glucose
tolerance and are at risk of heart disease
An oral single-pill combination of valsartan and hydro-
chlorothiazide, marketed as Diovan HCT/Co-Diovan, is
also approved in the US, the EU, Japan and other coun-
tries for the treatment of hypertension.
• Exforge (valsartan and amlodipine besylate) is an oral
single-pill combination of the ARB valsartan and the
calcium channel blocker amlodipine besylate. It is
approved in the US, the EU, Japan and other countries
for the treatment of:
• Adults with hypertension
An oral single-pill combination of valsartan, amlodipine
besylate and hydrochlorothiazide, marketed as Exforge
HCT, is also approved in the US, the EU, Japan and
other countries for the treatment of hypertension.
• Zortress/Certican (everolimus) is an oral inhibitor of the
mTOR pathway. It is approved in the US, the EU, Japan
and other countries for the prophylaxis of:
It is also approved in the EU and Japan for the prophy-
laxis of:
• Organ rejection in adults receiving a heart transplant
Everolimus is available under the trade names Afinitor/
Votubia for use in oncology. It is exclusively licensed to
Abbott Laboratories and sublicensed to Boston Scien-
tific for use in drug-eluting stents.
• Egaten (triclabendazole) is an oral narrow-spectrum
anthelmintic agent that inhibits a parasitic flatworm’s
motility and interferes with the worm’s microtubular
structure and function. Egaten is approved in the US,
France and Egypt for the treatment of:
• Patients aged 6 years and older with fascioliasis, a
parasitic infection commonly known as liver fluke
infestation
Egaten received US approval in February 2019. It is the
only medicine for fascioliasis recommended by the
World Health Organization (WHO) and is on the WHO
Model List of Essential Medicines. Novartis has been
donating Egaten to the WHO for the treatment of fas-
cioliasis since 2005.
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 are listed in alphabetical
order by project code, or by product name where appli-
cable. Projects include those seeking to develop poten-
tial uses of new molecular entities as well as potential
additional indications or new formulations for already
marketed products. The table below, entitled “Projects
added to and subtracted from the development table
since 2018,” highlights changes to the table entitled
“Selected development projects” from the previous year.
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 refers to the year in which
the decision to enter the phase was made. This may be dif-
ferent 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 submitted to a health authority for marketing approval.
34
Item 4. Information on the Company
Selected development projects
Project/
product
Common
name
Mechanism
of action
Potential indication
Business
franchise
Formulation/
route of
administration
Year project
entered
current
Planned filing
development dates/current
phase
phase
ABL001
asciminib
BCR-ABL inhibitor
Chronic myeloid leukemia, 3rd line
Oncology
Oral
2016
ACZ885
canakinumab Anti-interleukin-1 beta 2nd line non-small cell lung cancer
Oncology
Subcutaneous injection 2017
monoclonal antibody
1st line non-small cell lung cancer
Oncology
Subcutaneous injection 2017
Adjuvant non-small cell lung cancer
Oncology
Subcutaneous injection 2017
AVXS-1011 onasemno- Survival motor neuron Spinal muscular atrophy
Neuroscience
Intravenous infusion
2018
gene abepar- (SMN) gene
vovec
replacement therapy
(IV formulation)
2021/III
2021/III
2021/III
2022/III
US approved
EU registration
AVXS-201 TBD
Methyl-CpG binding
protein 2 (MECP2) gene
replacement therapy
Rett syndrome
Neuroscience
Intrathecal injection
2018
2023/I
Spinal muscular atrophy
(IT formulation)2
Neuroscience
Intrathecal injection
2018
2020/I
BYL7193
alpelisib
PI3K-alpha inhibitor
PIK3CA mutant hormone receptor-positive Oncology
(HR+)/human epidermal growth factor
receptor 2-negative (HER2-)
postmenopausal advanced breast cancer,
2nd line (+ fulvestrant)
PIK3CA-related overgrowth spectrum
Oncology
Triple negative breast cancer
Oncology
Hormone receptor-negative (HR-)/human Oncology
epidermal growth factor receptor 2-positive
(HER2+) advanced breast cancer
Ovarian cancer
Oncology
Head and neck squamous cell carcinoma Oncology
CEE321
TBD
Pan-JAK inhibitor
Atopic dermatitis
CFZ533
iscalimab
Blocking, non-depleting, Solid organ transplantation
anti-CD40 monoclonal
antibody
Sjögren’s syndrome
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
Immunology,
Hepatology and
Dermatology
Immunology,
Hepatology and
Dermatology
Immunology,
Hepatology and
Dermatology
Oral
2018
US approved
EU registration
Oral
Oral
Oral
Oral
Oral
Topical
2019
2019
2019
2019
2019
2019
2020/III
2023/III
2023/III
2023/III
≥2024/III
≥2024/II
Intravenous infusion
2017
2023/II
Intravenous infusion
2018
≥2024/II
Subcutaneous injection 2015
US/EU
registration
Subcutaneous injection 2015
2020/III
Ankylosing spondylitis head-to-head study Immunology,
versus Sandoz biosimilar Hyrimoz
(adalimumab)
Hepatology and
Dermatology
Subcutaneous injection 2015
2022/III
Hidradenitis suppurativa
Giant cell arteritis
Lichen planus
Immunology,
Hepatology and
Dermatology
Immunology,
Hepatology and
Dermatology
Immunology,
Hepatology and
Dermatology
Intravenous infusion
2017
2022/III
Intravenous infusion
2018
≥2024/II
Intravenous infusion
2019
≥2024/II
Severe asthma
Respiratory
Inhalation
2018
2023/II
CSJ117
TBD
Anti-thymic stromal
lymphopoietin
monoclonal
antibody fragment
ECF843
TBD
Boundary lubricant
Dry eye
Ophthalmology Eye drops
Entresto
valsartan and Angiotensin receptor/ Chronic heart failure with preserved
sacubitril
(as sodium
salt complex)
neprilysin inhibitor
ejection fraction
Post-acute myocardial infarction
Cardiovascular, Oral
Renal
and Metabolism
Cardiovascular, Oral
Renal
and Metabolism
2017
2012
2022/II
2020/III
2015
2021/III
1 Approved in the US as Zolgensma for spinal muscular atrophy (IV formulation)
2 The FDA has placed a partial clinical hold on AVXS-101 intrathecal trials for spinal muscular atrophy patients based on findings in a small preclinical animal study.
3 Approved in the US as Piqray for PIK3CA mutant HR+/HER2- postmenopausal advanced breast cancer, 2nd line (+ fulvestrant)
35
Item 4. Information on the Company
Project/
product
Common
name
Mechanism
of action
Potential indication
INC280
capmatinib
c-MET inhibitor
Non-small cell lung cancer
Solid tumors
Jakavi
ruxolitinib
JAK1/2 inhibitor
Acute graft-versus-host disease
Business
franchise
Oncology
Oncology
Oncology
Chronic graft-versus-host disease
Oncology
KAE609
cipargamin PfATP4 inhibitor
Malaria
Severe malaria
KAF156
ganaplacide
Imidazolopiperazines Malaria
derivative
Established
Medicines
Established
Medicines
Established
Medicines
Formulation/
route of
administration
Oral
Oral
Oral
Oral
Oral
Oral
Oral
Year project
entered
current
Planned filing
development dates/current
phase
phase
2014
2019
2016
2016
2012
US registration
≥2024/II
2021/III
2021/III
≥2024/II
2019
≥2024/II
2014
≥2024/II
Kisqali
ribociclib
CDK4/6 inhibitor
HR+/HER2- breast cancer (adjuvant)
Oncology
Oral
2018
2022/III
KJX839
inclisiran
Small-interfering RNA Hyperlipidemia
(PCSK9)
Cardiovascular, Subcutaneous injection 2019
Renal
and Metabolism
Secondary prevention of cardiovascular Cardiovascular, Subcutaneous injection 2019
Renal
events in patients with elevated levels
and Metabolism
of LDL-C
US/EU
registration
≥2024/III
Kymriah
tisagen-
lecleucel
CD19-targeted chimeric Relapsed/refractory follicular lymphoma Oncology
antigen receptor T-cell
immunotherapy
Intravenous infusion
2017
2021/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
≥2024/II
LAM320
clofazimine Mycobacterial
Multidrug-resistant tuberculosis
LJC242
DNA binding
tropifexor,
FXR agonist and
cenicriviroc CCR2/5 inhibitor
(in fixed-dose
combination)
Nonalcoholic steatohepatitis
LJN452
tropifexor
FXR agonist
Nonalcoholic steatohepatitis
Established
Medicines
Immunology,
Hepatology and
Dermatology
Oral
Oral
Immunology,
Hepatology and
Dermatology
Oral
2016
2021/III
2017
≥2024/II
2015
≥2024/II
LMI070
branaplam
SMN2 RNA splicing
modulator
Spinal muscular atrophy
Neuroscience
Oral
2017
≥2024/II
LNP023
TBD
Factor B inhibitor
IgA nephropathy
C3 glomerulopathy
Paroxysmal nocturnal hemoglobinuria
Membranous nephropathy
LOU064
TBD
BTK inhibitor
Chronic spontaneous urticaria
Cardiovascular, Oral
Renal
and Metabolism
Cardiovascular, Oral
Renal
and Metabolism
Cardiovascular, Oral
Renal
and Metabolism
Cardiovascular, Oral
Renal
and Metabolism
Immunology,
Hepatology and
Dermatology
Oral
2018
2023/II
2018
2023/II
2019
2023/II
2018
≥2024/II
2017
2023/II
177Lu-
PSMA-617
TBD
Targeted DNA
destruction via
beta-particle
radiation
Metastatic castration-resistant
prostate cancer
Oncology
Intravenous infusion
2018
2020/III
LXE408
TBD
Kinetoplastid
proteasome inhibitor
Visceral leishmaniasis
Established
Medicines
Oral
2019
≥2024/II
MBG453
TBD
TIM-3 antagonist
Myelodysplastic syndrome
Oncology
Intravenous infusion
2018
2021/II
Acute myeloid leukemia
Oncology
Intravenous infusion
2019
≥2024/II
OMB157
ofatumumab Anti-CD20 monoclonal Relapsing multiple sclerosis
Neuroscience
Subcutaneous injection 2015
antibody
US/EU
registration
PDR001
spartalizumab Anti-PD-1 monoclonal Metastatic BRAF V600+
Oncology
Intravenous infusion
2017
2020/III
antibody
melanoma
(w/ Tafinlar + Mekinist)
Metastatic melanoma (combo)
Oncology
Intravenous infusion
2017
2023/II
QBW251
TBD
CFTR potentiator
Chronic obstructive pulmonary disease
Respiratory
Oral
2017
≥2024/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
2019
EU registration
36
Item 4. Information on the Company
Project/
product
Common
name
Mechanism
of action
QVM149
indacaterol, Long-acting beta2-
mometasone adrenergic agonist,
furoate,
glyco-
pyrronium
bromide
(in fixed-dose
combination)
long-acting muscarinic
antagonist and inhaled
corticosteroid
Potential indication
Asthma
Business
franchise
Formulation/
route of
administration
Year project
entered
current
Planned filing
development dates/current
phase
phase
Respiratory
Inhalation
2019
EU registration
RTH2584
brolucizumab Anti-VEGF single-chain Neovascular (wet) age-related macular
Ophthalmology
Intravitreal injection
2019
antibody fragment
degeneration
Diabetic macular edema
Ophthalmology
Intravitreal injection
2017
Retinal vein occlusion
Ophthalmology
Intravitreal injection
2018
Proliferative diabetic retinopathy
Ophthalmology
Intravitreal injection
2019
US approved
EU registration
2021/III
2023/III
2023/III
SAF312
TBD
TRPV1 antagonist
Chronic ocular surface pain
Ophthalmology Topical
2019
≥2024/II
SEG1015
crizanlizumab P-selectin inhibitor
Sickle cell disease
Oncology
Intravenous infusion
2019
TQJ230
TBD
Anti-apo(a) antisense
oligonucleotide
Secondary prevention of cardiovascular Cardiovascular, Subcutaneous injection 2018
events in patients with elevated levels
of lipoprotein(a)
Renal and
Metabolism
US approved
EU registration
≥2024/III
UNR844
TBD
Reduction of
disulfide bonds
Presbyopia
VAY736
ianalumab
Anti-BAFF (B-cell-
activating factor)
monoclonal antibody
Autoimmune hepatitis
Primary Sjögren’s syndrome
VPM087
TBD
Interleukin-1 beta
neutralization
monoclonal antibody
Colorectal cancer, 1st line;
renal cell carcinoma, 1st line
Cardiovascular, Eye drops
Renal and
Metabolism
2017
≥2024/II
Immunology,
Hepatology and
Dermatology
Immunology,
Hepatology and
Dermatology
Subcutaneous injection 2016
≥2024/II
Subcutaneous injection 2015
≥2024/II
Oncology
Intravenous infusion
2018
≥2024/I
Xolair
omalizumab Anti-IgE monoclonal
Nasal polyps
Respiratory
Subcutaneous injection 2017
antibody
US/EU
registration
ZPL389
adriforant
Histamine H4 receptor Atopic dermatitis
antagonist
Immunology,
Hepatology and
Dermatology
Oral
2017
≥2024/II
Food allergy
Respiratory
Subcutaneous injection 2019
2021/III
4 Approved in the US as Beovu for neovascular (wet) age-related macular degeneration
5 Approved in the US as Adakveo for sickle cell disease
Key development projects
• ABL001 (asciminib) is an investigational oral BCR-ABL
inhibitor that binds to the allosteric site of its target
(BCR-ABL1). A broad clinical development program is
investigating ABL001 as a monotherapy and as a com-
bination therapy for the treatment of chronic myeloid
leukemia (CML). This program includes the Phase III
ASCEMBL third-line study, and the Phase II ASC-
4MORE first-line study of ABL001 plus imatinib in
patients with CML in chronic phase without achieving
deep molecular response. Novartis is studying ABL001
in patients with and without genetic mutations that
make them resistant to many targeted CML therapies.
• ACZ885 (canakinumab) is an injectable human mono-
clonal antibody designed to bind to human interleukin-1
beta (IL-1 beta). ACZ885 was first approved as Ilaris in
2009 for cryopyrin-associated periodic syndromes, a
group of rare auto-inflammatory disorders. At the 2017
European Society of Cardiology Congress, Novartis
presented data from CANTOS, a Phase III study eval-
uating quarterly injections of ACZ885 in people with a
prior heart attack and inflammatory atherosclerosis. A
blinded, pre-planned analysis of these data revealed a
77% reduction in lung cancer mortality and a 67%
reduction in lung cancer cases in patients treated with
300 mg of ACZ885. These findings suggest the poten-
tial benefit of inhibiting tumor-promoting inflammation
in cancer treatment. Based on these CANTOS findings,
Novartis initiated three Phase III studies of ACZ885 in
lung cancer: the CANOPY trials. Study outcomes may
begin to be reported in 2021. During 2019, Novartis
presented Trials in Progress (TiP) updates at the Amer-
ican Society of Clinical Oncology (ASCO) annual meet-
ing, and an overview of the Phase III CANOPY trials at
the European Society for Medical Oncology (ESMO)
Congress.
• AVXS-101 (onasemnogene abeparvovec, approved in
the US as Zolgensma) is a gene therapy designed to
address the genetic root cause of spinal muscular atro-
phy (SMA) by providing a functional copy of the human
survival motor neuron (SMN) gene to halt disease pro-
gression through sustained SMN protein expression.
The US Food and Drug Administration (FDA) approved
the intravenous formulation of AVXS-101 as Zolgensma
in May 2019 for the treatment of pediatric patients less
than 2 years old who have SMA with biallelic mutations
in the SMN1 gene. Regulatory reviews are underway in
37
Item 4. Information on the Company
Europe, with a CHMP opinion anticipated in the first
quarter of 2020, and in Japan, with a decision antici-
pated in the first half of 2020. AVXS-101 is in ongoing
clinical studies, including the global Phase III STR1VE
clinical program (consisting of STR1VE-US, STR1VE-EU
and STR1VE-AP) to evaluate the intravenous formula-
tion of AVXS-101 in patients who have SMA type 1, and
the multinational Phase III SPR1NT trial in presymptom-
atic patients who have SMA with two or three copies
of the SMN2 gene. Additionally, AVXS-101 intrathecal
administration is being studied in a Phase I/II STRONG
trial in patients who have SMA type 2 and three copies
of the SMN2 gene. The STRONG trial is currently on
partial clinical hold based on findings in a small preclin-
ical animal study, and the Company is working with the
FDA to determine next steps to resume dosing. New
data from trials were presented at 2019 congresses,
including the American Academy of Neurology Annual
Meeting.
• BYL719 (alpelisib, approved in the US as Piqray) is an
orally bioavailable, alpha-specific PI3K inhibitor
approved in combination with fulvestrant for the treat-
ment of postmenopausal women, and men, with HR+/
HER2-, PIK3CA-mutated, advanced or metastatic
breast cancer. Piqray received FDA approval based on
results of the Phase III SOLAR-1 trial, which showed
that Piqray plus fulvestrant nearly doubled median pro-
gression-free survival compared to fulvestrant alone.
Novartis is conducting a Phase II open-label trial, called
BYLieve, to evaluate BYL719 plus fulvestrant or letro-
zole in patients with HR+/HER2-, PIK3CA-mutated
advanced breast cancer who have progressed on prior
therapy. Novartis is also planning to evaluate BYL719
in triple negative breast cancer; head and neck squa-
mous cell carcinoma; ovarian cancer; and PIK3CA-re-
lated overgrowth spectrum, for which BYL719 received
FDA breakthrough therapy designation.
• CFZ533 (iscalimab), delivered subcutaneously as an
injection, is a fully human, Fc-silenced IgG1 monoclo-
nal antibody that blocks the CD40 receptor. CFZ533
is in clinical development to prevent graft rejection after
organ transplantation and to treat several autoimmune
diseases, including Sjögren’s syndrome. In the proof-
of-concept study, CFZ533 demonstrated the ability to
preserve graft function and pristine histology, confirm-
ing preclinical in vivo data. Recruitment is underway for
two Phase II studies in kidney and liver transplant recip-
ients (CIRRUS I and CONTRAIL I, respectively), and for
a Phase II study in patients with Sjögren’s syndrome
(TWINSS).
• Cosentyx (secukinumab) is an injectable fully human
monoclonal antibody that specifically inhibits interleu-
kin-17A (IL-17A). In August and December 2019, Novartis
submitted positive data to the EMA and the FDA,
respectively, from the Phase III PREVENT trial, which
evaluated the efficacy and safety of Cosentyx in
patients with non-radiographic axial spondyloarthritis.
In November 2019, Novartis disclosed first results from
the EXCEED head-to-head trial comparing Cosentyx
to Humira® (adalimumab) in patients with active psori-
atic arthritis (PsA). While narrowly missing statistical
significance for superiority in ACR20, the primary end-
point of the EXCEED trial, Cosentyx showed numeri-
cally higher results versus Humira®. Cosentyx is in a
Phase III head-to-head trial versus the Sandoz biosim-
ilar Hyrimoz (adalimumab) in ankylosing spondylitis;
Phase III trials in pediatric psoriasis, juvenile idiopathic
arthritis and hidradenitis suppurativa; and a Phase II
trial in giant cell arteritis.
• Entresto (sacubitril/valsartan) is an oral, first-in-class
angiotensin receptor/neprilysin inhibitor. Novartis is
conducting multiple studies of sacubitril/valsartan as
part of the FortiHFy clinical program, designed to gen-
erate additional data on sacubitril/valsartan and
increase understanding of heart failure. The PIO-
NEER-HF and TRANSITION studies both read out in
2018 and confirmed safety and superiority of Entresto
versus enalapril in patients with chronic heart failure
with reduced ejection fraction (HFrEF) who were sta-
bilized following admission to the hospital for an acute
decompensated heart failure event. The PROVE and
EVALUATE trials read out in 2019. The PROVE-HF trial
showed significant improvements in measures of car-
diac structure and function at six months and one year
in HFrEF patients; EVALUATE-HF results comple-
mented PROVE-HF findings. The FortiHFy program
also includes studies to investigate sacubitril/valsartan
use in novel indications and expanded patient popula-
tions. These include PARAGON-HF and PARAL-
LAX-HF, Phase III trials of sacubitril/valsartan in
patients with chronic heart failure with preserved ejec-
tion fraction (HFpEF). Results of PARAGON-HF were
published in September 2019, and while the trial nar-
rowly missed its primary endpoint with a 13% treatment
effect against an active valsartan comparator, the total-
ity of evidence suggests that treatment with sacubitril/
valsartan may result in clinically important benefits in
HFpEF. US regulatory submission for HFpEF is on track
for early 2020. PARALLAX-HF enrollment is complete
and results are expected to be presented in 2020.
Other trials include PARADISE-MI, a Phase III trial in
patients at high risk of developing heart failure after a
heart attack (post-acute myocardial infarction). Enroll-
ment is ongoing and results are expected in 2020.
Additionally, PARALLEL-HF is a Phase III trial for HFrEF
patients in Japan (Novartis reported results in March
2019, and a marketing authorization submission in
Japan is under review), and PANORAMA-HF is a Phase
III trial in pediatric patients with heart failure (enroll-
ment is ongoing and results are expected in 2021).
• INC280 (capmatinib) is an investigational oral, potent
and selective MET inhibitor. The GEOMETRY trial – a
Phase II study in adult patients with advanced non-
small cell lung cancer (NSCLC) harboring MET exon
14 skipping mutations – is ongoing, as are additional
early-stage studies in combination with other com-
pounds. During 2019, Novartis presented primary effi-
cacy results from the GEOMETRY trial at ASCO, and
the FDA granted breakthrough therapy designation to
INC280 as a first-line treatment for patients with met-
astatic MET exon 14 skipping-mutated (METex14)
NSCLC. Breakthrough therapy designation covers
both treatment-naive patients and patients previously
38
Item 4. Information on the Company
treated with platinum-based chemotherapy. INC280 is
licensed by Novartis from Incyte Corporation. Under
the Collaboration and License Agreement, Novartis has
exclusive worldwide development and commercializa-
tion rights to INC280, and Incyte Corporation maintains
certain rights to exercise options for both co-develop-
ment and co-detailing in the US.
• 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. A Phase IIb study tested multiple
dosing combinations and dosing schedules of KAF156
and lumefantrine in adults and adolescents, and con-
firmed good safety and efficacy of all doses. The safety
and efficacy of the combination will now be evaluated
in younger children.
• Kisqali (ribociclib) is an oral, cyclin-dependent kinase
inhibitor. Novartis continues to investigate Kisqali in
patients with HR+/HER2- breast cancer, and it is the
only CDK4/6 inhibitor to achieve statistically significant
overall survival in two Phase III trials with two distinct
patient populations. Novartis presented overall survival
results from MONALEESA-7 at ASCO 2019 and from
MONALEESA-3 at ESMO 2019, and continues to
assess Kisqali in MONALEESA-2, COMPLEEMENT-1
and the NataLEE adjuvant trial. These trials are evalu-
ating Kisqali in multiple endocrine therapy combina-
tions across a broad range of patients, including men
and premenopausal women. Kisqali was developed by
the Novartis Institutes for BioMedical Research under
a research collaboration with Astex Pharmaceuticals.
• KJX839 (inclisiran) is a long-acting, small-interfering
RNA (siRNA) administered twice a year as a subcuta-
neous injection. It is in development in atherosclerotic
cardiovascular disease and primary hyperlipidemia
(including familial hypercholesterolemia) for patients
who have already had an event like a heart attack or
stroke, or who are risk-equivalent. Pivotal Phase III trial
results were presented at the European Society of Car-
diology Congress and the American Heart Association
Scientific Sessions in 2019 by The Medicines Com-
pany, prior to its acquisition by Novartis. A cardiovas-
cular outcomes study, ORION-4, is ongoing.
• Kymriah (tisagenlecleucel) is a CD19-directed geneti-
cally modified autologous chimeric antigen receptor
T-cell (CAR-T) therapy delivered as an intravenous infu-
sion. Since 2018, Novartis has initiated six trials for new
or expanded indications for Kymriah – diffuse large
B-cell lymphoma (DLBCL) in second line, high-risk
pediatric acute lymphoblastic leukemia (ALL), relapsed/
refractory follicular lymphoma, pediatric non-Hodgkin
lymphoma, relapsed/refractory DLBCL in combination
with ibrutinib, and relapsed/refractory DLBCL in com-
bination with pembrolizumab – as well as a study of
Kymriah in adult ALL planned for a 2020 start. Novartis
and the University of Pennsylvania’s Perelman School
of Medicine developed Kymriah under a global collab-
oration. Please see “—Alliances and acquisitions”
below for additional information related to our collab-
oration with the University of Pennsylvania.
• LJN452 (tropifexor) is an oral, highly potent and selec-
tive nonsteroidal multimodal farnesoid X receptor
(FXR) agonist in development as both a monotherapy
and a combination therapy for the treatment of nonal-
coholic steatohepatitis (NASH). LJN452 is designed to
target the three major facets of NASH (steatosis,
inflammation and fibrosis), and has demonstrated the
ability to reduce all three in animal models. Recruitment
is complete for two Phase II studies: FLIGHT FXR (the
monotherapy study) and TANDEM (the combination
study with cenicriviroc). Additional collaborative stud-
ies are underway to explore the role of LJN452 as a
backbone in combination therapies.
• LNP023 is an oral, selective factor B inhibitor of the
alternative complement pathway. It is in development
for the treatment of rare complement-driven renal dis-
eases, including IgA nephropathy, membranous
nephropathy and C3 glomerulopathy. LNP023 is also
in development for the treatment of paroxysmal noc-
turnal hemoglobinuria. Phase II studies in all indications
are initiated.
• 177Lu-PSMA-617, delivered as an intravenous infusion,
is an investigational radioligand therapy in development
for metastatic castration-resistant prostate cancer
(mCRPC). Designed to target the prostate-specific
membrane antigen present in most patients with
mCRPC, 177Lu-PSMA-617 potentially offers a differen-
tiated targeted treatment option. A Phase III study of
177Lu-PSMA-617 in patients with mCRPC, called VISION,
is ongoing.
• Lutathera (lutetium Lu 177 dotatate/lutetium (177Lu) oxo-
dotreotide) is an intravenous radioligand therapy. A ran-
domized Phase III trial called NETTER-1 continues to
assess overall survival in patients who received
Lutathera and long-acting octreotide to treat inopera-
ble, progressive, well-differentiated (Grade 1 and Grade
2), somatostatin receptor-positive midgut neuroendo-
crine tumors.
• OMB157 (ofatumumab), administered as a subcutane-
ous injection, is a fully human monoclonal antibody that
works by binding to the CD20 molecule on the B-cell
surface and inducing B-cell depletion. OMB157 is in
development to treat multiple sclerosis (MS). Novartis
announced in August 2019 that the Phase III
ASCLEPIOS I and II studies met their primary end-
points in patients with relapsing forms of MS. Com-
pared to Aubagio® (teriflunomide), OMB157 showed a
statistically significant reduction in the number of con-
firmed relapses, evaluated as the annualized relapse
rate; highly significant suppression of both Gd+ T1
lesions and new or enlarging T2 lesions; and a relative
risk reduction in three- and six-month confirmed dis-
ability worsening in pre-specified pooled analyses.
39
Item 4. Information on the Company
Novartis is conducting a registration study for OMB157
in Japan, which started in March 2018.
• PDR001 (spartalizumab), delivered as an intravenous
infusion, is an investigational PD-1 antagonist that may
restore the ability of immune cells to induce cell death
and fight cancer. Novartis is evaluating PDR001 in com-
bination with Tafinlar + Mekinist in a Phase III trial (COM-
BI-i) for unresectable or metastatic BRAF V600 muta-
tion-positive melanoma, and presented results from the
safety run-in part and biomarker cohort at ASCO in
2019. Novartis is also evaluating PDR001 as a combi-
nation therapy with other Novartis drugs in clinical tri-
als for different tumor types, including metastatic mel-
anoma.
• QAW039 (fevipiprant) is an investigational, novel, once-
daily pill that blocks the DP2 pathway, a regulator of the
inflammatory cascade. In December 2019, Novartis
announced that development of QAW039 in asthma
would be discontinued after the Phase III LUSTER-1
and LUSTER-2 core registration trials did not meet the
clinically relevant threshold for reduction in asthma
attacks (exacerbations) in moderate to severe patients
with unresolved asthma despite treatment with inhaled
therapies. In addition, as announced in October 2019,
results of the Phase III ZEAL-1 and ZEAL-2 studies did
not meet the primary efficacy endpoint of lung function
(FEV1) improvement in patients with moderate asthma.
• QGE031 (ligelizumab), administered subcutaneously
as a once-monthly single injection, is a next-genera-
tion, high-affinity anti-IgE monoclonal antibody that is
highly potent in blocking the IgE/FceR1 pathway.
QGE031 is in clinical development for the treatment of
chronic spontaneous urticaria/chronic idiopathic urti-
caria (CSU/CIU). In a CSU/CIU Phase IIb study, a clear
dose response was demonstrated and a higher per-
centage of CSU/CIU patients had complete symptom
control with QGE031 72 mg or 240 mg than with omal-
izumab 300 mg or placebo. QGE031 is being investi-
gated in two ongoing Phase III twin trials, PEARL 1 and
PEARL 2, which are recruiting more than 2 000 patients
across 48 countries.
• RTH258 (brolucizumab, approved in the US as Beovu)
is an injectable, humanized, single-chain antibody frag-
ment that acts as an anti-vascular endothelial growth
factor (anti-VEGF) agent. The FDA approved RTH258
as Beovu in October 2019 for the treatment of neovas-
cular (wet) age-related macular degeneration, and reg-
ulatory filings are under review in the EU, Japan and
certain other countries. RTH258 is in clinical develop-
ment for diabetic macular edema and retinal vein occlu-
sion.
• SEG101 (crizanlizumab, approved in the US as Adakveo)
is a humanized monoclonal antibody that binds to P-se-
lectin, a cell adhesion protein that plays a central role
in the multicellular interactions that can lead to vaso-oc-
clusion in sickle cell disease. It is delivered as an intra-
venous infusion. The FDA approved SEG101 as Adakveo
in November 2019 to reduce the frequency of vaso-oc-
clusive crises (VOCs), or pain crises, in patients aged
16 years and older with sickle cell disease. Novartis
continues to study SEG101 in sickle cell disease through
the SENTRY clinical trial program, which includes
SOLACE-adults, SOLACE-kids, STAND, SPARTAN
and STEADFAST. These studies are evaluating SEG101
for the treatment of VOCs in children and adults, as
well as priapism and other complications, such as
sickle cell nephropathy.
• TQJ230 is an injectable antisense oligonucleotide
designed to target elevated lipoprotein(a) (Lp(a)), which
increases the risk of heart disease. The results of a
Phase II trial announced in 2018 showed that TQJ230
reduced Lp(a) in patients by as much as 80%. The Lp(a)
HORIZON trial, a Phase III trial in patients with estab-
lished cardiovascular disease and elevated Lp(a), was
initiated in December 2019. Results are expected in
2024. Novartis licensed TQJ230 from Akcea Thera-
peutics, Inc., an affiliate of Ionis Pharmaceuticals, Inc.,
in February 2019.
• UNR844 is a potential first-in-class topical treatment
in development for presbyopia, 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.
UNR844 is believed to work through the reduction of
disulfide bonds, softening the crystalline lens. 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 dif-
ference to placebo in binocular distance-corrected
near vision at all time points measured (from Day Eight).
At Day 90, 82% of participants treated with UNR844
had 20/40 binocular near vision (or 0.30 LogMAR) ver-
sus 48% in the placebo group. Near vision of 20/40
allows for the majority of near-vision tasks in most peo-
ple. UNR844 was acquired by Novartis through the
acquisition of Encore Vision, Inc. in January 2017.
• ZPL389 (adriforant) is a once-daily oral H4 receptor
antagonist. It is in Phase II clinical development for the
treatment of atopic dermatitis (AD) to evaluate its ben-
efit on key outcomes, such as reduction of the sever-
ity of AD lesions and reduction of itch. The Phase II
ZEST study is investigating the effect of several doses
of ZPL389 versus placebo. ZPL389 has already
demonstrated significant clinical and statistical
improvements in eczema lesions, leading to a 50%
reduction in Eczema Area and Severity Index (EASI)
score compared to placebo after eight weeks of treat-
ment, with a favorable safety profile in the proof-of-
concept study.
40
Item 4. Information on the Company
Projects added to and subtracted from the development table since 2018
Project/product Potential indication
Change
ABL001
Chronic myeloid leukemia, 1st line
Removed
Reason
Development discontinued
AVXS-101
Spinal muscular atrophy type 1 (IV formulation)
Now disclosed as spinal muscular atrophy (IV formulation)
Spinal muscular atrophy type 2/3 (IT formulation)
Now disclosed as spinal muscular atrophy (IT formulation)
BAF312
BYL719
Secondary progressive multiple sclerosis
Commercialized as Mayzent
Hormone receptor-positive (HR+)/human epidermal
growth factor receptor 2-negative (HER2-)
advanced breast cancer (postmenopausal women),
2nd line (+ fulvestrant)
Now disclosed as PIK3CA mutant hormone
receptor-positive (HR+)/human epidermal growth
factor receptor 2-negative (HER2-) postmenopausal
advanced breast cancer, 2nd line (+ fulvestrant)
PIK3CA-related overgrowth spectrum
Triple negative breast cancer
Hormone receptor-negative (HR-)/human epidermal
growth factor receptor 2-positive (HER2+) advanced
breast cancer
Ovarian cancer
Head and neck squamous cell carcinoma
CAD106
Alzheimer’s disease
CEE321
Atopic dermatitis
CNP520
Alzheimer’s disease
Cosentyx
Giant cell arteritis
Lichen planus
EMA401
Peripheral neuropathic pain
HDM201
Acute myeloid lymphoma
INC280
Non-small cell lung cancer (EGFR mutation)
Solid tumors
KAE609
Severe malaria
KJX839
Hyperlipidemia
Secondary prevention of cardiovascular events
in patients with elevated levels of LDL-C
Kymriah
LCI699
Chronic lymphocytic leukemia
Cushing’s disease
LNP023
C3 glomerulopathy
Paroxysmal nocturnal hemoglobinuria
Lucentis
Retinopathy of prematurity
Diabetic retinopathy
LXE408
Visceral leishmaniasis
MBG453
Myelodysplastic syndrome
Acute myeloid leukemia
MOR106
Atopic dermatitis
Added
Added
Added
Added
Added
Removed
Added
Removed
Added
Added
Removed
Removed
Removed
Added
Added
Added
Added
Removed
Removed
Added
Added
Commercialized
Commercialized
Added
Added
Added
Removed
PDR001
Malignant melanoma (combo)
Now disclosed as metastatic melanoma (combo)
Promacta/
Revolade
Severe aplastic anemia, 1st line
QAW039
Asthma
Removed
Removed
RTH258
Neovascular age-related macular degeneration
Now disclosed as neovascular (wet) age-related
macular degeneration
Rydapt
SAF312
TQJ230
Proliferative diabetic retinopathy
Acute myeloid leukemia (FLT3 wild type)
Chronic ocular surface pain
Secondary prevention of cardiovascular events
in patients with elevated levels of lipoprotein(a)
VAY785
Nonalcoholic steatohepatitis
Xolair
Food allergy
Added
Removed
Added
Added
Removed
Added
Principal markets
Entered Confirmatory Development
Entered Confirmatory Development
Entered Confirmatory Development
Entered Confirmatory Development
Entered Confirmatory Development
Development discontinued
Entered Confirmatory Development
Development discontinued
Entered Confirmatory Development
Entered Confirmatory Development
Development discontinued
Development discontinued
Development discontinued
Entered Confirmatory Development
Entered Confirmatory Development
Acquired with acquisition of
The Medicines Company
Acquired with acquisition of
The Medicines Company
Development discontinued
Divested to Recordati S.p.A.
Entered Confirmatory Development
Entered Confirmatory Development
Entered Confirmatory Development
Entered Confirmatory Development
Entered Confirmatory Development
Development discontinued
Development discontinued
Development discontinued
Entered Confirmatory Development
Development discontinued
Entered Confirmatory Development
Entered Confirmatory Development
Development discontinued
Entered Confirmatory Development
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 2019 net sales
of the Innovative Medicines Division by region:
41
Item 4. Information on the Company
Innovative Medicines
United States
Europe
Asia, Africa, Australasia
Canada and Latin America
Total
Of which in Established Markets *
Of which in Emerging Growth Markets *
2019 net sales
to third parties
USD millions
13 789
12 818
8 458
2 649
37 714
28 573
9 141
%
37
34
22
7
100
76
24
* 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
Our primary goal is to ensure the uninterrupted, timely
and cost-effective supply of products that meet all prod-
uct specifications and quality standards. The manufac-
turing of our products is highly regulated by governmen-
tal health authorities around the world, including the FDA
and EMA. In addition to regulatory requirements, many
of our products involve technically complex manufactur-
ing processes or require highly specialized raw materi-
als.
We manufacture our products at facilities worldwide,
producing active pharmaceutical ingredients in our own
facilities or purchasing them from third-party suppliers
(see also “—Item 4.D Property, plants and equipment”).
Across our network, we maintain state-of-the-art pro-
cesses, with quality as a priority, and require our suppli-
ers to adhere to the same high standards we expect from
our own people and processes. Those processes include
fermentation, chemical syntheses and precipitation, as
well as sterile processing. We are constantly working to
improve our existing manufacturing processes and to
develop new ones, and to review and adapt our manu-
facturing network to meet our needs and those of our
patients and customers.
We produce raw materials for manufacturing in-house
or we purchase them from a number of third-party sup-
pliers. Where possible, we maintain multiple supply
sources so that the business is not dependent on a sin-
gle 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 materials are required to
comply with applicable regulations and Novartis quality
standards.
Because the manufacturing of our products is com-
plex and highly regulated by governmental health author-
ities, 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 disruption to our
production activities. We have experienced supply inter-
ruptions for our products in the past, and there can be
no assurance that supply will not be interrupted again in
the future. However, we have implemented a global man-
ufacturing strategy to maximize business continuity in
case of such events.
Marketing and sales
The Innovative Medicines Division serves customers with
24 779 field force representatives, as of December 31,
2019, 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.
The marketplace for healthcare is evolving: Customer
groups beyond prescribers have increasing influence on
treatment decisions and guidelines, while patients con-
tinue to become more informed stakeholders in their
healthcare decisions and look for solutions to meet their
changing needs. Novartis is responding by adapting our
business practices to engage appropriately with patients,
customer groups and other stakeholders, including by
delivering innovative solutions to drive education, access
and improved patient care. Additionally, in the US, cer-
tain products can be advertised via digital and traditional
media channels, including the internet, television, news-
papers and magazines.
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.
42
Item 4. Information on the Company
In the US, the US Centers for Medicare & Medicaid
Services (CMS) is the largest single payer for healthcare
services as a result of continuing changes in healthcare
economics and an aging population. 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 coun-
tries, national health services are often the only signifi-
cant payer for healthcare services. In an effort to control
prescription drug costs, almost all managed care orga-
nizations and national health services use formularies
that list specific drugs that may be reimbursed and/or
the level of reimbursement for each drug. Managed care
organizations and national health services also increas-
ingly use 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 continue to reimburse exist-
ing drugs. We have dedicated teams that actively seek
to optimize patient access, including formulary positions,
for our products.
The trend toward consolidation among distributors
and retailers of Innovative Medicines Division products
continues in the US and internationally, both within coun-
try and across countries. This has increased our cus-
tomers’ 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 consolidation among our customers.
In addition, drug pricing is an increasingly prominent
issue in many countries as healthcare spending contin-
ues to rise. Pricing is a particularly complex issue for cell
and gene therapies because of their high costs and the
expectation that one treatment will have a long-term, if
not lifelong, benefit.
In 2019, AveXis, a Novartis company, formed an
agreement with Accredo Health Group, Inc. in the US to
offer a pay-over-time option of up to five years for
Zolgensma to help ease possible short-term budget con-
straints for customers. Additionally, AveXis offers payers
outcome-based agreements for Zolgensma based on
measures included in the clinical trial program, and has
these agreements in place with both commercial and
Medicaid contracts. In these agreements, if a patient has
a significant negative outcome during a five-year period,
AveXis reimburses a percentage of the cost of the ther-
apy relative to the time passed.
Also in the US, Novartis has established an out-
come-based framework for one of the approved indica-
tions of Kymriah, whereby the product invoice is linked
to a successful outcome for each patient at an agreed
milestone. Novartis also offers outcome-based agree-
ments for approved indications of Kymriah in certain
countries other than the US. These typically involve a full
upfront payment of the product with a partial refund in
case of failed outcomes, or installment payments based
on successful patient outcomes at agreed milestones
for one or both of the approved indications of Kymriah.
In addition, Novartis is in discussions with payers about
potentially offering similar agreements for Luxturna.
Competition
The global pharmaceutical market is highly competitive.
We compete against other major international corpora-
tions that have substantial financial and other resources,
as well as against smaller companies that operate region-
ally or nationally. Competition within the industry is
intense and extends across a wide range of activities,
including pricing, product characteristics, customer ser-
vice, sales and marketing, and research and develop-
ment.
Like other companies selling patented pharma-
ceuticals, Novartis faces challenges from companies
selling competing patented products. Generic forms of
our products may follow the expiry of intellectual prop-
erty protection, and generic companies may also gain
entry to the market through successfully challenging our
intellectual property rights. We use legally permissible
measures to defend those rights. See also “—Intellectual
property” below. We also may face competition from
over-the-counter (OTC) products that do not require a
prescription from a physician.
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
seeking to benefit from the increasing importance of
data and data management in our industry.
Research and development
The discovery and development of a new drug usually
requires approximately 10 to 15 years from the initial
research to bringing a drug to market. This includes
approximately six to eight years from Phase I clinical tri-
als 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 the development of a com-
pound 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.
These include 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.
43
Item 4. Information on the Company
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 highly talented
employees, a focus on fundamental disease mechanisms
that are relevant across different disease areas, contin-
uous improvement in technologies for drug discovery
and potential therapies, close alliances with clinical col-
leagues, and the establishment of strategic external alli-
ances.
Approximately 5 600 full-time-equivalent scientists,
physicians and business professionals work at NIBR
sites in Basel, Switzerland; Cambridge, Massachusetts;
East Hanover, New Jersey; San Diego, California;
Emeryville, California; and Shanghai, China. They con-
tribute to research into disease areas such as cardiovas-
cular 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), in Emeryville, California,
focuses on discovering new medicines to fight tropical
diseases, including malaria and cryptosporidiosis.
All drug candidates go through proof-of-concept tri-
als to enable an early assessment of the safety and effi-
cacy 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 confirmatory 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 decided to prioritize
our resources in other areas where we believe we are
better positioned to develop innovative medicines that
will have a positive impact for patients. Since then, we
have executed two out-licensing deals with Gilead and
Boston Pharmaceuticals for assets from our infectious
diseases portfolio. The San Francisco Bay Area remains
home to NITD and global drug discovery teams focused
on “undruggable” targets in collaboration with the Novar-
tis-Berkeley Center for Proteomics and Chemistry Tech-
nologies.
In November 2019, we announced that we will dis-
continue early discovery research at NIBR’s Shanghai
site and focus our research and development activities
there on expanding the scale and scope of our early clin-
ical development and later-stage clinical trial operations
to help accelerate the development of new medicines.
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. The GDD orga-
nization includes centralized global functions such as
Regulatory Affairs and Global Development Operations,
and global Development Units aligned with our business
franchises. GDD was created to improve resource allo-
cation, technology implementation and process stan-
dardization to further increase innovation. GDD includes
approximately 11 000 full-time equivalent associates
worldwide.
The traditional model of development consists of three
phases:
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, we have tai-
lored the development process to be simpler, more flex-
ible and efficient. We divide the development process
into two stages: Exploratory Development to establish
proof of concept, followed by Confirmatory Development
to confirm the concept in large numbers of patients.
Exploratory Development consists of clinical proof-of-
concept (PoC) studies, which are small clinical trials (typ-
ically involving in the range of between five and 15
patients) that combine elements of traditional Phase I/II
testing. NIBR conducts these customized trials, which
are designed to give early insights into issues such as
safety, efficacy and toxicity for a drug in a given indica-
tion. 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 benefit-risk
profile. Further, with new treatment approaches such as
gene therapy for rare diseases, elements of Exploratory
and Confirmatory Development may be combined and
suffice for registration under certain conditions such as
high unmet medical need and clinical data showing highly
favorable benefit-risk. In these cases, additional post-ap-
proval studies may be required by the regulatory author-
ities to continue to gather important data to further sup-
port approval.
44
Item 4. Information on the Company
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.”
Our Innovation Management Board (IMB) manages
our activities at each phase of clinical development. The
IMB is responsible for all major aspects of our develop-
ment portfolio and oversees our drug development bud-
get as well as major project phase transitions and mile-
stones following a positive proof-of-concept outcome,
including transitions to Confirmatory Development and
the decision to submit a regulatory application to the
health authorities. The IMB is also responsible for the
endorsement of overall development strategy, the
endorsement of development project priorities, and deci-
sions on project discontinuations. Our Chief Executive
Officer chairs the IMB, and other representatives from
Novartis senior management, with expertise spanning
multiple fields, are among its core and extended mem-
bership.
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. We focus on strategic alliances and acquisition
activities for key disease areas and indications that we
expect to be growth drivers in the future. We review prod-
ucts and compounds we are considering licensing, using
the same criteria that we use for our own internally dis-
covered drugs.
In January 2020, we completed the acquisition of
US-based biopharmaceutical company The Medicines
Company. The acquisition broadened the Novartis car-
diovascular portfolio by adding KJX839 (inclisiran), an
investigational cholesterol-lowering therapy.
In October 2019, we announced the discontinuation
of the clinical development program for MOR106 in
atopic dermatitis. We announced an exclusive licensing
agreement in July 2018 with biotech companies Galapa-
gos NV and MorphoSys AG regarding this compound.
Under the agreement, Novartis acquired 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 October 2019, certain affiliates of Recordati S.p.A.
acquired the worldwide rights from Novartis to Signifor®,
Signifor® LAR and LCI699 (osilodrostat). This transac-
tion supports our oncology strategy to focus on medicines
that have the potential to transform the standard of care
for patients in four distinct cancer treatment platforms:
targeted therapies, radioligand therapies, cell and gene
therapies, and immunotherapies.
In October 2019, we announced a multiyear research
and development collaboration with Microsoft. This alli-
ance is expected to bolster our artificial intelligence
capabilities to help accelerate the discovery, develop-
ment and commercialization of medicines for patients
worldwide.
In September 2019, Novartis and the University of
Pennsylvania (Penn) entered into a new focused agree-
ment on chimeric antigen receptor T-cell (CAR-T) clini-
cal trials and concluded our seven-year research and
development alliance, per the contractual terms. The
new agreement allows each organization to pursue its
own research in cell and gene therapies. Novartis and
Penn will continue to collaborate on certain CAR-T
research trials.
In September 2019, we signed a collaboration and
exclusive option agreement with IFM Due, Inc., a subsid-
iary of IFM Therapeutics LLC, to develop a group of
immunotherapies that inhibit the cGAS/STING pathway
for the potential treatment of serious inflammatory and
autoimmune diseases.
In July 2019, we announced the decision to discon-
tinue the investigation of the BACE1 inhibitor CNP520
(umibecestat) in two Phase II/III studies in the Alzhei-
mer’s Prevention Initiative Generation Program. This
study was launched through an expanded collaboration
with Amgen Inc. and Banner Alzheimer’s Institute,
announced in November 2017, to assess whether
CNP520 can prevent or delay the symptoms of Alzhei-
mer’s disease in a high-risk population.
In July 2019, we announced that we completed the
acquisition of Xiidra (lifitegrast) from Takeda Pharmaceu-
tical Company Limited, and we began recording sales as
of July 1, 2019. Xiidra is the first and only prescription
treatment approved to treat both signs and symptoms
of dry eye by inhibiting inflammation caused by the dis-
ease. For additional information, see “Item 18. Financial
Statements—Note 2. Significant transactions—Signifi-
cant transactions in 2019—Innovative Medicines – acqui-
sition of Xiidra.”
In May 2019, we completed the acquisition of IFM Tre,
Inc., a subsidiary of IFM Therapeutics LLC focused on
developing anti-inflammatory medicines targeting the
NLRP3 inflammasome (a key component of the innate
immune system). This acquisition includes full rights to
IFM Tre’s portfolio of NLRP3 inhibitors. For additional
information, see “Item 18. Financial Statements—Note 2.
Significant transactions—Significant transactions in
2019—Innovative Medicines – acquisition of IFM Tre, Inc.”
In April 2019, Novartis completed a USD 75 million
investment in Poseida Therapeutics, a privately held bio-
technology company focused on gene therapies. Pose-
ida Therapeutics has a pipeline of next-generation
CAR-T product candidates, including a BCMA CAR-T in
Phase II clinical development for the treatment of
relapsed/refractory multiple myeloma. Our investment
entitles us to appoint a director to the company’s board
of directors.
In February 2019, Novartis announced that it is exer-
cising its option to license the rights to develop and com-
mercialize TQJ230 from Akcea Therapeutics, Inc., an
affiliate of Ionis Pharmaceuticals, Inc., for targeted car-
diovascular therapy. If approved, TQJ230 could be the
first treatment that specifically targets elevated levels of
lipoprotein(a).
In February 2019, we completed the acquisition of
CellforCure, a French company specializing in the devel-
opment and manufacture of cell and gene therapies. This
acquisition strengthened our CAR-T therapy manufac-
turing capacity and builds on a previous agreement with
45
Item 4. Information on the Company
CellforCure to produce CAR-T therapies, including
Kymriah (tisagenlecleucel).
tially extend the time until a product may finally be avail-
able to patients.
For additional information, see “Item 18. Financial
Statements—Note 2. Significant transactions—Signifi-
cant transactions in 2018.”
The following provides a summary of the regulatory
processes in the principal markets served by Innovative
Medicines Division affiliates:
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 review the safety and efficacy
of pharmaceutical products. Extensive controls exist on
the non-clinical and clinical development of pharmaceu-
tical products. These regulatory requirements, and the
implementation of them by local health authorities around
the globe, are a major factor in determining whether a
substance can be developed into a marketable product,
and the amount of time and expense associated with
that development.
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. Even if a
drug is registered and marketed in one country, the reg-
istration authority in another country may request addi-
tional information from the pharmaceutical company
prior to registration or even reject the product. 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,
the US, the EU and Japan have made efforts to harmo-
nize registration requirements in order to achieve shorter
development and registration times for medical prod-
ucts. However, the requirement in many countries to
negotiate selling prices or reimbursement levels with
government regulators and other payers can substan-
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. This
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 and other healthcare providers
to prescribe. The drug owner must submit periodic
reports to the FDA, including any cases of adverse reac-
tions. 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 prod-
uct 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
46
Item 4. Information on the Company
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
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
respond 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 EC. The final EC decision under this
centralized procedure is a decision that is applicable to
all member states. This decision occurs 60 days, on aver-
age, 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. In the
MRP, the company first obtains a marketing authoriza-
tion in the RMS, which is then recognized by the con-
cerned member states in 90 days. In the DCP, the appli-
cation is done simultaneously in the RMS and all
concerned member states. During the DCP, the RMS
drafts an assessment report within 120 days. Within an
additional 90 days, the concerned member states review
the application and can issue objections or requests for
additional information. On Day 90, each concerned mem-
ber state 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 marketing authorizations
for the product.
After receiving the marketing authorizations, the
company must submit periodic safety reports to the rel-
evant health authority (EMA for the centralized proce-
dure, national health authorities for DCP or MRP). In addi-
tion, pharmacovigilance measures must be implemented
and monitored, including the collection, evaluation and
expedited reporting of adverse events, and updates to
risk management plans. For some medications, post-ap-
proval studies (Phase IV) may be imposed to comple-
ment available data with additional data to evaluate 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 those with expertise in chemistry, man-
ufacturing, clinical and non-clinical development, and
biostatistics. While a team evaluation is carried out, a
data reliability survey and inspections for good clinical
practice (GCP), good laboratory practice (GLP) and good
manufacturing practice (GMP) are carried out by the
Office of Non-clinical and Clinical Compliance of the
PMDA. Preliminary team evaluation results are passed
to the PMDA’s external experts, who then provide their
opinion about approvability 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. Marketing and
distribution approvals require a review to determine
whether the company is capable of managing manufac-
turing and distribution appropriately per the business
license for the type of drug concerned, and to confirm
the accreditation of manufacturing sites and testing facil-
ities for the applied new product.
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 intensive sur-
veillance (called early post-marketing phase vigilance)
for six months after launch, and/or additional post-ap-
proval 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,
47
Item 4. Information on the Company
which is designated at the time of the approval of the
application for the new product, the company must sub-
mit a re-examination application to enable the drug’s
safety and efficacy to be reassessed against approved
labeling by the PMDA and MHLW.
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 remain
robust – and potentially even to be strengthened – and
to have a continued 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 Donald Trump and
Congressional leaders declared the reduction of drug
prices as a key priority in 2019. Among the various pro-
posals introduced by the Administration, House of Rep-
resentatives or Senate were options that would impose
price controls, introduce reference pricing to countries
outside the US, permit medicine imports from Canada,
and make changes to drug reimbursement in Medicare
Parts B/D and Medicaid. It is anticipated that focus on
drug pricing will continue at the federal level in 2020.
Additionally, by the end of 2019, 17 US states had passed
legislation intended to impact pricing or requiring price
transparency reporting. These states are California,
Connecticut, Colorado, Delaware, Indiana, Louisiana,
Maine, Maryland, Massachusetts, Nevada, New Hamp-
shire, New York, Ohio, Oregon, Texas, Vermont and
Washington. The disclosure requirements vary by state.
Many states require multiple types of reporting, includ-
ing for new drug applications, new drug launches, prior
notice of price increases, and quarterly or annual report-
ing. It is expected in 2020 that state legislatures will con-
tinue 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 some
member states, these include reforms to permit the reim-
bursed use of off-label medicines, despite the presence
of licensed alternatives on the market. In the EU, govern-
ments influence the price of pharmaceutical products
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,
is intense. Increasingly strict analyses are applied when
evaluating the entry of new products, and as a result,
access to innovative medicines is limited based on strict
cost-benefit assessments. In addition, prices for mar-
keted products are referenced within member states and
across international borders, further impacting individ-
ual EU member state pricing. Member states also col-
laborate to enhance pricing transparency and have
started conducting joint health technology assessments,
joint pricing negotiations and/or joint purchasing. 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 2019, the MHLW introduced a cost-effective-
ness assessment and implemented an ad-hoc price revi-
sion to coincide with a consumption tax increase on
October 1. That followed new drug tariffs that became
effective from April 2018 after the Japanese government
reviewed the National Health Insurance (NHI) price cal-
culation methods for new products and the price revi-
sion rule for existing products. Also in 2018, the MHLW
implemented a price maintenance scheme with a nar-
rower scope and fewer products, and increased the fre-
quency of price cuts from every other year to annually
beginning in 2021. The Japanese government is continu-
ing deliberations on healthcare reform with the goal of
sustaining universal coverage under the NHI program,
and is addressing the efficient use of drugs, including
promoting the use of generic drugs.
Rest of world: Many other countries are taking steps to
control prescription drug prices. China – one of our most
important Emerging Growth Markets – conducted
national price negotiations in 2017 for 36 drugs without
any generic equivalent, and in 2018 for 17 oncology drugs
directly linked to national drug reimbursement, which
applied to over 1.3 billion residents covered by the
employee and resident medical insurance scheme. It also
conducted a national procurement pilot on certain
generic drugs at the end of 2018 and in 2019. These
efforts resulted in price reductions of more than 50% on
average for the drugs subject to these programs. In
November 2019, the National Healthcare Security Admin-
istration announced that 70 additional drugs have
obtained reimbursement access through negotiations,
with an average price reduction of 60.7%. Drug prices in
China may further decline due to ongoing national health
reform. However, reimbursement access is accelerating
and broadening coverage as the government aims to
resolve the public issue of accessibility and the high cost
of healthcare services. In August 2019, Canada pub-
lished amendments to its patented medicines regulations
to introduce three new economics-based price regula-
tory factors and the concept of affordability in price
assessments; to update the schedule of comparator
countries to include 11 countries with similar consumer
protection priorities, economic wealth and marketed
medicines as Canada and to exclude Switzerland and
the US from the list; and to require reporting of all con-
fidential discounts and rebates. These changes have a
planned effective date of July 1, 2020. Innovative
Medicines Canada (IMC), the local industry association,
and 16 member companies (including Novartis) are con-
testing the changes via an Application for Judicial Review
with the Federal Court. The Patented Medicine Prices
48
Item 4. Information on the Company
Review Board (PMPRB) issued its draft guidelines to the
new amendments of the patented medicines regulations;
a written consultation period is now open, providing
stakeholders with 60 days (until January 31, 2020) to
provide their perspectives on the draft. In Colombia, the
government took steps in 2016 to unilaterally reduce the
price of Glivec by up to 43% through a local procedural
mechanism called a Declaration of Public Interest. We
continue to contest the appropriateness of the govern-
ment’s unprecedented use of this mechanism to control
the price of a prescription drug and to manage its health-
care budget. Its use could become more widespread if
upheld in this case, potentially leading to a more systemic
impact on drug pricing.
Regulations favoring generics and biosimilars
In response to rising healthcare costs, most govern-
ments and private medical care providers have estab-
lished reimbursement schemes that favor the substitu-
tion of generic pharmaceuticals for more expensive
brand-name pharmaceuticals. All US states have generic
substitution statutes. These statutes permit or require
the dispensing pharmacist to substitute a less expensive
generic drug instead of an original patented drug. Other
countries, including many European countries, have sim-
ilar laws. We expect that the pressure for generic sub-
stitution will continue to increase. In addition, the US, the
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.
Cross-border sales
Price controls in one country can have an impact in other
countries as a result of cross-border sales. In the EU,
products that we have sold to customers in countries
with stringent price controls can be legally resold to cus-
tomers 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. However, given the
increased focus on pharmaceutical prices in the US, the
Trump Administration, certain members of the US Con-
gress, and several US states continue to explore regu-
latory and legislative ways to allow the safe importation
of pharmaceutical products into the US from select coun-
tries, including Canada. Four US states (Colorado, Flor-
ida, Maine and Vermont) have enacted drug importation
laws, but the US Secretary of the Department of Health
and Human Services must certify that each state’s impor-
tation plan is safe and cost-effective before it can be
implemented.
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. For example, we seek intellectual property pro-
tection under applicable laws for significant product
developments in major markets. Among other things, pat-
ents may cover the products themselves, including the
product’s active ingredient or ingredients and its formu-
lation. Patents may cover processes for manufacturing
a product, including processes for manufacturing inter-
mediate substances used in the manufacture of the prod-
uct. Patents may also cover particular uses of a product,
such as its use to treat a particular disease, or its dos-
age regimen. In addition, patents may cover assays or
tests for certain diseases or biomarkers – which can
improve patient outcomes when administered with cer-
tain drugs – as well as assays, research tools and other
techniques used to identify new drugs. The protection
afforded, which may vary from country to country,
depends upon the type of patent, its duration and its
scope of coverage.
In the US and other countries, the law recognizes that
product development and review by the FDA and other
health authorities can take an extended period, and per-
mits an extension of patent term for a period related to
the time taken for the conduct of clinical trials and for
the health authority’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. In practice, it is not uncommon for
patent term extensions (PTEs) to not fully compensate
the owner of a patent for the time it took to develop the
product and receive marketing authorization. As a result,
it is rarely the case that a product will have a full patent
term at the time it is approved by the FDA and other
health authorities.
In addition to patent protection, various countries
offer data or marketing exclusivities for a prescribed
period of time. Data exclusivity generally precludes a
potential competitor from filing a regulatory application
that relies on the sponsor’s clinical trial data, or the reg-
ulatory authority from approving the application for a set
period of time. The data exclusivity period can vary
depending upon the type of data included in the spon-
sor’s application. When it is available, market exclusivity,
unlike data exclusivity, may preclude a competitor from
obtaining marketing approval for a product even if a com-
petitor’s application relies on its own data. Data exclu-
sivity and market exclusivity periods generally 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.
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
49
Item 4. Information on the Company
that claims a product, method of treatment using a prod-
uct, or method of manufacturing a product may also be
eligible for a PTE. This type of extension 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 prod-
uct based on FDA delay.
Data and market exclusivity
In addition to patent exclusivities, the FDA may provide
data or market exclusivity, which runs in parallel to any
patent protection.
• A new small-molecule active pharmaceutical ingredi-
ent receives five years of regulatory data exclusivity,
during which time a competitor generally may not sub-
mit or obtain approval of an application to the FDA
based on a sponsor’s clinical data.
• For a small-molecule active pharmaceutical ingredient,
the FDA may also request that a sponsor conduct pedi-
atric studies and, in exchange, it will grant an additional
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.
• 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.
During this period, a potential competitor generally may
not market the same or similar drug for the same indi-
cation even if the competitor’s application does not rely
on data from the sponsor.
• A new biologic active pharmaceutical ingredient
receives 12 years of market exclusivity, during which
time a competitor generally may not market the same
or similar drug.
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 earliest application filing date. 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 autho-
rization 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 marketing authorization. However, an
SPC cannot last longer than five years. The SPC dura-
tion may be extended by a further six months if the prod-
uct is the subject of an agreed pediatric investigation
plan. The post-grant phase of patents, including the SPC
system, is currently administered on a country-by-coun-
try basis under national laws that, while differing, are
intended to (but do not always) have the same effect.
Data and market exclusivity
In addition to patent exclusivity, the EU provides a sys-
tem of regulatory data exclusivity for authorized human
medicines that runs in parallel to any patent protection.
The system for drugs being approved today is usually
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 a 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.
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 an application for the same or similar medi-
cine for the same indication will not generally be accepted
or granted. Under certain circumstances, this exclusiv-
ity can be extended with a two-year pediatric extension.
Japan
Patents
In Japan, the patent term granted is 20 years from the
earliest application filing date, subject to potential PTEs.
A PTE can be granted for up to five years to compensate
for the time needed to obtain the Japanese marketing
authorization. A Japanese PTE may apply to only a sub-
set of the approved indications for a particular product.
Data and market exclusivity
Japan 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 indications and
formulations, and a 10-year orphan drug exclusivity sys-
tem.
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
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). In
the 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 Japan Patent Office and
50
Item 4. Information on the Company
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 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 exclu-
sivity, pediatric extensions and SPCs), which could lead
to legislative changes in the scope and/or term of pro-
tection under those rights. Also, even though we may
own, co-own or in-license patents protecting our prod-
ucts, and conduct pre-launch freedom-to-operate anal-
yses, 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 additional details regarding intellec-
tual property protection for certain Innovative Medicines
Division products and compounds in development. For
each, we identify issued, unexpired patents by general
subject matter and, in parentheses, years of expiry in, if
relevant, the US, the EU and Japan. The identified pat-
ents are owned, co-owned or exclusively in-licensed by
Novartis and relate to the product or to the method of
treatment or its use as it is currently approved and mar-
keted or, in the case of a compound in development, as
it is currently submitted to 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, for exam-
ple, relating to compound forms, methods of treatment
or 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, and data re-exam-
ination 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 exclusivity (ODE), pediatric exclu-
sivity (PE), patent term extension (PTE) and supplemen-
tary protection certificate (SPC). We designate them as
“pending” if they have been applied for but not granted
and years of expiry are estimable. Such pending appli-
cations 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 or biosimilar competition for one or
more product versions in one or more approved indica-
tions in each of the major markets for which intellectual
property is disclosed. We identify ongoing challenges to
the disclosed intellectual property 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 property in one or more EU coun-
tries, 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 identify certain material terms
of such settlement agreements where they could have
a material adverse effect on our business. In other cases,
such settlement agreements may contain confidential-
ity 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);
three patents on salt forms (2026, 2027, 2028), three
PEs (2027, 2028, 2029); patent on polymorph com-
pound form (2026), PE (2027); two patents on capsule
form (2026, 2027), two PEs (2027, 2028); patent on
method of treatment (2032), PE (2032). EU: Patent on
compound (2023); patent on salt form (2026); patent
on polymorph compound form (2026); patent on cap-
sule form (2027); patent on method of treatment
(2030). Japan: Patent on compound (2023), two PTEs
(2024, 2028); patent on salt form (2026), PTE (2031);
patent on polymorph compound form (2026), two PTEs
(2030, 2031); patent on capsule form (2027), two PTEs
(2030, 2031); patent on method of use (2030).
There is no generic competition in the US, the EU or
Japan. In the US, generic manufacturers have filed
ANDAs challenging certain patents other than the com-
pound patent. The EU method-of-treatment patent and
the capsule form patent are being opposed in the EPO.
The EU polymorph compound form patent was upheld
as valid by the Opposition Division at the EPO.
• Sandostatin SC and Sandostatin LAR.
51
Item 4. Information on the Company
Sandostatin SC. There is no patent protection in the
US, the EU or Japan. There is generic competition in
the US, the EU and Japan.
Sandostatin LAR. There is no patent protection in the
US, the EU or Japan. There is generic competition in
some EU markets but no generic competition in the US
or Japan.
• 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),
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 neuroendo-
crine tumor use (2028). EU: Patent on dispersible tab-
let formulation (2022); two patents on breast cancer
use (2022, 2022); patent on renal cell carcinoma use
(2022); patent on neuroendocrine tumors of pancre-
atic origin (2022); patent on TSC/SEGA use (2022);
patent on neuroendocrine tumors of lung origin use
(2022); patent on TSC/SEGA and TSC/acute myeloid
leukemia (AML) use (2027); ODE (Votubia, tuberous
sclerosis) (2021). Japan: Patent on dispersible tablet
formulation (2022); patent on breast cancer use (2022);
patent on pancreatic neuroendocrine tumor use
(2026); patent on renal cell carcinoma use (2022); pat-
ent on gastrointestinal and lung neuroendocrine tumor
use (2026), PTE (2027); patent on TSC/SEGA and
TSC/AML use (2027); ODE (tuberous sclerosis tablet)
(2022); ODE (tuberous sclerosis dispersible tablet)
(2022).
There is no generic competition in Japan. There is
generic competition in the EU and the US. In the US,
the compound patent and renal cell carcinoma use pat-
ent were challenged in ANDA proceedings against
generic manufacturers, and the patents were upheld.
The US pancreatic neuroendocrine tumor use patent
is being challenged in IPR proceedings in the USPTO.
In the US, Novartis has resolved patent litigation with
certain generic manufacturers. There is generic com-
petition in the US for the three lower-dosage strengths
for Afinitor. Additional generic competition in the US
may start in mid-2020. Novartis has resolved patent
litigation relating to Afinitor Disperz. The EU breast can-
cer use patent, the EU TSC/SEGA use patent, the EU
renal cell carcinoma use patent, and the EU patents on
neuroendocrine tumors of pancreatic origin and of lung
origin are being opposed in the EPO. National enforce-
ment and validity actions are also ongoing on some of
these patents in certain countries.
• Promacta/Revolade. US: Patent on compound (2021),
PTE (2022), PE (2023); two patents on compound
(2021, 2021), two PEs (2021, 2021); patent on throm-
bocytopenia use (2021), PE (2021); patent on method
of enhancing platelet production (2021), PE (2021); pat-
ent on method of enhancing platelet production (2023),
PE (2023); patent on salt form (2025); PE (2026); four
patents on tablet formulations of different dose
strengths (2027) (4), PE (2028) (4); ODE on severe
aplastic anemia patients with an insufficient response
to immunosuppressive therapy (2021), PE (2022); ODE
on severe aplastic anemia patients in combination with
standard immunosuppressive therapy (2025). EU: Pat-
ent on compound (2021), SPC (2025); patent on salt
form (2023); patent on formulation (2027); RDP (2020).
Japan: Patent on compound (2021), PTE (2025); pat-
ent on salt form (2023), PTE (2023); patent on formu-
lation (2027); RDP (2020). There is no generic compe-
tition in the US, the EU or Japan. In the US, generic
manufacturers have filed ANDAs challenging certain
patents other than the compound patent. The EU for-
mulation patent is being opposed in the EPO.
• Tafinlar and Mekinist.
Tafinlar. US: Two patents on compound (2030, 2030);
patent on method of treatment (2029); ODE (2020).
EU: Patent on compound (2029); RDP (2023). Japan:
Patent on compound (2031). There is no generic com-
petition in the US, the EU or Japan.
Mekinist. US: Patent on compound (2025), PTE (2027);
patent on method of treatment (2025); three patents
on formulation (2032) (3); ODE (2020). EU: Patent on
compound (2025), SPC (2029); RDP (2025). Japan:
Patent on compound (2025); patent on method of use
(2025); patent on formulation (2031). There is no
generic competition in the US, the 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 no generic competition in the US, the EU or
Japan.
• Gleevec/Glivec. US: Patent on gastrointestinal stromal
tumor (GIST) use (2021), PE (2022). EU: Patent on GIST
use (2021); patent on tablet formulation (2023). Japan:
Patent on GIST use (2021); patent on tablet formula-
tion (2023).
There is generic competition in the US, the EU and
Japan. Novartis is taking steps in some EU countries
to enforce the GIST use patent. The EU GIST use pat-
ent is being challenged in one EU country. The EU tab-
let formulation patent is being challenged in the EPO.
• Jakavi. EU: Patent on compound (2026), SPC (2027);
patent on salt form (2028); patent on compound for
polycythemia vera (PV) use (2026); patent on salt form
for PV use (2028); RDP (2023). Japan: Patent on com-
pound (2026), three PTEs (2028, 2030, 2031); patent
on salt form (2028), three PTEs (2028, 2030, 2031);
patent on method of use (2026), two PTEs (2027,
2028); RDP (2022). There is no generic competition in
the EU or Japan. The EU salt patent is being opposed
in the EPO. The EU patent on salt form for PV use is
also being opposed in the EPO.
52
Item 4. Information on the Company
• Exjade and Jadenu.
Exjade. US: There is no patent protection for Exjade in
the US. EU: Patent on compound (2017), SPC (2021),
PE (2022); patent on dispersible tablet formulation
(2023). Japan: Patent on compound (2017), PTE (2021);
patent on dispersible tablet formulation (2023). There
is generic competition in the US. There is no generic
competition in the EU or Japan.
Jadenu (marketed as Exjade FCT in the EU and Japan).
The compound patents for Exjade also protect Exjade
FCT (EU/Japan). US: Patent on film-coated tablet for-
mulation (2034). EU: Two patents on film-coated tab-
let formulation (2034, 2034). There is generic compe-
tition in the US. There is no generic competition in the
EU or Japan. In the US, Novartis has resolved patent
litigation relating to the US formulation patent with a
generic manufacturer. In the EU, the formulation pat-
ents are being opposed in the EPO.
• Votrient. US: Patent on compound (2021), PTE (2023);
two patents on compound (2021, 2021). EU: Patent on
compound (2021), SPC (2025); RDP (2021). Japan: Pat-
ent on compound (2021), two PTEs (2025, 2026).
There is no generic competition in the US, the EU or
Japan.
• Kisqali. US: Three patents on compound (2028, 2030,
2031), pending PTE (2031); three patents on methods
of treatment (2029, 2029, 2031); patent on salt form
(2031); RDP (2022). EU: Patent on compound (2027);
patent on compound (2029), SPC (2032); patent on
methods of use (2029); RDP (2027). Japan: Two pat-
ents on compound (2027, 2029). Kisqali is not marketed
in Japan. There is no generic competition in the US or
the EU.
• Lutathera. US: RDP (2023); ODE (2025). EU: RDP
(2027); ODE (2027). Lutathera is not marketed in Japan.
There is no generic competition in the US or the EU.
• Kymriah. US: Seven patents on cells and/or pharma-
ceutical compositions comprising the cells (2031) (7);
four patents on methods of use of cells and/or phar-
maceutical compositions comprising the cells (2031)
(4); RDP (2029), PE (2030); ODE for relapsed or refrac-
tory (r/r) pediatric acute lymphoblastic leukemia (2024),
PE (2025); ODE for r/r diffuse large B-cell lymphoma
(2025), PE (2025). EU: One patent on methods of use
(2031), SPC (2033); RDP (2028); ODE (2028), PE
(2030). Japan: Two patents on pharmaceutical com-
positions (2031, 2031), PTE (2034); two patents on
cells, pharmaceutical compositions and use (2031,
2031), PTE (2033); two patents on CAR-T-associated
cytokine release syndrome use (2033, 2033); ODE
(2029). There is no generic competition in the US, the
EU or Japan.
• Piqray. US: Patent on compound (2029); patent on com-
pound and use (2030); RDP (2024). EU: Patent on com-
pound and use (2029). Japan: Patent on compound
and use (2029). Piqray is not marketed in the EU or
Japan. There is no generic competition in the US.
• Adakveo. US: Patent on composition of matter (2028),
PTE pending (2032); patent on method of use (2027);
RDP (2031). EU: Patent on composition of matter
(2027). Japan: There is no patent protection for
Adakveo in Japan. Adakveo is not marketed in the EU
or Japan. There is no generic competition in the US.
Novartis Pharmaceuticals business unit
Ophthalmology
• Lucentis. EU: Patent on composition of matter (2018),
SPC (2022). Japan: Patent on composition of matter
(2018), PTE for pathologic myopia (2021), PTE for ret-
inal vein occlusion (2023), PTE for diabetic macular
edema (2023). There is no generic competition in the
EU or Japan.
• Xiidra. US: Patent on compound (2024); three patents
on compound and use (2024) (2), (2025); patent on for-
mulation (2024); five patents on method of treatment
(2024, 2024, 2026, 2029, 2029); two patents on poly-
morph compound form (2029, 2029); RDP (2021). PTE
pending. EU: Three patents on compound and use of
compound (2024, 2026, 2026). Japan: Patent on com-
pound (2024); patent on the use of the compound and
formulation (2026); patent on formulation (2033).
There is no generic competition in the US. Xiidra is not
marketed in the EU or Japan.
• Beovu. US: Patent on composition of matter (2029),
PTE pending (2033); patent on method of treatment
(2029); patent on nucleic acid molecule (2029); patent
on antibodies (2023); patent on dosing regimen (2035);
RDP (2031). EU: Patent on composition of matter
(2029); patent on antibodies (2023). Japan: Patent on
composition of matter (2029); patent on antibodies
(2023). There is no generic competition in the US.
Beovu is not marketed in the EU or Japan.
Immunology, Hepatology and Dermatology
• Cosentyx. US: Patent on composition of matter (2026),
PTE (2029); patent on psoriasis use (2032); patent on
ankylosing spondylitis use (2033); RDP (2027). EU: Pat-
ent on composition of matter (2025), SPC (2030), PE
(2030); patent on psoriasis use (2031); RDP (2026).
Japan: Patent on composition of matter (2025), three
PTEs (2026, 2028, 2029); patent on psoriasis use
(2031), three PTEs (2032, 2032, 2033); patent on pso-
riatic arthritis use (2031); RDP (2022). There is no
generic competition in the US, the EU or Japan.
• Ilaris. US: Patent on composition of matter (2024); pat-
ent on cryopyrin-associated periodic syndromes
(CAPS) use (2026); patent on familial Mediterranean
fever (FMF) use (2026); patent on systemic onset juve-
nile idiopathic arthritis (SJIA) use (2027); patent on
hyperimmunoglobulin D syndrome (HIDS) and tumor
necrosis factor receptor-associated periodic syn-
drome (TRAPS) use (2028); patent on formulation
(2029); RDP (2021). EU: Patent on composition of mat-
ter (2021), SPC (2024), PE (2025); patent on SJIA use
(2026); patent on FMF use (2026); patent on formula-
tion (2029); RDP (2020). Japan: Patent on composition
53
Item 4. Information on the Company
of matter (2021), two PTEs (2024, 2026); patent on
familial cold urticaria, neonatal onset multisystem
inflammatory disease, SJIA and FMF use (2026); pat-
ent on Muckle-Wells syndrome use (2026); patent on
formulation (2029); ODE for CAPS (2021); ODE for
FMF, HIDS and TRAPS (2026); ODE for SJIA (2028).
There is no generic competition in the US, the EU or
Japan.
Neuroscience
• Gilenya. US: Patent on dosage regimen (2027), PE
(2027); patent on 0.25 mg formulation (2032), PE
(2032); patent on method of treatment (2027); RDP for
pediatric use and 0.25 mg (2021), PE (2021). EU: RDP
(2022); patent on formulation (2024), SPC (2026); pat-
ent on 0.25 mg formulation (2032). Japan: ODE (2021);
two patents on formulation (2024, 2024). There is no
generic competition in the US, the EU or Japan. In the
US, the ANDA proceedings challenging the compound
patent and extensions expiring in 2019 have been
resolved and the patent upheld. The dosage regimen
patent is being challenged in ANDA proceedings
against generic manufacturers. In parallel, an appeal
against a USPTO decision upholding the patent in IPR
proceedings is ongoing. Novartis is taking steps to
enforce the US dosage regimen patent and the method
of treatment patent against generic manufacturers.
• Zolgensma. US: Two patents on vector (2024, 2026);
ODE for spinal muscular atrophy (SMA) in patients less
than 2 years old with biallelic mutations in the SMN1
gene (2026); RDP (2031). EU: Two patents on vector
(2024, 2028); two patents on method of use (2028,
2028). Japan: Patent on vector (2024); patent method
of use (2028). Zolgensma is not marketed in the EU or
Japan. There is no generic competition in the US.
Cardiovascular, Renal and Metabolism
• Entresto. US: Four patents on combination (2023) (4),
PE (2023 (3), 2024); two patents on complex (2026,
2027), PE (2027, 2027); RDP (2020), PE (2021); RDP
for new pediatric patient population (2022), PE (2023).
PTE pending. EU: Patent on combination (2023), SPC
(2028); patent on complex (2026), SPC (2030); RDP
(2025). Japan: Patent on combination (2023); patent
on complex (2026); patent on formulation (2028).
There is no generic competition in the US or the EU.
Entresto is not marketed in Japan. The EU complex
patent is being opposed in the EPO. In the US, the com-
bination and complex patents are being challenged in
ANDA proceedings against generic manufacturers.
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),
three PTEs (2022, 2024, 2024); patent on combination
(2021); patent on Galvus formulation (2025), PTE
(2025); patent on Eucreas formulation (2026), PTE
(2028). Galvus/Eucreas is not marketed in the US.
There is generic competition for Galvus and Eucreas
in some EU countries. There is no generic competition
in Japan. The EU Galvus and Eucreas formulation pat-
ents are being opposed in the EPO.
• Diovan and Co-Diovan/Diovan HCT. Diovan: There is
generic competition in the US, the EU and Japan.
Co-Diovan/Diovan HCT: There is generic competition
in the US, the EU and Japan.
• Exforge and Exforge HCT.
• Aimovig. US (co-commercialized with Amgen): Patent
on composition of matter (2031); patent on dose/reg-
imen for migraine prevention (2036); RDP (2030). EU:
Patent on composition of matter (2029), SPC (2033);
RDP (2028). There is no generic competition in the US
or the EU.
Exforge. US: There is no patent protection for Exforge
combination in the US. EU: There is no patent protec-
tion for Exforge combination in the EU. Japan: There
is no patent protection for Exforge combination in
Japan. There is generic competition in the US, the EU
and Japan.
• Mayzent. US: Patent on compound (2024); RDP (2024);
patent on treatment initiation use (2030). PTE pend-
ing. EU: Patent on compound (2024); patent on solid
form (2029); patent on treatment initiation use (2029);
patent on formulation (2032); RDP (2030). Japan: Pat-
ent on compound (2024); patent on solid form (2029);
two patents on formulation (2032, 2032); patent on
patient subgroup use (2033). Mayzent is not marketed
in Japan. There is no generic competition in the US or
the EU.
Respiratory
• 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 no generic competition in the
US, the EU or Japan.
Exforge HCT. US: Patent on Exforge HCT combination
(2023); patent on formulation (2023). EU: There is no
patent protection for Exforge HCT combination in the
EU. Japan: Patent on Exforge HCT combination (2023).
There is generic competition in the US and the EU.
There is no generic competition in Japan.
• Zortress/Certican. US: Patent on compound (2014),
PTE (2019), PE (2020); patent on dispersible tablet for-
mulation (2022), PE (2023); patent on antioxidant
(2019), PE (2020). EU: Patent on dispersible tablet for-
mulation (2022). Japan: Patent on dispersible tablet
formulation (2022). There is no generic competition in
the US, the EU or Japan. In the US, the compound pat-
ent has been upheld as valid after a challenge in ANDA
proceedings against generic manufacturers.
• Egaten. US: RDP (2024); ODE (2026). EU: There is no
patent protection for Egaten in the EU. Japan: There is
no patent protection for Egaten in Japan. Egaten is not
54
Item 4. Information on the Company
marketed in Japan. There is no generic competition in
the US or the EU.
pound (2023 (3)); two patents on formulation (2028,
2028). Japan: Two patents on compound (2023, 2023);
two patents on formulation (2028, 2028).
• QMF149 (indacaterol acetate/mometasone furoate).
US: Patent on compound (2020); three patents on com-
bination (2020, 2021, 2023); three patents on formu-
lation (2020, 2020, 2021); patent on device (2028); pat-
ent on salt form (2029). EU: Patent on compound
(2020); patent on formulation (2020); patent on com-
bination (2021); patent on device (2025); patent on salt
form (2027). Japan: Patent on compound (2020); pat-
ent on device (2025); patent on salt form (2027).
• QVM149 (indacaterol acetate/glycopyrronium bro-
mide/mometasone furoate). US: Patent on compound
(2020); five patents on combination (2020 (3), 2021,
2023); eight patents on formulation (2020 (3), 2021 (5));
two patents on method of use (2021, 2021); patent on
device (2028); patent on salt form (2029). EU: Patent
on compound (2020); patent on formulation (2020);
patent on combination (2021); patent on device (2025);
patent on salt form (2027). Japan: Patent on compound
(2020); two patents on formulation (2025, 2025); pat-
ent on combination (2025); patent on device (2025);
patent on salt form (2027).
Compounds in development
We provide the following patent information for non-mar-
keted compounds in development that have been sub-
mitted to the FDA and/or the EMA for registration but
have not yet been approved by either agency. Unless
noted, the information below does not include antici-
pated or potential patent term extensions (PTEs or
SPCs), or RDP, both of which generally are not applied
for or granted until a product is approved or marketed.
For these products, Novartis will seek all appropriate
RDP, will continue to seek additional intellectual prop-
erty protection for significant product developments, and
will apply for patent term extensions in keeping with the
great importance we attach to intellectual property to
protect our investments in research and development,
manufacturing and marketing.
• INC280 (capmatinib). US: Patent on compound (2027);
patent on salt form (2031); patent on method of use
(2029); patent on formulation (2035). EU: Patent on
compound (2027); patent on salt form (2029). Japan:
Patent on compound (2027); patent on salt form (2029).
• KJX839 (inclisiran). US: Patent on composition of mat-
ter (2034), anticipated PTE (2035). EU: Patent on com-
position of matter (2033), anticipated SPC (2036).
Japan: Patent on composition of matter (2033).
• OMB157 (ofatumumab, for multiple sclerosis). US: Pat-
ent on compound (2031). EU: Three patents on com-
Sandoz
Our Sandoz Division is a global leader in generic
pharmaceuticals and biosimilars, and sells products in
well over 100 countries. In 2019, the Sandoz Division
achieved consolidated net sales of USD 9.7 billion, rep-
resenting 21% 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
small molecule pharmaceuticals to third parties across
a broad range of therapeutic areas, 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.
The Sandoz strategic ambition is to be the world’s
leading and most valued generics company (including
biosimilars). Under Sandoz CEO Richard Saynor, the divi-
sional strategy has been refined to focus on three areas:
developing a broad and consistent pipeline of off-patent
launches across key geographies and major therapeu-
tic areas; positioning Sandoz to be “first in” by having a
strong pipeline with a concentration on being first to mar-
ket, and to be “last out” by way of competitive costs and
stable supply; and instilling a true “generic mindset,” with
a focus on priorities, simple and rapid decision-making,
and focused resource allocation.
In 2018, Novartis announced an agreement 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 0.8 billion in cash and potential earn-outs. These
businesses had net sales of approximately USD 1.1 bil-
lion in 2019. The sale includes the Sandoz US generic
and branded dermatology businesses as well as its der-
matology development center. As part of the transaction,
Aurobindo will acquire the manufacturing facilities in Wil-
son, North Carolina, and in Hicksville and Melville, New
York. Following the transaction, the Sandoz US portfolio
55
Item 4. Information on the Company
will include primarily biosimilars and complex generics
such as injectable, respiratory and ophthalmic products.
The transaction is expected to be completed in the first
quarter of 2020 pending regulatory approval.
Sandoz is a market leader in biosimilars, with a total
of eight approved and marketed products and a pipeline
of over 10 molecules, including publicly announced com-
mercialization agreements with BioCon, Gan & Lee, Eir-
Genix and Polpharma Biologics. Availability of our bio-
similars varies by country.
In November 2019, we announced the planned acqui-
sition of the Japanese business of Aspen Global Incor-
porated. Aspen’s portfolio in Japan consists of off-pat-
ent medicines with a focus on anesthetics and specialty
brands. We have received all relevant approvals and this
transaction is expected to be completed in the first quar-
ter of 2020.
We received a CRL from the FDA in 2018 for our sub-
mission for a generic form of fluticasone propionate and
salmeterol inhalation powder, for oral inhalation (GSK’s
Advair®). In January 2020 we decided to discontinue the
generic Advair® development program in the US, follow-
ing a recent review of data read-outs.
Key marketed products
The Sandoz global portfolio covers a wide range of therapeutic areas. 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
Zoledronic acid
Acetylsteine
Fentanyl
Anti-Infectives
Active ingredients
Oral and sterile penicillins
Oral and sterile cephalosporins
Originator drug
Augmentin®
Aclasta
Various
Various
Description
Anti-infectives
Anti-infectives
Description
Antibiotic
Osteoporosis treatment
Mucolytic agent
Pain treatment
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 1
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
1 Approved in the US in 2016. Launch in the US pending final resolution of litigation with Amgen, which markets Enbrel®. The US District Court of New Jersey ruled against Sandoz
on August 9, 2019; Sandoz respectfully disagrees with the ruling and submitted an appeal. The appeals court hearing is scheduled for March 4, 2020.
56
Item 4. Information on the Company
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 1
Route of
administration
Potential indication/indications
Common
name
Mechanism of action
Therapeutic areas
Current phase
GP2017
adalimumab
TNF-α inhibitor
GP2411 3
denosumab
RANKL inhibitor
EGI014A1 4
trastuzumab
Anti HER2 monoclonal
antibody
Arthritides (rheumatoid arthritis, ankylosing
spondylitis, psoriatic arthritis), plaque psoriasis
and others (same as originator)
Immunology
Subcutaneous
EU: Approved
US: Approved2
Osteoporosis, bone loss, prevention of bone
complications in cancer that has spread to
the bone (indications vary in US and EU)
Endocrinology,
Neurology
Subcutaneous
Phase III
Breast and gastric tumors
Oncology
Intravenous
Phase III
DST356A1 5 natalizumab
Anti-Alpha 4 (α4) integrin Monotherapy for remitting relapsing forms of
multiple sclerosis (RRMS); in US second line
monoclonal antibody
treatment for active Crohn’s disease
Neurology,
Immunology (US only)
Intravenous
Phase III
1 LA-EP2006 (pegfilgrastim) was approved and launched in the EU as Ziextenzo in November 2018 and was approved and launched in the US in November 2019.
2 Launched as Hyrimoz in the EU in October 2018. Also in October 2018, we announced a global resolution of all intellectual property-related litigation with AbbVie concerning
adalimumab. Under the terms of the agreement, AbbVie grants us 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. We are not entitled to launch Hyrimoz in the US until the second half of 2023.
3 Development in collaboration with Hexal AG.
4 Development in collaboration with EirGenix, Inc.
5 Development in collaboration with Polpharma Biologics.
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 2019 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 *
2019 net sales
to third parties
USD millions
5 115
2 491
1 341
784
9 731
7 111
2 620
%
53
26
14
7
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.
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
Marketing and sales
For information on the production of our products, see
“—Item 4.B Business overview—Innovative Medicines—
Production.”
Due to impurities found in the active ingredients
batches sourced from third-party manufacturers, we
recalled Sandoz valsartan, losartan and ibersartan prod-
ucts in the second half of 2018 and first quarter of 2019,
and ranitidine film-coated tablets in the second half of
2019, from several markets, in line with our quality stan-
dards for all of our marketed products.
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-
57
Item 4. Information on the Company
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, result-
ing in increased competition among the companies sell-
ing 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 including cus-
tomer consolidation and growing competition from other
manufacturers of generic medicines. These factors con-
tributed to a decline in US sales that began in 2017 and
continued through 2019.
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 is jointly
overseen by Sandoz and by GDD and is mostly executed
by GDD. 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 are much
lower than those of the originator pharmaceuticals, as
no preclinical studies or clinical trials on dose finding,
safety and efficacy must be performed by the generic
company. As a result, generic pharmaceutical products
can be offered for sale at prices often much lower than
those of products protected by patents and data exclu-
sivity, which must recoup substantial research and devel-
opment costs through higher prices over the life of the
product’s patent 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 small molecule pharmaceutical. While
generic pharmaceuticals normally do not require clinical
studies in patients, regulators worldwide do require such
targeted 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. In 2019, the Supe-
rior Court of Quebec granted Sandoz the right to reac-
quire the site, which had subsequently gone into
receivership, in order to maintain stable operations pend-
ing a decision about the site’s long-term future. Sepa-
58
Item 4. Information on the Company
rately, in 2019, Sandoz confirmed the opening of a new
development center in Hyderabad, India, initially focused
on oral solid medicines. In May 2019, we announced the
planned closure of the Holzkirchen development and
registration site.
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
to be therapeutically equivalent to the reference prod-
uct.
In the US, the decision on whether a generic phar-
maceutical is therapeutically equivalent to the original
product is made by the FDA based on an Abbreviated
New Drug Application (ANDA) filed by the generic prod-
uct’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, for example,
regarding the interpretation of bioequivalence study
data, labeling requirements for the generic product, or
qualifying the supply of active ingredients. In addition,
the Hatch-Waxman Act requires a generic manufacturer
to certify in certain situations that the generic product
does not infringe on any current applicable patents on
the product held by the holder of the marketing authori-
zation for the reference product, or to certify that such
patents are invalid. This certification often results in a
patent infringement lawsuit being brought against the
generic company. In the event of such a lawsuit, the
Hatch-Waxman Act imposes an automatic 30-month
delay in the approval of the ANDA 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 inva-
lidity, the Hatch-Waxman Act generally provides those
applicants with 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 an ABLA to
the FDA, including an assessment of immunogenicity,
and pharmacokinetics or pharmacodynamics. The ABLA
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
reference biologic.
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-
59
Item 4. Information on the Company
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.
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 32. 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.
NTO manages the production and supply chains of
our Innovative Medicines and Sandoz Division products
through a network of 60 manufacturing sites, as well as
through external suppliers, and warehouse and distribu-
tion centers. AAA manages four sites for radioligand
therapies production, and certain other small sites for
diagnostics and enriched water production. AveXis man-
ages six sites for research and development, production,
warehousing, its headquarters and administrative offices.
Endocyte manages two sites for research and its head-
quarters and administrative offices.
The following table sets forth our major headquar-
ters and most significant production, research and devel-
opment, and administrative facilities. See also “—Item
4.B Business overview—Innovative Medicines—Produc-
tion” and “—Item 4.B Business overview—Sandoz—Pro-
duction” for a discussion of our manufacturing pro-
cesses.
60
Item 4. Information on the Company
Major facilities
Location
Size of site (in
square meters) Major activity
Basel, Switzerland – St. Johann
589 000 Global Group headquarters; global Innovative Medicines Division headquarters; Global Sandoz
Division; 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
340 000
Production of broad range of generics finished dosage forms
Cambridge, Massachusetts
205 000 Research and development
Shanghai, China
Ljubljana, Slovenia
Hyderabad, India
Longmont, Colorado
Stein, Switzerland
106 500 Research and development
83 000
Production of broad range of finished solid and sterile dosage forms
80 500 General administrative and development global service center
65 032
Production, warehouse, and administrative offices for AveXis
64 700
Production of sterile vials, pre-filled syringes and ampoules; inhalation capsules,
tablets and transdermals; active pharmaceutical ingredients, and cell and gene therapies
Holzkirchen, Germany
64 200 Global Sandoz Division headquarters, production of oral films, transdermal delivery systems,
Menges, Slovenia
Stryków, Poland
Huningue, France
Singapore
Barbera, Spain
matrix patches, product development
62 400
Production of drug substances and drug intermediates
45 000
Production of broad range of bulk oral solid forms and packaging
35 000
Production of drug substances for clinical and commercial supply
35 000
Production for 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
Rueil-Malmaison, France
29 500 Administrative offices for Innovative Medicines
Puurs, Belgium
Tokyo, Japan
27 500
Production for Innovative Medicines ophthalmic products
20 000 Administrative offices for Innovative Medicines and Sandoz
Morris Plains, New Jersey
15 600
Production for Innovative Medicines Division cell and gene therapies
Princeton, New Jersey
14 300 Sandoz Division US headquarters
Libertyville, Illinois
9 800
Production, warehouse, and administrative offices for AveXis
Targu Mures, Romania
9 070
Production of solids for Innovative Medicines and Sandoz
Les Ulis, France
5 920
Production for Innovative Medicines Division cell and gene therapies
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
As our product portfolio evolves, NTO is adapting our
manufacturing capacity and capabilities to meet our
changing needs, shifting from high-volume products
toward lower-volume, customized and personalized
medicines. As of December 31, 2019 we have closed,
exited or sold, or announced the closure, exit or sale of
19 facilities since 2016. We have also continued to expand
our capacity in personalized medicines and complex bio-
logic drugs, such as in Stein, Switzerland, as well as
investing in new facilities to provide cell and gene ther-
apies, such as in Les Ulis, France. We are leveraging inno-
vation to increase the reliability and productivity of our
manufacturing network, including using data and digital
technologies. We continue to seek opportunities to man-
age our production facilities as efficiently as possible,
optimize external spend, and simplify and standardize
across our manufacturing network to help us lower costs
and help optimize the value of our products. At the same
time, we are working to improve our environmental sus-
tainability, for example by reducing energy and water
consumption at our sites.
In 2012, we announced the construction of a new
state-of-the-art production facility to produce solid dos-
age form medicines for the Innovative Medicines Divi-
sion in Stein, Switzerland. In addition, we invested in new
technologies and packaging facilities for pharmaceuticals
at Stein. Both projects became fully operational in 2019.
As of December 31, 2019, the total amount paid and com-
mitted to be paid on the Stein projects 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. The facility became operational in 2019 and
is focused on drug substance manufacturing based on
cell culture technology. The facility is co-located with the
pharmaceutical production site based in Tuas, Singa-
pore. As of December 31, 2019, the total amount paid
and committed to be paid on this project is equivalent to
USD 0.8 billion.
In 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 operational in 2020. We expect
our investment in this facility to exceed USD 0.2 billion.
As of December 31, 2019, the total amount paid and com-
61
Item 4. Information on the Company
mitted to be paid on this project is approximately USD
0.2 billion.
In 2018, we announced our plan to establish a Euro-
pean cell and gene therapy hub in Stein, Switzerland, and
the facility was officially opened in November 2019. We
expect our investment in this project to exceed USD 0.1
billion. As of December 31, 2019, the total amount paid
and committed to be paid on this project is equivalent to
USD 0.1 billion.
In 2018, we announced the construction of a new
state-of-the-art advanced integrated biologics manufac-
turing 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 operational in
2020. As of December 31, 2019, the total amount paid
and committed to be paid on this project is equivalent to
approximately USD 0.1 billion.
In April 2019, AveXis purchased a former AstraZen-
eca site in Longmont, Colorado. The new facility is
expected to complement the AveXis sites in Libertyville,
Illinois, and Durham, North Carolina, and to allow for pro-
duction of gene therapy products. The site became oper-
ational in 2020. We expect our investment in this facility
to exceed USD 0.1 billion. As of December 31, 2019, the
total amount paid and committed to be paid on this proj-
ect (excluding the acquisition costs) is approximately
USD 0.1 billion.
In November 2019, we began to expand our existing
biologics drug substance manufacturing based on cell
culture technology in Schaftenau, Austria. We expect our
total investment in this project to amount to USD 0.2 bil-
lion. We expect this project to be operational in 2022. As
of December 31, 2019, the total amount paid and com-
mitted to be paid on this project is equivalent to approx-
imately 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 has
endorsed targets for environmental sustainability related
to our carbon footprint, waste production and water sus-
tainability, and we are party to 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,” “Item 3. Key Infor-
mation—Item 3.D Risk factors—Environmental liabilities
may adversely impact our financial results,” and “Item 3.
Key Information—Item 3.D Risk factors—Climate change,
extreme weather events, earthquakes and other natural
disasters could adversely affect our business.” See also
“Item 18. Financial Statements—Note 20. Provisions and
other non-current liabilities.”
62
Item 4A. Unresolved Staff Comments
Item 4A. Unresolved Staff Comments
Not applicable.
63
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 with
the Group’s consolidated financial statements 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” with the
sections on compounds in development and key devel-
opment projects of our divisions (see “Item 4. Informa-
tion on the Company—Item 4.B Business overview”) con-
stitute the Operating and Financial Review (Lagebericht),
as defined by the Swiss Code of Obligations.
Overview
Our purpose is to reimagine medicine to improve and
extend people’s lives. We use innovative science and tech-
nology to address some of society’s most challenging
healthcare issues. We discover and develop breakthrough
treatments and find new ways to deliver them to as many
people as possible. We also aim to reward those who invest
their money, time and ideas in our company. Our vision is
to be a trusted leader in changing the practice of medicine.
Our strategy is to build a leading, focused medicines com-
pany powered by advanced therapy platforms and data
science. As we implement our strategy, we have five pri-
orities to shape our future and help us continue to create
value for our company, our shareholders and society:
unleash the power of our people; deliver transformative
innovation; embrace operational excellence; go big on data
and digital; and build trust with society.
The businesses of Novartis are divided operationally
on a worldwide basis into two identified reporting seg-
ments:
• Innovative Medicines: innovative patent-protected pre-
scription medicines
• Sandoz: generic pharmaceuticals and biosimilars
In addition, we separately report the results of Corpo-
rate activities. The financial results of our Corporate
activities include the costs of the Group headquarters
and those of corporate coordination functions in major
countries. Corporate also 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.
Our divisions are supported by the following organi-
zational 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.
64
As part of our long-term strategy we announced and/
or completed several acquisitions and divestments
during 2019:
In April 2019, we completed the spin-off of the Alcon
business into a separately-traded standalone company.
In May 2019, we acquired IFM Tre, Inc., a privately
held, US-based biopharmaceutical company focused on
developing anti-inflammatory medicines targeting the
NLRP3 inflammasome.
In May 2019, we entered into an agreement with
Takeda to acquire the assets associated with Xiidra
worldwide. This transaction closed on July 1, 2019.
In November 2019, we entered into a binding agree-
ment for the acquisition of the Japanese business of
Aspen Global Incorporated (AGI). We have received all
relevant approvals and this transaction is expected to be
completed in the first quarter of 2020.
In November 2019, we entered into an agreement and
plan of merger with The Medicines Company, a US-based
pharmaceutical company headquartered in Parsippany,
New Jersey. The transaction closed in January 2020.
For a description of these and other significant trans-
actions, refer to “Item 4. Information on the Company—
Item4.A History and development of Novartis— Important
corporate developments 2017– January 2020”, “Item 18.
Financial Statements—Note 2. Significant transactions”,
“Item 18.Financial Statements—Note 3 Segmentation of
key figures 2019, 2018 and 2017,” and “Item 18.Financial
Statements—Note 30. Discontinued operations.”
As a result of the spin-off of the Alcon business,
Novartis has separated the Group’s reported financial
data for the current and prior years into “continuing” and
“discontinued” operations, to comply with International
Financial Reporting Standards (IFRS). Continuing opera-
tions include the businesses of the Innovative Medicines
and Sandoz Divisions, and the continuing Corporate activ-
ities. Discontinued operations include the Alcon eye care
devices business and certain Corporate activities attrib-
utable to the Alcon business prior to the spin-off, the gain
on distribution of Alcon Inc. to Novartis AG shareholders
and certain other expenses related to the spin-off.
In 2019, Novartis achieved net sales from continuing
operations of USD 47.4 billion, of which 25%, came from
Emerging Growth Markets, and 75%, came from Estab-
lished Markets. Emerging Growth Markets comprise all
markets other than the Established Markets of the US,
Canada, Western Europe, Japan, Australia and New Zea-
land.
Innovative Medicines accounted for USD 37.7 billion,
or 79%, of Group net sales, and for USD 9.3 billion, or
94%, of Group operating income (excluding Corporate
income and expense, net).
Sandoz accounted for USD 9.7 billion, or 21%, of
Group net sales, and for USD 551 million, or 6%, of Group
operating income (excluding Corporate income and
expense, net).
Item 5. Operating and Financial Review and Prospects
Opportunity and risk summary
Our financial results are affected to varying degrees by
external factors. The healthcare industry is in a phase of
significant progress and change. We believe biomedical
innovation has the potential to continue to accelerate
over the next two decades, – potentially leading to new
treatments and treatment modalities for previously
untreatable conditions. We see this as an opportunity
given our strong internal research capabilities, and we
expect to sustain long-term growth in part through our
15 ongoing and upcoming major launches.
The rapid expansion in data science and digital tech-
nologies has the potential to transform a wide range of
activities in healthcare, from drug research and develop-
ment, to the ways in which doctors diagnose and treat
diseases, and patients’ involvement in their own care.
These trends could help society address the changing
healthcare needs of aging populations and produce bet-
ter health outcomes for patients.
In addition, drug pricing is an increasingly prominent
issue in many countries as healthcare spending contin-
ues to rise. This impacts our ability to establish satisfac-
tory rates of reimbursement for our products by govern-
ments, insurers and other payers, which could affect our
ability to generate returns and invest for the future.
We expect loss of market exclusivity and the intro-
duction of branded and generic competitors to continue
to significantly erode sales of our 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.
We may also fail to take advantage of rapid progress
in new technologies and in the development of new busi-
ness models. Third parties may enter the healthcare field,
which could increase the competition we face or sup-
plant portions of our business. Our manufacturing pro-
cesses are technically complex and subject to strict reg-
ulatory requirements, which introduce a greater chance
for supply disruptions and liabilities.
We have a significant global compliance program in
place, but any failure to comply with local laws could lead
to substantial liabilities and harm our business and our
reputation. 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.
Tax authorities around the world have increased their
scrutiny of company tax filings. In addition, tax reform
initiatives by the Organization for Economic Co-opera-
tion and Development (OECD), the EU, Switzerland and
the US will require us to continually assess our organi-
zational structure against tax policy trends. This could
lead to an increased risk of international tax disputes
and an increase in our effective tax rate.
For more details on these trends and how they could
impact our results, see “—Factors affecting results of
operations” below.
65
Item 5. Operating and Financial Review and Prospects
Results of operations
2019 compared to 2018
Key figures1
(USD millions unless indicated otherwise)
Net sales to third parties from continuing operations
Sales to discontinued operations
Net sales from continuing operations
Other revenues
Cost of goods sold
Gross profit from continuing operations
Selling, general and administration
Research and development
Other income
Other expense
Operating income from continuing operations
Return on net sales (%)
Income from associated companies
Interest expense
Other financial income and expense
Income before taxes from continuing operations
Taxes
Net income from continuing operations
Net loss from discontinued operations
before gain on distribution of Alcon Inc.
to Novartis AG shareholders
Gain on distribution of Alcon Inc.
to Novartis AG shareholders
Net income/(loss) from discontinued operations
Net income
Attributable to:
Shareholders of Novartis AG
Non-controlling interests
Basic earnings per share from continuing operations (USD)
Basic earnings per share from discontinued operations (USD)
Total basic earnings per share (USD)
Net cash flows from operating activities from continuing operations
Free cash flow from continuing operations 2
Year ended
Year ended
Dec 31, 2019 Dec 31, 2018
47 445
44 751
53
82
47 498
44 833
1 179
1 266
– 14 425
– 14 510
34 252
31 589
– 14 369
– 13 717
– 9 402
– 8 489
2 031
1 629
– 3 426
– 2 609
9 086
8 403
19.2
659
– 850
45
18.8
6 438
– 932
186
8 940
14 095
– 1 793
– 1 295
7 147
12 800
Change
in USD
%
6
– 35
6
– 7
1
8
– 5
– 11
25
– 31
8
nm
9
– 76
– 37
– 38
– 44
Change in
constant
currencies
% 2
9
– 31
9
– 7
– 2
12
– 8
– 13
27
– 33
14
nm
8
– 69
– 33
– 46
– 41
– 101
– 186
nm
nm
4 691
4 590
– 186
11 737
12 614
11 732
12 611
5
3.12
2.00
5.12
3
5.52
– 0.08
5.44
13 547
13 049
12 937
11 256
nm
– 3
– 3
nm
– 40
nm
– 2
nm
– 7
– 7
nm
– 43
nm
– 6
4
15
1 Continuing operations include the businesses of the Innovative Medicines and Sandoz divisions and the continuing Corporate activities and discontinued operations include the
Alcon eye care devices business and certain Corporate activities attributable to the Alcon business prior to the spin-off, the gain on distribution of Alcon Inc. to Novartis AG
shareholders in 2019 and certain other expenses related to the distribution. See “Item 18. Financial Statements—Note 1. Significant accounting principles”, “Item 18.Financial
Statements—Note 2. Significant transactions—Significant transactions in 2019,” and “Item 18.Finanacial Statements—Note 30. Discontinued operations.”
2 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
In 2019, Novartis delivered strong sales performance,
margin expansion and breakthrough innovation launch-
ing five new molecular entities.
Net sales to third parties for Novartis continuing oper-
ations were USD 47.4 billion, up 6% in reported terms
and up 9% measured in constant currencies (cc) to
remove the impact of exchange rate movements. Sales
growth was driven by volume growth of 12 percentage
points, mainly driven by Cosentyx, Entresto, and
Zolgensma for the Novartis Pharmaceuticals business
unit and Promacta/Revolade, Kisqali and Lutathera for
the Novartis Oncology business unit. The strong volume
growth was partly offset by the negative impacts of pric-
ing (2 percentage points) and generic competition (1 per-
centage point).
By division, Innovative Medicines delivered net sales
of USD 37.7 billion (+8%, +11% cc). Sandoz net sales were
USD 9.7 billion (–1%, +2% cc), driven by growth in bio-
pharmaceuticals, partly offset by continued industrywide
pricing pressures on retail generics, mainly in the US.
66
Item 5. Operating and Financial Review and Prospects
In emerging growth markets, which comprise all mar-
kets excluding the US, Canada, Western Europe, Japan,
Australia and New Zealand, sales from continuing oper-
ations were USD 11.8 billion (+4%, +10% cc) driven by
China (USD 2.2 billion) growing 13%, (+19% cc).
Operating income from continuing operations was
USD 9.1 billion (+8%, +14% cc), mainly driven by higher
sales, higher divestments and productivity programs,
which were partly offset by growth investments, legal
provisions and higher impairments. Operating income
margin from continuing operations was 19.2% of net
sales, increasing by 0.4 percentage points (+0.9 percent-
age points cc).
Net income from continuing operations was USD 7.1
billion, compared to USD 12.8 billion in 2018 as the prior
year benefited from a USD 5.7 billion net gain recognized
from the sale of our stake in the GlaxoSmithKline (GSK)
consumer healthcare joint venture. Earnings per share
from continuing operations were USD 3.12, compared to
USD 5.52 in the prior year, declining less than net income,
driven by the lower weighted average number of shares
outstanding.
Cash flows from operating activities from continuing
operations amounted to USD 13.5 billion (+4%), com-
pared to USD 13.0 billion in the prior year. This increase
was driven by higher net income adjusted for non-cash
items and other adjustments, including divestment gains.
It was partly offset by lower dividends received from
associated companies due to the divestment of the GSK
consumer healthcare joint venture in the second quar-
ter of 2018, higher taxes paid, provision payments and
working capital, which included the receipt of a GSK
sales milestone from the divested Vaccines business of
USD 0.4 billion in the prior year.
Net sales by segment
Free cash flow from continuing operations amounted
to USD 12.9 billion (+15%), compared to USD 11.3 billion
in the prior year. The increase was mainly driven by higher
operating income adjusted for non-cash items.
We also present our core results, which exclude the
impact of amortization, impairments, disposals, acquisi-
tions, restructurings and other significant items, to help
investors understand our underlying performance.
Core operating income from continuing operations
was USD 14.1 billion (+12%, +17% cc), mainly driven by
higher sales and productivity programs, which were
partly offset by growth investments. Core operating
income margin was 29.7% of net sales, increasing by 1.6
percentage points (+1.9 percentage points cc).
Core net income from continuing operations was
USD 12.1 billion (+11%, +15% cc), driven by growth in core
operating income, which was partly offset by the discon-
tinuation of core income from the GSK consumer health-
care joint venture. Core earnings per share from continu-
ing operations were USD 5.28 (+12%, +17% cc), growing
faster than core net income driven by the lower weighted
average number of shares outstanding.
Discontinued operations net sales were USD 1.8 bil-
lion, and operating income amounted to USD 71 million.
Net income from discontinued operations was USD 4.6
billion, and included a non-taxable non-cash net gain on
distribution of Alcon Inc. to Novartis AG shareholders of
USD 4.7 billion.
For the total Group, net income amounted to USD 11.7
billion, and basic earnings per share were USD 5.12. Cash
flow from operating activities for the total Group was
USD 13.6 billion, and free cash flow was USD 12.9 billion.
The following table provides an overview of net sales to third parties by segment:
(USD millions)
Innovative Medicines
Sandoz
Net sales to third parties from continuing operations
Year ended
Year ended
Dec 31, 2019 Dec 31, 2018
37 714
34 892
9 731
9 859
47 445
44 751
Change
in USD
%
8
– 1
6
Change in
constant
currencies
%
11
2
9
67
Item 5. Operating and Financial Review and Prospects
Innovative Medicines
The Innovative Medicines Division delivered net sales of
USD 37.7 billion in 2019, up 8% in reported terms and 11%
in constant currencies (cc). The Novartis Pharmaceuticals
Business Unit delivered net sales of USD 23.3 billion in
2019 growing 9% (+12% cc), driven by Cosentyx reach-
ing USD 3.6 billion, Entresto USD 1.7 billion and Zolgensma
USD 0.4 billion. The Novartis Oncology Business Unit
delivered net sales of USD 14.4 billion growing 7% (+10%
cc), driven by Lutathera reaching USD 0.4 billion
Promacta/Revolade reaching USD 1.4 billion and Kisqali
USD 0.5 billion. Volume contributed 13 percentage points
to sales growth. Generic competition had a negative
impact of 1 percentage point. Net pricing had a negative
impact of 1 percentage point.
Regionally, the US (USD 13.8 billion, +16%) delivered
a strong performance driven by Cosentyx, Entresto,
Lutathera and Zolgensma. Europe sales (USD 12.8 bil-
lion, +4%, +10% cc) benefited from the continued strong
performance of Entresto, Tafinlar + Mekinist, Kisqali,
Kymriah and Jakavi. Japan sales were USD 2.4 billion
(+2%, 0% cc). Emerging Growth Markets sales grew
(+6%, +12% cc), led by double-digit growth in China,
including the launches of Cosentyx and Entresto.
The following table provides an overview of net sales
to third parties by business franchise in the Innovative
Medicines Division:
(USD millions)
Total Novartis Oncology business unit
Total Novartis Pharmaceuticals business unit
Ophthalmology
Immunology, Hepatology and Dermatology
Neuroscience
Respiratory
Cardiovascular, Renal and Metabolism
Established Medicines
Total Innovative Medicines
Year ended
Year ended
Dec 31, 2019 Dec 31, 2018
14 370
13 428
23 344
21 464
4 776
4 222
3 773
1 825
1 750
6 998
4 558
3 392
3 429
1 767
1 050
7 268
37 714
34 892
Change
in USD
%
Change in
constant
currencies
%
7
9
5
24
10
3
67
– 4
8
10
12
8
27
13
9
70
0
11
68
Item 5. Operating and Financial Review and Prospects
The following table provides the top 20 Innovative Medicines Division product net sales in 2019:
US
Rest of world
Total
Brands
Business franchise
Indication
%
change
USD m USD/cc 2
%
%
change change
cc 2
USD
USD m
%
%
change change
cc 2
USD
USD m
Cosentyx
Gilenya
Lucentis
Tasigna
Entresto
Immunology,
Hepatology and
Dermatology
Psoriasis, ankylosing
spondylitis and
psoriatic arthritis
2 220
33
1 331
14
20
3 551
25
Neuroscience
Relapsing multiple sclerosis
1 736
– 2
1 487
– 6
0
3 223
– 4
Ophthalmology
Age-related
macular degeneration
2 086
Oncology
Chronic myeloid leukemia
804
0
1 076
2
1
7
5
2 086
1 880
2
0
28
– 1
7
3
Cardiovascular, Renal
and Metabolism
Chronic heart failure
925
66
801
70
77
1 726
68
71
Sandostatin
Oncology
Carcinoid tumors
and acromegaly
Afinitor/Votubia
Oncology
Breast cancer/TSC
881
1 003
8
8
704
– 9
– 3
1 585
0
536 – 15 – 10
1 539
– 1
2
1
691
19
725
22
27
1 416
21
23
Promacta/Revolade Oncology
Tafinlar + Mekinist
Oncology
Immune thrombocytopenia
(ITP), severe aplastic
anemia (SAA)
BRAF V600+ metastatic
and adjuvant melanoma;
advanced non-small cell
lung cancer (NSCLC)
20
5
9
7
– 9
– 6
25
8
Galvus Group
Established Medicines Diabetes
1 297
1
5
1 297
1
481
5
857
23
30
1 338
16
Gleevec/Glivec
Oncology
Xolair 1
Jakavi
Respiratory
Oncology
Chronic myeloid
leukemia and GIST
Severe Allergic Asthma
(SAA) and Chronic
Spontaneous Urticaria
(CSU)
Myelofibrosis (MF),
polycytomia vera (PV)
Diovan Group
Established Medicines Hypertension
Exforge Group
Established Medicines Hypertension
334 – 24
929 – 17 – 14
1 263 – 19 – 17
1 173
13
19
1 173
13
19
1 114
14
86
2
978
13 – 32
1 012
4
3
20
10
1 064
8
1 025
4
2
1 114
14
20
Exjade/Jadenu
Votrient
Oncology
Oncology
Chronic iron overload
450 – 14
525
– 9
– 6
975 – 11
Renal cell carcinoma
332 – 18
423
0
5
755
– 9
Ilaris
Immunology,
Hepatology and
Dermatology
Auto-inflammatory (CAPS,
TRAPS, HIDS/MKD, FMF, SJIA,
AOSD and gout)
Zortress/Certican
Established Medicines Transplantation
304
169
16
17
367
26
33
671
21
316
– 1
4
485
5
Kisqali
Oncology
Top 20 products total
Rest of portfolio
Total division sales
HR+/HER2- metastatic
breast cancer
250
45
230
nm
nm
480 104 111
10 679
11 17 967
5
11 28 646
7
3 110
39
5 958
– 1
4
9 068
10
13 789
16 23 925
4
9 37 714
8
11
13
11
1 Net sales reflect Xolair sales for all indications.
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.”
Novartis Oncology business unit
Tasigna (USD 1.9 billion, 0%, +3% cc) grew across most
regions, mainly driven by Emerging Growth Markets
including China.
Sandostatin (USD 1.6 billion, 0%, +2% cc) grew mainly
driven by the US and Emerging Growth Markets, includ-
ing China, partly offset by competitive pressure in other
regions, including first generic competitors entering the
market in Europe and Japan.
Afinitor/Votubia (USD 1.5 billion, –1%, +1% cc) sales
were broadly in line with prior year, driven by growth in
the US in the TSC indication, offset by generic competi-
tion in other regions.
Promacta/Revolade (USD 1.4 billion, +21%, +23% cc)
grew at a double-digit rate across all regions driven by
increased use in chronic immune thrombocytopenia
(ITP) and uptake as first-line treatment for severe aplas-
tic anemia (SAA) in the US and Japan.
Tafinlar + Mekinist (USD 1.3 billion, +16%, +20% cc)
saw double-digit growth in metastatic and adjuvant mel-
anoma as well as non-small cell lung cancer (NSCLC),
69
Item 5. Operating and Financial Review and Prospects
with ongoing uptake of the adjuvant melanoma indica-
tion in the US and Europe.
Gleevec/Glivec (USD 1.3 billion, –19%, –17% cc)
declined due to generic competition in most major mar-
kets.
Jakavi (USD 1.1 billion, +14%, +20% cc) saw dou-
ble-digit growth across all regions driven by demand in
the myelofibrosis and polycythemia vera indications.
Exjade/Jadenu (USD 975 million, –11%, –9% cc)
declined mainly due to pressure from new generic com-
petition in the US and in other regions.
Votrient (USD 755 million, –9%, –6% cc) sales declined
mainly due to competitive pressure in the US.
Kisqali (USD 480 million, +104%, +111% cc) showed
solid growth in the US driven by use in metastatic breast
cancer patients, independent of menopausal status or
combination partner, with strong uptake and patient
share gain in Europe and other regions, benefitting from
the impact of overall survival data from the MONA-
LESSA-7 and MONALEESA-3 trials.
Lutathera (USD 441 million, +164%, +160% cc) con-
tinued to grow led by the US, with over 170 centers
actively treating patients, and ongoing launches in
Europe. Sales from all AAA brands (including Lutathera
and radiopharmaceutical diagnostic products) were
USD 679 million.
Kymriah (USD 278 million) strong demand continued
and sales increased primarily driven by ongoing uptake
in Europe and the US. There are over 200 qualified treat-
ment centers and more than 20 countries worldwide
have coverage for at least one indication, including
Japan, making Kymriah the only CAR-T approved in Asia.
We have significantly increased our global manufactur-
ing capacity. Three additional facilities in Les Ulis, Stein,
and Japan have started manufacturing clinical batches.
We have also signed a licensing agreement with Cellular
Biomedicine Group (CBMG) in China with plans to
expand further.
Piqray (USD 116 million) US launch progressed well.
Piqray was approved by the FDA as the first and only
treatment for patients with a PIK3CA mutation in hor-
mone receptor-positive (HR+)/human epidermal growth
factor receptor 2-negative (HER2-) advanced breast
cancer.
Xiidra (USD 192 million) is the only prescription eye
drop solution marketed in the US and Canada to treat
the signs and symptoms of dry eye disease. It is dosed
twice per day, approximately 12 hours apart, in each eye.
Xiidra is approved in multiple markets including the US,
Canada and Australia. It is under regulatory review in a
number of additional markets. Novartis acquired Xiidra
from Takeda and began recording sales as of July 1st,
2019.
Beovu (USD 35 million, brolucizumab, formerly
RTH258) was launched in the US following FDA approval
in October, offering patients with wet age-related mac-
ular degeneration (AMD) in the US a new treatment
option with demonstrated robust vision gains. Beovu is
the only anti-VEGF in wet AMD approved in the US to
maintain eligible patients on up to three month dosing
intervals immediately after the loading phase. Beovu
received a positive CHMP opinion in the EU in Decem-
ber 2019 and a permanent J-code from CMS on Janu-
ary 1, 2020.
Immunology, Hepatology and Dermatology
Sales in the Immunology, Hepatology and Dermatology
franchise reached USD 4.2 billion (+24%, +27% cc), of
which Cosentyx delivered USD 3.6 billion.
Cosentyx (USD 3.6 billion, +25%, +28% cc) contin-
ued momentum in the US (+33%) and in the rest of the
world (+14%, +20% cc), driven by strong demand across
indications and regions and broad first line access in all
three indications. In March, Cosentyx was the first IL-17A
inhibitor to be approved in China for the treatment of
psoriasis. In September, Novartis announced positive
new data from the Phase III PREVENT trial evaluating
the efficacy and safety of Cosentyx in patients with
non-radiographic axial spondyloarthritis (nr-axSpA).
Novartis has submitted the data to EMA and to the FDA.
Nr-axSpA would be the fourth indication for Cosentyx.
Ilaris (USD 671 million, +21%, +25% cc) sales were
driven by strong double-digit volume growth, mostly in
Europe.
Xolair sales for all indications are reported in the
Respiratory franchise. Dermatology teams help support
commercial efforts of Xolair in chronic spontaneous urti-
caria/chronic idiopathic urticaria.
Novartis Pharmaceuticals business unit
Ophthalmology
Sales in the Ophthalmology franchise were USD 4.8 bil-
lion (+5%, +8 cc), mainly driven by the acquisition of Xiidra
and growth of Lucentis, while benefitting from the launch
of Beovu.
Lucentis (USD 2.1 billion, +2%, +7% cc) grew driven
by strong execution of a focused commercial strategy
supported by new head-to-head evidence enabling an
improved efficacy and durability perception in an overall
strongly growing Retina market. Lucentis received
approval for the treatment of retinopathy of prematurity
(ROP) in premature infants in the EU and Japan in the
second half of 2019, making Lucentis the first licensed
pharmacological therapy to treat the condition. Lucentis
also received approval for the treatment of proliferative
diabetic retinopathy (PDR) in the EU in October, becom-
ing the first licensed pharmacological therapy to treat
adults with PDR ex-US.
Neuroscience
Sales in the Neuroscience franchise were USD 3.8 bil-
lion (+10%, +13% cc), mainly driven by the launch of
Zolgensma and sales growth of Aimovig, partly offset by
sales decline of Gilenya.
Gilenya (USD 3.2 billion, –4%, –1% cc) declined mainly
due to competitive pressures.
Zolgensma (USD 361 million, formerly AVXS-101) is
an adeno-associated virus vector-based gene therapy
designed to address the genetic root cause of spinal
muscular atrophy (SMA) by providing a functional copy
of the human survival motor neuron (SMN) gene to halt
disease progression through sustained SMN protein
expression. The FDA approved the intravenous formu-
lation of AVXS-101 as Zolgensma in May 2019 for the
treatment of pediatric patients less than 2 years old who
have SMA with biallelic mutations in the SMN1 gene. Reg-
ulatory reviews are underway in Europe, with a CHMP
opinion anticipated in Q1 2020, and Japan, with a deci-
70
Item 5. Operating and Financial Review and Prospects
sion anticipated in 1H 2020. AVXS-101 is in ongoing clin-
ical studies, including the global Phase III STR1VE clini-
cal program (consisting of STR1VE-US, STR1VE-EU and
STR1VE-AP) to evaluate the intravenous (IV) formulation
of AVXS-101 in patients who have SMA Type 1, and the
multinational Phase III SPR1NT trial in presymptomatic
patients who have a genetic diagnosis of SMA with two
or three copies of the SMN2 gene. Additionally, AVXS-
101 intrathecal administration is being studied in a Phase
I/II STRONG trial in patients who have SMA Type 2 and
three copies of the SMN2 gene. New data from trials
were presented at 2019 congresses, including the Amer-
ican Academy of Neurology Annual Meeting.
Aimovig (USD 103 million, ex-US, ex-Japan) is the
most prescribed anti-CGRP worldwide, with more than
350,000 patients prescribed worldwide in the post-trial
setting. It has now been launched in 38 countries for the
preventive treatment of migraine and additional launches
are underway. Aimovig is co-commercialized with Amgen
in the US, where Amgen records sales and Novartis has
exclusive rights in all ex-US territories excluding Japan.
Amgen issued a termination notice in April 2019, based
on an alleged material breach of the collaboration agree-
ments, and this notice, as well as other ancillary matters,
are the subject of legal proceedings between Novartis
and Amgen. Novartis disputes Amgen’s allegations vig-
orously. The collaboration continues during the litigation
between the companies, and will remain in force until
and unless a final court decision terminates the agree-
ments.
Mayzent (USD 26 million) launch is progressing and
efforts are ongoing to accelerate patient on-boarding
and drive urgency to treat. Mayzent was approved by the
FDA on March 26, 2019 and is indicated for the treat-
ment of relapsing forms of multiple sclerosis (MS), to
include clinically isolated syndrome, relapsing-remitting
disease, and active secondary progressive MS, in adults.
Mayzent is the only FDA approved oral therapy for active
SPMS based on evidence from a pivotal prospective
Phase III clinical trial (EXPAND) in a broad SPMS popu-
lation. Mayzent received EU approval in January 2020
for the treatment of adult patients with secondary pro-
gressive multiple sclerosis (SPMS) with active disease.
Respiratory
Sales in the Respiratory franchise were USD 1.8 billion
(+3%, +9% cc), of which Xolair delivered USD 1.2 billion.
Xolair (USD 1.2 billion, +13%, +19% cc) continued to
grow in both indications Severe Allergic Asthma (SAA)
and Chronic Spontaneous Urticaria (CSU). Growth for
both indications benefited from the recent approval of
Xolair for home-use in Europe and strong performance
in Emerging Growth Markets. We co-promote Xolair with
Genentech in the US and share a portion of operating
income, but we do not record any US sales.
Ultibro Breezhaler (USD 427 million, –6%, –1% cc), an
inhaled LABA/LAMA, sales declined mainly due to com-
petition.
Seebri Breezhaler (USD 121 million, –18%, –14% cc)
an inhaled LAMA, and Onbrez Breezhaler (USD 82 mil-
lion, –19%, –14% cc) an inhaled LABA, declined mainly
due to competition.
Cardiovascular, Renal and Metabolism
Sales in the Cardiovascular, Renal and Metabolism fran-
chise were USD 1.8 billion (+67%, +70% cc).
Entresto (USD 1.7 billion, +68%, +71% cc) continued
strong momentum across geographies, fueled by
increased demand in both hospital and ambulatory set-
tings. New data presented at American Heart Associa-
tion (AHA) Scientific Sessions 2019 on reverse cardiac
remodeling, in-hospital use and quality of life, further
reinforce Entresto as an essential, first-choice treatment
for heart failure with reduced ejection fraction.
Established Medicines
The Established Medicines franchise had sales of
USD 7.0 billion (–4%, 0% cc).
Galvus Group (USD 1.3 billion, +1%, +5% cc) grew, led
by solid performance in Emerging Growth Markets,
including China.
Diovan Group (USD 1.1 billion, +4%, +9% cc) grew in
Europe and Emerging Growth Markets, partially offset
by a decline in Japan.
Exforge Group (USD 1.0 billion, +2%, +7% cc) grew in
Emerging Growth Markets, offset by a decline in Europe,
Japan and the US due to generic competition.
Zortress/Certican (USD 485 million, +5%, +8% cc)
continued to grow in most regions.
Neoral/Sandimmun(e) (USD 419 million, –10%, –7%
cc) declined due to generic competition and mandatory
price reductions.
Voltaren/Cataflam (USD 417 million, –6%, –4% cc)
sales declined mainly due to generic competition.
71
Item 5. Operating and Financial Review and Prospects
Sandoz
Sandoz net sales in 2019 were USD 9.7 billion (–1%, +2%
cc) driven by strong volume growth of 8 percentage
points which was partially offset by 6 percentage points
of price erosion. Excluding the US, net sales grew
strongly (+2%, +7% cc).
Sales in Europe were USD 5.1 billion (+3%, +9% cc),
mainly driven by biosimilars. Sales in the US were USD 2.5
billion declining 10%, mainly due to continued industry-
wide pricing pressure. Sales in Asia, Africa and Austral-
asia were USD 1.3 billion (–2%, +1% cc). Sales in Canada
and Latin America were USD 784 million (+1%, +6% cc).
(USD millions)
Year ended
Year ended
Dec 31, 2019 Dec 31, 2018
Retail Generics1
7 590
Biopharmaceuticals 1 607
7 880
1 436
Anti-Infectives
(partner label/API)
534
543
Total Sandoz
9 731
9 859
Change
in USD
%
Change in
constant
currencies
%
– 4
12
– 2
– 1
0
16
2
2
1 Of which USD 784 million (2018: USD 826 million) represents anti-infectives sold
under the Sandoz name
Retail Generics
In Retail Generics, Sandoz develops, manufactures and
markets active ingredients and finished dosage forms of
small molecule pharmaceuticals to third parties across
a broad range of therapeutic areas, as well as finished
dosage form of anti-infectives sold to third parties. Retail
Generics sales in 2019 were USD 7.6 billion (–4%, 0%
cc), in line with prior year as first-to-market launches off-
set the impact of US pricing pressure.
Biopharmaceuticals
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
Biopharmaceuticals business also includes Glatopa, a
generic version of Copaxone®, which treats relapsing
forms of multiple sclerosis and is marketed in the US.
Global sales of Biopharmaceuticals grew to USD 1.6 bil-
lion (+12%, +16% cc), driven by continued strong dou-
ble-digit growth in Europe from Hyrimoz (adalimumab),
Rixathon (rituximab) and Erelzi (etanercept). Launch roll-
outs in Asia, Africa and Australasia also contributed to
growth.
Anti-Infectives
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. Sales of anti-infectives
sold to third parties under their own name were USD 534
million, down 2% (+2% cc). Total Anti-Infectives franchise
sales were USD 1.3 billion (–4%, 0% cc), including
USD 784 million finished dosage forms sold under the
Sandoz name.
Operating income from continuing operations
The following table provides an overview of operating income from continuing operations by segment:
(USD millions)
Innovative Medicines
Sandoz
Corporate
Operating income from continuing operations
Year ended
Dec 31, 2019
% of
Year ended
net sales Dec 31, 2018
% of
net sales
9 287
551
– 752
9 086
24.6
5.7
19.2
7 871
1 332
– 800
8 403
22.6
13.5
18.8
Change
in USD
%
18
– 59
6
8
Change in
constant
currencies
%
24
– 53
4
14
Operating income from continuing operations was
USD 9.1 billion (+8%, +14% cc), mainly driven by higher
sales, higher divestments and productivity programs,
which were partly offset by growth investments, legal
provisions and higher impairments. Operating income
margin from continuing operations was 19.2% of net
sales, increasing by 0.4 percentage points (+0.9 percent-
age points cc).
72
Item 5. Operating and Financial Review and Prospects
Core operating income from continuing operations key figures1
(USD millions unless indicated otherwise)
Core gross profit from continuing operations
Selling, general and administration
Research and development
Other income
Other expense
Core operating income from continuing operations
As % of net sales
Year ended
Year ended
Dec 31, 2019 Dec 31, 2018
37 392
34 886
– 14 319
– 13 690
– 8 386
– 8 154
495
558
– 1 070
– 1 043
14 112
12 557
29.7
28.1
Change
in USD
%
Change in
constant
currencies
%
7
– 5
– 3
– 11
– 3
12
10
– 7
– 5
– 9
– 5
17
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 from con-
tinuing operations to arrive at core operating income
from continuing operations amounted to USD 5.0 billion
(compared to USD 4.2 billion in the prior year). For details
please see “Item 5. – 2019, 2018 and 2017 reconciliation
from IFRS results to core results.”
Core operating income from continuing operations
was USD 14.1 billion (+12%, +17% cc), mainly driven by
higher sales and productivity programs, partly offset by
growth investments. Core operating income margin was
29.7% of net sales, increasing by 1.6 percentage points
(+1.9 percentage points cc).
The following table provides an overview of core operating income by segment:
(USD millions)
Innovative Medicines
Sandoz
Corporate
Year ended
Dec 31, 2019
% of
Year ended
net sales Dec 31, 2018
% of
net sales
12 650
2 094
– 632
33.5
21.5
11 151
2 002
– 596
32.0
20.3
Core operating income from continuing operations
14 112
29.7
12 557
28.1
Change
in USD
%
Change in
constant
currencies
%
13
5
– 6
12
18
10
– 9
17
Innovative Medicines
Operating income was USD 9.3 billion (+18%, +24% cc),
mainly driven by continued strong sales growth and pro-
ductivity, partly offset by growth investments. Operating
income margin was 24.6% of net sales, increasing 2.0
percentage points (+2.5 percentage points cc).
Core adjustments were USD 3.4 billion, mainly due
to USD 2.4 billion of amortization. Prior year core adjust-
ments were USD 3.3 billion. Core adjustment were
broadly in line with the prior year as higher legal provi-
sions were offset by higher divestment income and lower
restructuring.
Core operating income was USD 12.7 billion (+13%,
+18% cc), mainly driven by higher sales, partly offset by
higher growth investments. Core operating income mar-
gin was 33.5% of net sales, increasing 1.5 percentage
points (+1.8 percentage points cc).
Core gross margin was broadly in line with prior year
as productivity improvements were offset the ramp up
of capacity for cell / gene therapies and lower other rev-
enue (-0.8 percentage points cc). Core R&D expenses
decreased by 1.2 percentage points (cc), mainly driven
by the higher net sales, productivity and portfolio prior-
itization. Core selling, general and administration (SG&A)
expenses declined by 0.7 percentage points (cc), mainly
driven by sales leverage and productivity. Core other
income and expense did not have a material impact on
margin.
Sandoz
Operating income was USD 551 million (–59%, –53% cc),
impacted by higher impairments of intangible assets and
property, plant and equipment related to the discontin-
uation of the generic Advair® development program in
the US and higher restructuring charges mainly from the
ongoing business transformation. Operating income
margin was 5.7% of net sales, declining 7.8 percentage
points (-7.3 percentage points cc).
Core adjustments were USD 1.5 billion, including
USD 314 million of amortization. Prior year core adjust-
ments were USD 670 million. The change in core adjust-
ments compared to prior year was driven mainly by
higher impairments of intangible assets and property,
plant and equipment, higher restructuring charges mainly
from the ongoing transformation, net changes in legal
settlements and lower divestment income.
Core operating income was USD 2.1 billion (+5%,
+10% cc), as sales growth and continued gross margin
improvements were partly offset by price erosion and
lower divestment income. Core operating income mar-
gin was 21.5% of net sales, increasing 1.2 percentage
points (1.5 percentage points cc).
73
Item 5. Operating and Financial Review and Prospects
Core gross margin increased by 1.6 percentage
points (cc), as favorable product and geographic mix and
ongoing productivity improvements, were partly offset
by the impact of price erosion. Core R&D expenses were
in line with prior year, while core SG&A expenses
decreased by 0.6 percentage points (cc). Core other
income and expense decreased the margin by 0.7 per-
centage points (cc), mainly due to lower divestment
income.
Corporate income and expense, net
Corporate income and expense, which includes the cost
of Group headquarters and coordination functions,
amounted to an expense of USD 752 million in 2019 com-
pared to USD 800 million in the prior year, mainly driven
by lower impairment charges from the Novartis Venture
Fund financial asset, partly offset by higher restructur-
ing costs.
Innovative Medicines Division research and development
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 development1
Core confirmatory development1
Total core Innovative Medicines Division research and development expense
As % of Innovative Medicines net sales to third parties
Year ended
Year ended
Dec 31, 2019 Dec 31, 2018
– 2 855
– 2 770
– 5 297
– 4 905
– 8 152
– 7 675
21.6
22.0
– 2 706
– 2 665
– 4 879
– 4 675
– 7 585
– 7 340
20.1
21.0
Change
in USD
%
Change in
constant
currencies
%
– 3
– 8
– 6
– 2
– 4
– 3
– 4
– 10
– 8
– 2
– 6
– 5
1 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 increased by 3% (–4% cc) to
USD 2.9 billion, and confirmatory development expense
amounted to USD 5.3 billion, increasing by 8% (–10% cc)
versus prior year. This was mainly due to higher pipeline
investments, including Zolgensma, and higher impair-
ments of intangible assets.
Total core research and development expense in the
Innovative Medicines Division as a percentage of sales
decreased by 0.9 percentage points (1.2 percentage
points cc) to 20.1% of net sales, mainly driven by the
higher net sales, productivity and portfolio prioritization.
74
Item 5. Operating and Financial Review and Prospects
Non-operating income and expense
The term “non-operating income and expense” includes all income and expense items outside operating income.
The following table provides an overview of non-operating income and expense from continuing operations:
(USD millions unless indicated otherwise)
Operating income from continuing operations
Income from associated companies
Interest expense
Other financial income and expense
Income before taxes from continuing operations
Taxes
Net income from continuing operations
Net loss from discontinued operations
before gain on distribution of Alcon Inc.
to Novartis AG shareholders
Gain on distribution of Alcon Inc.
to Novartis AG shareholders
Net income from discontinued operations
Net income
Attributable to:
Shareholders of Novartis AG
Non-controlling interests
Basic earnings per share from continuing operations (USD)
Basic earnings per share from discontinued operations (USD)
Total basic earnings per share (USD)
nm = not meaningful
Year ended
Year ended
Dec 31, 2019 Dec 31, 2018
9 086
659
– 850
45
8 403
6 438
– 932
186
8 940
14 095
– 1 793
– 1 295
7 147
12 800
Change
in USD
%
Change in
constant
currencies
%
8
nm
9
– 76
– 37
– 38
– 44
14
nm
8
– 69
– 33
– 46
– 41
– 101
– 186
nm
nm
4 691
4 590
– 186
11 737
12 614
11 732
12 611
5
3.12
2.00
5.12
3
5.52
– 0.08
5.44
nm
– 7
– 7
nm
– 43
nm
– 6
nm
– 3
– 3
nm
– 40
nm
– 2
Income from associated companies
Income from associated companies amounted to
USD 659 million in 2019 compared to USD 6.4 billion in
prior year. This decrease is mainly due to the pre-tax
gain of USD 5.8 billion recognized on the divestment of
the 36.5% stake in the GSK consumer healthcare joint
venture in 2018.
The share of income from Roche was USD 662 mil-
lion compared to USD 526 million in the prior year. The
estimated income for Roche Holding AG was USD 748
million compared to USD 651 million in the prior year and
was partly offset by the negative prior year true up of
USD 129 million in the first quarter of 2019, compared to
a negative prior year true up of USD 125 million recog-
nized in the first quarter of 2018. In addition, a USD 43
million income from revaluation of deferred tax liability,
recognized upon initial accounting of the Roche invest-
ment, was recorded in the first quarter of 2019, follow-
ing a change in the enacted tax rate in February 2019 of
the Swiss Canton Basel-Stadt, effective January 1, 2019.
Interest expense and other financial income and
expense
Interest expense decreased to USD 850 million from
USD 932 million in the prior year, driven by lower out-
standing debts partly offset by the additional interest
expense on lease liabilities of USD 66 million, following
the implementation of IFRS 16 Leases as of January 1,
2019.
Other financial income and expense, net amounted
to an income of USD 45 million compared to USD 186
million in the prior year. The decrease is mainly due to
lower interest income and higher currency losses.
Taxes
The tax rate from continuing operations in 2019 was
20.1% compared to 9.2% in the prior year. The 2019 tax
rate was negatively impacted by a one-time, non-cash
deferred tax expense resulting from legal entity reorga-
nizations, a prior year item and an increase to an uncer-
tain tax position, partially offset by the deferred tax credit
from Swiss tax reform. The prior year tax rate was pos-
itively impacted by the divestment of the 36.5% stake in
the GSK consumer healthcare joint venture. Excluding
these impacts, the tax rate from continuing operations
would have been 15.4% compared to 14.9% in the prior
year. The increase compared to prior year is mainly the
result of a change in profit mix.
Net income from continuing operations
Net income from continuing operations amounted to
USD 7.1 billion, compared to USD 12.8 billion in the prior
year, as the prior year benefited from a USD 5.7 billion
net gain recognized from the sale of our stake in the GSK
consumer healthcare joint venture.
Earnings per share
Basic earnings per share from continuing operations
were USD 3.12, compared to USD 5.52 in the prior year,
declining less than net income due to the lower weighted
average number of shares outstanding.
75
Item 5. Operating and Financial Review and Prospects
Core non-operating income and expense from continuing operations1
The following table provides an overview of core non-operating income and expense from continuing operations:
(USD millions unless indicated otherwise)
Core operating income from continuing operations
Core income from associated companies
Core interest expense
Core other financial income and expense
Core income before taxes from continuing operations
Core taxes
Core net income from continuing operations
Core basic earnings per share from continuing operations (USD)
Year ended
Year ended
Dec 31, 2019 Dec 31, 2018
14 112
12 557
1 086
– 850
56
1 113
– 932
186
14 404
12 924
– 2 300
– 2 004
12 104
10 920
5.28
4.71
Change
in USD
%
Change in
constant
currencies
%
12
– 2
9
– 70
11
– 15
11
12
17
– 2
8
– 63
16
– 19
15
17
1 For an explanation of non-IFRS measures and reconciliation tables, see “Item 5.A Operating results—Non-IFRS measures as defined by Novartis.”
Core income from associated companies
Core income from associated companies from continu-
ing operations amounted to USD 1.1 billion, in line with
the prior year despite the discontinuation of core income
from the GSK consumer healthcare joint venture. The
core income contribution from Roche Holding AG
increased to USD 1.1 billion from USD 970 million in the
prior year. The increase is due to a higher estimated core
income contribution from Roche for the current period
and the recognition of a favorable prior-year core income
true-up of USD 32 million, compared to a favorable
true-up of USD 8 million in the first quarter of 2018.
Core interest expense and other financial income
and expense
Core interest expense from continuing operations was
USD 850 million, compared to USD 932 million in the
prior year. Core other financial income and expense from
continuing operations amounted to a net income of
USD 56 million, compared to USD 186 million in the prior
year.
Core taxes
The core tax rate from continuing operations (core taxes
as a percentage of core income before tax from continu-
ing operations) was 16.0% compared to 15.5% in the prior
year mainly as a result of a change in profit mix.
Core net income
Core net income from continuing operations was USD 12.1
billion (+11%, +15 cc), driven by growth in core operating
income, partly offset by the discontinuation of core
income from the GSK consumer healthcare joint venture.
Core earnings per share
Core earnings per share from continuing operations
were USD 5.28 (+12%, +17% cc), growing faster than core
net income due to the lower weighted average number
of shares outstanding.
76
Item 5. Operating and Financial Review and Prospects
Discontinued operations
Total Group
For the total Group, net income amounted to USD 11.7
billion in 2019, compared to USD 12.6 billion in 2018, and
basic earnings per share was USD 5.12 compared to
USD 5.44 in prior year. Cash flow from operating activi-
ties for the total Group amounted to USD 13.6 billion, and
free cash flow amounted to USD 12.9 billion.
Discontinued operations in 2019 include the business of
Alcon, and certain corporate costs directly attributable
to Alcon’s business up to the spin-off date. As the Alcon
spin-off was completed on April 9, 2019, there were no
operating results in the remainder of the year 2019. The
prior year includes the results for the full year.
Discontinued operations net sales in 2019 were
USD 1.8 billion, compared to USD 7.1 billion in 2018 and
operating income amounted to USD 71 million, compared
to an operating loss of USD 234 million in 2018.
Net income from discontinued operations in 2019
amounted to USD 4.6 billion, compared to a net loss of
USD 186 million in 2018, driven by the non-taxable, non-
cash net gain on distribution of Alcon Inc. to Novartis AG
shareholders, which amounted to USD 4.7 billion. For
further details, see “Item 18.Financial Statements—Note
2. Significant transactions—Completion of the spin-off
of the Alcon business through a dividend in kind distri-
bution to Novartis AG shareholders” and “Item 18.Finan-
cial Statements—Note 30. Discontinued operations.”
77
Item 5. Operating and Financial Review and Prospects
2018 compared to 2017
Key figures1
(USD millions unless indicated otherwise)
Net sales to third parties from continuing operations
Sales to discontinued operations
Net sales from continuing operations
Other revenues
Cost of goods sold
Gross profit from continuing operations
Selling, general and administration
Research and development
Other income
Other expense
Operating income from continuing operations
Return on net sales (%)
Income from associated companies
Interest expense
Other financial income and expense
Income before taxes from continuing operations
Taxes
Net income from continuing operations
Net (loss)/income from discontinued operations
Net income
Attributable to:
Shareholders of Novartis AG
Non-controlling interests
Basic earnings per share from continuing operations (USD)
Basic earnings per share from discontinued operations (USD)
Total basic earnings per share (USD)
Net cash flows from operating activities from continuing operations
Free cash flow from continuing operations 2
Year ended
Year ended
Dec 31, 2018 Dec 31, 2017
Change
in USD
%
Change in
constant
currencies
% 2
44 751
42 338
82
43
44 833
42 381
1 266
1 023
– 14 510
– 13 633
31 589
29 771
– 13 717
– 12 465
– 8 489
– 8 389
1 629
1 922
– 2 609
– 2 137
8 403
8 702
18.8
6 438
– 932
186
20.6
1 108
– 750
42
14 095
9 102
– 1 295
– 1 603
12 800
7 499
– 186
204
12 614
7 703
12 611
7 703
3
5.52
– 0.08
5.44
0
3.20
0.08
3.28
13 049
11 419
11 256
9 791
6
91
6
24
– 6
6
– 10
– 1
– 15
– 22
– 3
nm
– 24
nm
55
19
71
nm
64
64
nm
73
nm
66
14
15
5
76
5
24
– 5
6
– 9
0
– 16
– 21
– 3
nm
– 27
nm
55
19
71
nm
64
64
nm
73
nm
66
1 Continuing operations include the businesses of the Innovative Medicines and Sandoz divisions and the continuing Corporate activities and discontinued operations include the
Alcon eye care devices business and certain Corporate activities attributable to the Alcon business prior to the spin-off and certain other expenses related to the distribution. See
“Item 18. Financial Statements—Note 1. Significant accounting principles”, “Item 18.Financial Statements—Note 2. Significant transactions—Significant transactions in 2019,” and
“Item 18.Finanacial Statements—Note 30. Discontinued operations.”
2 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 continuing operations delivered strong perfor-
mance in 2018 driven by continued sales momentum
from our key growth products and the successful acqui-
sition of Advanced Accelerator Applications (AAA).
Net sales to third parties from Novartis continuing
operations were USD 44.8 billion, up 6% in reported
terms and up 5% measured in constant currencies (cc)
to remove the impact of exchange rate movements. This
strong sales growth was driven by volume growth of 10
percentage points, mainly driven by Cosentyx, AAA and
four drugs that reached blockbuster status (Promacta/
Revolade, Tafinlar + Mekinist, Entresto and Xolair). The
strong volume growth was partly offset by the negative
impacts of pricing (-3 percentage 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, includ-
ing Lutathera, a radioligand therapy for a rare type of
cancer in the pancreas or gut, amounted to USD 355
million.
78
Item 5. Operating and Financial Review and Prospects
By division, Innovative Medicines sales grew 8% (+8%
cc). Sandoz sales declined 2% (–3% cc), mainly due to
lower sales of retail generics, which was impacted by
continued US industrywide pricing pressures, which
were partly offset by growth in Biopharmaceuticals,
including the continued uptake of Rixathon and Erelzi in
Europe.
Operating income from continuing operations was
USD 8.4 billion (–3%, –3% cc), mainly due to the impacts
of M&A transactions, higher restructuring and net impair-
ment charges, and growth investments, which were
partly offset by higher sales. Operating income margin
from continuing operations decreased by 1.8 percent-
age points to 18.8% of net sales, driven by a decrease in
constant currencies of 1.6 percentage points and a neg-
ative currency impact of 0.2 percentage points.
Net income from continuing operations was USD 12.8
billion, compared to USD 7.5 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 from continuing oper-
ations were USD 5.52, compared to USD 3.20 in the prior
year, driven by higher net income and the lower weighted
average number of shares outstanding.
Cash flow from operating activities from continuing
operations was USD 13.0 billion (+14%), compared to
USD 11.4 billion in the prior year.
Free cash flow from continuing operations amounted
to USD 11.3 billion (+15%), compared to USD 9.8 billion in
the prior year, as higher cash flows from operating activ-
ities, including the receipt of a GSK sales milestone from
the divested Vaccines business, was partly offset by
higher net investments in intangible assets.
We also present our core results, which exclude the
impact of amortization, impairments, disposals, acquisi-
tions, restructurings and other significant items, to help
investors understand our underlying performance.
Core operating income from continuing operations
was USD 12.6 billion (+7%, +7% cc) driven by higher sales
and gross margin, which were partly offset by growth
investments, including AveXis. Core operating income
margin in constant currencies increased by 0.6 percent-
age points; currency had a negative impact of 0.2 per-
centage points, resulting in a net increase of 0.4 percent-
age points to 28.1% of net sales from continuing
operations.
Core net income from continuing operations was
USD 10.9 billion (+4%, +4% cc), driven by growth in core
operating income, which was partly offset by the discon-
tinuation of core income from the GSK consumer health-
care joint venture from April 1, 2018. Core earnings per
share were USD 4.71 (+6%, +5% cc), driven by growth in
core net income and the lower weighted average num-
ber of shares outstanding.
Discontinued operations include the business of
Alcon and certain corporate costs directly attributable
to Alcon’s business. Net sales of discontinued operations
were USD 7.1 billion, compared to USD 6.8 billion in the
prior year and operating loss from discontinued opera-
tions was USD 234 million, compared to an operating
loss of USD 73 million in the prior year. Net loss from dis-
continued operations amounted to USD 186 million, com-
pared to a net income from discontinued operations of
USD 204 million in the prior year.
Total Group net income amounted to USD 12.6 billion,
compared to USD 7.7 billion in the prior year, and basic
earnings per share increased to USD 5.44 from USD 3.28
in the prior year. Cash flow from operating activities
amounted to USD 14.3 billion, and free cash flow
amounted to USD 11.7 billion.
Net sales by segment
The following table provides an overview of net sales to third parties by segment:
(USD millions)
Innovative Medicines
Sandoz
Net sales to third parties from continuing operations
Year ended
Year ended
Dec 31, 2018 Dec 31, 2017
34 892
32 278
9 859
10 060
44 751
42 338
Change
in USD
%
8
– 2
6
Change in
constant
currencies
%
8
– 3
5
79
Item 5. Operating and Financial Review and Prospects
Innovative Medicines
Following the internal reorganization announced on
October 24, 2017, and January 24, 2018, which became
effective on January 1, 2018, we transferred our over-
the-counter ophthalmic products and certain surgical
diagnostic products with sales of USD 747 million in 2017
from the Innovative Medicines Division to the Alcon Divi-
sion. Our prescription ophthalmic medicines business
remains with the Innovative Medicines 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. For details
on Innovative Medicines net sales by business franchise,
see also “Item 18. Financial Statements—Note 3. Seg-
mentation of key figures 2019, 2018 and 2017.”
In addition, the former Immunology and Dermatology
franchise was reorganized into Immunology, Hepatology
and Dermatology, and certain products were transferred
to Established Medicines. The Cardio-Metabolic fran-
chise was renamed to Cardiovascular, Renal and Metab-
olism.
The Innovative Medicines Division delivered net sales
of USD 34.9 billion in 2018, up 8% in reported terms and
in constant currencies. The Novartis Pharmaceuticals
business unit grew 7% (+7% cc), driven by Cosentyx
reaching USD 2.8 billion and Entresto reaching USD 1.0
billion. The Novartis Oncology business unit grew 9%
(+9% cc), driven by AAA, including Lutathera, Promacta/
Revolade and Tafinlar + Mekinist which both reached
USD 1.2 billion, and Jakavi which reached USD 977 mil-
lion. 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, +11%, +8% cc) were driven by Cosentyx,
Entresto and Jakavi. Japan sales (USD 2.4 billion, –2%,
–3% cc) declined, mainly due to the biennial price cut
and generic competition. Emerging Growth Markets
sales increased 7% (+10% cc) to USD 8.6 billion, mainly
driven by strong growth in China.
The following table provides an overview of net sales to third parties by business franchise in the Innovative Medicines
Division:
(USD millions)
Total Novartis Oncology business unit
Total Novartis Pharmaceuticals business unit
Ophthalmology
Neuroscience
Immunology, Hepatology and Dermatology
Respiratory
Cardiovascular, Renal and Metabolism
Established Medicines
Total Innovative Medicines
Year ended
Year ended
Dec 31, 2018 Dec 31, 2017
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
%
Change in
constant
currencies
%
9
7
– 1
4
37
9
100
– 3
8
9
7
– 2
4
37
8
100
– 3
8
80
Item 5. Operating and Financial Review and Prospects
The following table provides the top 20 Innovative Medicines Division product net sales in 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
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
2
4
2
6
Brands
Gilenya
Cosentyx
Lucentis
Tasigna
581
30
593
41
40
1 174
35
35
Promacta/Revolade Oncology
Tafinlar + Mekinist
Oncology
Immune thrombocytopenia
(ITP), severe aplastic
anemia (SAA)
BRAF V600+ metastatic
and adjuvant melanoma;
advanced non-small cell
lung cancer (NSCLC)
31
3
7
4
24
2
457
35
698
31
29
1 155
32
Exjade/Jadenu
Oncology
Chronic iron overload
521
1
578
6
5
1 099
4
Xolair 1
Respiratory
Entresto
Cardiovascular, Renal
and Metabolism
Severe Allergic Asthma
(SAA) and Chronic
Spontaneous Urticaria
(CSU)
1 039
13
12
1 039
13
12
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
Jakavi
Votrient
Ilaris
Oncology
Oncology
Myelofibrosis (MF),
polycytomia vera (PV)
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
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.
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 below, see “Item 4. Information on the
Company—Item 4.B Business overview—Innovative Medicines—Key marketed products.”
Oncology business unit
Oncology sales were USD 13.4 billion (+9%, +9% cc),
driven by AAA, including Lutathera, Promacta/Revolade,
Tafinlar + Mekinist and Jakavi.
Afinitor/Votubia (USD 1.6 billion, +2%, +2% cc) grew
slightly, mainly driven by the tuberous sclerosis complex
(TSC) and neuroendocrine tumor (NET) indications in
the US.
Tasigna (USD 1.9 billion, +2%, +1% cc) was broadly in
Promacta/Revolade (USD 1.2 billion, +35%, +35% cc)
line with the prior year across most regions.
grew at a strong double-digit rate across all regions.
Sandostatin (USD 1.6 billion, –2%, –2% cc) declined
slightly, due to competitive pressure across most regions.
Gleevec/Glivec (USD 1.6 billion, –20%, –20% cc) con-
tinued to decline due to generic competition in most
major markets.
Tafinlar + Mekinist (USD 1.2 billion, +32%, +31% cc)
continued 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.
81
Item 5. Operating and Financial Review and Prospects
Exjade/Jadenu (USD 1.1 billion, +4% +3% cc) grew,
driven by continued uptake in Europe and Japan as well
as the film-coated tablets formulation launch in Europe.
Jakavi (USD 977 million, +26%, +24% cc) continued
strong double-digit growth across all regions, driven by
both the myelofibrosis and polycythemia vera indica-
tions.
Votrient (USD 828 million, +2%, +2% cc) sales grew
slightly driven by growth in Japan and Emerging Growth
Markets partially offset by competitive pressures in the
US and Europe.
Kisqali (USD 235 million, +209%, +210% cc) contin-
ued to build momentum with growth in the US and
launches in several European and Emerging Growth Mar-
kets. In July 2018, the 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. The FDA approved Lutathera in late January 2018,
shortly following the acquisition of AAA. In Europe, full
reimbursement for Lutathera has been achieved in sev-
eral countries in 2018. European authorities approved
Lutathera in late September 2017.
Kymriah sales were USD 76 million. In May 2018, the
FDA approved Kymriah for a second indication: 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.
Pharmaceuticals business unit
Ophthalmology
Sales in the Ophthalmology franchise were USD 4.6 bil-
lion (–1%, –2% cc), with increased sales of Lucentis partly
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, +8%, +7% cc) delivered
strong growth, benefitting from the implementation of a
focused global campaign as well as strong retina market
growth.
Travoprost Group (USD 517 million, –12%, –12% cc)
declined, mainly due to generic competition in Europe
and increased competition in the US.
Neuroscience
Sales in the Neuroscience franchise were USD 3.4 bil-
lion (+4%, +4% cc), mainly driven by Gilenya.
Gilenya (USD 3.3 billion, +5%, +4% cc) with approxi-
mately 267,000 treated patients worldwide, continued
solid growth, driven by increased demand in Europe and
the 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 relaps-
ing multiple sclerosis addressing the strong unmet clin-
ical 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 underway, including local reimbursement proce-
dures. Additional regulatory filings are pending with other
health authorities worldwide. Aimovig is co-commercial-
ized 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 world-
wide since launch.
Immunology, Hepatology and Dermatology
Sales in the Immunology, Hepatology and Dermatology
franchise reached USD 3.4 billion (+37%, +37% cc), of
which Cosentyx delivered USD 2.8 billion.
Cosentyx (USD 2.8 billion, +37%, +36% cc) delivered
strong volume growth across all indications in the US
and EU. In October 2018, Novartis presented five-year
data in psoriatic arthritis and ankylosing spondylitis con-
firming the efficacy and safety benefits of Cosentyx. This
added to the results of a Phase III psoriasis study reported
in 2017, demonstrating that Cosentyx delivers high and
long-lasting skin clearance in patients with moder-
ate-to-severe plaque psoriasis, with high response rates
essentially maintained from Year One to Year Five. These
scientific data are reinforcing Cosentyx’s unique posi-
tion as a long-lasting comprehensive treatment across
PsO, PsA and AS.
Ilaris (USD 554 million, +38%, +39% cc) sales were
driven by strong double-digit growth across most regions
driven by volume.
Xolair sales for all indications are reported in the
Respiratory franchise.
Respiratory
Sales in the Respiratory franchise were USD 1.8 billion
(+9%, +8% cc). Xolair sales amounted to USD 1.0 billion,
and our chronic obstructive pulmonary disease (COPD)
portfolio, including Onbrez Breezhaler, Seebri Breezhaler
and Ultibro Breezhaler, achieved sales of USD 703 mil-
lion (+4%, +2% cc).
Xolair (USD 1.0 billion, +13%, +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 dis-
ease awareness.
Ultibro Breezhaler (USD 454 million, +10%, +8% cc)
continued 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.
Cardiovascular, Renal and Metabolism
Sales in the Cardiovascular, Renal and Metabolism fran-
chise were USD 1.1 billion (+100%, +100% cc).
Entresto (USD 1.0 billion, +103%, +102% cc) sales
doubled year on year, driven by growing adoption by phy-
sicians and strong volume in all markets (US +87%, rest
of world +125%, +124% cc). New data from the landmark
PIONEER-HF trial presented at the A,erican Heart Asso-
ciation’s (AHA) Scientific Session 2018 and published in
the New England Journal of Medicine (NEJM) recon-
firmed the superiority of Entresto versus enalapril, as
demonstrated in PARADIGM-HF.
Established Medicines
The Established Medicines franchise had sales of
USD 7.3 billion (–3%, –3% cc).
82
Item 5. Operating and Financial Review and Prospects
Galvus Group (USD 1.3 billion, +4%, +6% cc) contin-
ued to grow driven by solid performance in Emerging
Growth Markets, including China.
Zortress/Certican (USD 464 million, +12%, +12% cc)
sales were driven by strong double-digit growth across
all regions.
Diovan Group (USD 1.0 billion, +7%, +7% cc) saw
increased demand, mainly due to the recall of generic
products in many markets.
Neoral/Sandimmun(e) (USD 463 million, –5%, –6%
cc) declined due to generic competition and mandatory
price reductions.
Exforge Group (USD 1.0 billion, +4%, +4% cc) saw
Voltaren/Cataflam (USD 445 million, –4%, –3% cc)
increased sales, mainly in Emerging Growth Markets.
declined due to generic competition.
Sandoz
Sandoz net sales in 2018 were USD 9.9 billion, down 2%
in reported terms. In constant currencies, sales declined
3%, as 8 percentage points of price erosion, mainly in
the US, were partly offset by volume growth of 5 per-
centage points. In the US, sales were USD 2.8 billion
(–16%), down mainly due to continued industrywide pric-
ing pressure. Sales in Europe were USD 5.0 billion (+7%,
+5% cc), with growth in biosimilars mainly in Germany,
France, the UK and Italy. Sales in Asia, Africa and Aus-
tralasia were USD 1.4 billion, down 2% (–2%cc). Sales in
Canada and Latin America were USD 779 million (+3%,
+8% cc). Excluding the US, net sales grew 5%, (+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 Sandoz
9 859
10 060
Change
in USD
%
Change in
constant
currencies
%
– 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
In Retail Generics, Sandoz develops, manufactures and
markets active ingredients and finished dosage forms of
small molecule pharmaceuticals to third parties across
a broad range of therapeutic areas, as well as finished
dosage form of anti-infectives sold to third parties. Retail
Generics sales in 2018 were USD 7.9 billion (–6%, –7%
cc), due to the decline in the US (–22%).
Biopharmaceuticals
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
Biopharmaceuticals business also includes Glatopa, a
generic version of Copaxone®, which treats relapsing
forms of multiple sclerosis and is marketed in the US.
Global sales of Biopharmaceuticals grew 27% (+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
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. Sales of anti-infectives
sold to third parties under their own name were USD 543
million, up 5% (+3% cc). Total Anti-Infectives franchise
sales were USD 1.4 billion (–2%,–3% cc), and included
USD 826 million in sales of finished dosage forms sold
under the Sandoz name.
Operating income from continuing operations
The following table provides an overview of operating income from continuing operations by segment:
(USD millions)
Innovative Medicines
Sandoz
Corporate
Operating income from continuing operations
nm = not meaningful
Year ended
Dec 31, 2018
% of
Year ended
net sales Dec 31, 2017
% of
net sales
7 871
1 332
– 800
8 403
22.6
13.5
18.8
7 595
1 368
– 261
8 702
23.5
13.6
20.6
Change
in USD
%
Change in
constant
currencies
%
4
– 3
nm
– 3
4
– 2
nm
– 3
Operating income from continuing operations was
USD 8.4 billion (–3%, –3% cc), mainly due to the impacts
of M&A transactions, higher restructuring and net impair-
ment charges, and growth investments, which were
83
Item 5. Operating and Financial Review and Prospects
partly offset by higher sales. Operating income margin
from continuing operations decreased by 1.8 percent-
age points to 18.8% of net sales, driven by a decrease in
constant currencies of 1.6 percentage points and a neg-
ative currency impact of 0.2 percentage points.
Core operating income from continuing operations key figures1
(USD millions unless indicated otherwise)
Core gross profit from continuing operations
Selling, general and administration
Research and development
Other income
Other expense
Core operating income from continuing operations
As % of net sales
Year ended
Year ended
Dec 31, 2018 Dec 31, 2017
34 886
32 374
– 13 690
– 12 468
– 8 154
– 7 808
558
748
– 1 043
– 1 132
12 557
11 714
28.1
27.7
Change
in USD
%
Change in
constant
currencies
%
8
– 10
– 4
– 25
8
7
7
– 9
– 4
– 26
9
7
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 from con-
tinuing operations to arrive at core operating income
from continuing operations amounted to USD 4.2 billion
(compared to USD 3.0 billion in 2017), increasing mainly
due to higher restructuring and net impairment charges.
Core operating income from continuing operations
was USD 12.6 billion (+7%, +7% cc) driven by higher sales
and gross margin, which were partly offset by growth
investments, including AveXis. Core operating income
margin in constant currencies increased by 0.6 percent-
age points; currency had a negative impact of 0.2 per-
centage points, resulting in a net increase of 0.4 percent-
age points to 28.1% of net sales.
The following table provides an overview of core operating income from continuing operations by segment:
(USD millions)
Innovative Medicines
Sandoz
Corporate
Year ended
Dec 31, 2018
% of
Year ended
net sales Dec 31, 2017
% of
net sales
11 151
2 002
– 596
32.0
20.3
10 019
2 080
– 385
31.0
20.7
Core operating income from continuing operations
12 557
28.1
11 714
27.7
Change
in USD
%
11
– 4
– 55
7
Change in
constant
currencies
%
11
– 3
– 52
7
Innovative Medicines
Operating income was USD 7.9 billion (+4%, +4% cc)
mainly driven by higher sales, which were partly offset
by increased growth and launch investments, and higher
restructuring 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 bil-
lion. 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, which were partly offset by
higher growth investments. Core operating income mar-
gin 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 the acquisitions of AveXis
and AAA. Core other income and expense, net, was in
line with the 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 the generic US
oral solids portfolio and lower sales, which were partly
offset by continued gross margin expansion and lower
amortization. Operating income margin was broadly in
line with the prior year.
Core adjustments amounted to USD 670 million,
including USD 363 million of amortization. Prior-year
84
Item 5. Operating and Financial Review and Prospects
core adjustments were USD 712 million. Core adjust-
ments declined compared to the prior year, driven by net
changes in legal provisions and lower amortization,
which were partly offset by impairment charges related
to the Sandoz US dermatology business and the generic
US oral solids portfolio. Core operating income was
USD 2.0 billion (–4%, –3% cc), mainly due to the sales
decline, ex-US marketing and sales (M&S) investments,
which were partly offset by continued core gross mar-
gin expansion. Core operating income margin in constant
currencies decreased by 0.1 percentage points, and cur-
rency had a negative impact 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).
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 800 million, compared to USD 261
million in the prior year. The increase in net expense com-
pared to the prior year was mainly due to lower contri-
butions from the Novartis Venture Fund, lower income
from retained Vaccines intellectual property, higher
Novartis Business Services (NBS) restructuring costs,
and an income from a sales milestone in the prior year
related to the Vaccines divestment.
Innovative Medicines Division research and development
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 development1
Core confirmatory development1
Total core Innovative Medicines Division research and development expense
As % of Innovative Medicines net sales to third parties
Year ended
Year ended
Dec 31, 2018 Dec 31, 2017
– 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
Change
in USD
%
Change in
constant
currencies
%
– 2
0
– 1
– 2
– 6
– 4
– 1
0
0
– 2
– 5
– 4
1 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 increased by 2% (–1% cc) to
USD 2.8 billion, and confirmatory development expense
amounted to USD 4.9 billion, broadly in line with the prior
year. This was mainly due to higher pipeline investments,
including AveXis, which were offset by lower net impair-
ment charges (mainly prior-year RLX030) and produc-
tivity.
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 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.
85
Item 5. Operating and Financial Review and Prospects
Non-operating income and expense from continuing operations
The term “Non-operating income and expense” includes all income and expense items outside operating income.
The following table provides an overview of non-operating income and expense from continuing operations:
(USD millions unless indicated otherwise)
Operating income from continuing operations
Income from associated companies
Interest expense
Other financial income and expense
Income before taxes
Taxes
Net income from continuing operations
Net (loss)/income from discontinued operations
Net income
Attributable to:
Shareholders of Novartis AG
Non-controlling interests
Basic earnings per share from continuing operations (USD)
Basic earnings per share from discontinued operations (USD)
Total basic earnings per share (USD)
nm = not meaningful
Year ended
Year ended
Dec 31, 2018 Dec 31, 2017
8 403
6 438
– 932
186
8 702
1 108
– 750
42
14 095
9 102
– 1 295
– 1 603
12 800
7 499
– 186
204
12 614
7 703
12 611
7 703
3
5.52
– 0.08
5.44
0
3.20
0.08
3.28
Change
in USD
%
– 3
nm
– 24
Change in
constant
currencies
%
– 3
nm
– 27
nm
55
19
71
nm
64
64
nm
73
nm
66
nm
55
19
71
nm
64
64
nm
73
nm
66
Income from associated companies
Income from associated companies from continuing
operations increased to USD 6.4 billion from USD 1.1 bil-
lion in the 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 divestment of the 36.5% stake
in the GSK consumer healthcare joint venture. Exclud-
ing this divestment gain, income from associated com-
panies amounted to USD 648 million, compared to
USD 1.1 billion in the prior year.
The share of income from Roche was USD 526 mil-
lion, compared to USD 456 million in the prior year. The
higher estimated income for Roche of USD 130 million
in 2018, was partly offset by the net impacts from a neg-
ative 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 the prior
year, due to the discontinuation of the recognition of
income from April 1, 2018 (see “Item 18. Financial State-
ments—Note 2. Significant transactions”).
Interest expense and other financial income and
expense
Interest expense from continuing operations was
USD 932 million, compared to USD 750 million in the
prior year, an increase of USD 182 million due to higher
interest expense of USD 136 million relating to the level
of outstanding debts, and higher interest expense of
USD 46 million on discounting of long-term liabilities.
Other financial income and expense from continuing
operations amounted to an income of USD 186 million,
compared to an income of USD 42 million in the prior
year, mainly due to higher interest income of USD 292
million, compared to USD 110 million in the prior year,
which was partly offset by higher currency losses of
USD 68 million, compared to currency losses of USD 58
million in the prior year and higher other financial
expenses, net of USD 38 million, compared to USD 10
million in the prior year.
Taxes
The tax rate from continuing operations was 9.2%, com-
pared to 17.6% in the prior year, due to the impact in 2018
on taxes of the divestment of the 36.5% stake in the GSK
consumer healthcare joint venture and the impact in 2017
on taxes from the US enacted tax reform legislation.
Excluding the impact of the divestment, the tax rate
would have been 14.9% in 2018 and excluding the impact
of US tax reform, 14.2% in 2017. The tax rate increased
as the benefit from favorable profit mix was offset by the
impact from the discontinuation of the recognition 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 trans-
actions”).
Net income from continuing operations
Net income from continuing operations was USD 12.8
billion, compared to USD 7.5 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 in the second quarter of 2018.
Earnings per share
Basic earnings per share from continuing operations
were USD 5.52, compared to USD 3.20 in the prior year,
driven by higher net income and lower weighted average
number of shares outstanding.
86
Item 5. Operating and Financial Review and Prospects
Core non-operating income and expense from continuing operations1
The following table provides an overview of core non-operating income and expense from continuing operations:
(USD millions unless indicated otherwise)
Core operating income from continuing operations
Core income from associated companies
Core interest expense
Core other financial income and expense
Core income before taxes from continuing operations
Core taxes
Core net income from continuing operations
Core basic EPS from continuing operations (USD)
Year ended
Year ended
Dec 31, 2018 Dec 31, 2017
12 557
11 714
1 113
– 932
186
1 335
– 750
42
12 924
12 341
– 2 004
– 1 867
10 920
10 474
4.71
4.46
Change
in USD
%
Change in
constant
currencies
%
7
– 17
– 24
nm
5
– 7
4
6
7
– 17
– 27
nm
5
– 7
4
5
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 taxes
The core tax rate from continuing operations (core taxes
as a percentage of core income before tax from continu-
ing operations) increased to 15.5% from 15.1% in the prior
year.
Core net income
Core net income from continuing operations was
USD 10.9 billion (+4%, +4% cc) driven by growth in core
operating income and partly offset by the discontinua-
tion of core income from the GSK consumer healthcare
joint venture from April 1, 2018.
Core earnings per share
Core earnings per share from continuing operations
were USD 4.71 (+6%, +5% cc), driven by growth in core
net income and the lower number of shares outstanding.
Core income from associated companies
Core income from associated companies from continu-
ing operations amounted to USD 1.1 billion, compared to
USD 1.3 billion in the prior year. The core income contri-
bution from Roche amounted to USD 970 million, com-
pared to USD 832 million in the 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 the prior year, due to
the discontinuation of core income from April 1, 2018 (see
“Item 18. Financial Statements—Note 2. Significant trans-
actions”).
Core interest expense and other financial income
and expense
Core interest expense from continuing operations was
USD 932 million, compared to USD 750 million in the
prior year. Core other financial income and expense from
continuing operations amounted to a net income of
USD 186 million, compared to USD 42 million in the prior
year.
Discontinued operations
Discontinued operations net sales were USD 7.1 billion,
compared to USD 6.8 billion in the prior year. Operating
loss amounted to USD 234 million, compared to an oper-
ating loss of USD 73 million in the prior year.
Net loss from discontinued operations amounted to
USD 186 million, compared to a net income from discon-
tinued operations of USD 204 million in the prior year.
Total Group
For the total Group, net income amounted to USD 12.6
billion in 2018, compared to USD 7.7 billion in the prior
year, and basic earnings per share increased to USD 5.44
from USD 3.28. Cash flow from operating activities for
the total Group amounted to USD 14.3 billion, and free
cash flow amounted to USD 11.7 billion.
87
Item 5. Operating and Financial Review and Prospects
Factors affecting comparability of year-on-year results
of operations
Significant transactions in 2019,
2018 and 2017, 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 our
long-term strategy to focus Novartis as a leading
medicines company, we announced and/or completed
several acquisitions and divestments during 2019, 2018
and 2017.
A detailed description of significant transactions in
2019, 2018 and 2017, and significant pending transac-
tions, can be found in “Item 4.Information on the Com-
pany—Item 4.A History and development of Novartis—
Important corporate developments 2017—2019,” and
“Item 18. Financial Statements—Note 2. Significant trans-
actions.”
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 pronouncement
Novartis implemented the new standard IFRS 16 Leases
effective as of January 1, 2019. IFRS 16 Leases substan-
tially changed the consolidated financial statements, as
the majority of leases for which the company is the les-
see became on-balance sheet liabilities with corre-
sponding right-of-use assets also recognized on the bal-
ance 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 agree-
ment. The standard replaces IAS 17 Leases and related
interpretations.
Upon adoption of the new standard, a portion of the
annual operating lease costs is recorded as an interest
expense. This was previously fully recognized within
operating income as a functional expense. In addition,
the portion of the lease payments that represents the
reduction of the lease liability is recognized in the cash
flow statement as an outflow from financing activities.
Previously, this was fully recognized as an outflow from
operating activities. Given the leases involved, these
effects are not significant to the presentation of our con-
solidated income statement or our consolidated cash
flows from operating activities and from financing activ-
ities.
The Group implemented the new standard on Janu-
ary 1, 2019, and applied 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.
From January 1, 2019, with the adoption of IFRS 16
Leases, the Group adopted new accounting policies for
leases and right-of-use assets, which are set forth in
“Item 18. Financial Statements—Note 1. Significant
accounting policies – Leases and right-of-use assets.”
For further information on the impact of adoption and
additional disclosures of IFRS 16 Leases, see “Item 18.
Financial Statements—Note 1. Significant accounting
policies” and “Item 18. Financial Statements—Note 10.
Right-of-use assets and lease liabilities.”
Non-current assets held for sale or
held for distribution to owners
Non-current assets are classified as assets held for sale
or related to discontinued operations when their carry-
ing amount is to be recovered principally through a sale
transaction or distribution to owners, and a sale or dis-
tribution to owners is considered highly probable. They
are stated at the lower of carrying amount and fair value
less costs to sell with any resulting impairment recog-
nized. Assets related to discontinued operations and
assets of disposal group held for sale are not depreci-
ated or amortized. The prior-year consolidated balance
sheet is not restated. For more details on the assets and
liabilities of disposal group classified as held for sale in
the 2019 and 2018 balance sheets, see “Item 18. Finan-
cial Statements—Note 2. Significant transactions—Sig-
nificant pending transactions.”
88
Item 5. Operating and Financial Review and Prospects
Distribution of Alcon Inc. to Novartis
AG shareholders
During the first quarter of 2019, at the Annual General
Meeting (AGM) of Novartis AG shareholders, held on
February 28, 2019, the Novartis AG shareholders
approved a special distribution by way of a dividend in
kind to effect the spin-off of Alcon Inc.
The February 28, 2019, shareholder approval for the
spin-off required the Alcon Division and selected por-
tions of corporate activities attributable to Alcon’s busi-
ness (the “Alcon business”) to be reported as discontin-
ued operations.
The shareholder approval to spin off the Alcon busi-
ness also required the recognition of a distribution liabil-
ity at the fair value of the Alcon business. The Group
elected to measure the distribution liability at the fair
value of the Alcon business net assets taken as a whole.
The distribution liability was recognized through a reduc-
tion in retained earnings. It was required to be adjusted
at each balance sheet date for changes in its estimated
fair value, up to the date of the distribution to sharehold-
ers through retained earnings. Any resulting impairment
of the business assets to be distributed would have been
recognized in the consolidated income statements in
“Other expense” of discontinued operations, at the date
of initial recognition of the distribution liability or at sub-
sequent dates resulting from changes of the distribution
liability valuation. At the April 8, 2019 distribution settle-
ment date, the resulting gain, which was measured as
the excess amount of the distribution liability over the
then-carrying value of the net assets of the business dis-
tributed, was recognized on the line “Gain on distribution
of Alcon Inc. to Novartis AG shareholders” in the income
statement of discontinued operations.
The recognition of the distribution liability required
the use of valuation techniques for purposes of impair-
ment testing of the Alcon business’ assets to be distrib-
uted and for the measurement of the fair value of the dis-
tribution liability. These valuations required the use of
management assumptions and estimates related to the
Alcon business’ future cash flows, market multiples to
estimate day one market value, and control premiums to
apply in estimating the Alcon business fair value. These
fair value measurements were classified as “Level 3” in
the fair value hierarchy. . “Item 18. Financial Statements—
Note 1. Impairment of goodwill and intangible assets”
provides additional information on key assumptions that
are highly sensitive in the estimation of fair values using
valuation techniques.
Transaction costs that were directly attributable to
the distribution (spin-off) of Alcon to the Novartis share-
holders, and that would otherwise have been avoided,
were recorded as a deduction from equity.
For additional disclosures, refer to “Item 18. Financial
Statements—Note 2. Significant transactions in 2019—
Completion of the Spin-off of the Alcon business through
a dividend in kind distribution to Novartis AG sharehold-
ers” and “Item 18. Financial Statements—Note 30. Dis-
continued operations.”
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 aged 65 and
older, and to people with certain disabilities, provides
prescription drug benefits under the Part D section of
the program. 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
contracts.
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.
89
Item 5. Operating and Financial Review and Prospects
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 (i.e. outcome based
arrangements) with certain healthcare providers. Under
these agreements, we may be required to make refunds
to the healthcare providers or to provide additional
medicines free of charge if anticipated treatment out-
comes do not meet predefined targets. The impact of
potential refunds or the delivery of additional medicines
at no cost is 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
the recording of the revenue deductions and the 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 pro-
jected 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 2019, 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 copay 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 22. Provisions and other current liabilities.”
90
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:
(USD millions)
2019
In % of
gross sales
2018
In % of
gross sales
2017
In % of
gross sales
Innovative Medicines gross sales subject to deductions
52 956
100.0
47 785
100.0
43 127
100.0
US-specific healthcare plans and program rebates
Non-US-specific healthcare plans and program rebates
– 4 824
– 3 438
– 9.1
– 3 921
– 8.2
– 3 303
– 6.5
– 3 140
– 6.6
– 2 652
Non-healthcare plans and program-related rebates,
returns and other deductions
– 6 980
– 13.2
– 5 832
– 12.2
– 4 894
Total Innovative Medicines gross-to-net sales adjustments
– 15 242
– 28.8
– 12 893
– 27.0
– 10 849
Innovative Medicines net sales
37 714
71.2
34 892
73.0
32 278
– 7.7
– 6.1
– 11.4
– 25.2
74.8
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 and other currently not amortized intangible
assets are reviewed for impairment at least annually.
An asset is considered impaired when its balance
sheet carrying amount exceeds its estimated recover-
able amount, which is defined as the higher of its fair
value less costs of disposal and its value in use. Usually,
Novartis applies the fair value less costs of disposal
method for its impairment assessment. In most cases,
no directly observable market inputs are available to
measure the fair value less costs of disposal. Therefore,
an estimate is derived indirectly and is based on net pres-
ent value techniques utilizing post-tax cash flows and
discount rates. In the limited cases where the value in
use method would be applied, net present value tech-
niques would be applied using pre-tax cash flows and
discount rates.
Fair value less costs of disposal reflects estimates of
assumptions that market participants would be expected
to use when pricing the asset or CGUs, and for this pur-
pose, management considers the range of economic
conditions that are expected to exist over the remaining
useful life of the asset.
The estimates used in calculating the net present val-
ues are highly sensitive and depend on assumptions spe-
cific to the nature of the Group’s activities with regard
to:
• 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
• Profit margins
• Probability of obtaining regulatory approval
• Future tax rate
• Appropriate terminal growth rate
• Appropriate discount rate
Due to the above factors, 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 State-
ments—Note 1. Significant accounting policies—Impair-
ment of goodwill and intangible assets and Note 11.
Goodwill and intangible assets.”
In 2019, intangible asset impairment charges in con-
tinuing operations of USD 1.2 billion were recognized, of
which USD 669 million was recorded in the Innovative
Medicines Division and USD 506 million was recorded
in the Sandoz Division.
In 2018, intangible asset impairment charges in con-
tinuing operations of USD 841 million were recognized,
of which USD 592 million was recorded in the Innovative
Medicines Division and USD 249 million was recorded
in the Sandoz Division.
In 2017, intangible asset impairment charges in con-
tinuing operations of USD 652 million were recognized,
of which USD 591 million was recorded in the Innovative
Medicines Division and USD 61 million was recorded in
the Sandoz Division.
In 2019, the reversal of prior year impairment charges
amounted to USD 37 million. In 2018 and 2017, 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 11. Goodwill and intangible assets.”
Additionally, net impairment charges for property,
plant and equipment from continuing operations during
2019 amounted to USD 202 million (2018: USD 301 mil-
lion; 2017: USD 157 million).
91
Item 5. Operating and Financial Review and Prospects
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 doubtful trade
receivables are established using an expected credit
loss model (ECL). The provisions are based on a for-
ward-looking ECL, which includes possible default
events on the trade receivables over the entire holding
period of the trade receivable. These provisions repre-
sent the difference between the trade receivable’s car-
rying amount in the consolidated balance sheet and the
estimated collectible 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 Argentina, Brazil,
Greece, Italy, Portugal, Russia, Saudi Arabia, Spain, Tur-
key and other countries, and evaluates trade receivables
in these countries for potential collection risks. Substan-
tially all of the trade receivables overdue from Argentina,
Brazil, Greece, Portugal, Saudi Arabia and Spain 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 amounts
due 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 in-process research and development
(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 as interest income recognized
in the consolidated income statement 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
2019, 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 95% of the Group total
defined benefit pension obligation, by approximately
USD 0.8 billion. Similarly, if the 2019 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 89% of
the Group’s total net periodic pension cost for pension
plans, would have increased by approximately USD 22
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
25. Post-employment benefits for associates.”
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Item 5. Operating and Financial Review and Prospects
Provisions and contingencies
Healthcare contributions
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 20. Provisions
and other non-current liabilities,” and “Item 18. Financial
Statements—Note 28. Commitments and contingen-
cies.”
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 (R&D) 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.
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.
In many countries, our subsidiaries are required to make
contributions to the country’s 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 government-
funded program sales. This pharmaceutical fee levy is
recognized in “Other expense.”
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, 2019. For
more details, see “Item 15. Controls and Procedures.”
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Item 5. Operating and Financial Review and Prospects
Factors affecting results of operations
Transformational changes fueling
demand
Accelerating biomedical innovation
We believe that biomedical innovation has the potential
to accelerate over the next two decades, with a poten-
tially transformative set of therapeutic platforms emerg-
ing that could make many intractable, “undruggable” tar-
gets accessible to new therapeutics and treatment
modalities. Our molecular understanding of biology is
steadily deepening to guide drug discovery. Artificial
intelligence (AI) and in silico drug discovery tools are also
maturing, with technology-native life sciences compa-
nies starting to develop their own drug pipelines. These
developments have the potential to provide us with new
tools to help reduce some of the uncertainty in drug dis-
covery, while at the same time helping to enable a new
set of potential competitors.
We see this as an opportunity because our strong
internal research capabilities should allow us to harness
the potential of an increasingly fragmented external inno-
vation environment. For example, we expect to sustain
long-term growth in part through our 15 ongoing or
upcoming major launches. In order to use this potential
to our advantage, first we will need to maintain a leading
position in new drug research capabilities that continue
to emerge. New methods to generate, analyze and use
big data to make predictions have the potential to make
biomedical problems more tractable, and new technol-
ogy platforms have the potential to make previously
“undruggable” targets accessible to new treatments.
Second, there may be an increasing number of contrib-
utors to drug research, with a broader range of possible
therapeutic advances. It will therefore be important for
us to effectively identify, operationalize, and scale new
technologies from a wide range of sources. Third, we will
need to continue to attract and retain talent who can har-
ness these new opportunities and continue to build inno-
vation leadership.
Aging populations
While accelerating medical innovation could help control
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
governments and payers 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 65 or over is projected
to reach nearly 1.5 billion by 2050, according to projec-
tions by the United Nations, up from 700 million today.
Aging populations, in addition to rapid urbanization and
changing lifestyles in the developing world, are contrib-
uting to an 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 is tak-
ing steps to expand reimbursement of new medicines to
help ensure broad access to medical innovation for its
population. In the coming years, we expect to double the
average number of our NDA approvals per year in China
compared with 2015-2019.
These factors are driving higher healthcare spend-
ing, which is projected by the consultancy firm Deloitte
to grow at an annual rate of 5.4% between 2018 and
2022, reaching a total of more than USD 10 trillion world-
wide (Deloitte, “2019 Global Healthcare Outlook, Shap-
ing the Future”).
To keep costs in check, governments and health
insurers are already employing a variety of measures,
including increasing the use of generics and biosimilars,
imposing price cuts, and limiting access to some
innovative therapies. The pharmaceutical industry is also
expected to play a role in controlling healthcare spend-
ing, including by exploring new pricing models and deliv-
ering innovative new treatments that help maximize ben-
efits for patients.
Moving towards value-based care
In the long term, we believe that healthcare systems are
more likely to remain sustainable if they are able to
reward on the basis of value, instead of volume, and ratio-
nally allocate resources to the treatments that lead to
the best outcomes for patients. In the US in particular,
changes to incentives currently built into the healthcare
system—which can encourage delivery of more expen-
sive treatments from manufacturers paying higher
rebates over more cost-effective products—may be
needed before value-based approaches become more
widely implemented. “American Patients First,” published
by the Trump administration in May 2018, included pro-
posals to remove barriers for value-based arrangements
and value-based purchasing, in addition to promoting
indication-based pricing projects in federal programs.
In the meantime, cost containment measures are
becoming increasingly prevalent. Before eventually shift-
ing to value-based pricing methods, which can some-
times be more difficult and complicated to implement,
countries are increasingly pursuing available sources of
savings including policies on prescription drug prices.
These direct moves are expected to drive our industry
to become much more innovative in demonstrating and
delivering value to healthcare systems.
We believe that technology and innovation hold great
potential to improve patient outcomes and quality of life,
while also supporting healthcare systems to improve
value for money and access. Novartis expects to con-
tinue to play a significant role in bringing new technolo-
gies into R&D and into patient support, and to help health-
care systems improve access.
Technology has the potential to help change the
way in which healthcare is delivered
The expansion in data science and digital technologies
has the potential to impact a number of areas across the
healthcare value chain. First, digital technologies may
increasingly improve the efficiency and effectiveness of
researching and developing potential new therapies. The
combination of data and artificial intelligence could
enable complex biological simulations that complement
94
Item 5. Operating and Financial Review and Prospects
human scientific ingenuity. This technology is anticipated
to augment our R&D capabilities. Second, increased vol-
umes of real-world data and the ability to analyze that
data with artificial intelligence, may in the future allow
more accurate, faster diagnosis of patients and recom-
mendation of appropriate treatments. Real-world evi-
dence will be important to demonstrate the value of our
innovation to payers and healthcare providers. Third, we
expect that in the future patients may have the opportu-
nity to be much more engaged in managing their own
care via clinical-grade digital tools, such as those sup-
porting adherence to instructions from healthcare pro-
fessionals. Patients are also likely to have greater deci-
sion-making power regarding with whom to share their
health data, as data ownership is expected to shift from
central data aggregators to the patient.
Increasingly challenging business
environment
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 products,
and our ability to establish satisfactory rates of reim-
bursement for our products by governments, insurers
and other payers.
We expect this scrutiny to continue in 2020, and the
following years, as governments and insurers around the
world strive to reduce healthcare costs through steps
such as restricting access to higher-priced new
medicines, increasing coinsurance or copays owed by
patients for medicines, increasing the use of generics,
and imposing price cuts. In this environment, we believe
it is more important than ever to demonstrate the value
that true innovation brings to the healthcare system.
To manage these pressures, we are investing in real
world data and analytics to provide additional evidence
of the health benefits of our products, exploring new
technologies and patient management services, and
working with payers to develop and scale out-
comes-based commercial models. For example, we are
working with customers on flexible pricing approaches
where we are fully compensated only if a drug succeeds
in meeting certain performance targets, or where the
price for a product administered only once is paid over
a period of time. For more information about these pric-
ing approaches, see “Item 4. Information on the Com-
pany—Item 4.B Business overview—Innovative
Medicines—Marketing and sales.”
We take a disciplined and value-based approach to
pricing. We strive to price our products commensurate
to the value they provide to society, which is primarily in
line with external benchmarks. Importantly, our sales
growth has been mainly driven by new innovations driv-
ing volume growth and not by price increases on exist-
ing drugs. The net pricing impact on our sales growth
has been negative or negligible for the last few years,
and has been more than offset by volume growth from
new products. We expect this to continue.
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 Sandoz Division, are pro-
tected by patent or other intellectual property rights,
allowing us to exclusively market those products. The
loss of exclusivity has had, and will continue to have, an
adverse effect on our results. In 2019, the total impact of
generic competition on our net sales amounted to
approximately USD 0.5 billion. The impact of generic
competition on sales growth in 2019 was lower than the
historical average.
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 product
Gleevec/Glivec continues to face increasing generic
competition in major markets. Patent protection for our
Sandostatin products has expired and we are facing
generic competition for Sandostatin LAR in Europe. Pat-
ent protection for Exjade in the US has expired and
generic versions of Exjade are available in the US. Look-
ing forward, intellectual property protecting a number of
our major products will expire at various times in the com-
ing years, raising the likelihood of further generic com-
petition. Among our products expected to begin losing
intellectual property protection in key countries during
the coming years are our everolimus products or their
remaining dosage strengths (Afinitor/Votubia and
Zortress/Certican), Sandostatin LAR in Europe, Jadenu,
Lucentis, and potentially Gilenya.
To counter the impact of intellectual property expi-
rations, we continuously invest in research and develop-
ment to rejuvenate our portfolio. For example, in 2019,
we invested 19.8% of total net sales in R&D. One mea-
sure of the output of our efforts is the performance of
our growth drivers, including Cosentyx, Entresto, and
Kisqali, and our Sandoz Division biosimilars. We also have
a number of late-stage product candidates in our pipe-
line with the potential to come to market in the next few
years. We launched five products with blockbuster
potential in 2019: Zolgensma, Piqray, Mayzent, Beovu, and
Adakveo. We expect to launch several potentially major
new molecular entities in 2020, including ofatumumab
(OMB157) for relapsing multiple sclerosis.
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
95
Item 5. Operating and Financial Review and Prospects
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. The
commercial success of our key products and launches
in the face of increasing competition and pressures on
pricing requires significant attention and focus from
members of our key management.
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 or fail. This may
cause a delay or add substantial expense, limit the poten-
tial for commercial success, or force us to abandon a
development project in which we have invested substan-
tial 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.
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.
Business practices
There is a continued focus on government investigations
and litigation against companies operating in our indus-
try, 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 addition, governments
and regulatory authorities worldwide are increasingly
challenging practices previously considered to be legal
and compliant. Beyond legal requirements, we strive to
meet evolving public expectations 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 substan-
tial liabilities that may not be covered by insurance and
could affect our business and reputation.
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. To help address this, we strive to contin-
ually strengthen our Ethics, Risk & Compliance function,
which is headed by our Chief Ethics, Risk and Compli-
ance Officer, who reports directly to the CEO of Novartis.
Investors and Novartis are increasingly focused on
Environmental, Social and Governance (ESG) issues. We
have made progress in transforming our culture and
building trust with society in 2019, which are two of the
key strategic priorities of our CEO. For all our new
medicines, we are systematically integrating access
strategies into how we research, develop and launch
products globally. We are developing innovative treat-
ments for diseases where there is unmet need, includ-
ing crizanlizumab (SEG101) in sickle cell disease, which
is now approved as Adakveo in the US.
Supply continuity
The manufacture of our products relies on technically
complex processes and, in some cases, highly special-
ized raw materials, and is highly regulated. Deviations,
difficulties or delays in production, or failure to obtain
specialized raw materials, have in the past resulted in
some of the following, and may in the future result in,
shut-downs, work stoppages, approval delays, voluntary
market withdrawals, product recalls, penalties, supply
disruptions or shortages, increased costs, product lia-
bility or reputational harm. Whether our products and the
related raw materials are manufactured at our own ded-
icated manufacturing facilities or by third parties, we
must ensure that all manufacturing processes comply
with current Good Manufacturing Practices (cGMP) and
other applicable regulations. Any significant failure by us
or our third party suppliers to comply with these require-
ments or health authorities’ expectations may cause us
to shut down production facilities or production lines,
either voluntarily or by order of a government health
authority.
96
Item 5. Operating and Financial Review and Prospects
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 therapies
and radioligand therapies, all of which are particularly
complex and involve highly specialized manufacturing
technologies. As a result, even slight deviations at any
point in their production processes may lead to produc-
tion failures or recalls. Sales of Kymriah, the first approved
CAR-T therapy, are currently constrained by production
capacity. We continue to optimize our manufacturing pro-
cess and have expanded our manufacturing capacity sig-
nificantly in 2019. Our facilities in Stein, Switzerland and
Les Ullis, France, have started manufacturing for clinical
study patients. Our ultimate goal is to make Kymriah avail-
able for every patient in need.
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. Of 177 inspections of
our facilities by health authorities around the world in
2019, all but seven were found to be good or acceptable
(96%).
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
Xiidra, Endocyte, AveXis, AAA, and certain oncology
assets acquired from GSK. As a result, we may incur sig-
nificant impairment charges if the fair value of intangible
assets and groupings of cash-generating units contain-
ing goodwill 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. Impairment testing under
IFRS may lead to impairment charges in the future. Any
significant impairment charges could have a material
adverse effect on our results of operations and financial
condition. In 2019, for example, we recorded intangible
asset impairment charges of USD 1.1 billion.
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 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.
In Switzerland, the Basel-Stadt Cantonal Tax Reform
was approved by voters in February 2019, with parts ret-
roactive from January 1, 2019. In May 2019, Swiss voters
approved the Swiss Federal Tax Reform. With the enact-
ment of this tax reform, new elements will be introduced
into law, for example the abolishment of special taxed
regimes, notional interest deduction, and an implemen-
tation of a Patent-Box, which provides tax advantages
on income generated from intellectual property rights.
Some of the new elements as well as the transition rules
for the Swiss tax reform might be regarded as not com-
pletely aligned with OECD and EU regulations, and might
require subsequent amendments, the need for and
impact of which are difficult to predict.
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, could lead to an increased risk of international
tax disputes and an increase in our effective tax rate,
and could adversely affect our financial results.
Approach to risk management
See “Item 6. Directors, Senior Management and Employ-
ees—Item 6.C Board practices—Corporate gover-
nance—Board of Directors—Information and control sys-
tems of the Board vis-à-vis management—Risk
management” and “Item 18. Financial Statements—Note
29. Financial instruments—additional disclosures.”
97
Item 5. Operating and Financial Review and Prospects
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, excluding software, net gains and
losses on fund investments and equity securities valued
at fair value through profit and loss, and certain acquisi-
tion- and divestment-related items. The following items
that exceed a threshold of USD 25 million are also
excluded: integration- and divestment-related income
and expenses; divestment gains and losses; restructur-
ing charges/releases and related items; legal-related
items; impairments of property, plant and equipment, and
financial assets, and income and expense items that
management deems exceptional and that are or are
expected to accumulate within the year to be over a
USD 25 million threshold.
Novartis believes that investor understanding of the
Group’s performance is enhanced by disclosing core
measures of performance because, core measures
exclude items that can vary significantly from year to
year, they enable better comparison of business perfor-
mance across years. For this same reason, Novartis uses
these core measures in addition to IFRS and other mea-
sures as important factors in assessing the Group’s per-
formance.
The following are examples of how these core measures
are utilized:
• In addition to monthly reports containing financial infor-
mation prepared under International Financial Report-
ing Standards (IFRS), senior management receives a
monthly analysis incorporating these core measures.
• Annual budgets are prepared for both IFRS and core
measures.
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
core measures (unlike IFRS measures) may not be com-
parable to the calculation of similar measures of other
companies. These core measures are presented solely
to permit investors to more fully understand how the
Group’s management assesses underlying performance.
These core measures are not, and should not be viewed
as, a substitute for IFRS measures.
As an internal measure of Group performance, these
core measures have limitations, and the Group’s perfor-
mance management process is not solely restricted to
these metrics. 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 acquisition, divestment, or amortization/impair-
ments of purchased 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 exchanges rates:
• The impact of translating the income statements of con-
solidated entities from their non-USD functional cur-
rencies to USD
• The impact of exchange rate movements on the major
transactions of consolidated entities performed in cur-
rencies other than their functional currency
We calculate constant currency measures by translating
the current year’s foreign currency values for sales and
other income statement items into USD, using the aver-
age exchange rates from the prior year and comparing
them to the prior-year values in USD.
We use these constant currency measures in evalu-
ating the Group’s performance, since they may assist us
in evaluating our ongoing performance from year to year.
However, in performing our evaluation, we also consider
equivalent measures of performance that are not affected
by changes in the relative value of currencies.
Growth rate calculation
For ease of understanding, Novartis uses a sign conven-
tion for its growth rates such that a reduction in operat-
ing expenses or losses compared to the prior year is
shown as a positive growth.
98
Item 5. Operating and Financial Review and Prospects
Free cash flow
Free cash flow is not intended to be a substitute mea-
sure for net cash flows from operating activities as deter-
mined under IFRS. Free cash flow is presented as addi-
tional information because management believes it is a
useful supplemental indicator of the Group’s ability to
operate without reliance on additional borrowing or use
of existing cash. Free cash flow is a measure of the net
cash generated that is available for investment in strate-
gic opportunities, returning to shareholders and for debt
repayment. Free cash flow is a non-IFRS measure, which
means it should not be interpreted as a measure deter-
mined 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 a non-IFRS measure, which means it should
not be interpreted as a measure determined under IFRS.
Net debt is presented as additional information because
management believes it is a useful supplemental indica-
tor of the Group’s ability to pay dividends, to meet finan-
cial commitments, and to invest in new strategic oppor-
tunities, including strengthening its balance sheet.
Novartis calculates net debt as current financial
debts and derivative financial instruments plus non-cur-
rent financial debt less cash and cash equivalents and
marketable securities, commodities, time deposits 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 old Long-
Term Performance Plan (LTPP) introduced in 2014. The
LTTP performance measures were changed effective
January 1, 2019, and from the 2019 cycle onward no lon-
ger include NCVA as a performance measure. More infor-
mation on NCVA is presented as part of the Compensa-
tion Report; see “Item 6. Directors, Senior Management
and Employees—Item 6.B Compensation.”
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), depreciation
of right-of-use assets and amortization of intangible
assets (including any related impairment charges). With
the adoption of IFRS 16 Leases on January 1, 2019, lease
expenses are classified as depreciation on right-of-use
assets. For comparative information on prior periods see
footnote 1 to the table.
(USD millions)
2019
2018
2017
Operating income from
continuing operations
Depreciation of property,
plant and equipment
Depreciation of the
right-of-use-assets 1
Amortization of intangible
assets
Impairments of property,
plant and equipment, and
intangible assets
EBITDA from continuing
operations 1
Operating income from
discontinued operations
Depreciation of property,
plant and equipment
Depreciation of the
right-of-use-assets
Amortization of intangible
assets
Impairments of property,
plant and equipment, and
intangible assets
9 086
8 403
8 702
1 345
1 482
1 303
305
2 836
2 587
2 624
1 340
1 142
809
14 912
13 614
13 438
71
– 234
– 73
42
235
217
9
174
1 052
1 066
394
57
EBITDA from discontinued
operations
296
1 447
1 267
EBITDA Total Group 1
15 208
15 061
14 705
1 In 2019, EBITDA is positively impacted through the adoption of IFRS 16 Leases on
January 1, 2019, as lease expenses are classified as depreciation on right-of-use
assets (USD 314 million, thereof USD 305 million continuing operations) and interest
expense (USD 66 million). In the prior years, the lease expense was recognized as a
functional expense within operating income (lease expense for total group was in
2018 USD 383 million, thereof USD 331 million from continuing operations and in 2017
USD 337 million thereof USD 292 million from continuing operations).
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, 2019 1 Dec 31, 2018 Dec 31, 2017
Market capitalization
214 815
196 950
195 541
Non-controlling interests
77
78
59
Non current financial debts
20 353
22 470
23 224
Current financial debts and
derivatives financial instruments
Marketable securities,
commodities, time deposits
and derivative financial
instruments
7 031
9 678
5 308
– 334
– 2 693
– 625
Cash and cash equivalents
– 11 112
– 13 271
– 8 860
Enterprise value
230 830
213 212
214 647
1 Decrmber 31, 2019 excludes the business of Alcon, which was spun off in April 2019
into a separately traded standalone company. For details see “Item 18. Financial
Statements—Note 2. Significant transactions”.
99
Item 5. Operating and Financial Review and Prospects
2019 and 2018 reconciliation from IFRS results to core results
(USD millions unless indicated otherwise)
2019
2018
2019
2018
2019
2018
2019
2018
IFRS operating income from continuing operations
9 287
7 871
551
1 332
– 752
– 800
9 086
8 403
Amortization of intangible assets
2 447
2 158
314
363
2 761
2 521
Innovative Medicines
Sandoz
Corporate
Group
Impairments
Intangible assets
Property, plant and equipment related to the Group-wide
rationalization of manufacturing sites
Other property, plant and equipment
Total impairment charges
Acquisition or divestment of businesses and related items
- Income
- Expense
Total acquisition or divestment of
businesses and related items, net
Other items
Divestment gains
632
592
503
249
1 135
841
83
10
170
65
69
33
63
725
827
605
312
152
43
233
65
1 330
1 139
– 8
87
126
79
126
– 108
– 21
– 116
115
29
202
– 21
155
7
8
86
134
– 1 091
– 482
– 78
2
– 56 – 1 089
– 616
Financial assets – fair value adjustments
– 18
– 107
– 20
113
– 38
6
Restructuring and related items
- Income
- Expense
Legal-related items
- Income
- Expense
Additional income
Additional expense
Total other items
Total adjustments
– 58
509
– 25
665
– 7
390
– 12
179
– 6
– 2
– 71
113
106
1 012
999
– 1
36
– 32
156
– 63
90
– 32
1 155
– 39
950
– 64
126
– 316
– 73
– 4
– 171
– 95
– 19
– 415
– 263
87
112
156
169
121
624
50
– 5
3 363
3 280
1 543
670
119
113
120
54
196
327
849
260
360
204
5 026
4 154
Core operating income from continuing operations
12 650 11 151
2 094
2 002
– 632
– 596 14 112 12 557
as % of net sales
33.5% 32.0% 21.5% 20.3%
29.7% 28.1%
Income from associated companies
1
1
2
5
656
6 432
659
6 438
Core adjustments to income from associated companies, net of tax
427 – 5 325
427 – 5 325
Interest expense
Other financial income and expense
Core adjustments to other financial income and expense
Taxes, adjusted for above items (core taxes)
Core net income from continuing operations
Core net income from discontinued operations 1
Core net income
Core net income attributable to shareholders of Novartis AG
Core basic EPS from continuing operations (USD) 2
Core basic EPS from discontinued operations (USD) 2
Core basic EPS (USD) 2
1 For details on discontinued operations reconciliation from IFRS to core net income, please refer to page 109.
2 Earnings per share (EPS) is calculated on the amount of net income attributable to shareholders of Novartis AG.
– 850
– 932
186
45
11
– 2 300 – 2 004
12 104 10 920
278
1 018
12 382 11 938
12 377 11 935
5.28
0.12
5.40
4.71
0.44
5.15
100
Item 5. Operating and Financial Review and Prospects
2018 and 2017 reconciliation from IFRS results to core results
(USD millions unless indicated otherwise)
2018
2017
2018
2017
2018
2017
2018
2017
IFRS operating income from continuing operations
7 871
7 595
1 332
1 368
– 800
– 261
8 403
8 702
Amortization of intangible assets
2 158
2 119
363
454
2 521
2 573
Innovative Medicines
Sandoz
Corporate
Group
Impairments
Intangible assets
Property, plant and equipment
related to the Group-wide
rationalization of manufacturing sites
Other property, plant and equipment
Financial assets 1
Total impairment charges
Acquisition or divestment of
businesses and related items
- Income
- Expense
Total acquisition or divestment of
businesses and related items, net
Other items
Divestment gains
592
591
249
61
841
652
170
65
7
77
63
60
13
233
65
67
90
197
197
827
675
312
134
197
1 139
1 006
126
– 2
32
– 21
– 115
– 21
– 117
29
130
155
162
126
30
8
15
134
45
– 482
– 368
– 78
– 56
113
– 616
– 368
6
Financial assets – fair value adjustments 1
– 107
Restructuring and related items
- Income
- Expense
Legal-related items
- Income
- Expense
Additional income
Additional expense
Total other items
Total adjustments
– 25
665
– 53
268
– 12
179
– 7
– 2
134
106
– 1
– 9
– 39
950
– 1
36
– 21
– 63
35
90
– 64
126
– 61
393
– 21
35
– 73
– 534
– 171
– 3
– 19
– 372
– 263
– 909
156
273
169
– 400
50
– 5
3 280
2 424
670
54
46
260
319
124
712
196
– 336
360
– 612
204
– 124
4 154
3 012
Core operating income from continuing operations
11 151 10 019
2 002
2 080
– 596
– 385 12 557 11 714
as % of net sales
Income from associated companies
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 from continuing operations
Core net income from discontinued operations 2
Core net income
Core net income attributable to shareholders of Novartis AG
Core basic EPS from continuing operations (USD) 3
Core basic EPS from discontinued operations (USD) 3
Core basic EPS (USD) 3
32.0% 31.0% 20.3% 20.7%
28.1% 27.7%
1
– 1
5
23
6 432
1 086
6 438
1 108
1
– 5 325
226 – 5 325
227
– 932
– 750
186
42
– 2 004 – 1 867
10 920 10 474
1 018
917
11 938 11 391
11 935 11 391
4.71
0.44
5.15
4.46
0.40
4.86
1 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.
2 For details on discontinued operations reconciliation from IFRS to core net income, please refer to page 110.
3 Earnings per share (EPS) is calculated on the amount of net income attributable to shareholders of Novartis AG.
101
Item 5. Operating and Financial Review and Prospects
2019, 2018 and 2017 reconciliation from IFRS results to core results – Group
2019 (USD millions unless indicated otherwise)
Gross profit from continuing operations
Operating income from continuing operations
Income before taxes from continuing operations
Taxes from continuing operations 5
Net income from continuing operations
Net income from discontinued operations 6
Net income
Basic EPS from continuing operations (USD) 7
Basic EPS from discontined operations (USD) 7
Basic EPS (USD) 7
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
related items 3
Impairments 2
Other
items 4 Core results
34 252
9 086
8 940
– 1 793
7 147
4 590
11 737
3.12
2.00
5.12
1 179
2 711
2 761
3 188
85
1 330
1 330
48
86
86
296
849
860
37 392
14 112
14 404
– 2 300
12 104
278
12 382
5.28
0.12
5.40
– 66
1 113
– 14 425
2 711
85
48
362
– 11 219
The following are adjustments to arrive at core operating income
Selling, general and administration
Research and development
Other income
Other expense
– 14 369
– 9 402
2 031
– 3 426
50
1 078
10
10
40
– 14 319
– 122
– 8 386
– 2
169
– 116
– 1 418
495
134
2 053
– 1 070
The following are adjustments to arrive at core income before taxes
Income from associated companies
Other financial income and expense
659
45
427
1 086
56
11
1 Amortization of intangible assets: cost of goods sold includes the amortization of acquired rights to in-market products and other production-related intangible assets; research
and development includes the amortization of acquired rights for technologies; income from associated companies includes USD 427 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 also includes the reversal of
an impairment charge; cost of goods sold, other income and other expense include net 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, other income and other expense include net charges related to acquisitions; other income and other expense also include transitional service fee income and
expenses related to the portfolio transformation and the Alcon spin-off
4 Other items: other revenues includes income from an outlicensing agreement, and income related to an amendment of 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; 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; cost of goods sold, and research and
development also include fair value adjustments of contingent consideration liabilties; cost of goods sold also includes inventory write-offs and other provisions; selling, general
and administration includes receivable expected credit loss provisions and other provisions; other income and other expense include fair value adjustments and divestment gains
and losses on financial assets and legal-related items as well as environmental provisions; other income also includes net gains from the divestment of products and property, plant
and equipment, and provision releases; other expense includes a provision for onerous contracts and other provisions; other financial income and expense includes a revaluation
impact of a financial liability incurred through the Alcon distribution
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 507 million. The
average tax rate on the adjustments is 9.3%.
6 For details on discontinued operations reconciliation from IFRS to core net income please refer to page 109.
7 Earnings per share (EPS) is calculated on the amount of net income, attributable to shareholders of Novartis AG.
102
Item 5. Operating and Financial Review and Prospects
2018 (USD millions unless indicated otherwise)
Gross profit from continuing operations
Operating income from continuing operations
Income before taxes from continuing operations
Taxes from continuing operations 5
Net income from continuing operations
Net income from discontinued operations 6
Net income
Basic EPS from continuing operations (USD) 7
Basic EPS from discontined operations (USD) 7
Basic EPS (USD) 7
Amortization
of intangible
assets 1
IFRS results
Acquisition or
divestment of
businesses and
related items 3
Impairments 2
Other
items 4 Core results
31 589
8 403
14 095
– 1 295
12 800
– 186
12 614
5.52
– 0.08
5.44
2 342
2 521
2 965
488
1 139
5
134
1 139
– 5 656
462
360
381
34 886
12 557
12 924
– 2 004
10 920
1 018
11 938
4.71
0.44
5.15
The following are adjustments to arrive at core gross profit
Cost of goods sold
– 14 510
2 342
488
5
462
– 11 213
The following are adjustments to arrive at core operating income
Selling, general and administration
Research and development
Other income
Other expense
– 13 717
– 8 489
1 629
– 2 609
179
167
28
23
– 1
– 13 690
– 34
– 8 154
– 21
– 1 050
558
484
99
983
– 1 043
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 the 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, 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, 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 and a charge for onerous contracts; 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 1.2 billion to arrive at the core results before tax amounts to USD 709 million. 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 4.6 billion to arrive at the core results before tax amounts to USD 770
billion. The average tax rate on the adjustments excluding this transaction is 16.7%.
6 For details on discontinued operations reconciliation from IFRS to core net income please refer to page 110.
7 Earnings per share (EPS) is calculated on the amount of net income, attributable to shareholders of Novartis AG.
103
Item 5. Operating and Financial Review and Prospects
Amortization
of intangible
assets 1
IFRS results
Acquisition or
divestment of
businesses and
related items 3
Impairments 2
2 386
2 573
2 949
92
1 006
1 007
29 771
8 702
9 102
– 1 603
7 499
204
7 703
3.20
0.08
3.28
Other
items 4 Core results
125
32 374
45
45
– 612
11 714
– 762
12 341
– 1 867
10 474
917
11 391
4.46
0.40
4.86
2017 (USD millions unless indicated otherwise)
Gross profit
Operating income
Income before taxes
Taxes 5
Net income from continuing operations
Net income from discontinued operations 6
Net income
Basic EPS from continuing operations (USD) 7
Basic EPS from discontined operations (USD) 7
Basic EPS (USD) 7
The following are adjustments to arrive at core gross profit
Cost of goods sold
– 13 633
2 386
92
125
– 11 030
The following are adjustments to arrive at core operating income
Selling, general and administration
Research and development
Other income
Other expense
– 12 465
– 8 389
1 922
– 2 137
187
594
– 9
329
– 3
– 12 468
– 200
– 7 808
– 117
– 1 048
748
162
514
– 1 132
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 the 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, other income and other
expense include reversals and charges related to the impairment of property, plant and equipment; other expense also includes impairment charges related to 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
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, 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 3.2 billion to arrive at the core results before tax amounts to USD 264 million. The average tax rate on the
adjustments is 8.2%.
6 For details on discontinued operations reconciliation from IFRS to core net income please refer to page 110.
7 Earnings per share (EPS) is calculated on the amount of net income, attributable to shareholders of Novartis AG.
104
Item 5. Operating and Financial Review and Prospects
2019, 2018 and 2017 reconciliation from IFRS results to core results – Innovative Medicines
2019
(USD millions)
Gross profit
Operating income
The following are adjustments to arrive at core gross profit
Other revenues
Cost of goods sold
Amortization
of intangible
assets 1
IFRS results
29 539
9 287
2 397
2 447
1 092
– 10 050
2 397
Acquisition or
divestment of
businesses and
related items 3
Impairments 2
725
The following are adjustments to arrive at core operating income
Selling, general and administration
Research and development
Other income
Other expense
– 11 617
– 8 152
1 586
– 2 069
50
632
– 1
94
Other
items 4 Core results
116
112
32 100
12 650
– 66
182
1 026
– 7 423
25
– 11 582
– 125
– 7 585
– 1 230
1 326
347
– 630
48
79
48
10
10
– 8
19
1 Amortization of intangible assets: cost of goods sold includes the amortization of acquired rights to in-market products and other production-related intangible assets; research
and development includes the amortization of acquired rights for technologies
2 Impairments: research and development includes impairment charges and a reversal of impairment charges related to intangible assets; other income and other expense include
net 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, other income and other expense include net charges related to acquisitions; other income and other expense also include transitional service-fee income and
expenses related to the portfolio transformation and the Alcon spin-off
4 Other items: other revenues includes a net income from an outlicensing agreement and an income related to an amendment of a collaboration agreement; cost of goods sold, other
income and other expense include restructuring and other charges related to the Group-wide rationalization of manufacturing sites; 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; selling, general and administration includes other provisions; other income and other expense include fair value adjustments and
divestment gains and losses on financial assets; other income also includes net gains from the divestment of products and property, plant and equipment, and provision releases;
other expense includes legal-related items
2018
(USD millions)
Gross profit
Operating income
Amortization
of intangible
assets 1
IFRS results
Acquisition or
divestment of
businesses and
related items 3
Impairments 2
26 951
7 871
1 979
2 158
423
827
5
126
Other
items 4 Core results
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 the 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
105
Item 5. Operating and Financial Review and Prospects
Amortization
of intangible
assets 1
IFRS
results
Acquisition or
divestment of
businesses and
related items 3
Impairments 2
25 194
7 595
1 932
2 119
31
675
Other
items 4 Core results
56
27 213
30
– 400
10 019
2017
(USD millions)
Gross profit
Operating income
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 Amortization of intangible assets: cost of goods sold includes the 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
2 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
3 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
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;
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
2019, 2018 and 2017 reconciliation from IFRS to core results – Sandoz
2019
(USD millions)
Gross profit
Operating income
Amortization
of intangible
assets 1
IFRS results
Acquisition or
divestment of
businesses and
related items
Impairments 2
4 601
551
314
314
85
605
Other
items 3 Core results
180
624
5 180
2 094
The following are adjustments to arrive at core gross profit
Cost of goods sold
– 5 334
314
85
180
– 4 755
The following are adjustments to arrive at core operating income
Selling, general and administration
Research and development
Other income
Other expense
– 2 218
– 1 250
167
– 749
446
– 1
75
15
3
– 39
465
– 2 203
– 801
127
– 209
1 Amortization of intangible assets: cost of goods sold includes the 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; cost of goods sold, other income and other expense
include net impairment charges related to property, plant and equipment
3 Other items: cost of goods sold 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, other income and other expense include restructuring income and charges and related items; cost of goods sold also includes inventory
write-offs and other provisions; selling, general and administration includes receivable expected credit loss provisions and other provisions; other income and other expense also
include legal-related items; other expense also includes an environmental provision, a provision for onerous contracts and other provisions
106
Item 5. Operating and Financial Review and Prospects
2018
(USD millions)
Gross profit
Operating income
Amortization
of intangible
assets 1
IFRS results
Acquisition or
divestment of
businesses and
related items
Impairments 2
4 568
1 332
363
363
65
312
Other
items 3 Core results
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 the 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
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 Core results
69
124
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 the 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
2019, 2018 and 2017 reconciliation from IFRS results to core results – Corporate
2019
(USD millions)
Gross profit
Operating loss
The following are adjustments to arrive at core operating income
Other income
Other expense
Amortization
of intangible
assets
IFRS results
Acquisition or
divestment of
businesses and
related items 1
Impairments
Other
items 2 Core results
112
– 752
278
– 608
7
113
112
– 632
– 108
– 149
21
115
262
– 231
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 related to the portfolio transformation and the Alcon spin-off
2 Other items: other income and other expense include fair value adjustments and divestment gains and losses on financial assets, restructuring income and charges and related
items, as well as environmental provisions
107
Item 5. Operating and Financial Review and Prospects
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
– 800
147
– 512
Other
items 2 Core results
70
8
196
– 596
– 21
29
– 84
280
42
– 203
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
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 Core results
162
– 261
691
– 662
197
15
– 336
– 115
– 373
197
130
37
162
– 385
203
– 298
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
108
Item 5. Operating and Financial Review and Prospects
2019, 2018 and 2017 reconciliation of IFRS results to core results – discontinued operations
2019
(USD millions)
Gross profit
Operating income of discontinued operations
Income before taxes of discontinued operations
Taxes 4
Net loss/income from discontinued operations
before gain on distribution of Alcon Inc.
to Novartis AG shareholders
Gain on distribution of Alcon Inc.
to Novartis AG shareholders
Net income from discontinued operations
Basic EPS (USD) 5
Amortization
of intangible
assets 1
IFRS results
Acquisition or
divestment of
businesses and
related items 2
Impairments
165
167
949
71
58
– 159
– 101
4 691
4 590
2.00
– 4 691
Other
items 3 Core results
9
1 123
112
350
337
– 59
278
278
0.12
The following are adjustments to arrive at core gross profit
Cost of goods sold
– 860
165
9
– 686
The following are adjustments to arrive at core operating income
Selling, general and administration
Research and development
Other income
Other expense
– 638
– 142
15
– 113
2
14
4
– 3
88
– 624
– 136
12
– 25
1 Amortization of intangible assets: cost of goods sold includes the amortization of acquired rights to in-market products and other production-related intangible assets; research
and development includes the amortization of acquired rights for technologies
2 Acquisition or divestment of businesses and related items represents the non-taxable, non-cash gain adjustment related to the distribution of Alcon Inc. (spin-off) to Novartis AG
shareholders
3 Other items: cost of goods sold, selling, general and administration, research and development and other expense include other restructuring charges and related items; research
and development also includes amortization of option rights and the fair value adjustment of a contingent consideration liability; other income includes fair value adjustments on a
financial asset; other expense also includes legal-related items
4 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. Due to these factors and the differing effective tax rates in the various jurisdictions, the tax on the total adjustments, excluding the non-taxable, non-cash
gain on the distribution (spin-off) of Alcon Inc. to Novartis AG shareholders of USD 279 million to arrive at the core results before tax amounts to USD 100 million. The 2019 core tax
rate, excluding the effect of the gain on the distribution of Alcon Inc. to Novartis AG shareholders, is 17.5%.
5 Earnings per share (EPS) is calculated on the amount of net income attributable to shareholders of Novartis AG.
109
Item 5. Operating and Financial Review and Prospects
2018
(USD millions)
Gross profit
Operating loss/income of discontinued operations
Loss/income before taxes of discontinued operations
Taxes 4
Net loss/income from discontinued operations
Basic EPS (USD) 5
The following are adjustments to arrive at core gross profit
Amortization
of intangible
assets 1
IFRS results
Acquisition or
divestment of
businesses and
related items
Impairments 2
Other
items 3 Core results
3 170
– 234
– 260
74
– 186
– 0.08
996
1 007
389
391
– 23
102
4 532
1 266
1 240
– 222
1 018
0.44
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
61
– 126
13
47
– 23
88
– 2 739
– 527
38
– 38
1 Amortization of intangible assets: cost of goods sold includes the 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 include 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 the fair value adjustment of a contingent consideration liability; other income
includes fair value adjustments on a financial asset; other expense includes legal-related items
4 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. Due to these factors and the differing effective tax rates in the various jurisdictions, the tax on the total adjustments of USD 1.5 billion to arrive at the core
results before tax amounts to USD 296 million. The 2018 core tax rate is 17.9%.
5 Earnings per share (EPS) is calculated on the amount of net income attributable to shareholders of Novartis AG.
2017
(USD millions)
Gross profit
Operating loss/income of discontinued operations
Loss/income before taxes of discontinued operations
Taxes 4
Net income from discontinued operations
Basic EPS (USD) 5
Amortization
of intangible
assets 1
IFRS
results
Acquisition or
divestment of
businesses and
related items
Impairments 2
Other
items 3 Core results
1 015
1 025
86
98
3 189
– 73
– 103
307
204
0.08
4 204
1 136
1 106
– 189
917
0.40
– 2 573
The following are adjustments to arrive at core gross profit
Cost of goods sold
– 3 588
1 015
The following are adjustments to arrive at core operating income
Research and development
Other income
Other expense
10
86
– 583
47
– 194
– 18
– 17
133
– 505
30
– 61
1 Amortization of intangible assets: cost of goods sold includes the 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
2 Impairments: research and development includes impairment charges related to intangible and financial assets
3 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
4 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. Due to these factors and the differing effective tax rates in the various jurisdictions, the tax on the total adjustments of USD 1.2 billion to arrive at the core
results before tax amounts to USD 496 million. The 2017 core tax rate is 17.1%.
5 Earnings per share (EPS) is calculated on the amount of net income attributable to shareholders of Novartis AG.
110
Item 5. Operating and Financial Review and Prospects
5.B Liquidity and capital resources
The following tables summarize the Group’s cash flows and net debt.
(USD millions)
Net cash flows from operating activities of continuing operations
Net cash flows from operating activities of discontinued operations
Net cash flows used in investing activities of continuing operations
Net cash flows used in investing activities from discontinued operations
Net cash flows used in financing activities of continuing operations
Net cash flows from/used in financing activities of discontinued operations
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
2019
2018
2017
13 547
13 049
11 419
78
1 223
1 202
– 1 067
– 4 590
– 2 344
– 1 159
– 1 001
– 775
– 16 884
– 4 077
– 7 318
3 257
69
– 2 159
– 2 359
– 167
– 26
4 411
2 068
– 415
84
1 853
– 145
Change in current and non-current financial debts and derivative financial instruments
4 764
– 3 616
– 4 730
Change in net debt
Net debt at January 1
Net debt at December 31
Cash flow
246
2 863
– 3 022
– 16 184
– 19 047
– 16 025
– 15 938
– 16 184
– 19 047
Financial year 2019 compared to 2018
Net cash flows from operating activities from continuing
operations amounted to USD 13.5 billion, compared to
USD 13.0 billion in 2018. This increase was driven by
higher net income adjusted for non-cash items and other
adjustments, including divestment gains. It was partly
offset by lower dividends received from associated com-
panies due to the divestment of the GSK consumer
healthcare joint venture in the second quarter of 2018,
higher taxes paid, provision payments and working cap-
ital, which included the receipt of a GSK sales milestone
from the divested Vaccines business of USD 0.4 billion
in the prior year.
Net cash flows from operating activities from discon-
tinued operations were USD 78 million, compared to
USD 1.2 billion in 2018. This reduction was due to the
completion of the Alcon spin-off on April 9, 2019.
Net cash flows used in investing activities from con-
tinuing operations amounted to USD 1.1 billion, compared
to USD 4.6 billion in 2018. The current year mainly
includes cash outflows of USD 1.4 billion for the purchase
of property, plant and equipment; USD 0.9 billion for the
purchase of intangible assets; USD 0.4 billion for the pur-
chase of financial assets and other non-current assets;
and USD 3.8 billion for the acquisitions and divestments
of businesses, net, including the acquisition of IFM Tre,
Inc. (USD 0.3 billion) and the acquisition of Xiidra from
Takeda Pharmaceutical Company Limited (USD 3.5 bil-
lion). These were partly offset by net proceeds of USD 2.3
billion from the sale of marketable securities and com-
modities; cash inflows of USD 0.9 billion from the sale of
property, plant and equipment (including the proceeds
from the sale and leaseback of real estate); cash inflows
of USD 1.2 billion from the sale of financial assets (includ-
ing USD 976 million in proceeds from the sale of Alcon
Inc. shares); and cash inflows of USD 1.0 billion from the
sale of intangible assets.
In 2018, net cash flows used in investing activities
from continuing operations were mainly related to the
cash inflows of USD 13.0 billion from the divestment of
our 36.5% stake in the GSK consumer healthcare joint
venture, and of USD 1.1 billion in proceeds from the sale
of property, plant and equipment; intangible assets; and
financial assets. This was offset by cash outflows of
USD 13.7 billion for the acquisitions of businesses, mainly
Advanced Accelerator Applications S.A. (USD 3.5 billion,
net), AveXis, Inc. (USD 8.3 billion, net) and Endocyte, Inc.
(USD 1.8 billion, net); USD 1.3 billion for the purchase of
property, plant and equipment; and USD 1.4 billion for
the purchase of intangible assets. Net purchases of mar-
ketable securities and commodities amounted to USD 2.0
billion.
Net cash flows used in investing activities from dis-
continued operations amounted to USD 1.2 billion, com-
pared to USD 1.0 billion in 2018. The current year mainly
includes the cash outflow of USD 0.3 billion for the acqui-
sition of PowerVision, Inc., and USD 0.6 billion due to the
derecognized cash and cash equivalents following the
completion of the Alcon spin-off on April 9, 2019.
Net cash flows used in financing activities from con-
tinuing operations amounted to USD 16.9 billion, com-
pared to USD 4.1 billion in 2018. The current year mainly
includes the cash outflows of USD 6.6 billion for the div-
idend payment and of USD 5.3 billion for net treasury
share transactions (mainly related to the up-to USD 5
billion share buyback), and net cash outflows of USD 3.1
billion for non-current financial debts (mainly driven by
the repayment at maturity of a US dollar bond of USD 3.0
billion). The net repayments of current financial debts
amounted to USD 1.6 billion. Payments for lease liabili-
ties, net, and other financing cash flows resulted in a net
cash outflow of USD 0.2 billion.
In 2018, net cash flows used in financing activities
from continuing operations mainly included the cash out-
111
Item 5. Operating and Financial Review and Prospects
flows of USD 7.0 billion for the dividend payment and of
USD 1.3 billion for net treasury share transactions, partly
offset by a net increase of USD 4.2 billion in current and
non-current financial debts.
Net cash inflows from financing activities from dis-
continued operations amounted to USD 3.3 billion, com-
pared to a cash outflow of USD 0.2 billion in 2018. The
current-year mainly includes the cash inflows of USD 3.5
billion from Alcon borrowings, partly offset by USD 0.2
billion in payments for transaction costs.
Financial year 2018 compared to 2017
Net cash flows from operating activities from continuing
operations amounted to USD 13.0 billion, compared to
USD 11.4 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
included the receipt of a GSK sales milestone from the
divested Vaccines business.
Net cash flows from operating activities from discon-
tinued operations amounted to USD 1.2 billion, which was
in line with 2017.
Net cash flows used in investing activities from con-
tinuing operations amounted to USD 4.6 billion, com-
pared to USD 2.3 billion in 2017. The 2018 amount
includes cash inflows of USD 13.0 billion from the divest-
ment of our 36.5% stake in the GSK consumer health-
care joint venture, and of USD 1.1 billion in proceeds from
the sale of property, plant and equipment; intangible
assets; and financial assets. This was offset by cash out-
flows of USD 13.7 billion for the acquisitions of busi-
nesses, mainly Advanced Accelerator Applications S.A.
(USD 3.5 billion, net; USD 3.9 billion, net of cash acquired
USD 0.4 billion), AveXis, Inc. (USD 8.3 billion, net; USD 8.7
billion, net of cash acquired USD 0.4 billion) and Endo-
cyte, Inc. (USD 1.8 billion, net; USD 2.1 billion, net of cash
acquired USD 0.3 billion); USD 1.3 billion for the purchase
of property, plant and equipment; and USD 1.4 billion for
the purchase of intangible assets. Net purchases of mar-
ketable securities and commodities amounted to USD 2.0
billion.
In 2017, net cash flows used in investing activities from
continuing operations mainly related to cash outflows of
USD 1.3 billion for the purchase of property, plant and
equipment; USD 1.0 billion for the purchase of intangible
assets; USD 0.4 billion for the purchase of financial
assets and other non-current assets; and USD 0.7 billion
for the acquisitions and divestments of businesses, net,
including the acquisitions of Ziarco Group Limited and
Encore Vision, Inc. This was partly offset by cash inflows
of USD 1.1 billion from the sale of property, plant and
equipment; intangible assets; and financial assets.
Net cash flows used in investing activities from dis-
continued operations amounted to USD 1.0 billion, com-
pared to USD 0.8 billion in 2017. The 2018 amount
includes cash outflows of USD 0.2 billion for the acqui-
sitions of businesses, net.
Net cash flows used in financing activities from con-
tinuing operations amounted to USD 4.1 billion, compared
to USD 7.3 billion in 2017. The 2018 amount mainly
includes the cash outflows of USD 7.0 billion for the div-
idend payment and of USD 1.3 billion for net treasury
share transactions, partly offset by a net increase of
USD 4.2 billion in current and non-current financial debts.
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 of USD 1.7 billion in current
financial debts. It was partly offset by repayments of
non-current financial debts of USD 0.4 billion.
In 2017, net cash flows used in financing activities
from continuing operations included cash outflows of
USD 6.5 billion for the dividend payment and of USD 5.2
billion for net treasury share transactions. The net cash
inflows from current and non-current financial debts of
USD 4.1 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, partly offset by the repayment of current
and non-current financial debts of USD 0.8 billion. Other
financing cash inflows amounted to USD 0.3 billion.
Net cash flows used in financing activities from dis-
continued operations amounted to USD 0.2 billion, com-
pared to USD 0.4 billion in 2017. The 2018 amount
includes USD 0.1 billion in payments for transaction
costs. The 2017 amount included a cash outflow of
USD 0.1 billion due to a net decrease in current financial
debts.
Group liquidity, financial debts and net debt
Novartis calculates net debt as current financial debts
and derivative financial instruments plus non-current
financial debt less cash and cash equivalents and mar-
ketable securities, commodities, time deposits and deriv-
ative financial instruments. Net debt constitutes a non-
IFRS financial measure, which means that it should not
be interpreted as a measure determined under Interna-
tional Financial Reporting Standards (IFRS). Net debt is
presented as additional information, as it is a useful indi-
cator of the Group’s ability to meet financial commit-
ments and to invest in new strategic opportunities,
including strengthening its balance sheet.
112
Item 5. Operating and Financial Review and Prospects
Group liquidity, financial debts and net debt consists of:
(USD millions)
Non-current financial debts
Current financial debts
and derivative financial
instruments
Total financial debts
Less liquidity
Cash and cash equivalents
Marketable securities,
commodities, time deposits
and derivative financial
instruments
Total liquidity
Net debt at December 31
2019
2018
2017
– 20 353
– 22 470
– 23 224
– 7 031
– 9 678
– 5 308
– 27 384
– 32 148
– 28 532
11 112
13 271
8 860
334
2 693
625
11 446
15 964
9 485
– 15 938
– 16 184
– 19 047
Financial year 2019
Group net debt at December 31, 2019, decreased to
USD 15.9 billion, compared to USD 16.2 billion at Decem-
ber 31, 2018.
Total financial debt decreased by USD 4.8 billion to
USD 27.4 billion at December 31, 2019, from USD 32.1
billion at December 31, 2018. Non-current financial debts
decreased by USD 2.1 billion to USD 20.4 billion at
December 31, 2019, from USD 22.5 billion at December
2018, mainly driven by foreign exchange translation
adjustments and the reclassification of two US dollar
bonds totaling USD 2.0 billion, which are due in 2020, to
current financial debts.
Current financial debts and derivative financial instru-
ments decreased by USD 2.6 billion to USD 7.0 billion at
December 31, 2019, from USD 9.7 billion at December
31, 2018, mainly due to the repayment at maturity of a
US dollar bond of USD 3.0 billion, partially offset by the
reclassification of two US dollar bonds totaling USD 2.0
billion from non-current financial debts, which are due in
2020.
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 2.3 billion
under these three programs were outstanding as per
December 31, 2019 (2018: USD 4.0 billion).
Novartis further has a committed credit facility of
USD 6.0 billion, which was renewed in September 2019.
This credit facility is provided by a syndicate of banks
and is intended to be used as a backstop for the US com-
mercial paper programs. The renewed facility matures
in September 2024 and was undrawn as per December
31, 2019, and December 31, 2018.
In December 2019, Novartis entered into a short-term
credit facility of USD 7.0 billion, with a maturity date of
June 30, 2020 with a syndicate of banks. On January 7,
2020, Novartis borrowed USD 7.0 billion under the facil-
ity with interest based on the USD LIBOR.
As of year-end 2019, Moody’s Investors Service rated
the Company A1 for long-term maturities and P-1 for
short-term maturities and S&P Global Ratings rated the
company AA- for long-term maturities and A-1+ for short-
term maturities.
Financial year 2018
Group net debt at December 31, 2018, decreased to
USD 16.2 billion, compared to USD 19.0 billion at Decem-
ber 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 became 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
billion from non-current liabilities, which became 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).
As of year-end 2018, Moody’s Investors Service rated
the Company A1 for long-term maturities and P-1 for
short-term maturities and S&P Global Ratings rated the
company AA- for long-term maturities and A-1+ for short-
term maturities.
113
Item 5. Operating and Financial Review and Prospects
The maturity schedule of our current financial assets, current and non-current financial debts and net debt is as
follows:
2019
(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, time deposits and short-term
investments with original maturity more than 90 days
20
26
16
Due after
five years
57
110
3
Total
122
110
102
11 112
170
11 446
3
3
6
14
9 712
9 746
79
1 400
1 505
3
19
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
– 9 110
– 11 243
– 20 353
– 9 150
– 11 355
– 20 505
– 9 110
– 11 243
– 20 353
– 4 243
– 1 373
– 1 230
– 4 243
– 1 373
– 1 230
– 130
– 29
– 26
– 4 373
– 1 402
– 1 256
– 6 846
– 6 846
– 185
– 7 031
Net debt
5 373
103
– 1 237
– 9 104
– 11 073
– 15 938
(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
2018
Due later than Due later than Due later than
one year
one month three months
Due within but less than but less than but less than
five years
one month three months
one year
Due after
five years
Total
39
56
2 091
198
40
3 571
3 650
75
9 700
9 831
27
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
114
Item 5. Operating and Financial Review and Prospects
For a description of risks and restrictions on the ability
of subsidiaries to transfer funds to the company via cash
dividends, loan or advances please see “Item 5.B –
Effects of currency fluctuations” and “Item 18. Financial
Statements—Note 29. Financial instruments—Nature
and extent of risks arising from financial instruments.”
Information regarding the company’s material com-
mitments for capital expenditures as of the end of 2019
and 2018 and an indication of the general purpose of
such commitments and the anticipated sources of funds
needed to fulfill such commitments are provided in “Item
5.F Tabular disclosure of contractual obligations.”
The following table provides a breakdown of liquidity and financial debt by currency as of December 31:
Liquidity and financial debt by currency
USD
CHF
EUR
JPY
Other
Liquidity
in % 2019 1
Liquidity
in % 2018 1
Liquidity
in % 2017 1
Financial
debt in %
2019 2
Financial
debt in %
2018 2
Financial
debt in %
2017 2
72
14
7
1
6
100
83
7
6
4
100
77
5
8
1
9
53
12
29
3
3
60
10
25
3
2
63
11
20
4
2
100
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 continuing operations based on
IFRS values for 2019, 2018 and 2017, for currencies most important to the Group:
Currency
US dollar (USD)
Euro (EUR)
Swiss franc (CHF)
Japanese yen (JPY)
Chinese yuan (CNY)
Canadian dollar (CAD)
British pound (GBP)
Brazilian real (BRL)
Russian ruble (RUB)
Australian dollar (AUD)
Other currencies
2019
2018
2017
Net sales
%
Operating
expenses
% 1
Net sales
%
Operating
expenses
% 1
Net sales
%
Operating
expenses
% 1
37
28
2
6
5
3
2
2
2
1
12
36
26
16
3
4
2
2
1
1
1
8
35
29
2
6
4
3
2
2
2
1
14
31
27
20
3
3
2
2
1
1
1
9
36
28
2
6
4
3
2
2
2
2
13
37
24
17
5
3
1
2
1
1
1
8
1 Operating expenses include cost of goods sold; selling, general and administration; research and development; other income and other expense.
115
Item 5. Operating and Financial Review and Prospects
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.
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.
Certain countries have legal or economic restrictions
on the ability of subsidiaries to transfer funds to the
Group in the form of cash dividends, loans or advances,
but these restrictions do not have an impact on the abil-
ity of the Group to meet its cash obligations.
The most significant countries in this respect are
Argentina and Venezuela, where the governments have
implemented capital controls. The net outstanding inter-
company payable balance of Argentina and Venezuela
subsidiaries were not material for the Group at Decem-
ber 31, 2019, and at December 31, 2018.
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 Argentina
and Venezuela. Venezuela was hyperinflationary for all
years presented, and Argentina became hyperinflation-
ary effective July 1, 2018, requiring retroactive implemen-
tation of hyperinflation accounting as of January 1, 2018.
The impacts from applying IAS 29 are not significant.
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
2019, 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 15. Trade receivables,” “Item 18. Financial State-
ments—Note 28. Commitments and contingencies” and
“Item 18. Financial Statements—Note 29. 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))
Average for year
Year-end
2019
0.695
0.254
0.754
1.006
0.145
1.120
1.277
0.918
1.546
2018 Change in %
0.748
0.275
0.772
1.023
0.151
1.181
1.336
0.906
1.600
– 7
– 8
– 2
– 2
– 4
– 5
– 4
1
– 3
2019
0.701
0.249
0.767
1.032
0.144
1.121
1.313
0.920
1.613
2018 Change in %
0.707
0.258
0.735
1.014
0.145
1.144
1.274
0.907
1.437
– 1
– 3
4
2
– 1
– 2
3
1
12
116
Item 5. Operating and Financial Review and Prospects
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
The following table provides a summary of the currency
impact on key Group figures due to their conversion into
US dollars, the Group’s reporting currency, of the finan-
cial data from entities reporting in non-US dollars. Con-
stant currency (cc) calculations apply the exchange rates
of the prior year to the current-year financial data for
entities reporting in non-US dollars.
Currency impact on key figures
Total Group
Net sales to third parties from continuing operations
Operating income from continuing operations
Net income from continuing operations
Basic earnings per share from continuing operations (USD)
Core operating income from continuing operations
Core net income from continuing operations
Core basic earnings per share from continuing operations (USD)
Innovative Medicines
Net sales to third parties
Operating income
Core operating income
Sandoz
Net sales to third parties
Operating income
Core operating income
Corporate
Operating loss
Core operating loss
nm = not meaningful
Change in
USD %
2019
Change in
Percentage
constant point currency
impact
2019
currencies %
2019
Change in
Change in
Percentage
constant point currency
impact
2018
USD % currencies %
2018
2018
6
8
– 44
– 43
12
11
12
8
18
13
– 1
– 59
5
9
14
– 41
– 40
17
15
17
11
24
18
2
– 53
10
– 3
– 6
– 3
– 3
– 5
– 4
– 5
– 3
– 6
– 5
– 3
– 6
– 5
6
– 3
71
73
7
4
6
8
4
11
– 2
– 3
– 4
5
– 3
71
73
7
4
5
8
4
11
– 3
– 2
– 3
6
– 6
4
– 9
2
3
nm
– 55
nm
– 52
1
0
0
0
0
0
1
0
0
0
1
– 1
– 1
nm
– 3
For additional information on the effects of currency fluctuations, see “Item 18. Financial Statements—Note 29.
Financial instruments – additional disclosures.”
117
Item 5. Operating and Financial Review and Prospects
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 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. For further information about the free cash
flow measure, which is a non-IFRS measure, see “Item
5. Operating and Financial Review and Prospects—Item
5.A Operating results—Non-IFRS measures as defined
by Novartis—Free cash flow” above. The following is a
summary of the free cash flow:
(USD millions)
Operating income from continuing operations
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 from continuing operations
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 1
Purchase of other non-current assets
Proceeds from sales of other non-current assets
Free cash flow from continuing operations
Free cash flow from discontinued operations 2
Total free cash flow
2019
2018
9 086
8 403
2017
8 702
5 788
1 871
– 476
5 217
4 963
895
86
– 229
– 465
16 269
14 286
13 286
463
242
719
459
987
97
– 826
– 847
– 967
– 1 876
– 1 506
– 1 487
– 924
– 809
– 638
– 679
1 008
1 255
– 829
– 776
1 108
13 547
13 049
11 419
– 1 379
– 1 254
– 1 325
857
102
– 878
– 1 394
973
823
– 302
– 205
176
– 60
3
165
– 39
9
91
– 969
640
– 354
328
– 40
1
12 937
11 256
9 791
– 62
461
637
12 875
11 717
10 428
1 For the free cash flow, proceeds from the sales of financial assets exclude the cash inflows from the sale of a portion of the Alcon Inc. shares received by certain consolidated
foundations through the Alcon spin-off, which amounted to USD 976 million. See “Item 18. Financial Statements – Note 2 Significant transactions in 2019.”
2 In 2019, the free cash flow from discontinued operations was a cash outflow of USD 62 million (2018: USD 461 million cash inflow, 2017: USD 637 million cash inflow) consisting of
USD 78 million net cash inflows from operating activities from discontinued operations (2018 and 2017: USD 1.2 billion), USD 1.2 billion net cash flows used in investing activities
from discontinued operations (2018: USD 1.0 billion, 2017: USD 775 million) adjusted by USD 362 million of net cash outflows for acquisition and divestments of businesses (2018:
USD 239 million, 2017: USD 210 million) and by USD 657 million for cash outflows attributable to the spin-off of the Alcon business (2018 and 2017: nil).
Financial year 2019 compared to 2018
Free cash flow from continuing operations amounted to
USD 12.9 billion (+15%) compared to USD 11.3 billion in
2018. The increase was mainly driven by higher operat-
ing income adjusted for non-cash items, higher real
estate divestment proceeds and lower investments in
intangible assets, partly offset by higher taxes paid, pro-
vision payments and working capital, which in the prior
year included the receipt of a GSK sales milestone from
the divested Vaccines business of USD 0.4 billion, as well
as lower dividends received from associated companies,
as prior year included the GSK consumer healthcare joint
venture that was divested in the second quarter of 2018.
Financial year 2018 compared to 2017
Free cash flow from continuing operations in 2018
amounted to USD 11.3 billion (+15%), compared to USD 9.8
billion in 2017, as higher cash flows from operating activ-
ities, which includes the receipt of a GSK sales milestone
from the divested Vaccines business, were partly offset
by higher net investments in intangible assets.
118
Item 5. Operating and Financial Review and Prospects
Condensed consolidated balance sheets
(USD millions)
Assets
Property, plant and equipment
Right-of-use assets
Goodwill
Intangible assets other than goodwill
Financial and other non-current assets
Total non-current assets
Inventories
Trade receivables
Other current assets and income tax receivable
Cash, marketable securities, commodities, time deposits
and derivative financial instruments
Assets of disposal group held for sale
Total current assets
Total assets
Equity and liabilities
Total equity
Financial debts
Lease liabilities
Deferred tax liabilities
Provisions and other non-current liabilities
Total non-current liabilities
Trade payables
Financial debts and derivative financial instruments
Lease liabilities
Provisions and other current liabilities and
current income tax liabities
Liabilities of disposal group held for sale
Total current liabilities
Total liabilities
Total equity and liabilities
Dec 31, 2019 Dec 31, 2018
Change
12 069
15 696
– 3 627
1 677
1 677
26 524
35 294
– 8 770
28 787
38 719
– 9 932
19 809
20 291
– 482
88 866
110 000
– 21 134
5 982
8 301
2 934
6 956
8 727
3 109
– 974
– 426
– 175
11 446
15 964
– 4 518
841
807
34
29 504
35 563
– 6 059
118 370
145 563
– 27 193
55 551
78 692
– 23 141
20 353
22 470
– 2 117
1 703
5 867
6 632
1 703
7 475
– 1 608
7 319
– 687
34 555
37 264
– 2 709
5 424
7 031
246
5 556
– 132
9 678
– 2 647
246
15 532
14 322
1 210
31
51
– 20
28 264
29 607
– 1 343
62 819
66 871
– 4 052
118 370
145 563
– 27 193
There has been a significant change in the consolidated
balance sheet resulting from the spin-off of the Alcon
business through the dividend in kind distribution to
Novartis AG shareholders completed on April 9, 2019.
For further details see “Item 18. Financial Statements—
Note 1. Significant accounting policies—Distribution of
Alcon Inc. to Novartis AG shareholders” and “Item 18.
Financial Statements—Note 2. Significant transactions—
Completion of the spin-off of the Alcon business through
a dividend in kind distribution to Novartis AG sharehold-
ers.”
The December 31, 2018, consolidated balance sheet
includes the assets and liabilities of the Alcon business.
The December 31, 2019, consolidated balance sheet
excludes the assets and liabilities of the Alcon business,
due to the derecognition of the Alcon business at the
date of the spin-off. The consolidated balance sheet dis-
cussion and analysis that follows excludes the impacts
of the derecognition of the Alcon business at the date of
the spin-off. For details on the net assets derecognized
at April 9, 2019, the completion date of the spin-off, see
“Item 18. Financial Statements—Note 30. Discontinued
operations—Net assets derecognized.”
Total non-current assets of USD 88.9 billion at
December 31, 2019, increased by USD 2.5 billion com-
pared to December 31, 2018, excluding the impact of the
derecognition of the Alcon business non-current assets
as a result of the spin-off. This increase was mainly driven
by the recognition of right-of-use assets resulting from
the implementation of IFRS 16 Leases on January 1, 2019,
amounting to USD 1.7 billion; an increase in intangible
assets other than goodwill of USD 0.7 billion, mainly due
to the impact of acquiring Xiidra from Takeda Pharma-
ceutical Company Limited, net of amortizations; an
increase in financial assets of USD 0.6 billion, primarily
from the financial investments in Alcon Inc. shares rec-
ognized by certain consolidated foundations through the
Alcon spin-off, and an increase in investments in asso-
ciated companies of USD 0.3 billion. This was partly off-
set by a decrease in property, plant and equipment of
USD 0.7 billion, mainly due to depreciation in excess of
net additions and a decrease in deferred tax assets of
USD 0.1 billion. Goodwill and other non-current assets
were broadly in line compared to December 31, 2018.
Total current assets of USD 29.5 billion at December
31, 2019, decreased by USD 2.7 billion compared to
December 31, 2018, excluding the impact of the derecog-
119
Item 5. Operating and Financial Review and Prospects
nition of the Alcon business current assets as a result of
the spin-off. This decrease was mainly driven by the
reduction in marketable securities, commodities, time
deposits and derivative financial instruments of USD 2.4
billion and in cash and cash equivalents of USD 1.9 bil-
lion mainly due to the repayment of financial debts and
the dividend payment. This was partly offset by an
increase in trade receivables by USD 0.8 billion, in inven-
tories by USD 0.5 billion, and in other current assets by
USD 0.2 billion. Income tax receivable and assets of dis-
posal group held for sale remained broadly in line com-
pared to December 31, 2018.
Net assets of disposal group held for sale of USD 0.8
billion include net assets and liabilities related to the
pending divestment of the Sandoz US dermatology busi-
ness 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”).
We consider our provisions for doubtful trade receiv-
ables to be adequate. We continue to monitor the level
of trade receivables, particularly in Argentina, Brazil,
Greece, Italy, Portugal, Russia, Saudi Arabia, Spain and
Turkey. 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 Decem-
ber 31, 2019, amounted to USD 1.6 billion (2018: USD 1.7
billion), of which USD 61 million is past due for more than
one year (2018: USD 97 million), and for which provisions
of USD 24 million have been recorded (2018: USD 44
million). At December 31, 2019, 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 Portugal, Saudi Arabia
and Spain (in 2018, in addition Greece) 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, 2019 and 2018:
(USD millions)
Not overdue
Past due for not more than one month
Past due for more than one month
but less than three months
Past due for more than three months
but less than six months
Past due for more than six months
but less than one year
Past due for more than one year
Provisions for doubtful trade receivables
2019
7 763
161
123
103
96
150
– 95
Total trade receivables, net
8 301
2018
7 916
296
194
136
98
213
– 126
8 727
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 34.6 billion
decreased by USD 0.2 billion compared to December
31, 2018, excluding the impact of the derecognition of
the Alcon business non-current liabilities as a result of
the spin-off. This decrease was mainly driven the USD 2.0
billion decrease in long-term financial debts, mainly
driven by the reclassification from non-current to cur-
rent financial debt of USD 2.0 billion US dollar bonds due
in 2020. This was partly offset by the recognition of lease
liabilities resulting from the implementation of IFRS 16
Leases on January 1, 2019, amounting to USD 1.7 billion,
and the USD 0.2 billion increase in provisions and other
non-current liabilities, mainly due to higher pension plan
liabilities due to the decrease in discount rates used to
calculate the actuarial defined benefit obligations.
Deferred tax liabilities were broadly in line compared to
December 31, 2018.
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 28.3 billion increased
by USD 0.5 billion compared to December 31, 2018,
excluding the impacts of the derecognition of the Alcon
business current liabilities as a result of the spin-off. This
was mainly driven by an increase in provisions and other
current liabilities of USD 2.0 billion, primarily from higher
legal and revenue deduction provisions, increases of
USD 0.5 billion in trade payables, USD 0.3 billion in cur-
rent income tax liabilities and USD 0.2 billion in lease lia-
bilities, resulting from the implementation of IFRS 16
Leases on January 1, 2019. This was partially offset by a
USD 2.6 billion decrease in financial debts and deriva-
tive financial instruments, mainly due to the repayment
of USD 3.0 billion of bonds issued in February 2009.
In our key countries, Switzerland and the United
States, assessments have been agreed by the tax author-
ities up to 2015 in Switzerland and 2014 in the United
States, respectively, 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
acquisition, has an open position related to the tax years
2014 and 2015.
The Group’s equity decreased by USD 23.1 billion to
USD 55.6 billion at December 31, 2019, compared to
USD 78.7 billion at December 31, 2018. This decrease
was mainly due to the dividend in kind to effect the spin-
off of Alcon Inc. of USD 23.4 billion (for further details,
see “Item 5.A Operating results – Critical accounting pol-
icies and estimates”, “Item 18. Financial Statements –
Note 2. Significant transactions” and “Item 18. Financial
Statements – Note 30. – Discontinued operations”), the
cash-dividend payment of USD 6.6 billion, the purchase
of treasury shares of USD 5.5 billion, net actuarial losses
of USD 0.5 billion, transaction costs attributable to the
Alcon spin-off of USD 0.3 billion, and taxes on treasury
shares of USD 0.2 billion. This was partially offset by net
income of USD 11.7 billion, the net effect of exercise of
options and employee transactions of USD 1.0 billion,
favorable currency translation differences of USD 0.4 bil-
lion and a decrease in the treasury share repurchase
obligation under a share buyback trading plan of USD 0.3
billion.
The Group’s liquidity amounted to USD 11.4 billion at
December 31, 2019, compared to USD 16.0 billion at
120
Item 5. Operating and Financial Review and Prospects
December 31, 2018. Total non-current and current finan-
cial debts, including derivatives, amounted to USD 27.4
billion at December 31, 2019, compared to USD 32.1 bil-
lion at December 31, 2018. The debt/equity ratio
increased to 0.49:1 at December 31, 2019, compared to
0.41:1 at December 31, 2018.
The net debt decreased to USD 15.9 billion at Decem-
ber 31, 2019, compared to USD 16.2 billion at December
31, 2018.
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
2019
2018
Change
Change USD millions USD millions USD millions
2018
2019
Balance at beginning of year
Impact of change in accounting policy 1
Restated equity at January 1
Shares acquired to be canceled
Other share purchases
Exercise of options and employee transactions
Other share sales
Equity-based compensation
Shares delivered to Alcon employees as
a result of the Alcon spin-off
Taxes on treasury share transactions 2
Decrease/(increase) of treasury share repurchase
obligation under a share buyback trading plan
Transaction costs, net of taxes 3
Dividends
Dividend in kind to effect the
spin-off of Alcon Inc. 4
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 5
Balance at end of year
2 311.2
2 317.5
– 6.3
78 614
74 168
3
60
78 617
74 228
4 446
– 57
4 389
– 60.3
– 23.3
– 37.0
– 5 351
– 1 859
– 3 492
– 1.2
7.8
3.0
7.4
– 1.7
5.5
9.4
0.9
– 0.5
– 2.3
– 3.0
2.0
0.9
– 160
– 114
210
833
18
– 189
284
– 253
434
263
756
– 284
– 79
– 6 645
– 6 966
– 46
– 224
– 263
77
18
– 189
568
– 174
321
– 23 434
– 23 434
11 732
12 611
– 879
– 3
– 13
10
– 207
– 401
22
38
194
– 16
2 265.0
2 311.2
– 46.2
55 474
78 614
– 23 140
1 In 2019, the impact of change in accounting policy includes USD 3 million related to the implementation of IFRS 16 Leases (see “Item 18. Financial Statements—Note 1. Significant
accounting policies”). In 2018, the impact of change in accounting policy includes USD 60 million related to the implementation of IFRS 15, and USD 177 million related to the
implementation of IFRS 9.
2 Included in 2019 is a USD 69 million impact related to the revaluation of deferred tax liability on treasury shares. This revaluation resulted from the Swiss federal tax reform enacted
in May 2019 (see “Item 18. Financial Statements—Note 12. Deferred tax assets and liabilities”).
3 Transaction costs, net of tax of USD 36 million (2018: USD 20 milion), directly attributable to the potential distribution (spin-off) of Alcon to Novartis shareholders (see “Item 18.
Financial Statements—Note 1. Significant accounting policies”).
4 Fair value of the dividend in kind of Alcon Inc. shares to Novartis AG shareholders and ADR (American Depositary Receipt) holders approved at the 2019 Annual General Meeting
held on February 28, 2019. Distribution was effected on April 8, 2019, whereby each Novartis AG shareholder and ADR holder received one Alcon Inc. share for every five Novartis
AG shares/ADRs they held on April 8, 2019, close of business (see “Item 18. Financial Statements—Note 1. Significant accounting policies”).
5 Impact of hyperinflationary economies (see “Item 18. Financial Statements—Note 1. Significant accounting policies”).
In 2019, the up to USD 5 billion share buyback announced
in June 2018 was completed with a total of 55.8 million
shares for USD 5.0 billion repurchased since the
announcement.
During 2019, Novartis repurchased a total of 60.3 mil-
lion shares for USD 5.4 billion on the SIX Swiss Exchange
second trading line, including 46.5 million shares
(USD 4.2 billion) bought back under the up-to USD 5 bil-
lion share buyback announced in June 2018, and 13.8
million shares (USD 1.1 billion) to mitigate dilution related
to participation plans of associates.
In addition, 1.7 million shares (USD 0.2 billion) were
repurchased from associates. In the same period, 15.8
million shares (for an equity value of USD 1.1 billion) were
delivered as a result of options exercised and share deliv-
eries related to participation plans of associates. Con-
sequently, the total number of shares outstanding
decreased by 46.2 million versus December 31, 2018.
These treasury share transactions resulted in a decrease
in equity of USD 4.5 billion and a net cash outflow of
USD 5.3 billion.
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.
In addition, 1.2 million shares for USD 0.1 billion were
acquired from employees, which were previously granted
121
Item 5. Operating and Financial Review and Prospects
to them under the respective programs. In 2018, 15.2 mil-
lion 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.
Other share sales for USD 0.3 billion resulted in an
increase of 3.0 million shares outstanding.
With these transactions, the total number of shares
outstanding decreased by 6.3 million shares in 2018 ver-
sus December 31, 2017. These treasury share transac-
tions resulted in an equity decrease of USD 0.5 billion
and a net cash outflow of USD 1.3 billion in 2018.
Treasury shares
At December 31, 2019, our holding of treasury shares
amounted to 262.4 million shares, or approximately 10%
of the total number of issued shares. Approximately 118
million treasury shares were held in entities that limit their
availability for use.
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.
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 three-year bond of USD 1.0
billion with a coupon of 1.80%, a five-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 four-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%.
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 2017 and 2018), and raised funds through our
commercial paper programs.
Bonds
In February 2019, a 10-year USD bond of USD 3.0 billion
with a coupon of 5.125% was repaid at maturity.
The maturity schedule of our net debt can be found
in “Item 18. Financial Statements—Note 29. Financial
instruments – additional disclosures.”
5.C Research and development, patents and licenses
Our R&D spending from continuing operations totaled
USD 9.4 billion, USD 8.5 billion and USD 8.4 billion (Core
R&D USD 8.4 billion, USD 8.2 billion and USD 7.8 billion)
for the years 2019, 2018 and 2017, 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.
122
Item 5. Operating and Financial Review and Prospects
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 28. Commitments
and contingencies,” and matters described in “— Item
5.F Tabular disclosure of contractual obligations.”
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
22 355
2 002
4 650
4 460
11 243
Interest on non-current financial debt, including current portion
Lease liabilities, non-current and current portion
Interest on lease liabilities, non-current and current portion
Unfunded pensions and other post-employment benefit plans
Research and development potential milestone commitments
Contingent consideration liabilities
Property, plant and equipment purchase commitments
Acquisition of business commitments 1
Total contractual cash obligations
5 434
1 949
1 536
1 748
4 404
1 036
220
464
246
49
101
809
71
177
10 164
10 130
845
365
83
201
761
352
43
34
686
257
66
208
891
230
3 439
1 081
1 338
1 238
1 943
383
48 846
14 049
7 334
6 798
20 665
1 For acquisition of business commitments, please refer to “Item 18. Financial Statements – Note 2 Significant transactions – significant pending transactions”.
The Group intends to fund the research and develop-
ment; property, plant and equipment; intangible asset
purchase commitments with internally generated
resources, and the acquisition of business commitment
through available cash and short- and long-term borrow-
ings.
The acquisition of business commitments relate to
the acquisition of The Medicines Company (see “Item 18.
Financial Statements—Note 2. Significant transactions
—Significant Transactions entered into in 2019 and
closed in January 2020”) and to the pending acquisition
of the Japanese business of Aspen Global Incorporated
(see “Item 18. Financial Statements—Note 2. Significant
transactions — Significant pending transactions”).
In December 2019, Novartis entered into a short-term
credit facility of USD 7.0 billion, with a maturity date of
June 30, 2020 with a syndicate of banks. On January 7,
2020, Novartis borrowed USD 7.0 billion under the facil-
ity with interest based on the USD LIBOR.
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 10. Right-of-use assets and lease liabilities,” “Item
18. Financial Statements—Note 20. Provisions and other
non-current liabilities,” and “Item 18. Financial State-
ments—Note 28. Commitments and contingencies.”
123
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—Board of Directors” and
“Item 6.C Board practices—Corporate governance—
Executive Committee” is incorporated by reference.
124
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
2019 Compensation Report of Novartis AG. It follows a
similar structure to the previous year’s report, which was
supported by over 94% of shareholders.
At the 2019 Annual General Meeting (AGM), we wel-
comed new Board member Patrice Bula to the Compen-
sation Committee.
During 2019, the committee continued to engage with
shareholders and proxy advisors to gather feedback on
the compensation system for the Executive Committee
and our disclosures. In response to this feedback, and
to better align with the interests of shareholders, we have
introduced a mandatory holding period of two years
beyond the vesting date for all Long-Term Incentive (LTI)
awards (after applicable taxes) to the CEO and CFO
granted from 2020 onward.
Reflecting our commitment to shareholders regard-
ing transparency in executive compensation, we would
like to also draw attention to the following changes and
enhanced disclosures:
• Increased disclosure on the balanced scorecard for
the CEO’s Annual Incentive, in particular, on targets
related to environmental, social and governance (ESG)
metrics
• Increased transparency on innovation metrics for the
2019-2021 Long-Term Performance Plan (LTPP) by
taking them from the published Novartis selected
development projects in Innovative Medicines
• Added an interim update of how performance is track-
ing against targets for all metrics relating to the ongo-
ing LTPP performance cycles to provide an upfront indi-
cation of ongoing performance
• Provided explanations of pension benefits for mem-
bers of the Executive Committee, which are fully
aligned with the pensions of all other associates at
Novartis
2019 Company performance
Financial performance significantly exceeded targets set
at the beginning of the year, which enabled the company
to raise its guidance to shareholders every quarter. Net
sales to third parties for Novartis continuing operations
grew 6% in reported terms and 9% measured in constant
currencies (cc) to remove the impact of exchange rate
movements, core operating income grew by 12% (+17%
cc) and free cash flow amounted to USD 12.9 billion
(+15%) mainly driven by higher operating income. Growth
brands contributed to strong sales growth, as Cosentyx
sales reached USD 3.6 billion, Entresto sales reached
USD 1.7 billion and Promacta/Revolade sales reached
USD 1.4 billion. Recently launched products, including
Zolgensma, Piqray and Beovu, also contributed to our
growth.
In addition to delivering a strong financial year, there
were significant achievements across all our strategic pil-
lars:
• Delivered transformative innovation in 2019, with 18
new approvals (of which 5 were new molecular enti-
ties), and 17 major submissions
• Continued to improve our operational excellence by
transforming our manufacturing operations and busi-
ness services which, together with increased research
and development productivity, led to an overall core
operating income margin improvement of 1.6% (+1.9%
cc)
• Advanced our digital ecosystem, investing in data archi-
tecture and analytics, and forming external strategic
partnerships
• Made good progress on our cultural journey, with sig-
nificant investment in leadership development, exter-
nal recognition of our approach to learning, and an
improvement in our key diversity metrics
• Took significant actions to address areas of “building
trust with society” as put in our ESG initiatives, includ-
ing access to healthcare as we launched our sub-Sa-
haran Africa strategy to drive access for patients
across all income levels
On April 9, 2019, Novartis successfully spun off the Alcon
eye care devices business, generating significant share-
holder value. This was, at the time, the largest-ever spin-
off in Europe. Our recent transactions in M&A are
strengthening our innovation programs and further sup-
porting our strategy to become a leading, focused
medicines company.
More details on the performance of our strategic pri-
orities can be found in “—2019 CEO balanced scorecard.”
Overall, shareholders benefited from a total share-
holder return (TSR) in 2019 of 22.3%. Between 2017 and
2019, they benefited from a three-year TSR of 63.4%.
2019 realized compensation
The Board of Directors assessed the performance of the
CEO in his second year and determined that he will be
awarded a 2019 Annual Incentive of CHF 4 017 639, which
is 160% of target, within the payout range of 0% to 200%.
The 2017-2019 Long-Term Performance Plan (LTPP)
delivered strong results with Cash Value Added (CVA)
and innovation at above target, reflecting the underlying
performance of our business over the three-year cycle.
Overall, the Board of Directors awarded the CEO a pay-
out of CHF 3 510 963, corresponding to a 164% payout
against a maximum of 200%.
125
Item 6. Directors, Senior Management and Employees
The 2017-2019 Long-Term Relative Performance Plan
(LTRPP) award was based on three-year relative TSR in
USD compared to the global healthcare peer group.
Novartis ranked No. 6 out of a total of 16 companies
(including Novartis), reflecting continued positive
momentum in our business. The Board of Directors eval-
uated the overall context and assigned the CEO a pay-
out of CHF 1 107 806, which is 138% of target and within
the payout of 0–200%.
These incentive performance outcomes, combined
with base salary and other benefits, pension, share price
movement and dividend equivalents, resulted in 2019 total
realized compensation for the CEO of CHF 10 615 740.
The strong performance of the 2017-2019 LTI awards,
coupled with the 30% increase of the share price between
grant and vesting of these awards, contributed to a sig-
nificantly higher total realized compensation for the CEO
compared to 2018 (CHF 6 680 288).
The 2019 total realized compensation for the Exec-
utive Committee members (comprising the CEO, the
other 12 active Executive Committee members, and the
two former Executive Committee members who stepped
down during the financial year) was CHF 66 491 488,
which is broadly in line with the prior year. Strong Com-
pany performance drove higher payouts of the Annual
Incentive and both LTI grants contributing to a slightly
higher total realized payout compared to 2018; partly off-
set by the fact that there were several Executive Com-
mittee members in their first year and fewer Executive
Committee members to be reported overall in 2019.
2020 AGM
In line with our Articles of Incorporation, at the 2020 AGM,
shareholders will be asked to approve, in a binding vote,
the maximum aggregate amount of compensation for the
Board of Directors from the 2020 AGM to the 2021 AGM,
and the maximum aggregate amount of compensation for
the Executive Committee for financial year 2021. For the
Board of Directors, the amount considers the nomination
of two new Board members for election to the Board at
the next AGM, and a reallocation of Board Committee
memberships. For the Executive Committee, the requested
maximum aggregate amount of compensation remains
broadly unchanged compared to the prior year. Share-
holders 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 the following
email address: investor.relations@novartis.com.
Respectfully,
Enrico Vanni, Ph.D.
Chairman of the Compensation Committee
126
Item 6. Directors, Senior Management and Employees
Compensation at a glance
Executive Committee compensation system
2019 fixed pay and benefits
Performance-related variable pay
Annual base salary
Pension and other
benefits
2019 Annual Incentive
Purpose
Reflects responsibil-
ities, experience and
skill sets
Form of payment
Cash
Provides retirement
and risk insurances
(tailored to local market
practices/regulations)
Rewards for perfor-
mance against short-
term financial and stra-
tegic objectives, and
Values and Behaviors
Country/individual-
specific and aligned
with other employees
50% cash
50% equity3 deferred
for three years
Long-Term Incentive awards
cycle 2017-2019
LTPP1
LTRPP2
Rewards long-term shareholder
value creation and innovation in line
with our strategy
Equity, vesting following a three-
year performance period
Performance measures
–
–
Balanced scorecard
comprising:
• Financial measures
(60%)
• Strategic objectives4
(40%)
• 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 2017-2019 performance cycle, the peer group comprises 16 global healthcare companies, including Novartis, as listed in “—Approach to benchmarking.”
Target incentive opportunity levels for the CEO are 150% and 325% of base salary for the Annual Incentive and
LTI, respectively. Based on Novartis compensation guidelines, the other members of the Executive Committee have
Annual Incentive and LTI target opportunity levels that range from 80% to 120%, and 160% to 270% of base sal-
ary, respectively. The payout range remains at 0% to 200% of target opportunity based on achievement against
performance.
As disclosed in the 2018 Compensation Report, from cycle 2019-2021, the LTRPP plan is discontinued, and the
LTPP metrics are transformed into four equally weighted measures: net sales compound annual growth rate, core
operating income compound annual growth rate, innovation and relative TSR.
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
EXECUTIVE COMMITTEE COMPENSATION RISK MANAGEMENT PRINCIPLES
• Rigorous performance management
• All variable compensation is capped at
process
• Balanced mix of short-term and
long-term variable compensation
elements
• Performance evaluation under the
Annual Incentive includes an individual
balanced scorecard
• Performance-based LTI, with three-year
cycles
200% of target
• Contractual notice period of 12 months
• Post-contractual non-compete period
limited to a maximum of 12 months from
the end of employment. Resulting
compensation is limited to the annual
base salary plus the prior-year Annual
Incentive as per contract, if applicable
DECISION-MAKING AUTHORITY
Board of Directors
Board of Directors
Compensation Committee
• Good and bad leaver provisions apply to
the variable compensation of leavers
• No severance payments or change-of-
control clauses
• Clawback and malus principles apply to
all elements of variable compensation
• Share ownership requirements; no
hedging or pledging of Novartis share
ownership position
127
Item 6. Directors, Senior Management and Employees
2019 CEO pay for performance – outcomes
Measure
Target1
Achievement versus target
2019 ANNUAL INCENTIVE (SEE “—2019 ANNUAL INCENTIVE”)
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
USD 45 384 million
Significantly above
USD 8 129 million
24.8%
7.9%
Significantly above
Significantly above
Above
Significantly above
1 For performance evaluation purposes, Target as well as Actual financial KPIs excluded the results of the Sandoz US dermatology business and generic US oral solids portfolio,
which was expected to be divested to Aurobindo. The transaction is now expected to close in the first quarter of 2020 pending regulatory approval.
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 and other ESG topics) (20%)
Overall assessment of strategic objectives
Significantly above
Significantly above
Above
Above
Met
Above
Overall assessment of CEO balanced scorecard
Outstanding
TOTAL Annual Incentive:
160% of target (payout range 0% – 200%)
2017-2019 LONG-TERM INCENTIVES (SEE “— LONG-TERM INCENTIVE PLANS, 2017-2019 CYCLE”)
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 6.1 billion
Significantly above
164% of target (payout range 0% – 200%)
Above
Above threshold
138% of target (payout range 0% – 200%)
2019 total realized compensation for the CEO
The 2019 total realized compensation for the CEO was CHF 10 615 740. It includes payouts of the Annual Incen-
tive, LTPP and LTRPP based on actual performance assessed for cycles concluding in 2019. More information on
the overall assessment of the CEO by the Board of Directors can be found in “—2019 CEO balanced scorecard.”
CHF
Annual base
salary
Pension and other
benefits
2019 Annual
Incentive
LTPP
2017-2019 cycle1
LTRPP
2017-2019 cycle1
Total realized
compensation
Fixed pay and benefits
Variable pay – performance-related
Vasant Narasimhan
(CEO)
1 653 333
325 999
4 017 639
3 510 963
1 107 806
10 615 740
1 The shown amounts represent the underlying share value of the total number of shares vested (including dividend equivalents) to the CEO for the LTPP and LTRPP performance
cycle 2017-2019, which were granted before Vasant Narasimhan was appointed CEO.
128
Item 6. Directors, Senior Management and Employees
2019 Board compensation system
The compensation system applicable to the Board of Directors is shown below, and remains unchanged since prior
year. All fees to the 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
2019 Board compensation
AGM 2019-2020
annual fee
3 800
280
50
130
90
70
70
40
Total actual compensation earned by Board members in the 2019 financial year is shown in the table below.
CHF 000s
Chairman of the Board
Other 12 members of the Board
Total
2019
total compensation 1
3 804
4 387
8 191
1 Includes an amount of CHF 21 002 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 413 985 , and provides a right to the maximum future insured government pension benefit for the Board member.
129
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
• They underpin the assessment of overall
performance for the Annual Incentive
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 until the end of 2019, which will be updated from
2020 to consider the acquisition of Celgene, as pre-
sented below.
GLOBAL HEALTHCARE PEER GROUP
AbbVie
Biogen
Amgen
AstraZeneca
Bristol-Myers Squibb
Celgene1
Competitive
compensation
• Total compensation must be sufficient to
attract and retain key global talent
Eli Lilly & Co.
Gilead Sciences
GlaxoSmithKline
Johnson & Johnson
Merck & Co.
Novo Nordisk
• Overarching emphasis on pay for
performance
Pfizer
Roche
Sanofi
Alignment with Company strategy
Our strategy is to become a leading, focused medicines
company powered by advanced therapy platforms and
data science. We foster a company culture that is
inspired, curious and unbossed. We believe these ele-
ments drive continued innovation and will support the
creation of value over the long term for our Company,
society and shareholders.
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 an LTI plan with a balanced set of mea-
sures and targets. The Board of Directors determines
specific, measurable and time-bound performance mea-
sures for the Annual Incentive and LTI plan. The Com-
pensation Committee has reviewed the existing com-
pensation system and determined that it continues to
support our new strategy.
Approach to market benchmarking
There remains significant competition for top executive
talent with deep expertise, competencies and proven
1 Celgene will be removed from the 2020 peer group as a result of the acquisition by
Bristol-Myers Squibb
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 positioned
around the market median benchmark for comparable
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.
130
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 enable the recruitment of global executive talent with
deep expertise and competencies.
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 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).
131
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.
If a participant leaves involuntarily, restricted shares and RSUs are released on the original blocking end
date.
All awards are subject to non-compete terms until the end of the three-year blocking date, starting from the
date of grant.
Awards are not subject to forfeiture during the deferral period.
Annual Incentive – voluntary
restricted shares/RSUs/ADRs
(US associates only)
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 (including retirement)
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.
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 of Directors for the CEO, and
the Compensation Committee for the other Executive
Committee members, may decide – subject to applica-
ble law – to retain any unpaid or unvested incentive com-
pensation (malus), or to recover incentive compensation
that has been paid or has vested in the past (clawback).
This applies in cases where the payout violates laws or
conflicts with internal management standards, including
Company and accounting policies.
This principle applies to both the short-term Annual
Incentive and LTI plans.
132
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 the Compensation Commit-
tee discuss their individual performance evaluations.
Prior to determining the final outcome, related factors
such as performance relative to peers, wider market con-
ditions, general industry trends and good practice are
used to inform the overall performance assessment.
Objective setting
Performance evaluation
Compensation determination
• The CEO proposes 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 of Directors and Compensation
Committee.
• The CEO’s performance against
• A recommendation for the CEO’s
the individual balanced scorecard is
assessed by the Board of Directors.
• 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 of
Directors.
• Periodic assessments, including at the
mid-year stage, ensure progress is
suitably tracked.
variable pay is made by the
Compensation Committee to the Board
of Directors for final determination.
• For the Long-Term Incentive financial
measures 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 of Directors is notified of the
outcomes.
133
Item 6. Directors, Senior Management and Employees
2019 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.
2019 annual base salaries
The 2019 annual base salaries were as follows:
• CEO (effective March 1, 2019): CHF 1 674 000 (CEO base salary may increase as he develops in the role)
• OTHER EXECUTIVE COMMITTEE MEMBERS (effective March 1, 2019): All other members of the
Executive Committee were awarded increases in line with the average of all Novartis employees, with the
exception of three individuals as disclosed in Item 6.B of the 2018 Annual Report. These members were
appointed to their roles with base salaries below external market median level and have demonstrated
excellent performance during their tenure.
Pension and other benefits
Overview
• Pension and other benefits do not constitute a significant proportion of total compensation and are
provided to the Executive Committee on the same terms as all other associates based on local country
practices and regulations.
• The CEO and all other Swiss-based members of the Executive Committee are members of the Novartis
Swiss pension funds, which provide Company contributions on the base salary and Annual Incentive up to
the legal cap on the insured salary of CHF 853 200. No supplementary pension plans or savings plans are
provided. The CEO’s employer pension contributions represent 10.01% of his base salary.
• Globally the Company operates both defined benefit and defined contribution pension plans (see also Note
25 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.
134
Item 6. Directors, Senior Management and Employees
2019 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 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 2019 balanced scorecard targets and achievements of the CEO are detailed on the next page.
• The 2019 balanced scorecards for other Executive Committee members include 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 of Directors for approval.
• The strategic objectives are aligned with the most important priorities in any performance year.
Payout ranges
• The 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 expectations1
PAYOUT (% of on-target)
170% – 200%
130% – 160%
80% – 120%
40% – 70%
0% – 30%
1 From the 2020 performance cycle, a performance deemed “below expectations” will provide for a payout of 0% only.
Payout formula
Annual base
salary
x
Target incentive
(% of base salary)
x
Payout factor (% of
target: 0%–200%)
=
Realized
Annual Incentive
Payout vehicle
• 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 “—Treatment of variable compensation for
Executive Committee leavers”).
• 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.
135
Item 6. Directors, Senior Management and Employees
2019 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 of Directors uses a stringent process to set ambi-
tious financial targets to incentivize superior performance.
CEO achievements – 2019
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
Target1
Achievement versus
target
45 384 million
| 8 129 million
| 24.8%
7.9%
|
|
Significantly above
Significantly above
Significantly above
Above
Significantly above
1 For performance evaluation purposes, Target as well as Actual financial KPIs excluded the results of the Sandoz US dermatology business and generic US oral solids portfolio,
which was expected to be divested to Aurobindo. The transaction is now expected to close in the first quarter of 2020 pending regulatory approval.
| Significantly above
| Significantly above
|
Above
Strategic objectives – 40% of total Annual Incentive, comprising:
Innovation (20%)
Novartis achieved 18 key approvals. Five of these key approvals were for new molecular entities–Adakveo, Beovu,
Mayzent, Piqray and Zolgensma – which were all approved and launched in the US. Additional highlights include
approvals for new indications for Lucentis in Europe, and for Kymriah, Afinitor and Xolair in Japan.
The Company also achieved 22 submissions. Seventeen of these submissions were major submissions, including
Entresto HF-rEF, submitted for approval in Japan; Cosentyx non-radiographic axial SA in Europe; SEG101 (crizan-
lizumab) for sickle cell disease in the US and Europe; and LCI699 (osilodrostat) for Cushing’s syndrome in the US.
Novartis also achieved 7 Phase IIb transitions, which was on target, and 15 proof of concepts/proof of mechanisms,
slightly above the target of 14.
Additionally, the CEO achieved his targets in the buildup of advanced therapy platforms. In the CAR-T platform,
the clinical portfolio was expanded, with four new CAR-T programs having achieved “first patient first visit” (FPFV).
In gene therapy, the platform was strengthened, with progress on new programs and manufacturing capacity
expanded for Zolgensma. Finally, the protein degradation platform also advanced, with DKY709 achieving FPFV.
Operational excellence (20%)
In key operational financial metrics, continuing operations Core Operating Income was USD 14 112 million, which
is a 12% increase compared to prior year (+17% cc). Continuing operations Core Operating Margin was 29.7%,
growing by 1.6 percentage points from prior year (+1.9% percentage points cc).
The Alcon eye care business was successfully spun off on April 9, 2019, with immediate and significant value cre-
ation to shareholders. The timeline was in line with the target set at the beginning of the year, and value creation
was ahead of expectations.
Progress was made on the Sandoz transformation, including strategy definition and execution in major markets.
On-target merger and acquisition efforts were realized, including the Aspen Japan deal. However, the Sandoz-Au-
robindo deal was delayed until 2020, pending Federal Trade Commission approval.
The transformation of Novartis Business Services (NBS) is ahead of plan, aiming to deliver USD 300 million of
recurrent savings by the end of 2019, significantly ahead of the USD 250 million savings target. Novartis Technical
Operations (NTO) is well ahead of its productivity target and on track to deliver over USD 1 billion in savings by
2020, through manufacturing site consolidations.
Data and digital (20%)
All 12 priority lighthouses, aimed at embedding data science and digital technology across the enterprise, are
currently either achieved or underway. Highlights include ACTalya, the virtual assistant for our sales reps that is
now live with over 5 000 sales reps on priority brands in 11 markets, and the use of artificial intelligence (AI)-based
marketing to optimize spend on Oncology brands in eight markets. We also launched the GenS platform for sickle
cell patients in the US, which reached more than 25% of the total patient population and attracted more than
15 000 registrations.
In the Novartis Institutes for BioMedical Research (NIBR) and Global Drug Development (GDD), the SENSE plat-
form is now using AI to monitor all trials globally at Novartis. The Data42 project to ingest over 95% of clinical trial
data from over 20 years of study was above the target (80%). In NTO, three key digital implementations progres-
sed on target (Buying Engine, “spot on” cockpit, and Asset Management). In NBS, several projects were achieved,
including rollout of an AI-based financial planning system and the single client engagement layer OneNovartis
Services.
Novartis made strong progress on expanding our capabilities in data science and AI by building up dedicated
teams. More than 2 000 Novartis leaders participated in our Digital Immersion for Leaders program. The digital
collaboration platform One Digital was launched, hosting over 260 projects in over 40 countries, and the Digital
Awareness Hub has attracted more than 30% of the Novartis population.
Partnerships were established with Microsoft and Amazon Web Services to collaborate on AI exploration and
empowerment across the value chain. In China, Novartis signed a partnership with Tencent in heart failure
to develop a novel patient solution that was tested by 90 patients and that gained buy-in from key opinion
leaders.
136
|
Above
|
Met
Item 6. Directors, Senior Management and Employees
2019 CEO BALANCED SCORECARD − CONTINUED
People and culture (20%)
The culture continues to develop positively toward an inspired, curious and unbossed organization supporting
stronger innovation, performance and ethics. Investment has been made in leadership upskilling so that leaders
can role model the culture attributes.
We are reimagining our performance management based on three elements: (i) ensuring that goals are meaningful
and link to the Company’s purpose; (ii) ensuring that associates receive frequent and quality feedback that helps
them develop; and (iii) ensuring that associates are recognized in a timely manner and rewarded for their contri-
butions.
Our new global recognition program was implemented and is currently reaching 66% of employees. Equal global
parental leave was also launched in the first wave of countries.
The learning strategy was implemented and encouraged all associates to spend 5% of their time on digital learning
through courses available on Coursera, Learnlight and LinkedIn Learning. Further learning, including certificates
at universities via Coursera, is also now freely available to all associates. Altogether, learning hours per associate
increased 30% compared to the prior year.
Associate engagement of our sales force is 78%, and 74% when considering all associates, which is notably above
the 72% benchmark.
Novartis progressed in line with its aspiration toward its UN commitments under the EPIC pledge to achieve gender
balance in management by 2023. In 2019, female representation increased at all senior levels – the Executive
Committee (25%), top executive positions (31%) and the management level (44%) – and it remains above external
benchmarks. Our median gender pay gap of 2.4% is also well below the Bloomberg benchmark of 9% (10 000
companies).
Building trust with society (including access to healthcare and reputation and other ESG topics) (20%)
Novartis conducted an environmental, social and governance (ESG) materiality assessment, and then set a mix
of qualitative and quantitative targets in each of the following four identified areas. Additional information can be
found in our Novartis in Society, ESG 2019 report.
ETHICAL STANDARDS
Novartis strengthened representation on ethical matters by establishing a Risk & Resilience function, which was
operational as of April 1, 2019. A newly integrated enterprise risk management strategy and process (the Novartis
Risk Compass) was designed to support this and was fully executed in 2019. A new Code of Ethics is also on track
for implementation, and a digital engagement app called iEthics has launched in 33 countries.
PRICING AND ACCESS
We reduced our launch time lag between approval of new medicines in developed markets and availability in
lower-middle-income countries (LMICs) and lower-income countries (LICs). The five-month time lag for Kisqali
was best in class. Our goal is a maximum of one year, which is extremely ambitious versus the industry benchmark.
Overall, Novartis was able to achieve the targeted price reductions through manufacturing efficiencies and local
brands for all LMICs/LICs to ensure affordability. Access plans were established for six of our biggest innovative
brands for 2019 (including Entresto, Cosentyx, Kisqali and Adakveo), and more will follow in 2020.
GLOBAL HEALTH
Novartis put in place a new structure for the Global Health & Corporate Responsibility function. All flagship pro-
grams delivered against target. Novartis is the only big pharmaceutical company to be innovating in malaria,
developing new programs KAF156 and KAE609. We pledged to reach an additional 1.3 million patients by 2020
in leprosy. Novartis was admitted to the Global Chagas Disease Coalition, and our Phase IIIb study is ongoing for
advancing Chagas chronic cardiomyopathy. In sickle cell disease, a partnership was signed with the government of
Ghana and the Sickle Cell Foundation of Ghana.
RESPONSIBLE CITIZENSHIP
Novartis successfully reduced the number of product recalls to below historical levels. The target was –10%, and
actual achievement was –36%. Novartis achieved –3% in energy consumption, versus a target of –5%; –8% in
water consumption, against a target of –5%; and –7% in waste sent for disposal, which was on target. The Com-
pany made progress in dealing with legacy litigation and integrity issues. Disappointingly, only 96% of health autho-
rity inspections were deemed acceptable, below the target of >99% set at the beginning of the year.
While important progress was made in this area, given the reputational impact of the Zolgensma data integrity
issue, the CEO has requested that he not receive an incentive payout for his ‘building trust with society’ objective.
The Board of Directors agreed with this request.
Overall assessment of strategic objectives
Overall assessment of CEO balanced scorecard
Above
Outstanding
ANNUAL INCENTIVE PAYOUT
Payout
Based on the overall assessment, the Board of Directors decided on an adjusted Annual Incentive
resulting in a payout for the CEO amounting to CHF 4 017 639, which is 160% of target, within the
range of 0–200%.
137
Item 6. Directors, Senior Management and Employees
Long-Term Incentive plans, 2017-2019 cycle
• The Long-Term Performance Plan (LTPP) is the first of two LTI plans operated over the 2017-2019 cycle and
rewards creation of long-term value and innovation.
• The Long-Term Relative Performance Plan (LTRPP) is the second of two LTI plans operated over the 2017-2019
cycle and 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 in “—Treatment of variable compensation for Executive Committee leavers” provides
details on the treatment of Long-Term Incentive awards for leavers.
138
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:
Group performance outcome
for the 2017-2019 cycle
INNOVATION (25% OF LTPP)
Description
Group performance outcome
for the 2017-2019 cycle
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.
During the 2017-2019 cycle, Novartis delivered an NCVA of USD 7.8 billion, 28% ahead of a target of USD 6.1
billion in constant currencies.
When setting the target for the 2017-2019 cycle, the Compensation Committee took into account the following:
• An expected increase in operational performance
• Key business transformation investments and restructuring costs, particularly in the manufacturing and
business services organizations
• Higher capital cost driven by a growing capital base due to key M&A investments in line with our strategy to become
a streamlined medicines company
The 2017-2019 NCVA performance was mainly driven by the following:
• Out-performance of sales targets over the three-year cycle by Pharmaceuticals (+USD 2.3 billion, mainly driven by
Cosentyx, Entresto, Ophtha and valsartan) as well as by Oncology (+USD 1.0 billion, mainly driven by Promacta/
Revolade, Tafinlar + Mekinist, and Afinitor). The return of Alcon to growth also played a key role.
• Overachievement of productivity targets, mainly in manufacturing (COGS), as well as further increased R&D and
NBS productivity (–1% point of service cost over sales) allowed for targeted launch investments while increasing
core operating income margin in constant currencies.
Following the application of the agreed payout curve, the 128% achievement versus target generates a
performance factor of 184% of target for this part of the LTPP.
For LTPP cycles starting from 2019, Novartis replaced NCVA as the financial metric with a combination of a
three-year net sales compound annual growth rate (CAGR) and core operating income CAGR.
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
For the cycle 2017-2019, 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.
In the 2017-2019 period, Novartis achieved outstanding innovation performance against target. In this three-year
period, Novartis received approval for eleven new molecular entities, of which five were approved in 2019 alone.
Key achievements for the Innovative Medicines Division include the approvals of Adakveo for sickle cell disease
and Zolgensma for spinal muscular atrophy, and the submission of OMB157 (ofatumumab) for multiple sclerosis
as well as BYL719 (alpelisib) for HR+ mBC. However, some targets were missed, including the approval of RLX030
(serelaxin) for acute heart failure (due to the failure of the Phase III study for this program), and the approval of
ACZ885 (canakinumab) for cardiovascular risk reduction (due to the withdrawal of the file). On the other hand, our
overachievements included the rapid approval of Kisqali for HR+/HER2- advanced or metastatic breast cancer, and
the approval of Kymriah for diffuse large B-cell lymphoma, which was ahead of schedule.
Sandoz delivered important goals, such as the submissions of pirfenidone, apixaban, amantadine hydrochloride and
tazarotene cream, but also missed some goals, including the filing of two biosimilar programs, and one low molecular
weight generic goal. NIBR made significant progress in applying novel technologies to therapeutic problems, including
expanding the use of digital tools for measuring clinical endpoints, and the use of protein degradation to drug
difficult targets, and a substantial expansion of the translational capabilities in oncology. NIBR also made substantial
progress in the early-stage pipeline, progressing several agents in areas such as immuno-oncology, bispecifics and
neuroscience.
Following input from the Research & Development Committee, the Board of Directors approved an innovation
performance factor for the CEO and Group function heads of 105% of target.
LTPP PAYOUT
Payout
Overall, the Board of Directors approved an LTPP payout for the CEO amounting to CHF 3 510 963,
which is 164% of target, within the range of 0–200%. This amount includes CHF 262 600 of dividend
equivalents accrued, and CHF 814 147 in share price evolution over the performance cycle.
139
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 2017-2019 performance cycle are as follows:
2017-2019 peer group
(15 companies, excluding Novartis)
Novartis position
in the peer group
Payout range
(% of target)
AbbVie
Biogen
Amgen
AstraZeneca
Position 1 – 4
Bristol-Myers Squibb
Celgene1
Position 5 – 8
Eli Lilly & Co.
Gilead Sciences
GlaxoSmithKline
Position 9 – 12
Johnson & Johnson
Merck & Co.
Novo Nordisk
Position 13 – 16
160% – 200%
100% – 150%
20% – 80%
0%
Pfizer
Roche
Sanofi
There will be no vesting for below-median performance for the
2018-2020 performance cycle onward as communicated in Item 6B. of
the 2018 Annual Report.
1 Celgene will be removed from the 2020 peer group as a result of the acquisition by Bristol-Myers Squibb.
The payout matrix includes a significant reduction (including scope to reduce to nil) when Novartis does not
outperform the majority of the companies in the group. At the end of the performance cycle, all companies
are ranked in order of highest to lowest TSR in USD.
The Compensation Committee uses its discretion to determine the payout factor within the ranges shown
above, and takes into consideration factors such as absolute TSR, overall economic conditions, currency
fluctuations and other unforeseeable economic situations.
Group performance outcome
for the 2017-2019 cycle
Novartis TSR over the three-year period (2017-2019) was 63.4%. When compared to the global healthcare
peer group, Novartis TSR ranked No. 6 out of 16 companies.
LTRPP PAYOUT FOR THE 2017-2019 CYCLE
Payout
Based on the ranking, the Board of Directors approved an LTRPP payout of 138% of target for the CEO,
resulting in CHF 1 107 806. This amount includes CHF 82 858 of dividend equivalents accrued, and CHF
256 886 in share price evolution over the performance cycle.
140
Item 6. Directors, Senior Management and Employees
Executive Committee membership changes in 2019
2019 Executive Committee member external appointments and buyout awards
The table below provides an overview of the Executive Committee external hires made during 2019. 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 in “—Executive Committee appointments compensation policy.”
During 2019, one external newly appointed Executive Committee member was granted buyout awards in place
of forfeited compensation at his former company in agreement with our aforementioned policy. These are described
in the table below. Buyout awards are of equivalent economic value and are subject to the same vesting or perfor-
mance period, payable no earlier than the compensation forfeited upon joining Novartis. Further details on the vest-
ing of the awards below will be provided in relevant future compensation reports.
Name
Date of appointment
Cash payments (CHF)
Equity awards
Richard Saynor
July 15, 2019
157 087
1 034 803
Total value at grant
1 191 890
CEO, Sandoz
equal to 4 172 PSUs and 7 280 RSUs,
vesting over the period 2020-2022
2019 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, pension, Annual Incentive 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 in “—Treatment of vari-
able compensation for Executive Committee leavers.”
The CEO of Novartis Pharmaceuticals, Paul Hudson, resigned from his position on June 7, 2019. The Board of
Directors agreed to shorten his 12-month notice period and decided on a cool-off period until August 31, 2019,
during which he had no access to any confidential information concerning the Company. Strictly in line with the
Novartis incentive plan rules, his Annual Incentive for the 2019 performance year; unvested LTI for cycles 2017-
2019, 2018-2020 and 2019-2021; unvested Deferred Share Bonus Plan (DSBP) awarded in 2017, 2018 and 2019;
and unvested equity buyouts (5 993 PSUs) made at the point of his recruitment on July 1, 2016, to replace lost equity
at his former employer were all forfeited in full.
The CEO of Sandoz, Richard Francis, stepped down from the Executive Committee on March 31, 2019, and will
fulfill the required 12-month notice period until the end of March 2020. Outstanding LTI grants will vest at the end
of the relevant performance cycles on a pro-rata basis per his contractual agreement and in line with the plan rules.
141
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 LTI are dis-
closed at the end of their respective performance cycles, reflecting actual payouts based on performance.
The total actual payout may vary year on year depending on multiple factors, including the composition of the
Executive Committee and the tenure of its members (as new members may not have vested LTI), compensation
increases, payout of variable compensation based on actual performance, share price fluctuations of the LTI, and
dividend equivalents.
2019 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 2019 per-
formance year, the realized LTI for the 2017-2019 performance cycle, and any buyouts vesting in 2019. The portion
of the Annual Incentive paid in shares for the year 2019 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 cal-
culated using the share price on the date of vesting.
2019 annual base
salary
2019 pension
benefits1
2019 Annual Incentive
Long-Term Incentives
LTPP
2017-2019 cycle
LTRPP
2017-2019 cycle
Currency
Cash (amount)
Amount
Cash
Equity2
Equity (value
at vesting date)3
Equity (value
at vesting date)3
Other 2019
compensation
Total realized
compensation
(incl. share
Amount2,4,5 price movement)6
Executive Committee members
Vasant Narasimhan (CEO)
CHF
1 653 333
165 547
2 008 800
2 008 839
3 510 963
1 107 806
160 452 10 615 740
Aggregate realized
compensation of the other 14
Executive Committee
members, including the two members
who stepped down
during financial year 2019 7, 8
Total
CHF
9 370 547
CHF 11 023 880
2 131 905
2 297 452
5 809 455
7 818 255
7 013 842 17 932 704
9 022 682 21 443 667
6 383 700
7 491 506
7 233 594 55 875 748
7 394 046 66 491 488
See “—2018 realized compensation for the CEO and other Executive Committee members” for 2018 comparative figures.
1 Includes mandatory employer contributions of CHF 4 373 for the CEO and CHF 63 461 for the other Executive Committee members paid by Novartis to governmental social security
systems. This amount is out of total employer contributions of CHF 3 923 070 paid in 2019 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 21, 2020) of CHF 92.89 per
Novartis share and USD 95.19 per ADR.
3 The amounts represent the underlying share value of the 232 425 LTPP PSUs and 77 904 LTRPP PSUs vesting on January 17, 2020, to the CEO and other Executive Committee
members for the performance cycle 2017-2019, inclusive of earned dividend equivalents for the three-year cycle (details in “—2017-2019 performance cycle LTPP and 2017-2019
performance cycle LTRPP”).The taxable value is determined using the closing share price on the day the Novartis Board of Directors approved the final LTPP and LTRPP performance
factors (i.e., January 21, 2020) of 92.89 per Novartis share and USD 95.19 per ADR. Shannon Thyme Klinger, Stefan Lang, Susanne Schaffert and Marie-France Tschudin were
promoted to the Executive Committee during the course of the performance period 2017-2019, and as such, the information disclosed reflects their pro-rata LTPP & LTRPP 2017-2019
payouts attributable to the period they were a member of the Executive Committee. Bertrand Bodson, Klaus Moosmayer, John Tsai, Robert Weltevreden and Richard Saynor joined
Novartis post the 2017 LTI awards being made and hence did not receive LTPP & LTRPP awards for the 2017-2019 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 & LTRPP after the step down date.
5 Includes 5 430 vested RSUs (CHF 502 003) on July 28, 2019, to John Tsai, in lieu of the LTI that he forfeited when leaving his previous employer and 1 323 vested RSUs (CHF
123 092) and 14 470 vested PSUs (CHF 1 346 289) on March 24, 2019, to Paul Hudson in lieu of the LTI that he forfeited when leaving his previous employer. The PSUs had the same
performance measures as the LTPP for the 2016-2018 performance cycle (NCVA and long-term innovation).
6 All amounts are before deduction of the social security contribution and income tax due by the Executive Committee member.
7 Comprises the compensation of Richard Francis, the former CEO of Sandoz including the vesting of his Long-Term Incentives for performance cycle 2017-2019, as per the plan rules.
Unvested shares for Paul Hudson were forfeited upon his departure from the Company. See “—Executive Committee member departures” for details.
8 Amounts for Executive Committee members paid in USD were converted at a rate of USD 1.00 = CHF 0.9938, which is the same average exchange rate used in the Group’s 2019
consolidated financial statements.
142
Item 6. Directors, Senior Management and Employees
The table and information below provide additional details on awards granted as part of the 2017-2019 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.
2017-2019 LTPP performance cycle
PSUs at grant
Shares delivered at vesting
PSUs
(target number)
PSUs
(target value
at grant date)
2
(CHF)
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)
Executive Committee members 1
Vasant Narasimhan
21 323
1 980 693
164%
34 970
3 248 363
2 827
262 600
3 510 963
Other 14 Executive Committee
members, including the
two members who stepped down
during financial year 2019 5
109 616 10 247 244
164%
178 984 16 735 046
13 151
1 227 397 17 932 704
Total
130 939 12 227 938
213 954 19 983 409
15 978
1 489 997 21 443 667
1 Shannon Thyme Klinger, Stefan Lang, Susanne Schaffert and Marie-France Tschudin joined the Executive Committee during the course of the performance period 2017-2019. As
such, the information disclosed reflects their pro-rata LTPP 2017-2019 payout attributable to the period they were a member of the Executive Committee. Bertrand Bodson, Klaus
Moosmayer, John Tsai, Robert Weltevreden and Richard Saynor joined Novartis post the 2017 LTPP awards being made and hence did not receive an LTPP award for the 2017-2019
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 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.
3 The shown amounts represent the underlying share value of the target number of PSUs vested for the performance period 2017-2019, based on the last closing share price on the
day the Novartis Board of Directors approved the final LTPP and LTRPP performance payout factors (i.e., January 21, 2020) of CHF 92.89 per Novartis share and USD 95.19 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 2017-2019. At vesting, the dividend equivalents are credited in shares or ADRs.
5 Includes the LTPP vesting for Richard Francis, the former CEO, Sandoz for performance cycle 2017-2019, as per the plan rules. The LTPP vesting for the former CEO, Novartis
Pharmaceuticals, Paul Hudson were forfeited on August 31, 2019, at his departure from the Company. See “—LTPP perfomance outcomes” for further details.
2017-2019 LTRPP performance cycle
PSUs at grant
Shares delivered at vesting
PSUs
(target number)
PSUs
(target value
at grant date)
2
(CHF)
Performance shares
Payout factor Performance shares delivered at vesting
equivalent shares delivered at vesting
for LTRPP delivered at vesting (value at vesting date) delivered at vesting (value at vesting date)
(CHF)
(CHF)
(number)
(number)
(% of target)
Dividend
4
3
Dividend
Total shares
equivalent shares delivered at vesting
(value at
vesting date)
(CHF)
Executive Committee members 1
Vasant Narasimhan
7 996
742 748
138%
11 034
1 024 948
892
82 858
1 107 806
Other 14 Executive Committee
members, including the
two members who stepped down
during financial year 2019 5
45 858
4 290 344
138%
63 283
5 920 579
5 077
474 933
6 383 700
Total
53 854
5 033 093
74 317
6 945 527
5 969
557 791
7 491 506
1 Shannon Thyme Klinger, Stefan Lang, Susanne Schaffert and Marie-France Tschudin joined the Executive Committee during the course of the performance period 2017-2019. As
such, the information disclosed reflects their pro-rata LTRPP 2017-2019 payout attributable to the period they were a member of the Executive Committee. Bertrand Bodson, Klaus
Moosmayer, John Tsai, Robert Weltevreden and Richard Saynor joined Novartis post the 2017 LTRPP awards being made and hence did not receive an LTRPP award for the
2017-2019 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 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.
3 The shown amounts represent the underlying share value of the target number of PSUs vested for the performance period 2017-2019, based on the last closing share price on the
day the Novartis Board of Directors approved the final LTPP and LTRPP performance payout factors (i.e., January 21, 2020) of CHF 92.89 per Novartis share and USD 95.19 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 2017-2019. At vesting, the dividend equivalents are credited in shares or ADRs.
5 Includes the LTRPP vesting for the CEO of Sandoz for performance cycle 2017-2019, as per the plan rules. The LTRPP vesting for Paul Hudson were forfeited on August 31, 2019, at
his departure from the Company. See “—LTRPP perfomance outcomes” for further details.
143
Item 6. Directors, Senior Management and Employees
The table and information below provide details on the 2018 realized compensation for the CEO and other Exec-
utive Committee members, for comparative purposes.
2018 realized compensation for the CEO and other Executive Committee members
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
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
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. 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.
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.
Realized compensation for the Executive Committee for 2019 compared to 2018
In his second, and first full year in the role, and following a strong performance year for the Company, the 2019 total
realized compensation for the CEO was CHF 10 615 740, and includes the payouts of the Annual Incentive, LTPP
and LTRPP based on actual performance assessed for the three-year cycle concluding in 2019. This increase,
compared to 2018, can be further explained by the following:
• The CEO’s annual base salary was increased by 8% from March 31, 2019 in line with our “—Executive Committee
appointments compensation policy” as communicated in Item 6.B of the 2018 Annual Report.
• The 2017-2019 LTPP and LTRPP (his first LTI granted as a member of the Executive Committee prior to his CEO
role) vested at 164% and 138%, respectively (compared to the 2018 payouts of 136% and 0%).
• The Novartis share price increased by 30.2% between the grant and vest date of the LTPP and LTRPP.
Overall, the 2019 total realized compensation for the Executive Committee, including the CEO, was CHF 66.5 mil-
lion, which is broadly in line with the 2018 total realized compensation of CHF 66.3 million. The lower turnover of
Executive Committee members (four members stepped down in 2018 versus two members in 2019) was partly off-
set by the higher performance payouts of the variable pay elements (both the Annual Incentive and the LTI) due to
the strong Company performance. In addition, 2019 was also the first full year for a number of other members of
the Executive Committee.
144
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 following
tables disclose for the CEO and other Executive Committee members:
• Fixed 2019 compensation (base salary and benefits)
• The actual cash portion and the deferred portion granted in equity of the 2019 Annual Incentive
• 2019-2021 LTPP performance cycle awards, which are reported at target value at grant date under the assump-
tion that the awards will vest at 100% achievement, excluding any share price movement and dividend equiva-
lents that may be accrued over the performance cycle. The future payout will be determined only after the per-
formance cycle concludes in three years (i.e., the end of 2021), with a payout range of 0% to 200% of the target
value.
• Other compensation for 2019, 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 2019, including the Annual Incentive payout for the 2019 performance
year and the LTI payouts for the 2017-2019 performance cycle, shareholders should refer to the 2019 realized
compensation table in “—2019 realized compensation for the CEO and other Executive Committee members.”
145
Item 6. Directors, Senior Management and Employees
2019 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 2019
Long-Term Incentive
2019-2021 cycle
grants at target
2019 annual base
salary
2019 pension
benefits
2019 Annual Incentive
(performance achieved)
LTPP
2019-2021 cycle
Other 2019
compensation
Total
compensation
paid, promised
or granted 2019
Currency
Cash
(amount)
Amount
1
Cash
(amount)
Equity
(value at
2
grant date)
PSUs
(target value
3
at grant date)
Amount
4
5
Amount
Executive Committee members active on December 31, 2019
Vasant Narasimhan
Steven Baert
Bertrand Bodson
James Bradner 6
Harry Kirsch
Shannon Thyme Klinger
Steffen Lang
Klaus Moosmayer
Richard Saynor (from July 15, 2019) 7
Susanne Schaffert 7
John Tsai
Marie-France Tschudin (from June 7, 2019) 7
Robert Weltevreden
Subtotal
Executive Committee members who stepped down during 2019
Richard Francis (until March 19, 2019) 8, 9
Paul Hudson (until June 7, 2019) 9, 10
CHF
CHF
Subtotal
Total
CHF
CHF
CHF
USD
CHF
CHF
CHF
CHF
CHF
CHF
CHF
CHF
CHF
1 653 333
789 750
607 500
1 126 781
1 053 000
783 333
745 000
500 000
356 021
850 000
858 333
481 667
607 500
10 405 223
179 315
439 342
618 657
11 023 880
165 547
161 454
170 178
359 961
164 467
188 990
167 815
125 483
87 118
167 096
181 048
92 090
157 423
2 186 434
2 008 800
633 360
341 040
951 720
1 045 044
468 000
408 000
260 000
179 315
459 000
602 000
290 630
158 340
7 799 341
2 008 839
633 417
341 092
951 805
1 045 105
468 073
612 145
260 092
179 371
1 071 115
602 020
290 653
475 132
5 440 530
1 662 585
974 476
2 832 511
2 744 591
1 600 005
1 200 026
800 047
–
1 870 066
2 064 063
968 249
974 476
8 932 950 23 114 040
160 452 11 437 501
4 005 545
124 979
2 572 111
137 826
6 308 275
85 498
6 079 865
27 658
3 619 776
111 375
3 142 796
9 810
2 117 371
171 749
2 752 732
1 950 908
4 577 528
160 252
4 685 007
377 544
2 123 289
–
2 377 731
4 860
3 322 378 55 760 366
36 025
74 994
111 018
2 297 452
18 914
–
18 914
7 818 255
37 435
–
37 435
4 800 594
3 669 950
8 470 543
8 970 384 24 104 951 10 015 988 64 230 910
3 808 445
2 885 164
6 693 609
720 460
270 451
990 910
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 2022.
See next page for 2018 comparative figures.
1 Includes mandatory employer contributions of CHF 4 373 for the CEO and CHF 63 461 for the other Executive Committee members paid by Novartis to governmental social security systems. This amount is out
of total employer contributions of CHF 3 923 070 paid in 2019 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 21, 2020) of CHF 92.89 per Novartis share and USD 95.19
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 2019-2021, 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 for all members except for Mr. Richard Saynor, who was not part of the Company at the annual grant date and hence did not
receive an LTPP award.
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 Amounts in USD for James Bradner were converted at a rate of CHF 1.00 = USD 1.006 , which is the average rate used in the Group’s 2019 consolidated financial statements.
7 For those members who joined the Executive Committee in 2019, the information under the columns “Actual compensation paid or granted for 2019” and “Long-Term Incentive 2019-2021 cycle grants at target”
includes their pro-rata compensation from the date they joined the Executive Committee to December 31, 2019 or to the end of the performance cycle in the case of the “Long-Term Incentive 2019-2021 cycle
grants at target”.
8 Richard Francis stepped down as CEO, Sandoz on March 19, 2019 and will leave the company on 31 March, 2020 in line with his contractual notice period. Until the end of the notice period, he will receive further
contractual compensation that includes the base salary, Annual Incentive and pension benefits. In accordance with the plan rules, the LTPP 2019-2021 cycle grant (21 217 PSUs), included in full in the above
table, will vest on the normal vesting date pro-rata based on the number of months of Novartis employment during the performance cycle. The vesting of this grant is subject to performance conditions assessed
at the end of the period.
9 For those members leaving the Executive Committee, the columns under “Actual compensation paid or granted for 2019” and “Long-Term Incentive 2019-2021 cycle grants at target” reflect the pro-rata
compensation for their period as Executive Committee member. The column “Other 2019 compensation” includes inter alia their pro-rata compensation from the date they left the Executive Committee to
December 31, 2019 or to the end of the performance cycle in the case of the “Long-Term Incentive 2019-2021 cycle grants at target”. See “—2019 Executive Committee member departures” for details.
10 Paul Hudson stepped down as CEO, Novartis Pharmaceuticals on June 7, 2019 and left the company on August 31, 2019 in line with his reduced contractual notice period (see for more details “—2019 Executive
Committee member departures”). The Annual Incentive and LTPP 2019-2021 cycle grant (31 553 PSUs) included in the table above, were forfeited in full upon his departure.
146
Item 6. Directors, Senior Management and Employees
2018 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 2018.
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.
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.
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.
147
Item 6. Directors, Senior Management and Employees
Compensation at grant value for the Executive Committee for 2019 compared to 2018
Grant compensation delivered to the CEO increased by CHF 1.5 million from 2018 to 2019, largely due to the payout
of the 2019 Annual Incentive, and an 8% increase in annual base salary from March 31, 2019 as reported in Item 6.B
of the 2018 Annual Report.
Overall, there is a notable decrease when comparing the 2019 Executive Committee total compensation at grant
value of CHF 64.2 million to the 2018 grant value of CHF 70.2 million. The difference is primarily due to:
• The reduced overlap of members (in total, 17 Executive Committee members were granted compensation in 2018
compared to 15 members in 2019).
• The CEO of Alcon, who stepped down in 2018 and was not replaced following the decision to spin off Alcon.
• Buyout awards (in cash and/or in equity) granted to one onboarding external member in 2019 versus three joining
in 2018 (see Item 6.B in the 2018 Annual Report).
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.
Malus and clawback
Per our “—Executive Committee compensation philosophy and principles,” in 2019, there was no legal or factual
basis on which to exercise malus or clawback for current or former Executive Committee members.
148
Item 6. Directors, Senior Management and Employees
Number of equity instruments granted to the CEO and other Executive Committee members for financial
year 2019
Executive Committee members active on December 31, 2019
Vasant Narasimhan
Steven Baert
Bertrand Bodson
James Bradner
Harry Kirsch
Shannon Thyme Klinger
Steffen Lang
Klaus Moosmayer
Richard Saynor (from July 15, 2019) 4
Susanne Schaffert
John Tsai
Marie-France Tschudin (from June 7, 2019) 4
Robert Weltevreden
Subtotal
Executive Committee members who stepped down during 2019
Richard Francis (until March 19, 2019) 5, 6
Paul Hudson (until June 7, 2019) 5, 7
Subtotal
Total
Variable compensation1
2019 Annual Incentive
(performance achieved)
LTPP
2019-2021 cycle
Other
Equity
(number) 2
PSUs
(target number) 3
Equity/PSUs
(number)
21 626
6 819
3 672
9 999
11 251
5 039
6 590
2 800
1 931
11 531
6 481
3 129
5 115
61 726
18 863
11 056
32 071
31 139
18 153
13 615
9 077
0
0
0
0
0
0
0
0
0
11 452
21 217
23 418
11 085
11 056
0
0
0
0
95 983
262 476
11 452
403
0
403
96 386
8 841
4 525
13 366
275 842
0
0
0
11 452
See next page for 2018 comparative figures.
1 The values of the awards are reported in the table “2019 compensation at grant value for the CEO and other Executive Committee members” in “—2019 compensation at grant value
for the CEO and other Executive Committee members.”
2 Vested shares, restricted shares and/or RSUs granted under the Annual Incentive for performance period 2019
3 Target number of PSUs granted under the LTPP as applicable for the performance cycle 2019-2021
4 For those members who joined the Executive Committee in 2019, the information under the column “Variable compensation” includes their pro-rata number of equity instruments
from the date they joined the Executive Committee to December 31, 2019 or to the end of the performance cycle in case of the “LTPP 2019-2021 cycle”.
5 For those members leaving the Executive Committee, the column under “Variable compensation” reflects the pro-rata number of equity instruments for their period as Executive
Committee member. The column “Other” includes their pro-rata compensation from the date they left the Executive Committee to December 31, 2019 or to the end of the
performance cycle in the case of the “LTPP 2019-2021 cycle”. See “—2019 Executive Committee member departures” for details.
6 Richard Francis stepped down as CEO, Sandoz on March 19, 2019 and will leave the company on 31 March, 2020 in line with his contractual notice period. In accordance with the
plan rules, the LTPP 2019-2021 cycle grant (21 217 PSUs), included in full in the above table, will vest on the normal vesting date pro-rata based on the number of months of Novartis
employment during the performance cycle. The vesting of this grant is subject to performance conditions assessed at the end of the period.
7 Paul Hudson stepped down as CEO, Novartis Pharmaceuticals on June 7, 2019 and left the company on August 31, 2019 in line with his reduced contractual notice period (see for
more details “—2019 Executive Committee member departures”). The 2019 Annual Incentive and LTPP 2019-2021 cycle grant (31 553 PSUs) included in the table above, were
forfeited in full upon his departure.
149
Item 6. Directors, Senior Management and Employees
Number of equity instruments granted to the CEO and other Executive Committee members for financial
year 2018 (comparative information)
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
1 The values of the awards are reported in the table “2018 compensation at grant value for the CEO and other Executive Committee members” in “—2018 compensation at grant value
for the CEO and Executive Committee members.”
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.
150
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 RSUs within five years of hire or pro-
motion, 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 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, 20191
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, 2019. As of December 31, 2019, 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, 2019, 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 1 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, 2019
Equity ownership level
Vasant Narasimhan
Steven Baert
Bertrand Bodson
James Bradner
Harry Kirsch
Shannon Thyme Klinger
Steffen Lang
Klaus Moosmayer
Richard Saynor
(from July 15, 2019)
Susanne Schaffert
John Tsai
Marie-France Tschudin
(from June 7, 2019)
Robert Weltevreden
59 983
39 785
4 600
21 794
108 193
12 193
56 063
0
0
43 770
11 859
5 500
150
89 381
31 890
11 492
46 531
40 968
22 028
20 248
3 016
9 211
26 123
29 570
24 715
7 751
Total 6
363 890
362 924
8x
8x
2x
5x
12x
3x
9x
0x
1x
7x
4x
3x
1x
115 896
64 538
15 037
104 379
102 484
35 117
26 782
12 034
1 790
36 224
12 487
45 078
11 386
583 232
4 657
0
0
0
0
1 488
4 535
0
0
1 735
0
0
0
269 917
136 213
31 129
172 704
251 645
70 826
107 628
15 050
11 001
107 852
53 916
75 293
19 287
12 415
1 322 461
1 Includes holdings of “persons closely linked” to Executive Committee members (see definition “—Persons closely linked.”)
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. Also includes unvested keep-whole shares received in connection to the Alcon spin-off.
3 The multiple is calculated based on the full-year annual base salary and the closing share price as at the end of the 2019 financial year. The share price on the final trading day of
2019 was CHF 91.90 / USD 94.69 as at December 31, 2019.
4 The target number of PSUs is disclosed pro-rata to December 31, 2019, 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, 2019, unless the award qualified for full vesting under the plan rules. LSSP
participation for Executive Committee members ceased in 2014 although some current members received later grants under this plan prior to becoming members of the Executive
Committee. Outstanding awards will vest five years from the grant date, subject to the LSSP plan rules.
6 Paul Hudson and Richard Francis stepped down from the Executive Committee in 2019. At the time they stepped down from the Executive Committee, Mr. Hudson owned zero
vested shares, and 140 121 unvested shares and other equity rights and Mr. Francis owned 50 615 vested shares and 86 740 unvested shares and other equity rights.
151
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 2019:
Vasant Narasimhan
Steven Baert
Bertrand Bodson
James Bradner
Harry Kirsch
Shannon Thyme Klinger
Steffen Lang
Klaus Moosmayer
Richard Saynor
Susanne Schaffert
John Tsai
Marie-France Tschudin
Robert Weltevreden
Total 3
Annual
Variable
base salary 1 compensation 2
14.7%
20.5%
25.3%
18.9%
17.8%
22.8%
25.0%
25.1%
13.4%
19.3%
19.1%
23.7%
27.4%
19.4%
85.3%
79.5%
74.7%
81.1%
82.2%
77.2%
75.0%
74.9%
86.6%
80.7%
80.9%
76.3%
72.6%
80.6%
1 Excludes pension and other benefits
2 See table “2019 compensation at grant value for the CEO and other Executive
Committee members” with regard to the disclosure principles of variable
compensation.
3 Excludes Richard Francis, who stepped down from the Executive Committee during
2019 and Paul Hudson, who resigned.
Other payments to Executive Committee members
During 2019, 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 LTI plan rules, pay-
ments were made to eight former members. Of this, CHF
34 312 111 relates to the vesting of the LTPP and LTRPP
for the 2017-2019 performance cycle, based on actual
performance outcomes plus dividend equivalents, and
CHF 4 130 033 (USD 4 451 756) relates to the vesting of
the one-off award to the Alcon CEO (see “—Former Alcon
CEO one-off performance award”). In addition, contrac-
tual amounts totaling 2 050 096 were made (comprising
of base salary, Annual Incentive and other benefits), and
two individuals received CHF 516 957 in tax equalization
on incentive compensation granted during an interna-
tional assignment.
No other payments (or waivers of claims) were made
to former Executive Committee members or to “persons
closely linked” to them during 2019.
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 2019, and none were outstanding as of
December 31, 2019.
Persons closely linked
“Persons closely linked” are (i) their spouse, (ii) their chil-
dren below age 18, (iii) any legal entities that they own or
otherwise control, and (iv) any legal or natural person
who is acting as their fiduciary.
Note 27 to the Group’s audited consolidated
financial statements
The total expense for the year for compensation awarded
to Executive Committee and Board members, using
International Financial Reporting Standards (IFRS) mea-
surement rules, is presented in Note 27 to the Group’s
audited consolidated financial statements.
Award and delivery of equity to Novartis associates
During 2019, 17.7 million unvested restricted shares (or
ADRs), RSUs and target PSUs were granted, and 13.4
million Novartis vested shares (or ADRs) were delivered
to Novartis associates under various equity-based par-
ticipation plans. Current unvested equity instruments
(restricted shares, RSUs and target PSUs) and outstand-
ing equity options held by associates represent 1.53%
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.
152
Item 6. Directors, Senior Management and Employees
Additional disclosures – Alcon spin-off and CEO one-off performance award
Former Alcon CEO one-off performance award
As disclosed in the 2016 Compensation Report, the Alcon CEO, F. Michael Ball, received a one-off award of 50 000
Performance Share Units (the payout range was 0–200% of target) on February 1, 2016, when he joined Novartis,
subject to the achievement of targets linked to the turnaround of Alcon during the 2016-2018 performance cycle.
Mr. Ball gave notice to retire from the Executive Committee on July 1, 2018, following the announcement of the
spin-off of Alcon but continued to work in a full-time capacity for Alcon.
To provide transparency to shareholders, the Board of Directors of Novartis decided to communicate the out-
come of the Alcon CEO’s one-off performance award.
The performance metrics of the award were 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 successful developments and launches of new products. Performance was moni-
tored regularly across the three-year performance cycle and assessed against the targets supported by the Com-
pensation Committee at the end of each financial year.
After a significant gap in performance versus the targets in the first year, Alcon partially closed the gap in the
next two years. Overall, the turnaround of the business resulted in a very successful spin-off, creating significant
value for shareholders. Core operating income grew ahead of sales, and target launches of new products like Pan-
Optix, and Dailies Total1 were well executed. However, the final payout was below target, as overall sales grew slower
than peers, core operating income margin was below the average of peers and other launches were below target.
This one-off award vested on March 18, 2019, at 85% of target based on performance outcomes versus the tar-
gets. The total value of the award at vesting, including dividend equivalents, was USD 4 451 756 (comprising 42 651
shares out of the target of 50 000 after the performance adjustment, plus 5 130 dividend equivalent shares). This
figure is included in payments made to former members of the Executive Committee in “—2019 realized compen-
sation for the CEO and other Executive Committee members.”
Alcon spin-off equity restoration plan
As disclosed in the 2018 Compensation Report and in line with communications delivered ahead of the spin-off,
Novartis shareholders received a dividend in kind in Alcon shares at the spin-off date. PSUs and RSUs held by
Novartis employees, including members and former members of the Executive Committee, are not entitled to div-
idends and therefore did not receive the dividend in kind distribution.
To ensure equal treatment of PSU and RSU holders relative to Novartis shareholders, Novartis granted equity
awards (called Keep Whole Awards) to its employees, including the Executive Committee members, following the
spin-off. The Keep Whole Awards restored the PSUs and RSUs to their pre-spin values. This was done in accor-
dance with the Alcon spin-off equity restoration plan as follows:
• The Keep Whole Awards had a value similar to the estimated 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 were granted in the same equity instrument (i.e., PSUs or RSUs) with the same vesting
terms and performance conditions (if applicable) as the underlying award.
• The Keep Whole Awards aimed to ensure that Novartis employees who had been granted PSUs or RSUs, includ-
ing members of the Executive Committee, were not disadvantaged by the spin-off relative to Novartis sharehold-
ers.
The total value of Keep Whole Awards granted to the current members of the Executive Committee was USD 8.5
million. The sums are equivalent to the estimated reduction in value of the dividend in kind as a result of the spin-
off, and as such are not considered by the Compensation Committee to be additional compensation.
153
Item 6. Directors, Senior Management and Employees
Interim update regarding ongoing LTI performance cycles
Following feedback from our shareholders and in line with
our commitment made in the 2018 Compensation Report,
below we report how performance is tracking against tar-
get for our ongoing LTI performance cycles.
2018-2020 LTPP and LTRPP
After the second year of these LTI performance cycles,
both are currently tracking ahead of target. Financial per-
formance continues to advance as we continue to make
improvements to our operational efficiencies. All
Innovative Medicines targets to be completed by 2019
were achieved, and our NIBR objectives were equally suc-
cessful. Forecasts at the end of December place the
Novartis TSR sixth out of 15 among our global healthcare
peer group.
PERFORMANCE MEASURES
TRACKING
LTPP NCVA (75%)
LTPP innovation (25%)
Ahead of target
Ahead of target
LTRPP relative TSR (100%)
Ahead of peer group median
2019-2021 LTPP
As disclosed in the 2018 Compensation Report, the two
LTI plans, LTPP and LTRPP, were combined into a single
LTPP plan for performance cycles beginning in 2019. The
new LTPP plan has four equally weighted metrics. After
the first year of the three-year performance cycle, net
sales growth is tracking ahead of target. This is largely
due to strong sales execution, particularly for Cosentyx
and Entresto. Core operating income is tracking ahead
of target, mainly driven by higher sales. Innovation is
tracking at target, with a number of read-outs, submis-
sions and approvals achieved in our Innovative Medicines
programs, and all NIBR milestones on track for comple-
tion by the end of the cycle. Relative TSR is tracking
ahead of the peer group median.
154
Item 6. Directors, Senior Management and Employees
2020 Executive Committee compensation
system
The Compensation Committee has evaluated the Exec-
utive Committee compensation system based on feed-
back received from shareholders; the Compensation
Committee believes that the compensation system is
largely operating as intended, supports the Company’s
strategy, and is aligned with market and best practices.
The following enhancements to the Annual Incentive and
LTI systems should however be acknowledged.
Annual Incentive payout matrix
The payout matrix of the Annual Incentive will be updated
such that a performance that is determined to be “below
expectations” will receive a 0% payout (previously this
provided for a 0–30% payout).
LTPP innovation metric
At the beginning of 2019, the Research & Development
Committee and the Compensation Committee jointly
approved to change the LTPP innovation metric for cycle
2019-2021 onward. The committees decided that GDD
and NIBR targets would be weighted 70% and 30% of
the innovation metric, respectively.
The GDD targets are transparent to shareholders
given that they are taken directly from the first three
years of the published filing chart in the Novartis Annual
Report (for 2019, see “—Item 4.B Business overview—
Innovative Medicines—Selected development projects”)
for the start of the performance cycle. Performance is
assessed using a scoring mechanism based on the num-
ber of successful targeted filings and the time of their
completion against target. NIBR milestones are set at
the beginning of the cycle, and these will be assessed
according to the number of milestones achieved against
target. Overall performance will then be calculated
based on the actual outcome for GDD and NIBR versus
the overall target outcome. The payout schedule is iden-
tical to that used for the Annual Incentive (see “—2019
Annual Incentive”).
LTPP holding period
As of grants made from 2020, the CEO and CFO will be
required to hold any equity vesting under the LTPP plan
(after the applicable tax and/or social security) for a min-
imum of two years after the vesting date. Taking into con-
sideration the three-year vesting period, this means that
they will not be permitted to sell or trade the resulting
shares before the fifth anniversary of the grant date. This
holding period will be additional to the existing share
ownership requirements.
LTPP TSR peer group
There will also be a change to the structure of the TSR
peer group as a result of the recent acquisition of Cel-
gene by Bristol-Myers Squibb, both of which are com-
panies in our TSR peer group. The Compensation Com-
mittee decided that Celgene will therefore be removed
from the peer group for the 2018-2020 LTI cycle, thereby
reducing the total number of peers, from 15 to 14. Given
the anticipated timing of the acquisition, the Compensa-
tion Committee decided to keep Celgene in the peer
group for the 2017-2019 performance cycle.
LTPP TSR share price evaluation
The Compensation Committee reported last year the
decision to combine the two LTI plans, LTPP and LTRPP,
into a single LTPP plan for performance cycles begin-
ning in 2019 onward. Both prior and current LTI systems
consider the TSR performance measure for the LTI pay-
out and, under former rules, a one-day closing price
method was used to determine the share price at the
start and end of performance cycles.
The Compensation Committee decided that going
forward, a three-month averaging method will be imple-
mented. This means that for the ongoing 2018-2020 and
2019-2021 LTI cycles, a one-day pricing approach will
be kept for the start of the performance cycles, and the
three-month averaging method will then be used to
determine the corresponding share price at the end of
the cycles.
The three-month averaging method will be used at
the beginning and end of the cycles from 2020-2022.
This approach was chosen to be more consistent with
market practice and to provide a more stable view of lon-
ger-term performance. The Compensation Committee
does not believe that this change makes the perfor-
mance targets any easier or more difficult to achieve.
155
Item 6. Directors, Senior Management and Employees
2020 Executive Committee compensation
As outlined in our “—Executive Committee appointments compensation policy,” some members, including the CEO,
were appointed with total target compensation below external market median level. Each year, we collaborate with
our advisors to benchmark the compensation levels of the members of the Executive Committee. Taking this into
consideration and to ensure our competitiveness in the market, the total target compensation for these members
has been assessed, and increases have been made for 2020 in line with their demonstrated performance and abil-
ity in their respective roles in 2019.
Vasant Narasimhan, CEO (in role since February 1, 2018)
In his second year as CEO, Vasant Narasimhan delivered a strong financial and outstanding innovation year for
Novartis in 2019, and made good progress toward our digital and culture transformation, and building trust with
society. Further detail on his achievements is provided in “—2019 CEO balanced scorecard.” Owing to this perfor-
mance, Dr. Narasimhan will receive a 5% annual base salary increase effective March 1, 2020 (from CHF 1 674 000
to CHF 1 757 700), bringing him closer to the external market median level, while leaving room to progress further,
in line with proven performance in the coming years. There will be no change to his target Annual Incentive and his
target Long-Term Incentive (325% of base salary in total).
All other Executive Committee members were awarded annual base salary increases in line with the annual com-
pensation review applicable to all associates in Switzerland and the US, with the exception of the members listed
below, who joined the Executive Committee in the last two years.
Bertrand Bodson, Chief Digital Officer (in role since April 1, 2018)
Bertrand Bodson led the substantial scaling of our digital initiatives in 2019, increased the momentum in data sci-
ence across the Company, and put in place key partnerships with Microsoft, AWS and Tencent. Mr. Bodson will
receive an annual base salary increase of 5% as from March 1, 2020, and his target Long-Term Incentive will be
increased by 20% of annual base salary as from 2020. There will be no change to his Annual Incentive target.
Shannon Thyme Klinger, Group General Counsel (in role since April 1, 2018)
Shannon Thyme Klinger helped transform our legal function in 2019, becoming one function globally, and leverag-
ing technology to improve efficiency. Ms. Klinger supported the spin-off of our eye-care division, Alcon, creating
large value to shareholders. To continue to be competitive in the market, Ms. Klinger will receive an annual salary
increase of 9% as from March 1, 2020, and in addition an increase in her current target Annual Incentive and tar-
get Long-Term Incentive of 10% and 20%, respectively as a percentage of annual base salary.
Klaus Moosmayer, Chief Ethics, Risk and Compliance Officer (in role since December 1, 2018)
Klaus Moosmayer revamped the Novartis Risk approach in 2019, finalized the strategic integration of Risk and Com-
pliance in the business, and upgraded talent in his department, thereby strengthening our compliance across the
global organization. Mr. Moosmayer will receive an annual base salary increase of 5% as from March 1, 2020. There
will be no change to his Annual Incentive and his Long-Term Incentive targets.
Robert Weltevreden, Head of Novartis Business Services (in role since June 1, 2018)
Robert Weltevreden made great progress in our NBS transformation; set to over-deliver with recurring savings of
over USD 300m in 2019, by increasing the footprint of our Global Service Center, securing international real estate
and facility service contracts, and consolidating our IT services. In 2020, Mr. Weltevreden will receive an annual
base salary increase of 5% and a target Long-Term Incentive, as a percentage of annual base salary, increase of
20%.
To bring their compensation further toward the external market median for their roles, and within policy guidelines,
Steffen Lang, Susanne Schaffert, John Tsai, and Marie-France Tschudin will also receive a 10–20% increase of
their target 2020-2022 Long-Term Incentive (LTI). The LTI is subject to three-year performance conditions and
provides for an overall payout between 0% and 200%.
156
Item 6. Directors, Senior Management and Employees
2019 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 of Directors 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 compensation
due to the comparability of Swiss legal requirements,
including broad personal and individual liabilities under
Swiss law (and new criminal liability under Swiss rules
regarding board and executive committee compensa-
tion related to the Ordinance against Excessive Com-
pensation in Listed Companies), and under US law (due
to the Company’s secondary listing on the New York
Stock Exchange). The Board of Directors reviews the
compensation of its members, including the Chairman,
each year based on a proposal by the Compensation
Committee and on advice from its independent advisor,
including relevant benchmarking information. The peer
group used for the Board of Directors is different than
that used for the Executive Committee to ensure inde-
pendence of decision-making.
The contract of the Chairman and the Board of Direc-
tors compensation policy do not provide for any termi-
nation-related payments.
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 2019, 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 (1.2% for 2019).
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 2019 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 2019-2020
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.
2020 Board compensation
The Board of Directors compensation system and fee
levels will remain unchanged in 2020.
157
Item 6. Directors, Senior Management and Employees
Board member total compensation earned for the financial year 2019
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, 2019
Joerg Reinhardt 4
Enrico Vanni
Nancy Andrews
Ton Buechner
Patrice Bula 5
Srikant Datar
Elizabeth Doherty
Ann Fudge
Frans van Houten
Andreas von Planta
Charles L. Sawyers
William T. Winters
Subtotal
Chair
Vice Chair
•
•
•
•
•
•
•
•
•
•
•
•
•
Chair
•
Chair
21 498 1 900 000 1 900 000 4 373 3 804 373
Chair
•
4 494 220 833 309 166 3 512 533 511
•
•
2 035 180 000 180 000
– 360 000
•
•
•
•
•
Chair
•
• 5
•
•
2 967 145 833 204 166 4 373 354 372
1 813
– 266 667 4 373 271 040
Chair
2 602 230 000 230 000
– 460 000
•
•
•
2 544 225 000 225 000
– 450 000
2 262 200 000 200 000
– 400 000
2 716
26 667 293 334
– 320 001
2 602 230 000 230 000 4 373 464 373
2 035 180 000 180 000
– 360 000
3 620
– 353 333
– 353 333
51 188 3 538 333 4 571 666 21 002 8 131 001
Board members who stepped down at the 2019 AGM
Dimitri Azar 6
Subtotal
Total
•
•
•
1 016
30 000
30 000
1 016
30 000
30 000
–
–
60 000
60 000
52 204 3 568 333 4 601 666 21 002 8 191 001
See next page for 2018 comparative figures.
1 The shown amounts represent the gross number of shares delivered to each Board member in 2019 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 2019 for the services from the 2018 AGM to the 2019 AGM, and (ii) the first of two
equity installments delivered in August 2019 for the services from the 2019 AGM to the 2020 AGM. The second and final equity installment for the services from the 2019 AGM to the
2020 AGM will take place in February 2020.
2 Includes an amount of CHF 21 002 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 413 985 , 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 February 28, 2019
6 Until February 28, 2019
158
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
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.
159
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 2019, and none were outstanding as of Decem-
ber 31, 2019.
Other payments to Board members
During 2019, no payments (or waivers of claims) other
than those set out in the Board member compensation
table (including its footnotes) in “—Board member total
compensation earned for the financial year 2019” were
made to current members of the Board or to “persons
closely linked” to them.
Payments to former Board members
During 2019, 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
27 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, 2019, all current and former members of the Board
of Directors who were required to meet the minimum
share ownership requirements did so.
Shares, ADRs and share options owned by Board
members
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, 2019, is
shown in the table below. As of December 31, 2019, 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, 2019 1,2
Joerg Reinhardt
Enrico Vanni
Nancy Andrews
Ton Buechner
Patrice Bula
Srikant Datar
Elizabeth Doherty
Ann Fudge
Frans van Houten
Andreas von Planta
Charles L. Sawyers
William T. Winters
Total 3
563 697
26 645
7 265
10 950
1 946
41 334
6 765
14 114
4 764
161 035
10 986
18 170
867 671
1 Includes holdings of “persons closely linked” to Board members (see definition
“—Persons closely linked”)
2 Each share provides entitlement to one vote.
3 Dimitri Azar stepped down from the Board of Directors on February 28, 2019. On
February 28, 2019, Mr. Azar owned 18 750 shares. His shares are not included in the
total.
160
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 of Directors and Executive
Committee members, their equity participation in the
Group, and loans made to them. This Annual Report ful-
fills that requirement. In addition, the Annual Report is in
line with the principles of the Swiss Code of Best Prac-
tice for Corporate Governance of the Swiss Business
Federation (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
management process, with
approval of targets and
evaluation of performance
for the CEO by the Board of
Directors
• Balanced mix of short-term
and long-term variable com-
pensation elements
• Values and Behaviors are a
key component of the Annual
Incentive and are embedded in
our culture
• 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
• Contractual notice period of
12 months
• Post-contractual non-compete
period limited to a maximum
of 12 months from the end
of employment. Resulting
compensation is limited to the
annual base salary plus the
prior-year Annual Incentive as
per contract, if applicable
• Good and bad leaver
provisions apply to variable
compensation of leavers
• No severance payments or
change-of-control clauses
• Share ownership requirements;
no hedging or pledging of
Novartis share ownership
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 “—Share ownership requirements for the
CEO and other Executive Committee members.”
Compensation decision-making authorities
Authority for decisions related to compensation is gov-
erned by the Articles of Incorporation, Board Regulations
and the Compensation Committee Charter, which are all
published on the Company website: www.novartis.com/
investors/company-overview/corporate-governance. The
Compensation Committee serves as the supervisory and
governing body for compensation policies and plans within
Novartis, and has overall responsibility for determining,
reviewing and proposing compensation policies and plans
for approval by the Board of Directors in line with the Com-
pensation Committee Charter. A summary of discussions
and conclusions of each committee meeting is delivered
to the full Board of Directors. 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 2019 AGM, the Compensation Committee had the fol-
lowing five members: Patrice Bula, 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 2019 as its independent exter-
nal compensation advisor to support the Committee in
determining the design and implementation of compen-
sation and benefits. The advisor was hired directly by the
Compensation Committee in 2017, and the Compensa-
tion Committee has been fully satisfied with the perfor-
mance and independence of the advisor since its engage-
ment. In determining whether to renew the engagement
with the advisor, the Compensation Committee evalu-
ates, at least annually, the quality of the consulting ser-
vice, the independence of the advisor, and the benefits
of rotating advisors. Mercer Limited also provides ser-
vices related to management development at the mid-
and frontline leader level and in respect of corporate
pensions. The individual Mercer Limited consultants that
advise and support the Committee are not responsible
or rewarded for work beyond support to the Compen-
sation Committee and P&O on senior compensation.
Compensation Committee meetings held in 2019
In 2019, the Compensation Committee held six formal
meetings, one additional joint meeting with the Gover-
nance, Nomination and Corporate Responsibilities Com-
mittee, and two additional joint meetings with the
Research & Development Committee to review and
endorse for approval by the Board of Directors the inno-
vation targets and achievements of the LTPP and Annual
Incentive. The Compensation Committee conducted a
self-evaluation in 2019.
161
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 2019 CEO and other Executive
Committee members’ realized compensation on pages
142-144, the 2019 CEO and other Executive Committee
members’ compensation at grant value on pages 145-
147 and the additional disclosures on pages 149-152, as
well as the 2019 Board compensation on pages 157-159
and the additional disclosures on page 160 of the accom-
panying Compensation Report of Novartis AG for the
year ended December 31, 2019 (hereinafter referred to
as “disclosures made on the pages defined as subject
to audit”).
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 disclosures made on the pages defined as sub-
ject to audit. We conducted our audit in accordance with
Swiss Auditing Standards. Those standards require that
we comply with ethical requirements and plan and per-
form the audit to obtain reasonable assurance about
whether the disclosures made on the pages defined as
subject to audit comply with Swiss law and articles 14–16
of the Ordinance.
An audit involves performing procedures to obtain
audit evidence on the disclosures made on the pages
defined as subject to audit 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 misstatements in disclosures made on the
pages defined as subject to audit, whether due to fraud
or error. This audit also includes evaluating the reason-
ableness of the methods applied to value components
of remuneration, as well as assessing the overall presen-
tation of the disclosures made on the pages defined as
subject to audit. We believe that the audit evidence we
have obtained is enough and appropriate to provide a
basis for our opinion.
Opinion
In our opinion, the disclosures made on the pages defined
as subject to audit of the accompanying Compensation
Report of Novartis AG for the year ended December 31,
2019, comply with Swiss law and articles 14–16 of the
Ordinance.
PricewaterhouseCoopers AG
Martin Kennard
Audit expert
Auditor in charge
Kris Muller
Global relationship
partner
Basel, January 28, 2020
162
Item 6. Directors, Senior Management and Employees
6.C Board practices
Corporate governance
Framework
Novartis is committed to effective corporate governance,
and our corporate governance framework is intended to
support sustainable financial performance and long-
term value creation for our shareholders, patients,
employees and other stakeholders based on our Values
and Behaviors.
The Novartis corporate governance principles are fur-
ther elaborated in key governance documents, in partic-
ular in our Articles of Incorporation and the Regulations
of the Board, the Board Committees and the Executive
Committee (Board Regulations) (www.novartis.com/
investors/company-overview/corporate-governance).
The Governance, Nomination and Corporate Responsi-
bilities Committee (GNCRC) regularly reviews both the
corporate governance principles and the key governance
documents against evolving best practice standards and
new developments in line with our commitment to main-
taining the highest standards.
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 auditor; adopts and modifies Articles of Incorporation
BOARD OF DIRECTORS
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
163
AUDIT AND COMPLIANCE COMMITTEECOMPENSATION COMMITTEERESEARCH & DEVELOPMENT COMMITTEERISK COMMITTEEGOVERNANCE, NOMI NATION AND CORPORATE RESPONSIBILITIES COMMITTEE
Item 6. Directors, Senior Management and Employees
Group structure and shareholders
Group structure
Novartis AG and Group companies
Novartis AG, the Group’s holding company, is a corpo-
ration organized under Swiss law with issued registered
shares and registered office at Lichtstrasse 35, CH-4056
Basel, Switzerland.
The principal subsidiaries and associated companies
of the Novartis Group are shown in “Item 18. Financial
Statements—Note 32. Principal Group subsidiaries and
associated companies.”
Divisions
Novartis has two focused, customer-facing divisions:
Innovative Medicines, which includes the Novartis
Pharmaceuticals and Novartis Oncology business units;
and Sandoz, the generics and biosimilars division. The divi-
sions are supported by the Novartis Institutes for BioMed-
ical Research (NIBR), Global Drug Development (GDD),
Novartis Technical Operations (NTO), Novartis Business
Services (NBS), and corporate functions. A detailed review
of the 2019 business results can be found in “Item 18.
Financial Statements—Note 3. Segmentation of key fig-
ures 2019, 2018 and 2017.” In April 2019, Novartis com-
pleted the spin-off of its former eye care division, Alcon,
into a separately traded standalone company.
e
a ti v
v
s
In n o
te functio n
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o
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o
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M e d i c i nes/Pharmaceutic
Busin
als
e
s
s
s
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v
i
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e
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(
N
B
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)
S
a
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g
olo
dicin es/Oncolo
dicines/Onc
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anufacturin g ( N T O )
I n n o v a t i v
In n o v a t i v
e M e
e M e
Shareholdings
Majority holdings in publicly traded Group
companies
The Novartis Group owns 70.7% of Novartis India Ltd.,
with registered office in Mumbai, India, and listing 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 67.8 million on December 31,
2019, 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 231.2 million, and that of the shares owned by
Novartis was USD 163.4 million.
Significant minority shareholding owned by the
Group
The Novartis Group owns 33.3% of the bearer shares of
Roche Holding AG, with registered office in Basel, Swit-
zerland, and listing on the SIX Swiss Exchange (ISIN
CH0012032113, symbol: RO). The market value of the
Group’s interest in Roche Holding AG, as of Decem-
ber 31, 2019, was USD 16.9 billion. The total market value
of Roche Holding AG was USD 278.4 billion. Novartis
does not exercise control over Roche Holding AG, which
is independently governed, managed and operated.
Shareholders
Significant shareholders
According to the Share Register, as of December 31,
2019, the following registered shareholders (including
nominees and the ADS depositary) held more than 2%
of the total share capital, with the right to vote all their
shares based on an exemption granted by the Board
(see “—Item 6.C Board practices—Shareholder partici-
pation—Voting rights, restrictions and representation—
Registration restrictions”):1
Shareholders registered for their own account:
Emasan AG, Basel
Novartis Foundation for Employee Participation, Basel
UBS Fund Management (Switzerland) AG, Basel
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
Through The Bank of New York Mellon, SA/NV, Brussels
Nortrust Nominees Ltd., London
% holding of
share capital
Dec 31, 2019
3.5
2.1
2.1
% holding of
share capital
Dec 31, 2019
10.4
3.8
2.0
1.2
0.6
3.9
Shareholder acting as American Depositary Share (ADS) depositary:
JPMorgan Chase Bank, N.A., New York
12.5
1 Excluding 5.7% of the share capital held as treasury shares by Novartis AG or its fully
owned subsidiaries
164
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 but was not regis-
tered in the Share Register as of December 31, 2019.
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 registered, or registered with less than 2% of
the share capital as of December 31, 2019:
• BlackRock Inc., New York
• The Capital Group Companies Inc., Los Angeles
Disclosure notifications pertaining to shareholdings filed
with Novartis AG and the SIX Swiss Exchange are pub-
lished on the latter’s electronic publication platform:
www.six-exchange-regulation.com/en/home/publications/
significant-shareholders.html.
Duty to make an offer
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.
Cross shareholdings
Novartis AG has no cross shareholdings in excess of
5% of capital, or voting rights with any other company.
Overview on shareholder structure
The following tables relate only to registered share-
holders and cannot be assumed to represent the entire
investor base because nominees and JPMorgan Chase
Bank, N.A., as ADS depositary, are registered as share-
holders for a large number of beneficial owners.
As of December 31, 2019, Novartis AG had approxi-
mately 161 000 registered shareholders.
Number of shares held
As of December 31, 2019 1
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 2
Number of
registered
shareholders
% of registered
share capital
25 442
97 161
34 884
3 080
451
64
29
0.06
1.59
3.84
3.16
5.45
4.96
50.66
69.72
30.28
100.00
Total registered shareholders/shares
161 111
Unregistered shares
Total
1 At the record date of the Annual General Meeting (AGM) 2019, unregistered shares
amounted to 15%
2 Including significant registered shareholders as listed above
Registered shareholders by type
As of December 31, 2019
Shareholders in %
Shares in %
Individual shareholders
Legal entities 1
Nominees, fiduciaries
and ADS depositary
Total
96.43
3.52
0.05
100.00
12.99
32.77
54.24
100.00
1 Excluding 5.7% of the share capital held as treasury shares by Novartis AG or its fully
owned subsidiaries
Registered shareholders by country1
As of December 31, 2019
Shareholders in %
Shares in %
Belgium
France
Germany
Japan
Luxembourg
Switzerland 2
United Kingdom
United States
Other countries
Total
0.13
2.06
5.66
0.21
0.05
87.68
0.56
0.32
3.33
1.13
0.29
1.64
0.70
0.42
42.38
26.15
25.41
1.88
100.00
100.00
1 Registered shares held by nominees are shown in the country where the company/
affiliate entered in the Share Register as shareholder has its registered seat.
2 Excluding 5.7% of the share capital held as treasury shares by Novartis AG or its fully
owned subsidiaries
165
Item 6. Directors, Senior Management and Employees
Capital structure
Share capital
Convertible securities and options
Novartis AG has not issued convertible or exchange-
able bonds, warrants, options or other securities grant-
ing rights to shares, other than options (or similar instru-
ments such as stock appreciation rights) granted under
or in connection with equity-based participation plans of
associates. Novartis AG does not grant any new stock
options under these plans.
Limitation on transferability
No transferability restrictions are imposed on shares (for
registration restrictions, see “—Item 6.C Board practices—
Shareholder participation—Voting rights, restrictions and
representation—Registration restrictions”). The registra-
tion of shareholders in the Share Register or in the ADR
register kept by JPMorgan Chase Bank, N.A., does not
affect the tradability of shares or ADRs.
As of December 31, 2019, the share capital amounted
to CHF 1 263 687 410 fully paid-in and divided into
2 527 374 820 registered shares with a nominal value
of CHF 0.50 each.
Shares are listed on the SIX Swiss Exchange (ISIN
CH0012005267, symbol: NOVN) and on the New York
Stock Exchange (NYSE) in the form of American Depos-
itary Receipts (ADRs) representing American Deposi-
tary Shares (ADSs) (ISIN US66987V1098, symbol: NVS).
No authorized and conditional capital exists as of
December 31, 2019.
Shares, participation certificates,
non-voting equity securities, profit-
sharing certificates
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 Intermedi-
ated Securities). All shares have equal voting rights and
carry equal entitlements to dividends. No participation
certificates, non-voting equity securities (Genuss scheine)
or profit-sharing certificates have been issued.
Changes to share capital
AGM
Shareholder decision
2017
• Capital reduction by CHF 5.1 million (from CHF 1 313 557 410 to CHF 1 308 422 410)
2018
• Capital reduction by CHF 33.11 million (from CHF 1 308 422 410 to CHF 1 275 312 410)
2019
• Capital reduction by CHF 11.63 million (from CHF 1 275 312 410 to CHF 1 263 687 410)
• Authorization of the Board to repurchase shares up to a maximum of CHF 10 billion
until the AGM 2022 under an eighth share repurchase program
Shares cancelled
10 270 000
66 220 000
23 250 000
AGM
Proposal to the shareholders
Shares to be cancelled
2020
• Capital reduction by CHF 30.16 million (from CHF 1 263 687 410 to CHF 1 233 530 460)
60 313 900
1 All shares were repurchased on the SIX Swiss Exchange second trading line.
Average repurchase
share price (CHF) 1
74.67
78.34
79.08
Average repurchase
share price (CHF) 1
88.18
Key Novartis share data
Issued shares
Treasury shares 1
Outstanding shares at December 31
2019
2018
2017
2 527 374 820
2 550 624 820
2 616 844 820
262 366 332
239 453 391
299 388 321
2 265 008 488
2 311 171 429
2 317 456 499
Weighted average number of shares outstanding
2 290 792 782
2 319 322 369
2 345 783 843
1 Approximately 118 million treasury shares (2018: 122 million; 2017: 131 million) are held in Novartis entities that restrict their availability for use.
166
Item 6. Directors, Senior Management and Employees
Per-share information1
Basic earnings per share from continuing operations (USD)
Basic earnings per share from discontinued operations (USD)
Total basic earnings per share (USD)
Diluted earnings per share from continuing operations (USD)
Diluted earnings per share from discontinued operations (USD)
Total diluted earnings per share (USD)
Net cash flow from operating activities of continuing operations (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 2019: proposal to shareholders for approval at the AGM on February 28, 2020
2019
3.12
2.00
5.12
3.08
1.98
5.06
5.91
2018
5.52
– 0.08
5.44
5.46
– 0.08
5.38
5.63
2017
3.20
0.08
3.28
3.17
0.08
3.25
4.87
24.49
34.01
2.95
2.85
32.00
2.80
Key ratios – December 31
Share price (CHF)
Year-end share price
High 2
Low 2
Year-end market capitalization
(USD billions) 3
Year-end market capitalization
(CHF billions) 3
2019 1
91.90
96.04
77.03
2018
84.04
91.84
72.42
2017
82.40
85.15
69.55
214.8
197.0
195.5
208.2
194.2
191.0
1 2019 excludes the business of Alcon, which was spun off in April 2019 into a
separately traded standalone company.
2 Based on the daily closing prices
3 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.
Price/earnings ratio 1
Price/earnings ratio from
continuing operations 1
Dividend yield (%) 1
2019
18.5
30.4
3.2
2018
15.7
15.4
3.4
2017
25.7
25.7
3.4
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 2
Low 2
Number of
ADRs outstanding 3
2019 1
94.69
96.14
75.40
2018
85.81
93.91
72.44
2017
83.96
86.65
70.03
315 073 094 338 641 387 320 833 039
1 2019 excludes the business of Alcon, which was spun off in April 2019 into a
separately traded standalone company.
2 Based on the daily closing prices
3 The depositary, JPMorgan Chase Bank, N.A., holds one Novartis AG share for every
ADR issued.
167
Item 6. Directors, Senior Management and Employees
Shareholder participation
Shareholder engagement
Shareholder engagement is fundamental to our commit-
ment to governance and transparency, and the feedback
we receive during these engagements helps us create
long-term and sustainable value.
We concentrate our outreach efforts on our largest
100 shareholders – portfolio managers, buy-side profes-
sionals, stewardship teams and environmental, social
and governance (ESG) analysts – who represent 60% of
our ownership. While the Chairman, CEO and CFO
together with Investor Relations are accountable for
ensuring effective shareholder engagement, other senior
managers from within and outside the Executive Com-
mittee also participate in the meetings. We conduct reg-
ular outreach to investors throughout the year.
TYPES OF ENGAGEMENTS (SELECT EXAMPLES):
• Quarterly results conference calls for analysts and investors
• Bank conferences
• Management roadshows
• Reverse roadshows at Novartis sites
• Capital markets event (meet Novartis management)
• R&D Day
• AGM
• Governance and compensation roadshow
• Governance teleconferences
• Chairman’s dinner in Zurich, London, US East and West Coast
• ESG roadshow
• ESG investor day
TOPICS DISCUSSED WITH SHAREHOLDERS DURING 2019:
INNOVATION:
• Progress
• Milestones
• Data of pipeline projects (e.g., Zolgensma intrathecal, ofatumumab,
fevipiprant, Entresto in heart failure with preserved ejection fraction)
• Launches (e.g., Zolgensma, Piqray, Mayzent, Beovu)
OPERATIONAL EXECUTION:
• Progress on financial, strategic and operational performance
• Long-term sustainability of financial performance
• Capital allocation strategy
• Policy and pricing environment
• Lifecycle management
DATA AND DIGITAL:
• New initiatives and progress
BUILDING TRUST WITH SOCIETY AND CULTURE (ESG):
• Clear duties regarding disclosures and ESG integration
• Progress on culture and metrics
• Updates on alleged controversies in relation to Greece, the
Southern District of New York, and Zolgensma
• Board accountability to ESG topics
• Granularity on how ESG is embedded in the compensation system
• Pricing and access programs
• Environmental targets
COMPENSATION AND GOVERNANCE:
• Diversity of the Board, the Executive Committee and the Company
overall
• Board refreshment and succession planning
• Board evaluation process
• Link of compensation system to key strategic priorities
• Risk oversight
• Independence of the Audit Committee
• Overboarding
We appreciate the growing importance shareholders
attach to ESG matters and recognize that good out-
comes on ESG performance can be an indicator of over-
all good long-term performance of the Company. We are
committed to continuing our efforts to integrate ESG into
our overall strategy. In the last two years, we have more
than doubled the number of investor engagements on
ESG matters, and in 2019, we held our first in-person
ESG Day in London, led by our CEO, and our first ESG
roadshow in the Netherlands.
Voting rights, restrictions and
representation
REGISTRATION
Shareholders have the right to vote and to execute all
other rights as granted under Swiss law and the Arti-
cles of Incorporation (see, in particular, articles 17 and
18 of the Articles of Incorporation: www.novartis.com/
investors/company-overview/corporate-governance).
Each share registered with the right to vote by the
third business day before the General Meeting entitles
the holder to one vote at General Meetings. To be regis-
tered 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/corpo-
rate-governance), the Board may register nominees with
the right to vote. The Share Register is an internal,
non-public register subject to statutory confidentiality
and data-privacy.
REGISTRATION RESTRICTIONS
Article 5, paragraph 2 of the Articles of Incorporation
(www.novartis.com/investors/company-overview/cor-
porate-governance) provides that no shareholder shall
be registered with the right to vote for more than 2% of
the registered share capital. Given that shareholder rep-
resentation at General Meetings traditionally has been
rather low in Switzerland, Novartis AG considers registra-
tion restrictions ne cessary to prevent a minority share-
holder from dominating a General Meeting. The Board
may, upon request, grant an exemption from this restric-
tion. Considerations include whether the shareholder sup-
ports the Novartis goal of creating sustainable value and
has a long-term investment horizon. Exemptions are in
force for the registered significant shareholders listed in
“—Item 6.C Board practices—Group structure and share-
holders—Shareholders—Significant shareholders,” and
for Norges Bank (Central Bank of Norway), Oslo, which
as of December 31, 2019, was not registered in the Share
Register but according to a disclosure notification filed
with Novartis AG, held 2.1% of the share capital. No further
exemptions were requested in 2019. The same restric-
tions indirectly apply to ADR holders.
168
Item 6. Directors, Senior Management and Employees
Article 5, paragraph 3 of the Articles of Incorporation
provides that no nominee shall be registered with the right
to vote for up to 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 individuals for whose account
it holds 0.5% or more of the registered share capital. Exemp-
tions are in force for the nominees listed in “—Item 6.C
Board practices—Group structure and shareholders—
Shareholders—Significant shareholders,” and for the nom-
inee Citibank, London, which in 2015 requested an exemp-
tion, but as of December 31, 2019, was not registered in
the Share Register. The same restrictions indirectly apply
to ADR holders.
Shareholders, ADR holders, or nominees who are
linked to each other or who act in concert to circumvent
registration restrictions are treated as one person or nom-
inee for the purposes of the restrictions on registration.
REPRESENTATION AND SHERPANY PLATFORM
Shareholders can vote their shares by themselves or
appoint another shareholder or the Independent Proxy
to vote on their behalf. In 2019, we reconsidered the Inde-
pendent Proxy set-up and it was concluded that the pro-
cessing of voting instructions to the Independent Proxy
should be without any involvement of Novartis. All share-
holders (who are not yet registered on the online platform)
receive a General Meeting invitation letter with a form
for the appointment of the Independent 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.
Shareholders can use an online platform (the Sher-
pany Platform) to receive invitations to future General
Meetings exclusively by email. They can then use Sher-
pany to order their admission ticket, appoint a proxy, and
give voting instructions. Not-yet-registered shareholders
can sign up with the account opening document that will
be sent to them with the invitation to the AGM 2020 or
by ordering the document from the Share Register. Share-
holders can deactivate their online account at any time
and again receive invitations in paper form.
ADR HOLDERS
ADR holders have 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
shares underlying the ADRs and is registered as a share-
holder in the Share Register. An ADR is not a share, and
an ADR holder is not a Novartis AG shareholder. Each
ADR represents one 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 registered shares underlying ADRs for
which no voting instructions have been given by providing
a discretionary proxy to an uninstructed independent des-
ignee. Such designee has to be a Novartis shareholder.
General Meeting
CONVENING
The AGM must be held within six months after the close
of the financial year (December 31), and normally takes
place in late February/early March. Extraordinary Gen-
eral Meetings may be requested by the Board, the exter-
nal auditor, or shareholders representing at least 10% of
the share capital.
AGENDA
Shareholders representing 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, specifying the requested item and proposal.
POWERS
The following powers are vested exclusively in the
General Meeting:
• Adoption and amendment of the Articles of Incorporation
• Election and removal of the Board Chairman, the Board
and Compensation Committee members, the Indepen-
dent Proxy and the external auditor
• 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 Board compensa-
tion (from an AGM until the next AGM) and of the Exec-
utive Committee (for the financial year following the
AGM). If the maximum aggregate amount of compen-
sation already approved by the AGM is not sufficient to
cover the compensation of newly appointed or promoted
Executive Committee members, Novartis may use up to
40% of the amount last approved for the newly appointed
or promoted Executive Committee members.
• Discharge of 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
STATUTORY QUORUMS
The General Meeting passes resolutions and elections with
the absolute majority of the votes represented at the meet-
ing. However, under article 18 of the Articles of 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 contribution
in kind, for the purpose of an acquisition of property or
the grant of special rights
• Restriction or suspension of rights or options to subscribe
• Change of location of the registered office of Novartis AG
• Dissolution of Novartis AG
In addition, the law provides for a qualified majority for
other resolutions, such as a merger or demerger.
169
Item 6. Directors, Senior Management and Employees
Board of Directors
Composition (as per December 31, 2019)1
CHAIRMAN: J. Reinhardt
VICE CHAIRMAN: E. Vanni
N. Andrews
T. Buechner
P. Bula
S. Datar
E. Doherty
A. Fudge
F. van Houten
A. von Planta
C. Sawyers
W. Winters
AUDIT AND COMPLIANCE
COMMITTEE
COMPENSATION
COMMITTEE
GOVERNANCE, NOMINATION
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)
P. Bula
S. Datar
A. Fudge
W. Winters
A. von Planta (Chair)
A. Fudge
C. Sawyers
E. Vanni
W. Winters
J. Reinhardt (Chair)
N. Andrews
F. van Houten
C. Sawyers
S. Datar (Chair)
N. Andrews
E. Doherty
A. Fudge
A. von Planta
1 Dimitri Azar’s term as a Board member ended at the 2019 AGM following his decision not to stand for re-election. His CV is included in the 2018 Annual Report (page 188,
available at www.novartis.com/annualreport2018).
Election and term of office
Independence of Board members
Board members (including the Chairman) and Compen-
sation Committee members are individually elected by
the AGM for one year until the end of the next AGM.
There is no mandatory term limit for Board members.
However, Board members must retire after reaching age
70. Under special circumstances, shareholders may grant
an exemption and re-elect a Board member for additional
terms of office.
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. A search
for a new Board member is launched – normally with the
support of a professional executive search company –
with individual selection criteria defined based on the
evolving governance needs of the Company and a con-
tinuing focus on diversity. Candidates are interviewed by
the Chairman, members of the GNCRC, other Board
members, and members of the Executive Committee.
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.
All Board members – including the Chairman – are
non-executive and independent, pursuant to applica-
ble corporate governance rules and Novartis indepen-
dence criteria, which reflect international best practice
and are outlined in Appendix II to the Board Regulations
(www.novartis.com/investors/company-overview/cor-
porate-governance). In particular, no Board member is
or was a member of the management of Novartis AG or
of any other Novartis Group company in the last three
financial years up to December 31, 2019, or has a signif-
icant business relationship with Novartis AG or with any
other Novartis Group company.
The independence is assessed on an annual basis.
We consider tenure – along with many other factors –
when determining a Board member’s independence in
the assessment to ensure that the average tenure is not
excessively high while balancing continuity of knowledge
and experience with refreshment. We do not believe that
an individual automatically becomes “non-independent”
after a given period. This has enabled Novartis to bene-
fit from the insight and knowledge of long-standing Board
members, which has been particularly important during
the last years of Board refreshment. In the past four
years, Novartis has added four new Board members, and
two additions will be proposed to the shareholders for
the AGM 2020.
170
NATIONALITY
NATIONALITY
GENDER
GENDER
EXECUTIVE/NON-EXECUTIVE
EXECUTIVE/NON-EXECUTIVE
INDEPENDENCE
INDEPENDENCE
Item 6. Directors, Senior Management and Employees
Board profile
Diversity is a key factor to success and Board effective-
ness, and an important criterion for the GNCRC when
identifying new Board member candidates. A diverse
Board ensures that the appropriate balance of skills,
expertise and experience is represented to discharge
responsibilities to shareholders, and helps create long-
term value. The Board composition aligns with our sta-
tus as a listed company as well as our business portfo-
lio, geographic reach and culture. To ensure appropriate
strategic oversight, the Board members have a diverse
set of skills and experience, as highlighted in the Board
members’ biographies (see “—Item 6.C Board practices—
Board of Directors—Members of the Board of Directors”).
We are continuously looking for opportunities to improve
our Board diversity, and in particular aspire to find female
candidates for two of the next three nominations.
Diversity
NATIONALITY
NATIONALITY
Nationality1
BACKGROUND/EXPERIENCE
GENDER
BACKGROUND/EXPERIENCE
Gender
GENDER
AGE
AGE
EXECUTIVE/NON-EXECUTIVE
EXECUTIVE/NON-EXECUTIVE
Age
TENURE
TENURE
Tenure
INDEPENDENCE
INDEPENDENCE
p Swiss
p American
p British
p Dutch
p German
33%
33%
13%
13%
8%
p Male
p Female
75%
25%
p <55
p 55–60
p 61–65
p >65
8%
25%
42%
25%
p <3 y
p 3–6 y
p 7–9 y
p >9 y
17%
50%
8%
25%
1 Please note that three Board members have two nationalities. Each of these nationalities were taken into account by a factor of 0.5 in the above chart.
Background/experience
BACKGROUND/EXPERIENCE
BACKGROUND/EXPERIENCE
AGE
AGE
Medicine/healthcare/R&D
42%
Leadership management
Finance/accounting
Law
Engineering/technology
Marketing
Environmental, social
and governance (ESG)
75%
67%
8%
50%
25%
33%
TENURE
TENURE
5/12
9/12
8/12
1/12
6/12
3/12
4/12
171
Item 6. Directors, Senior Management and Employees
Members of the Board of Directors
Joerg Reinhardt, Ph.D.
Chairman of the Board of Directors since 2013 | Nationality: German | Year of birth: 1956
Professional experience
• Chairman of the board of management and the executive committee, Bayer HealthCare AG, Germany
(2010–2013)
• Chief Operating Officer, Novartis AG, Switzerland (2008–2010)
• Head of the Vaccines and Diagnostics Division, Novartis AG, Switzerland (2006–2008)
• Various managerial positions at Sandoz Pharma Ltd. and Novartis AG, Switzerland (1982–2006)
Mandates
• Chairman of the board of trustees, Institute of Molecular and Clinical Ophthalmology Basel (IOB),
Switzerland
• Chairman of the board of trustees, Novartis Foundation, Switzerland
• Board member, Swiss Re AG, Switzerland
• Member of the European Advisory Panel, Temasek Holdings Private Ltd., Singapore
• Board member, Lonza Group AG, Switzerland (2012–2013)
• Chairman, Genomics Institute of the Novartis Research Foundation, US (2000–2010)
Education
• Doctorate in pharmaceutical sciences, Saarland University, Germany
Key skills
x Medicine/healthcare/R&D g Leadership management
Enrico Vanni, Ph.D.
Vice Chairman of the Board of Directors since 2011 | Nationality: Swiss | Year of birth: 1951
Professional experience
• Independent consultant, supporting leaders of pharmaceutical and biotechnology companies (2008–2015)
• Director, consulting in pharmaceutical, consumer and financial sectors, McKinsey & Co., Switzerland
(1994–2007)
• Head of the Geneva Office, McKinsey & Co., Switzerland (1988–2004)
Mandates
• Board member, Advanced Oncotherapy PLC, UK
• Board member, Lombard Odier & Cie SA, Switzerland
• Board member, Banque Privée BCP (Suisse) SA, Switzerland
• Board member, Eclosion2 SA, Switzerland (2009–2017)
• Board member, Alcon Inc., Switzerland (2010–2011)
• Board member, Actavis PLC, Ireland (2010)
Education
• Master of Business Administration, INSEAD, France
• Doctorate in physical chemistry, University of Lausanne, Switzerland
• Engineering degree in chemistry, Federal Polytechnic School of Lausanne, Switzerland
Key skills
x Medicine/healthcare/R&D m Finance/accounting o Engineering/technology
Nancy C. Andrews, M.D., Ph.D.
Member of the Board of Directors since 2015 | Nationality: American/Swiss | Year of birth: 1958
Professional experience
• Dean emerita, Duke University School of Medicine, and vice chancellor emerita for academic affairs,
Duke University, US (2017–present)
• Dean, Duke University School of Medicine, and vice chancellor for academic affairs, Duke University, US
(2007–2017)
• Professor of pediatrics, pharmacology & cancer biology, Duke University, US (2007–present)
• Dean of basic sciences and graduate studies, Harvard Medical School, US (2003–2007)
• Director, Harvard/MIT M.D.-Ph.D. Program, US (1999–2003)
• Biomedical research investigator, Howard Hughes Medical Institute, US (1993–2006)
Mandates
• Member of the executive committee of the corporation, Massachusetts Institute of Technology, US
• Chair, American Academy of Arts and Sciences, US
• Member of the Scientific Advisory Board, Dyne Therapeutics, US
• Board member and former chair, Burroughs Wellcome Fund, US (2011–2019)
• Member of the Scientific Management Review Board, National Institutes of Health, US (2014–2019)
Education
• Doctor of medicine, Harvard Medical School, US
• Doctorate in biology, Massachusetts Institute of Technology, US
• Master and Bachelor of Science in molecular biophysics and biochemistry, Yale University, US
Key skills
x Medicine/healthcare/R&D g Leadership management
172
Item 6. Directors, Senior Management and Employees
Ton Buechner
Member of the Board of Directors since 2016 | Nationality: Dutch/Swiss | Year of birth: 1965
Professional experience
• Chairman and CEO of the executive board, AkzoNobel NV, Netherlands (2012–2017)
• CEO, Sulzer AG, Switzerland (2007–2011)
• Various managerial positions at Sulzer AG, Switzerland (1994–2007)
Mandates
• Member of the presidential and shareholder committees, Voith GmbH & Co. KGaA, Germany
• Member of the supervisory board, Voith GmbH & Co. KGaA, Germany (2014–2018)
Education
• Master of Business Administration, IMD business school, Switzerland
• Master of Science in civil engineering, Delft University of Technology, Netherlands
Key skills
g Leadership management m Finance/accounting z Environmental, social and governance (ESG)
o Engineering/technology
Patrice Bula
Member of the Board of Directors since February 28, 2019 | Nationality: Swiss | Year of birth: 1956
Professional experience
• Executive vice president and head of strategic business units, marketing, sales and Nespresso,
Nestlé SA, Switzerland (2011–present)
• Market head of the Greater China region, Nestlé SA, Switzerland (2007–2011)
• Market head of Germany, Nestlé SA, Switzerland (2003–2007)
• Head of the confectionery and biscuits strategic business unit, Nestlé SA, Switzerland (2000–2003)
• Various managerial positions at Nestlé SA, Switzerland (1980–2000)
Mandates
• Board member, Schindler AG, Switzerland
• Board member, Cereal Partners Worldwide SA, Switzerland (Nestlé representative)
• Board member, Froneri Ltd., UK (Nestlé representative)
• Board member, Bobst Group SA, Switzerland (2017–2019)
• Chairman, Blue Bottle Coffee Inc., US (Nestlé representative) (2017–2019)
• Chairman, Nestlé Nespresso SA, Switzerland (Nestlé representative) (2011–2019)
• Board member, Hsu Fu Chi Food Companies, China (Nestlé representative) (2011–2019)
Education
• Program for Executive Development, IMD business school, Switzerland
• Master’s degree in economic sciences, HEC Lausanne, Switzerland
Key skills
g Leadership management w Marketing m Finance/accounting o Engineering/technology
Srikant Datar, Ph.D.
Member of the Board of Directors since 2003 | Nationality: American | Year of birth: 1953 |
Audit Committee Financial Expert
Professional experience
• Faculty chair, Harvard Innovation Lab, and senior associate dean for university affairs, Harvard Business
School, US (2015–present)
• Professor of business administration, Harvard Business School, US (1996–present)
• Professor of accounting and management, Stanford Graduate School of Business, US (1989–1996)
• Professor of industrial administration, Carnegie Mellon University (1986–1988)
Mandates
• Board member, ICF International Inc., US
• Board member, Stryker Corp., US
• Board member, T-Mobile US Inc., US
• Board member, HCL Technologies Ltd., India (2012–2014)
• Board member, KPIT Cummins Infosystems Ltd., India (2007–2012)
Education
• Doctorate in business (accounting), Stanford University, US
• Master of Arts in economics, Stanford University, US
• Master of Science in statistics, Stanford University, US
• Postgraduate diploma in business management, Indian Institute of Management, India
• Bachelor of Science in mathematics and economics, Bombay University, India
Key skills
m Finance/accounting
173
Item 6. Directors, Senior Management and Employees
Elizabeth (Liz) Doherty
Member of the Board of Directors since 2016 | Nationality: British | Year of birth: 1957 |
Audit Committee Financial Expert
Professional experience
• CFO (interim), Cognita Schools Ltd., UK (2014–2015)
• CFO and Board member, Reckitt Benckiser Group PLC, UK (2011–2013)
• CFO (interim), City Inn, UK (2010)
• CFO, Brambles Ltd., Australia (2007–2009)
• Group international finance director, Tesco PLC, UK (2001–2007)
• Various managerial positions at Unilever PLC, UK (1981–2001)
Mandates
• Board member, Corbion NV, Netherlands
• Board member, Royal Philips NV, Netherlands
• Advisor, Affinity Petcare SA and GB Foods, Spain
• Board member, Dunelm Group PLC, UK (2013–2019)
• Board member, HM Courts & Tribunals Service, UK (2015–2019)
• Board member, Ministry of Justice, UK (2015–2019)
• Board member, Delhaize Group, Belgium (2013–2016)
• Board member, Nokia Corp., Finland (2013–2016)
• Board member, Brambles Ltd., Australia (2007–2009)
• Board member, SABMiller PLC, UK (2004–2010)
Education
• Fellow, Chartered Institute of Management Accountants, UK
• Bachelor’s degree in liberal studies in science (physics), University of Manchester, UK
Key skills
g Leadership management w Marketing m Finance/accounting o Engineering/technology
Ann Fudge
Member of the Board of Directors since 2008 | Nationality: American | Year of birth: 1951
Professional experience
• Chairman and CEO, Young & Rubicam Brands, US (2003–2007)
• President of the Beverages, Desserts and Post Division brands, Kraft Foods Inc., US (2000–2001)
• Various managerial positions at Kraft Foods Inc., US (1986–2000)
Mandates
• Board member, Northrop Grumman Corporation, US
• Chair, WGBH Public Media, US
• Chair of the United States Program Advisory Panel, Bill & Melinda Gates Foundation, US (2007–2019)
• Member of the visiting committee, Harvard Business School, US (2014–2019)
• Board member and former vice chair, Unilever PLC and NV, UK and Netherlands (2009–2018)
• Board member, General Electric Co., US (1999–2015)
Education
• Master of Business Administration, Harvard Business School, US
• Bachelor’s degree in management, Simmons College, US
Key skills
g Leadership management w Marketing z Environmental, social and governance (ESG)
Frans van Houten
Member of the Board of Directors since 2017 | Nationality: Dutch | Year of birth: 1960
Professional experience
• CEO and chairman of the executive committee and the board of management, Royal Philips NV,
Netherlands (2011–present)
• Interim management, ING Group NV, Netherlands (2009–2010)
• CEO and chairman of the management board, NXP Semiconductors NV (formerly Philips
Semiconductors NV), Netherlands (2004–2009)
• Various managerial positions at Royal Philips Electronics NV, Netherlands (1986–2004)
Mandates
• Vice chairman and member of the supervisory board, Philips Lighting, Netherlands (2016–2017)
Education
• Master of Science in economics and business management, Erasmus University Rotterdam, Netherlands
• Bachelor of Science in economics, Erasmus University Rotterdam, Netherlands
Key skills
x Medicine/healthcare/R&D g Leadership management m Finance/accounting o Engineering/technology
174
Item 6. Directors, Senior Management and Employees
Andreas von Planta, Ph.D.
Member of the Board of Directors since 2006 | Nationality: Swiss | Year of birth: 1955
Professional experience
• Senior counsel, Lenz & Staehelin, Switzerland (2017–present)
• Partner, Lenz & Staehelin, Switzerland (1988–2017)
Mandates
• Board member, Helvetia Holding AG, Switzerland
• Board member, A.P. Moller Finance SA, Switzerland
• Board member, Helvetia Schweizerische Lebensversicherungsgesellschaft AG, Switzerland
• Board member, Helvetia Schweizerische Versicherungsgesellschaft AG, Switzerland
• Chairman, HSBC Private Bank (Suisse) SA, Switzerland
• Chairman, HSBC Private Banking Holdings (Suisse) SA, Switzerland
• Board member, Socotab Frana SA, Switzerland
• Chairman of the regulatory board, SIX Swiss Exchange AG, Switzerland
• Board member, Burberry (Suisse) SA, Switzerland
• Chairman of the audit committee, International Road Transport Union, Switzerland
• Board member, Raymond Weil SA, Switzerland (2007–2018)
• Board member and former chairman, Clinique Générale-Beaulieu SA, Switzerland (2008–2016)
• Board member and former chairman, Schweizerische National Versicherungs AG, Switzerland (1997–
2015)
• Board member, Holcim AG, Switzerland (2003–2014)
Education
• Master of Laws, Columbia Law School, US
• Bar examination, Switzerland
• Doctorate in law, University of Basel, Switzerland
• Licentiatus iuris, University of Basel, Switzerland
Key skills
m Finance/accounting l Law z Environmental, social and governance (ESG)
Charles L. Sawyers, M.D.
Member of the Board of Directors since 2013 | Nationality: American | Year of birth: 1959
Professional experience
• Chair of the Human Oncology and Pathogenesis Program, Memorial Sloan Kettering Cancer Center, US
(2006–present)
• Professor of medicine (2008–present), and professor of cell and developmental biology (2011–present),
Weill Cornell Graduate School of Medical Sciences, US
• Investigator, Howard Hughes Medical Institute, US (2002–2006 and 2008–present)
• Associate chief, Division of Hematology-Oncology, University of California, Los Angeles, US (1996–2006)
Mandates
• Member, National Cancer Advisory Board, US
• Investigator, Howard Hughes Medical Institute, US
• Science advisor for the following US companies: Agios Pharmaceuticals Inc.; BeiGene Ltd.; Blueprint
Medicines Corp.; Foghorn Therapeutics Inc.; Housey Pharmaceutical Research Laboratories; KSQ
Therapeutics Inc.; Nextech Invest Ltd.; ORIC Pharmaceuticals Inc.; PMV Pharmaceuticals Inc.;
The Column Group
• President, American Association for Cancer Research, US (2013–2014)
Education
• Doctor of medicine, Johns Hopkins University School of Medicine, US
• Bachelor of Arts, Princeton University, US
Key skills
x Medicine/healthcare/R&D g Leadership management z Environmental, social and governance (ESG)
William T. Winters
Member of the Board of Directors since 2013 | Nationality: British/American | Year of birth: 1961
Professional experience
• CEO, Standard Chartered PLC, UK (2015–present)
• Chairman and CEO, Renshaw Bay LLP, UK (2011–2015)
• Co-CEO of the Investment Bank, JPMorgan Chase & Co., UK (2004–2010)
• Various managerial positions at JPMorgan Chase & Co., UK and US (1983–2004)
Mandates
• Board member, Standard Chartered Bank PLC, UK
• Board member, International Rescue Committee, UK
• Board member, The Coronet Theatre, UK
• Commissioner, Independent Commission on Banking, UK (2010–2011)
Education
• Master of Business Administration, Wharton School of the University of Pennsylvania, US
• Bachelor’s degree in international relations, Colgate University, US
Key skills
g Leadership management m Finance/accounting o Engineering/technology
Corporate Secretary
Charlotte Pamer-Wieser, Ph.D.
175
Item 6. Directors, Senior Management and Employees
Board self-assessment
The Board and its committees conduct a self-assessment
once a year, covering topics including Board composition,
purpose, scope and responsibilities; Board processes and
governance; Board meetings and pre-reading material;
team effectiveness; and Chairman evaluation and peer
evaluation. Periodically, this process is conducted by an
independent consultant (this last happened in 2017 and
is planned again for 2020).
Anonymous survey
Qualitative review
Outcome
• Each Board member fills out an
• Based on the results, the Chairman
• The last self-assessment of January
anonymous survey.
• A report identifying key strengths and
challenges is produced for the Board
and its committees.
and the committee chairs each lead a
qualitative review with their colleagues
and then with the entire Board.
2019 determined that the Board and its
committees were functioning effectively
and efficiently.
• In addition, the Board, without its
Chairman, discusses the Chairman’s
performance, and then provides him
with feedback.
• The feedback confirmed that the Board
has an open, transparent and critical
boardroom culture.
• The results also served as a source
for potential improvements, touching
upon the scope of information and the
Board’s desire to receive additional/or
more detailed information on particular
topics, including more insights into
external views on the Company and its
competitors, and the Company’s cost-
saving efforts.
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, with the exception of deci-
sions reserved for shareholders.
The Board has delegated certain of its duties and
responsibilities to its five committees led by a Board-
elected Chairman, as set out in the Board Regulations
(www.novartis.com/investors/company-overview/
corporate-governance). In some cases, these responsi-
bilities are of an advisory or preparatory nature (A/P). In
other cases, the committee has decision-making power
that is subject to final Board approval (FBA), or the respon-
sibilities have been fully delegated to the committee (FD).
All committees have the authority to retain external con-
sultants.
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.
176
Item 6. Directors, Senior Management and Employees
Board of Directors
Primary responsibilities
• Group strategy: deciding on the ultimate direction of the Group’s business (including portfolio, markets, acquisitions
and divestments)
• Group structure and organization: determining and reviewing major changes in the Group’s organization
and governance
• Group culture: overseeing the strategy and implementation of the corporate culture
• Group risk management system: overseeing the most significant risks and how these are managed
• Group finance: determining the Group’s accounting system, financial controls and financial planning; reviewing and
approving the Annual Report (including the Compensation Report)
• People & organization: nominating or appointing, removing, and determining duties and responsibilities
of key executives, and succession planning
Key activities in 2019
Strategic priorities3
• Oversaw the corporate strategy, including reviewing and approving the required steps
for the Alcon spin-off, our investments in breakthrough technologies (e.g., the acquisition i e
of Xiidra and The Medicines Company), and the divestments in oncology (e.g., Signifor®)
• Focused on accelerating our push into the data and digital healthcare space,
aligning with the general trend of investing in artificial intelligence
• Oversaw the shaping of a corporate culture of empowerment and responsibility
to help drive innovation, performance and reputation
• Reviewed ESG developments and oversaw our activities and priorities
p i e d
p i s
s
• Reviewed the Zolgensma data integrity issue, lessons learned and additional
management actions to further strengthen the governance of newly acquired companies s
e
• Reviewed cost productivity programs
• Engaged external experts to provide strategic guidance on the Company’s
cybersecurity efforts
• Discussed longer-term Board succession planning, assessing which profiles
are required in the upcoming years
• Topics addressed during private sessions included the Board self-evaluation
and the performance assessment of the Executive Committee members,
as well as their succession planning
d
s
p
Meetings
Number of meetings held
Number of members
Approximate average duration (hours)
Meeting attendance
8
12
7:48
98%
Subject to additional special meetings, the Board and Board
Joerg Reinhardt1
Enrico Vanni
Nancy C. Andrews
Ton Buechner
Patrice Bula2
Srikant Datar
committee meetings take place in January, April, June, August,
Elizabeth Doherty
October and December. Typically, these meetings last two
Ann Fudge
days, with the first day allocated to Board committee meetings,
and the second day allocated to the meeting of the full Board.
Frans van Houten
Andreas von Planta
Charles L. Sawyers
William T. Winters
Documents
• Articles of Incorporation of Novartis AG
• Board Regulations
www.novartis.com/investors/company-overview/corporate-governance
1 Chair
2 Mr. Bula was elected at the AGM 2019 and has attended all Board meetings since his election.
3 Strategic priorities:
p Unleash the power of
our people
i Deliver transformative
innovation
e Embrace operational
excellence d Go big on data and
digital
8
8
8
8
6
8
7
8
8
8
7
8
s Build trust with society
177
Item 6. Directors, Senior Management and Employees
Audit and Compliance Committee
Primary responsibilities
• Supervising the external auditor (FD),** and selecting and nominating the external auditor for election
by the shareholders (FBA)***
• Overseeing Internal Audit (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)**
Key activities in 2019
• Focused on acquisitions as well as divestments
• Reviewed the accounting and financial reporting
Strategic priorities3
i
e
• Reviewed the potential impact and implications of the Zolgensma data integrity issue
together with external advisors
• Received reports and updates from Internal Audit; Quality; Ethics, Risk & Compliance;
the SpeakUp Office; Health, Safety and Environment (HSE); Tax; and Legal
• Evaluated the performance and discussed the rotation of the external auditor
s
p s
e
Meetings
Number of meetings held
Number of members
Approximate average duration (hours)
Meeting attendance
Documents
9
5
2:15
96%
Elizabeth Doherty1,2
Ton Buechner
Srikant Datar2
Andreas von Planta
Enrico Vanni
8
8
9
9
9
• Board Committees Charter, Appendix I to the Board Regulations
www.novartis.com/investors/company-overview/corporate-governance
1 Chair
2 Audit Committee Financial Expert
* A/P = advisory or preparatory task
** FD = fully delegated task
*** FBA = task subject to final Board approval
3 Strategic priorities:
p Unleash the power of
our people
i Deliver transformative
innovation
e Embrace operational
excellence d Go big on data and
digital
s Build trust with society
178
Item 6. Directors, Senior Management and Employees
Compensation Committee
Primary responsibilities
• Designing, reviewing and recommending to the Board the compensation policies and programs (FBA)***
• Advising the Board on the compensation of Board members and of 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)***
Key activities in 2019
• Made decisions relating to Executive Committee compensation during the year
Strategic priorities3
p
• Reviewed the Long-Term Incentive, including the relative total shareholder return financial
and innovation metrics, for Executive Committee members and other Novartis executives p s
• Discussed compensation governance matters and made compensation decisions
for executives transferred with the Alcon spin-off, which took place in April 2019
• Reviewed shareholder feedback related to Novartis compensation practices
and disclosures
• Considered additional disclosures in the 2019 Compensation Report
p
p s
s
Meetings
Number of meetings held
Number of members
Approximate average duration (hours)
Meeting attendance
Documents
7
5
1:55
100%
Enrico Vanni1
Patrice Bula2
Srikant Datar
Ann Fudge
William T. Winters
7
6
7
7
7
• Board Committees Charter, Appendix I to the Board Regulations
www.novartis.com/investors/company-overview/corporate-governance
1 Chair
2 Mr. Bula was elected at the AGM 2019 and has attended all Compensation Committee meetings since his election.
* A/P = advisory or preparatory task
** FD = fully delegated task
*** FBA = task subject to final Board approval
3 Strategic priorities:
p Unleash the power of
our people
i Deliver transformative
innovation
e Embrace operational
excellence d Go big on data and
digital
s Build trust with society
179
Item 6. Directors, Senior Management and Employees
Governance, Nomination and Corporate Responsibilities Committee
Primary responsibilities
• 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 regularly the Articles of Incorporation, with a view to reinforcing shareholder rights (FD)**
• Reviewing regularly 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)***
Key activities in 2019
Strategic priorities3
• Discussed the succession of Board and committee members, considering anticipated
vacancies due to the mandatory retirement age, and the need to increase diversity
• Revised Board Regulations
• Evaluated AGM and proxy advisor trends
• Discussed important corporate governance developments (e.g., diversity,
climate change, cybersecurity risks) relevant for Novartis, including changes to Swiss
and international laws and regulations
p
e
s
s
in order to move beyond profitability ratios and profit optimization
• Decided on a renewed approach to providing patient access in sub-Saharan Africa
e
• Reviewed emerging trends and best practices in responsible and sustainable business s
s
• Discussed ESG targets
• Decided to pledge to the United Nations’ Equal Pay International Coalition (EPIC)
to achieve gender balance and pay equity by 2023
s
Meetings
Number of meetings held
Number of members
Approximate average duration (hours)
Meeting attendance
Documents
4
5
2:07
100%
Andreas von Planta1
Ann Fudge
Charles L. Sawyers
Enrico Vanni
William T. Winters
4
4
4
4
4
• Board Committees Charter, Appendix I to the Board Regulations
www.novartis.com/investors/company-overview/corporate-governance
1 Chair
* A/P = advisory or preparatory task
** FD = fully delegated task
*** FBA = task subject to final Board approval
3 Strategic priorities:
p Unleash the power of
our people
i Deliver transformative
innovation
e Embrace operational
excellence d Go big on data and
digital
s Build trust with society
180
Item 6. Directors, Senior Management and Employees
Research & Development Committee
Primary responsibilities
• 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)*
Key activities in 2019
• Discussed science and innovation in China
• Discussed the gene therapy portfolio
• Reviewed an external assessment of the portfolio and productivity of Novartis research
and development
• Discussed the radioligand therapeutics portfolio
Strategic priorities3
i
i
i e
i e
• Discussed a potential new direction for the Research & Development Committee
to broaden its remit to cover science and technology matters, including digital innovation i e
and data science
Meetings
Number of meetings held
Number of members
Approximate average duration (hours)
Meeting attendance
Documents
3
4
8:10
92%
Joerg Reinhardt1
Nancy C. Andrews
Frans van Houten
Charles L. Sawyers
3
3
3
2
• Board Committees Charter, Appendix I to the Board Regulations
www.novartis.com/investors/company-overview/corporate-governance
1 Chair
* A/P = advisory or preparatory task
** FD = fully delegated task
*** FBA = task subject to final Board approval
3 Strategic priorities:
p Unleash the power of
our people
i Deliver transformative
innovation
e Embrace operational
excellence d Go big on data and
digital
s Build trust with society
181
Item 6. Directors, Senior Management and Employees
Risk Committee
Primary responsibilities
• Overseeing the risk management system and processes (FBA)***
• Reviewing, together with management, the prioritization and management of risks, the risk portfolio, and the actions
implemented by management (FBA)***
• Performing deep dives into key risk areas and fostering a culture of smart risk-taking (FBA)***
• Approving guidelines and reviewing policies and processes (FBA)***
Key activities in 2019
• Approved a new approach to achieve integrated assurance
• Analyzed pricing in various markets
• Reviewed the anti-counterfeiting activities status and outlook
Strategic priorities3
e
i s
e
• With input from the Novartis team and an independent panel of experts, reviewed
the status of cybersecurity, including evolving vulnerabilities, threats and measures d
to address security and recovery
• Evaluated risks and opportunities associated with the digital status and strategy,
and the Novartis Business Services transformation
• Reviewed the Company’s third-party risk management
• Reviewed the Enterprise Risk Management Report
i d
e s
e
Meetings
Number of meetings held
Number of members
Approximate average duration (hours)
Meeting attendance
Documents
4
5
2:10
95%
Srikant Datar1
Nancy C. Andrews
Elizabeth Doherty
Ann Fudge
Andreas von Planta
4
4
3
4
4
• Board Committees Charter, Appendix I to the Board Regulations
www.novartis.com/investors/company-overview/corporate-governance
1 Chair
* A/P = advisory or preparatory task
** FD = fully delegated task
*** FBA = task subject to final Board approval
3 Strategic priorities:
p Unleash the power of
our people
i Deliver transformative
innovation
e Embrace operational
excellence d Go big on data and
digital
s Build trust with society
182
Item 6. Directors, Senior Management and Employees
Chairman
Mandates outside the Novartis Group
The Chairman leads the Board to represent the interests
of all stake holders, and ensures an appropriate balance
of power between the Board and the Executive Commit-
tee. In this role, he:
• 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
• Ensures onboarding programs for new Board members,
and continuing education and specialization for all Board
members
• Ensures that the Board’s performance is annually
evaluated
• Promotes effective relationships and communication
between Board and Executive Committee members
• Ensures effective communication with the Company’s
shareholders
Vice Chairman
The Vice Chairman:
• 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 to
evaluate the performance of the Chairman, during which
the Chairman is not present
No separate meetings of the independent Board members
were held in 2019.
Honorary Chairmen
Dr. Alex Krauer and Dr. Daniel Vasella have been appointed
Honorary Chairmen in recognition of their significant
achievements on behalf of Novartis. They are not provided
with Board documents and do not attend Board meetings.
According to article 34, paragraph 1 of the Articles of
Incorporation
(www.novartis.com/investors/company-
overview/corporate-governance), the following limita-
tions on mandates apply:
Mandates
Other listed companies 1
Maximum number
of mandates
10
4
1 Chairmanship of the board of directors in other listed companies counts as two
mandates.
According to article 34, paragraph 3 of the Articles of
Incorporation (www.novartis.com/investors/company-
overview/corporate-governance), the following man-
dates are not subject to the above-mentioned limitations:
Maximum number
of mandates
Mandates in companies that are controlled by Novartis AG
No limit
Mandates held at the request of Novartis AG
or companies controlled by it
Mandates in associations, charitable organizations,
foundations, trusts and employee welfare foundations
5
10
“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.
In 2019, some investors asked questions regarding
the election of Patrice Bula for reasons of deemed over-
boarding. The nomination was based on a thorough
assessment of Mr. Bula’s capability to not only attend
meetings but also to invest an appropriate amount of
time in providing strategic oversight as a Novartis Board
member, in particular also in case of any urgent matter.
We are satisfied that any concerns related to overboard-
ing are outweighed by the significant long-standing Swiss
and global business experience Mr. Bula will bring to the
Board, including his experience in challenging markets
like China. Mr. Bula has attended all Novartis Board and
Compensation Committee meetings since his election.
As of 1 January 2020, Mr. Bula will no longer be respon-
sible at Nestlé for the unit elaborating Portfolio Strat-
egy and Business Intelligence and, he will step down
from his roles as chairman of Blue Bottle Coffee Inc. and
Nestlé Nespresso SA, and as board member of Hsu Fu
Chi Food Companies.
183
Item 6. Directors, Senior Management and Employees
Information and control systems of
the Board vis-à-vis management
Information from senior management
The Board ensures that it receives sufficient information
from the Executive Committee through:
• Monthly CEO reporting (including detailed written
updates from each division and business unit head),
regular CEO information on current developments, and
a yearly presentation
• Executive Committee meeting minutes
• Regular meetings/teleconferences by the Board and/
or Board committees with the CEO and/or other mem-
bers of the Executive Committee (e.g., the CFO, Group
General Counsel, Chief Ethics, Risk & Compliance Offi-
cer) and occasional meetings/teleconferences with
senior management (e.g., the Global Head of Novartis
Business Assurance & Advisory/Internal Audit)
• Information from Executive Committee members or
other Novartis associates, and visits to Novartis sites
To get an outside view, the Board and/or Board com-
mittees occasionally invite external advisors (e.g., the
independent advisor of the Compensation Committee,
the external auditor) to attend a meeting and/or repre-
sent a specific topic.
Regular reports to the Board
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 Report-
ing 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 and earnings per share
on a USD basis
Management information related to the consolidated
income statements and free cash flow is made available
to Board members through the monthly CEO Report,
including an analysis of key deviations from the prior
year or target.
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.
Annually, in the middle of the year, the Board approves
the Company’s strategic plan for the next three years. In
the fourth quarter of the year, the Board 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 accordance with IFRS and non-IFRS
measures as defined by Novartis (core results).
The Board does not have direct access to the Novartis
financial and management reporting systems but can, at
any time, request more detailed information.
184
Item 6. Directors, Senior Management and Employees
Risk management
Ultimate oversight of the Board of Directors
The Board is supported by:
RISK COMMITTEE
• Oversees the risk management system and processes
• Reviews, together with management, the priorization and management of risks, the risk
portfolio and actions implemented by management
• Performs deep dives into key risk areas and fosters a culture of smart risk-taking
• Approves guidelines and reviews policies and processes
• Receives regular presentations from the Chief Ethics, Risk & Compliance Officer and the
Head of Risk & Resilience as well as designated risk owners
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—Compensation governance—Risk management principles”)
AUDIT AND COMPLIANCE
COMMITTEE
• Ensures that Internal Audit plans are aligned with key risks and that the function provides
independent assurance and insights around those
• Receives bi-annually a presentation from the Chief Ethics, Risk & Compliance Officer,
who is free to also request a closed session with the ACC and/or its Chair as needed
• Pays particular attention to financial risk
EXECUTIVE COMMITTEE
• Regularly assesses risks and fosters a culture of risk awareness, in line with the Novartis
Values and Behaviors
ETHICS, RISK &
COMPLIANCE (ERC)
• Provides an integrated Enterprise Risk Management (ERM) framework to gather a
holistic view and drive a culture of smart risk-taking
• Our integrated framework was further strengthened by launching the Novartis Risk &
Resilience organization as an ERC subfunction, bringing together the Group Risk Office,
Risk Assessment & Monitoring (RAM), Business Continuity Management (BCM), and
Novartis Emergency Management (NEM)
SENIOR LEADERS OF
DIVISIONS, ORGANIZATIONAL
UNITS AND GROUP FUNCTIONS,
AT ALL LEVELS
• Provide appropriate risk management within their area of responsibility
• Establish adequate risk prevention and mitigation strategies when risk exposure is
identified, involving periodic meetings to track progress and review of the resources for
mitigation
• Assess emerging risks, trends and overall exposure
Coverage of the ERM framework in general
The ERM process covers, but is not limited to covering, the risks associated with:
• Research, development, manufacturing, marketing and sales of products
• Finance; taxes; intellectual property; compliance with law and regulations; security; product safety; human resources; and
health, safety and environmental protection
• Business objectives and strategies, including mergers and acquisitions
• External factors such as the social, political and economic environment
2019 ERM activities
Under the ERC, the ERM process has evolved to further adapt to the Company’s changing needs. As part of the ERC, the
ERM performed risk workshops, and in close collaboration with all risk assurance functions gathered an integrated view of
the risks across the Company. Each Novartis unit had at its leadership team level a focused risk workshop, usually in the con-
text of the strategic planning process. In parallel, the ERC piloted integrated risk workshops in a selected group of countries.
This informed the creation of a risk portfolio (the Novartis Risk Compass) with a mitigation action plan per local unit, followed
by a “one risk discussion” with the country leadership team, which helped identify and prioritize key risks at the country level.
185
Item 6. Directors, Senior Management and Employees
Internal Audit
Independent assurance, advice and insights
The function supports Novartis in achieving its objectives; identifying and managing major risks; and complying with policies,
laws and regulations in the following ways:
• Internal Audit executes the risk-based annual audit plan approved by the ACC at Group and entity level, and reports the
results to the audited units, the Executive Committee (including a root cause analysis), and the ACC (in the form of formal
quarterly presentations and audit report executive summaries).
• (Potential) material irregularities are escalated to the SpeakUp Office for triage and potential investigation, and to the ACC.
Action plans are developed together with the audited units.
• Internal Audit conducts desktop follow-up for high-risk findings prior to the due date of the remediation actions. In case of
“needs major improvement” audit opinion, a follow-up audit will take place in the following year.
• Audit findings and action plans are stored and monitored in a single application to enable efficient follow-up.
• Internal Audit also proactively shares insights, best practices and recurring findings with the business to foster continuous
learning.
The Global Head of Novartis Business Assurance & Advisory/Internal Audit reports administratively to the CEO, and
functionally to the Chair of the ACC, and meets with the latter and the Chairman of the Board at least quarterly.
2019 Internal Audit activities and observations
Compared to previous years, Internal Audit broadened the coverage by applying an end-to-end approach and conducting
advisory engagements to assess and strengthen governance, risk management and controls (for example, in ongoing
strategic projects, newly set-up processes or acquired companies). In 2019, Internal Audit performed:
44
Audits
20
Advisories
14
Site visits
Coverage extended to engagements in commercial entities, as well as multiple corporate functions and projects, such as
various digital initiatives and the transformations of NTO and NBS. Recurring observations identified across functions and
business units relate to:
• Improving project governance
• End-to-end processes
• The sustainability and impact of business transformations
• Principles-based decision-making
• Data governance
• System interface management and system security
• Third-party management
Internal Audit and the ERC functions have initiated a multiyear integrated assurance project to further optimize coverage and
minimize blind spots and duplications. In 2019, a self-assessment framework was implemented to determine and potentially
improve the maturity of monitoring functions. Internal Audit also advised on the execution of joint monitoring visits piloted by
ERC, Financial Control and Compliance (FC&C), and BCM.
186
Item 6. Directors, Senior Management and Employees
Executive Committee
Composition (as per December 31, 2019)
Vasant Narasimhan
Chief Executive Officer
Steven Baert
Chief People &
Organization Officer
Shannon Thyme Klinger
Group General Counsel
Bertrand Bodson
Chief Digital Officer
James Bradner
President of the Novartis Institutes
for BioMedical Research (NIBR)
Harry Kirsch
Chief Financial Officer
Steffen Lang
Global Head of Novartis
Technical Operations (NTO)
Klaus Moosmayer
Chief Ethics, Risk
& Compliance Officer
Susanne Schaffert
President of
Novartis Oncology
John Tsai
Head of Global Drug Development
and Chief Medical Officer
Marie-France Tschudin
President of
Novartis Pharmaceuticals
Richard Saynor
Chief Executive Officer
of Sandoz
Robert Weltevreden
Head of Novartis
Business Services (NBS)
Changes to the Executive Committee
• Preparing and submitting quarterly and annual reports
Susanne Schaffert became President of Novartis Oncology
and a member of the Executive Committee effective Jan-
uary 1, 2019. Marie-France Tschudin became President
of Novartis Pharmaceuticals and a member of the Exec-
utive Committee effective June 7, 2019. She replaced
Paul Hudson, who stepped down as of the same date.
His CV can be found in the 2018 Annual Report (page
194). Richard Saynor became CEO of Sandoz and a
member of the Executive Committee effective July 15,
2019. Richard Francis served as CEO of Sandoz until
March 31, 2019. His CV can be found in the 2018 Annual
Report (page 194). The 2018 Annual Report is available
at www.novartis.com/annualreport2018.
Role of the Executive Committee
The Board has appointed the Executive Committee
members and delegated to them the overall responsi-
bility for and oversight of the operational management
of Novartis, including:
• Recruiting, appointing and promoting senior management
• Ensuring the efficient operation of the Group and the
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
There are no contracts between Novartis and third par-
ties whereby Novartis would delegate any business man-
agement tasks to such third parties.
CEO
With the support of the Executive Committee, the CEO is
responsible for the operational management of Novartis.
This includes effectively implementing the Company strat-
egy, delivering financial results, and shaping a corporate
culture of empowerment and responsibility to help drive
innovation, performance and reputation.
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:
• Ensuring Novartis has the capabilities to achieve its
long-term strategic objectives
achievement of optimal results
• Developing robust management succession and devel-
• Promoting an active internal and external communications
opment plans for presentation to the Board
policy
• Promoting effective communication with shareholders
• Developing policies and strategic plans for Board
and other stakeholders
approval, and implementing those approved
• Ensuring Novartis conducts its business in a legal and
• 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 to
the Novartis Group
ethical manner
• Developing an effective risk control framework for all
business activities
• Ensuring the flow of information to the Board is accu-
rate, timely and clear
187
NATIONALITY
NATIONALITY
GENDER
GENDER
EXECUTIVE/NON-EXECUTIVE
EXECUTIVE/NON-EXECUTIVE
INDEPENDENCE
INDEPENDENCE
Item 6. Directors, Senior Management and Employees
Executive Committee profile
The composition as of December 31, 2019, in terms of length of tenure, gender and nationality, is shown in the
following charts:
Diversity
NATIONALITY
NATIONALITY
Nationality1
BACKGROUND/EXPERIENCE
GENDER
BACKGROUND/EXPERIENCE
Gender
GENDER
AGE
AGE
EXECUTIVE/NON-EXECUTIVE
EXECUTIVE/NON-EXECUTIVE
Age
TENURE
TENURE
Tenure
INDEPENDENCE
INDEPENDENCE
p American
p German
p Swiss
p Belgian
p Dutch
p British
31%
23%
15%
15%
8%
8%
p Male
p Female
77%
23%
p <45
p 45–50
p >50
15%
39%
46%
p <2 y
p 2–4 y
p >4 y
70%
15%
15%
1Please note that two Executive Committee members have two nationalities. Each of these nationalities were taken into account by a factor of 0.5 in the above chart.
TENURE
“Mandates” means those in the supreme governing body
TENURE
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.
BACKGROUND/EXPERIENCE
BACKGROUND/EXPERIENCE
Mandates outside the Novartis Group
AGE
AGE
According to article 34, paragraph 2 of the Articles of
Incorporation (www.novartis.com/investors/company-
overview/corporate-governance), the following limita-
tions on mandates apply:
Mandates
Other listed companies 1
Maximum number
of mandates
6
2
1 Chairmanship of the board of directors in other listed companies is not allowed.
According to article 34, paragraph 3 of the Articles of
Incorporation (www.novartis.com/investors/company-
overview/corporate-governance), the following mandates
are not subject to above-mentioned limitations:
Maximum number
of mandates
Mandates in companies that are controlled by Novartis AG
No limit
Mandates held at the request of Novartis AG
or companies controlled by it
Mandates in associations, charitable organizations,
foundations, trusts and employee welfare foundations
5
10
188
Item 6. Directors, Senior Management and Employees
Members of the Executive Committee
Vasant (Vas) Narasimhan, M.D.
Chief Executive Officer of Novartis since 2018 | Nationality: American | Year of birth: 1976
Professional experience
• Global Head of Drug Development and Chief Medical Officer, Novartis AG, Switzerland (2016–2018)
• Global Head of Development, Novartis Pharmaceuticals, Switzerland (2014–2016)
• Global Head of Biopharmaceuticals and Oncology Injectables, Sandoz International, Germany (2014)
• Global Head of Development, Novartis Vaccines, US (2012–2014)
• North America Region Head, Novartis Vaccines, and US Country President, Novartis Vaccines and
Diagnostics, US (2008–2012)
• Joined Novartis in 2005
Mandates
• Committee member, Biopharmaceutical CEOs Roundtable (BCR), International Federation of
Pharmaceutical Manufacturers & Associations (IFPMA), Switzerland
• Member of the board of fellows, Harvard Medical School, US
• Board member, Pharmaceutical Research and Manufacturers of America (PhRMA), US
Education
• Doctor of medicine, Harvard Medical School, US
• Master’s degree in public policy, John F. Kennedy School of Government, Harvard University, US
• Bachelor’s degree in biological sciences, University of Chicago, US
Steven Baert
Chief People & Organization Officer of Novartis since 2014 | Nationality: Belgian | Year of birth: 1974
Professional experience
• Global Head of Human Resources, Novartis Oncology, Switzerland (2012–2014)
• Head of Human Resources for the US and Canada, Novartis Pharmaceuticals, US (2009–2012)
• Head of Human Resources for Emerging Growth Markets, Novartis Pharmaceuticals, Switzerland
(2008–2009)
• Head of Human Resources Global Functions, Novartis Pharmaceuticals, Switzerland (2006–2008)
Mandates
• Board member, WeSeeHope charity, US
• Represented Novartis on the board of GlaxoSmithKline Consumer Healthcare Holdings Ltd. (2015–2018)
Education
• Master of Business Administration, Vlerick Business School, Belgium
• Master of Laws, Katholieke Universiteit Leuven, Belgium
• Bachelor of Laws, Katholieke Universiteit Brussels, Belgium
Bertrand Bodson
Chief Digital Officer of Novartis since 2018 | Nationality: Belgian | Year of birth: 1975
Professional experience
• Chief digital and marketing officer, Sainsbury’s Argos, UK (2013–2017)
• Executive vice president of the global digital business, EMI Music, UK (2010–2013)
• Co-founder and CEO, Bragster.com, UK (2006–2010)
• Senior group product manager, Amazon Inc., US and UK (2003–2006)
Mandates
• Board member, Electrocomponents PLC, UK
• Member of the supervisory board, Wolters Kluwer NV, Netherlands
Education
• Master of Business Administration, Harvard Business School, US
• Master’s degree in commercial engineering, Solvay Business School, Belgium/McGill University, Canada
James (Jay) Bradner, M.D.
President of the Novartis Institutes for BioMedical Research (NIBR) since 2016 | Nationality: American |
Year of birth: 1972
Professional experience
• Associate professor, Department of Medicine, Harvard Medical School, US (2014–2016)
• Assistant professor, Department of Medicine, Harvard Medical School, US (2010–2014)
• Attending physician, Department of Medical Oncology, Dana-Farber Cancer Institute, US (2005–2015)
• Co-founder of five biotechnology companies
• Co-author of more than 200 scientific publications and 30 US patent applications
Mandates
• Member, Alpha Omega Alpha Honor Medical Society, US
• Member, American Society for Clinical Investigation, US
• Chairman, Genomics Institute of the Novartis Research Foundation, US
Education
• Doctor of medicine, University of Chicago Pritzker School of Medicine, US
• Bachelor’s degree in biochemistry, Harvard University, US
• Postdoctoral training in chemistry and chemical biology, Harvard University, US
• Fellowship in medical oncology and hematology, Dana-Farber Cancer Institute, US
• Residency in medicine, Brigham and Women’s Hospital, US
189
Item 6. Directors, Senior Management and Employees
Harry Kirsch
Chief Financial Officer of Novartis since 2013 | Nationality: German/Swiss | Year of birth: 1965
Professional experience
• Chief Financial Officer of the Pharmaceuticals Division (now known as the Innovative Medicines Division),
Novartis Pharmaceuticals, Switzerland (2010-2013)
• Chief Financial Officer of Pharma Europe, Novartis Pharmaceuticals, Switzerland (2008–2010)
• Head of Business Planning & Analysis for the Pharmaceuticals Division, Novartis Pharmaceuticals,
Switzerland (2005–2008)
• Joined Novartis in 2003 as Head Finance Global Primary Care, and over the years held positions of
increasing responsibility within Finance
Mandates
• Represented Novartis on the board of GlaxoSmithKline Consumer Healthcare Holdings Ltd. (2015–2018)
Education
• Diploma degree in industrial engineering and economics, University of Karlsruhe, Germany
Shannon Thyme Klinger
Group General Counsel of Novartis since 2018 | Nationality: American | Year of birth: 1971
Professional experience
• Chief Ethics, Risk and Compliance Officer, Novartis AG, Switzerland (April–May 2018)
• Chief Ethics and Compliance Officer and Global Head of Litigation, Novartis AG, Switzerland (2016–2018)
• General Counsel and Global Head of Legal, Sandoz International, Germany (2012–2016)
• General Counsel for North America, Sandoz Inc., US (2011–2012)
• Partner, Mayer Brown LLP, US (2010–2011)
• General counsel and senior vice president, Solvay Pharmaceuticals Inc., US (2008–2010)
Mandates
• Board member, SIX Group, Switzerland
Education
• Bar memberships: State of Georgia, District of Columbia, US
• Juris doctor with honors, University of North Carolina at Chapel Hill, US
• Bachelor’s degree in psychology, University of Notre Dame, US
Steffen Lang, Ph.D.
Global Head of Novartis Technical Operations (NTO) since 2017 | Nationality: German/Swiss | Year of birth: 1967
Professional experience
• Global Head of Biologics Technical Development and Manufacturing, Novartis Technical Operations,
Switzerland (2015–2017)
• Global Head of Technical Research and Development, Novartis Pharmaceuticals, Switzerland (2009–2015)
• Joined Novartis in 1994 as Head of Laboratory in Research, and over the years held positions of
increasing responsibility within Pharmaceuticals Development
Education
• Doctorate in pharmaceutical technology, Swiss Federal Institute of Technology, Switzerland
• Master’s degree in pharmaceutical sciences, University of Heidelberg, Germany
Klaus Moosmayer, Ph.D.
Chief Ethics, Risk & Compliance Officer of Novartis since 2018 | Nationality: German | Year of birth: 1968
Professional experience
• Chief compliance officer, Siemens AG, Germany (2014–2018)
• Chief counsel compliance, Siemens AG, Germany (2009–2013)
• Compliance operating officer, Siemens AG, Germany (2007–2009)
Mandates
• Chair of the Anti-Corruption Committee of the Business and Industry Advisory Committee, Organization
for Economic Co-operation and Development (OECD), Paris
• Co-founder and chair, European Chief Compliance and Integrity Officers’ Forum
• Co-chair, B20 Integrity & Compliance Task Force under the G20 presidency of Saudi Arabia
• Co-chair, B20 Integrity & Compliance Task Force under the G20 presidency of Argentina (2018)
• Chair, B20 Integrity & Compliance Task Force under the G20 presidency of Germany (2017)
Education
• First and second state examination in law, Germany
• Doctor of jurisprudence, University of Freiburg, Germany
190
Item 6. Directors, Senior Management and Employees
Richard Saynor
Chief Executive Officer of Sandoz since July 15, 2019 | Nationality: British | Year of birth: 1967
Professional experience
• Senior vice president of classic and established products, and commercial and digital platforms,
GlaxoSmithKline (GSK) Pte. Ltd., UK (March–June 2019)
• Senior vice president and global head of classic and established products, GSK, UK (2014–2019)
• Senior vice president and global head of established products, GSK, UK (2013–2014)
• Senior vice president of classic brands and generics for Europe, Japan, and the emerging markets and
Asia-Pacific (EMAP) region, GSK, Singapore (2010–2013)
• Region Head of Asian Markets, Sandoz International, Singapore (2008–2010)
• Region Head of Asia-Pacific, Latin America, Canada and Turkey, Sandoz International, Germany (2005–2008)
Mandates
• Member, Royal Pharmaceutical Society, UK
• Board member, GSK India, India (2018–2019)
Education
• Bachelor of Pharmacy, University of Bradford, UK
Susanne Schaffert, Ph.D.
President of Novartis Oncology since January 1, 2019 | Nationality: German | Year of birth: 1967
Professional experience
• Chairperson and President, Advanced Accelerator Applications, Switzerland (2018–2019)
• General Manager of Europe, Novartis Oncology, Italy (2012–2018)
• Global Head of Investor Relations, Novartis AG, Switzerland (2010–2012)
• Global Franchise Head for Immunology and Infectious Diseases, Novartis AG, Switzerland (2009–2010)
• General Manager of Northern and Central Europe, Novartis Oncology, Italy (2007–2009)
• General Manager of Germany, Novartis Oncology, Germany (2004–2007)
Mandates
• Board member, Novartis AG, Germany
• Board member, European Federation of Pharmaceutical Industries and Associations (EFPIA), Belgium
• Represented Novartis on the board of GlaxoSmithKline Consumer Healthcare Holdings Ltd. (2015–2018)
Education
• Doctorate in organic chemistry, University of Erlangen, Germany
John Tsai, M.D.
Head of Global Drug Development and Chief Medical Officer for Novartis since 2018 | Nationality: American |
Year of birth: 1967
Professional experience
• Chief medical officer and senior vice president of Global Medical, Amgen Inc., US (2017–2018)
• Global head of clinical development for marketed products, Bristol-Meyers Squibb Co. (BMS), US (2016–2017)
• Full development team leader in oncology, BMS, US (2015–2016)
• Head of Worldwide Medical, BMS, US (2014–2015)
• Chief medical officer for Europe, BMS, France (2012–2014)
• Vice president of US Medical, BMS, US (2010–2012)
• Vice president of Cardiovascular Medical, BMS, US (2006–2010)
Education
• Doctor of medicine, University of Louisville School of Medicine, US
• Bachelor of Science in electrical engineering, Washington University in St. Louis, US
Marie-France Tschudin
President of Novartis Pharmaceuticals since June 7, 2019 | Nationality: Swiss | Year of birth: 1971
Professional experience
• President, Advanced Accelerator Applications, France (March–June 2019)
• Europe Region Head, Novartis Pharmaceuticals, Switzerland (2017–2019)
• Corporate vice president of hematology and oncology for Europe, the Middle East and Africa, Celgene
International, Switzerland (2014–2016)
• Regional vice president of northern Europe, Celgene International, Switzerland (2012–2014)
• General manager of Austria, Switzerland, the Czech Republic, Poland, Slovenia and Slovakia, Celgene
International, Switzerland (2009–2011)
• Country manager of Switzerland, Celgene International, Switzerland (2008–2009)
Education
• Master of Business Administration, IMD business school, Switzerland
• Bachelor of Science, Georgetown University, US
Robert Weltevreden
Head of Novartis Business Services (NBS) since 2018 | Nationality: Dutch | Year of birth: 1969
Professional experience
• Head of business services, Syngenta AG, Switzerland (2015–2017)
• Head of business process management, Syngenta AG, Switzerland (2014)
• Head of finance services, Syngenta AG, Switzerland, (2009–2014)
• Chief financial officer of the Asia-Pacific region, Syngenta Crop Protection AG, Singapore (2007–2009)
Education
• Master’s degree in international finance, economics and business administration, Erasmus University
Rotterdam, Netherlands
• Master of Business Administration in financial management, Vlerick Business School, Belgium
191
Item 6. Directors, Senior Management and Employees
Auditors
Duration of the mandate and terms of
office of the external auditor
Based on a recommendation by the ACC, the Board nom-
inates an independent auditor for election at the AGM.
Pricewaterhouse Coopers AG (PwC) assumed its existing
auditing mandate for Novartis in 1996. Luc Schulthess,
auditor in charge, began serving in his role in 2018, and
Kris Muller, global relationship partner, began serving
in her role in 2019. The ACC together with PwC ensure
that these partners are rotated at least every five years.
Auditing fees and additional fees
The ACC monitors and preapproves the fees paid to the
external auditor for all audit and non-audit services. It has
developed and approved a policy with clear guidelines
on the engagement of the independent auditor firm. This
policy is designed to help ensure that the independence
of the external auditor is maintained. It limits the scope
of services that the external auditor may provide to the
Group, stipulating certain permissible types of audit-re-
lated and non-audit services, including tax services and
other services that have been preapproved by the ACC.
The ACC preapproves all other services on a case-by-
case basis.
The external auditor is required to report periodically
to the ACC about the scope of the services it has pro-
vided to the Group and the fees for the services it has
performed to date. PwC fees for professional services
related to the 12-month periods ended December 31,
2019, and December 31, 2018, are as follows:
Audit services
Audit-related services
Tax services
Other services
Total
2019
USD million
2018
USD million
21.2
1.0
0.7
1.4
24.3
25.6
13.4
0.7
2.4
42.1
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 ACC
The ACC, acting on behalf of the Board, is responsible
for overseeing the activities of PwC. In 2019, this commit-
tee held nine meetings. PwC was invited to six of these
meetings to attend the discussions on auditing matters
and any other matters relevant to its audit.
The ACC recommended to the Board to approve the
audited consolidated financial statements and the sep-
arate parent company financial statements of Novartis
AG for the year ended December 31, 2019. The Board
proposed the acceptance of these financial statements
for approval by the shareholders at the next AGM.
The ACC regularly evaluates 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 ACC holds private
meetings with the CFO and the Global Head of Novartis
Business Assurance & Advisory/Internal Audit and, if
necessary, obtains an independent external assessment.
Criteria applied for the performance assessment of PwC
include an evaluation of its technical and operational
competence; its independence and objectivity; the suf-
ficiency 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
ACC, the Internal Audit function 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 ACC with writ-
ten disclosures required by the US Public Company
Accounting Oversight Board, and the committee and
PwC discuss PwC’s independence from Novartis.
192
Item 6. Directors, Senior Management and Employees
Information policy
Novartis is committed to open and transparent commu-
nication with shareholders, investors, 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.
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 available at
www.novartis.com/investors.
Novartis also publishes a Novartis in Society ESG
Report, available at www.novartis.com/nisreport2019,
which details progress and demonstrates the Compa-
ny’s commitment in global health and corporate respon-
sibility. This report has been prepared in accordance
with the Global Reporting Initiative, GRI Standards: Core
option, and fulfills the Company’s reporting requirement
as a signatory of the UN Global Compact.
The information on Board and Executive Committee
compensation is outlined in the Compensation Report
(see “Item 6.B Compensation” in general, and for certain
compensation information with respect to our Board that
is responsive to Item 6.C.2 of Form 20-F, see “Item 6.B
Compensation—2019 Board compensation—Philosophy
and benchmarking”). Please also refer to articles 29-35
of the Articles of Incorporation (www.novartis.com/inves-
tors/company- overview/corporate-governance). There
are no change-of-control and “golden parachute” clauses
benefiting Board members, Executive Committee members,
or other members of senior management. Employment
contracts with Executive Committee members are either
for a fixed term not exceeding one year or for an indefinite
period with a notice period not exceeding 12 months, and
do not contain commissions for the acquisition or transfer
of enterprises or severance payments. No loans or credits
are granted to Board and Executive Committee members.
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
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 at www.novartis.com/investors.
Website information
Topic
Share capital
Shareholder rights
Annual General Meeting of Shareholders
Board Regulations
Novartis code for senior financial officers
Novartis in Society ESG Report
Novartis financial data
Press releases
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
Annual General Meeting of Shareholders
www.novartis.com/investors/shareholder-information/annual-general-meeting
Board Regulations
www.novartis.com/investors/company-overview/corporate-governance
Novartis Code of Ethical Conduct for CEO and Senior Financial Officers
www.novartis.com/investors/company-overview/corporate-governance
Novartis in Society ESG Report
www.novartis.com/nisreport2019
Novartis financial data
www.novartis.com/investors/financial-data
Press releases
www.novartis.com/news/news-archive?type=press_release
Free email service
www.novartis.com/news/stay-up-to-date
Additional information
(including Novartis investors event calendar, registered office,
contact and email addresses, phone numbers, etc.)
Novartis Investor Relations
www.novartis.com/investors
193
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, 2019
(full-time equivalents)
USA
Canada and Latin America
Europe
Asia/Africa/Australasia
Total
For the year ended
December 31, 2018
(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
5 360
3 396
2 830
5 412
838
16 395
19 386
17 455
3 163
480
9 988
4 296
614
864
4 352
4 233
Total
14 979
5 975
763
397
2 666
52 787
1 026
30 173
42 606
26 217
20 176
10 063
4 852
103 914
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
899
4 845
3 613
51 116
36 517
21 234
10 824
5 470
125 161
Thereof continuing operations2
Thereof discontinued operations2
43 954
25 862
19 803
10 824
4 337
104 780
7 162
10 655
1 431
0
1 133
20 381
For the year ended
December 31, 2017
(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
6 563
4 477
7 095
1 305
6 803
1 680
557
726
471
Total
22 867
7 710
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
900
4 903
3 386
Thereof continuing operations2
Thereof discontinued operations2
42 115
25 564
20 060
10 869
3 859
102 467
6 595
10 218
1 356
0
961
19 130
1 NBS relates to full-time equivalent employees from our Novartis Business Services organizational unit.
2 Continuing operations include the businesses of the Innovative Medicines and Sandoz Divisions and the continuing Corporate activities, and
discontinued operations include the Alcon eye care devices business and certain corporate activities attributable to Alcon prior to the
spin-off. See “Item 18.Financial Statements—Note 2. Significant transactions—Significant transactions in 2019.”
As of December 31, 2019, the number of our full-time equivalent employees decreased by 21 247 compared to
December 31, 2018, mainly due to the April 2019 completion of the Alcon spin-off. For more information on this
transaction, please see “Item 18. Financial Statements—Note 2. Significant transactions in 2019.”
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.
194
Item 6. Directors, Senior Management and Employees
6.E Share ownership
The information set forth under “Item 6. Directors, Senior
Management and Employees—Item 6.B Compensa-
tion—2019 Executive Committee compensation—Addi-
tional disclosures for the CEO and other Executive Com-
mittee members—Shares, ADRs and other equity rights
owned by Executive Committee members at Decem-
ber 31, 2019” and under “Item 6. Directors, Senior Man-
agement and Employees—Item 6.B Compensation—2019
Board compensation—Additional disclosures—Shares,
ADRs and share options owned by Board members,” is
incorporated by reference. For more information on our
equity-based participation plans, see the information set
forth under “Item 18. Financial Statements—Note 26.
Equity-based participation plans for associates,” which
is incorporated by reference.
195
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,
2019, Novartis had approximately 161 000 shareholders
listed in the Novartis AG Share Register, representing
approximately 69.7% of issued shares. Based on the
Novartis AG Share Register and excluding treasury
shares, approximately 42.4% of the shares registered by
name were held in Switzerland, and approximately 25.4%
were held in the US. Approximately 13% of the shares
registered in our share register were held by individual
investors, while approximately 32.8% were held by legal
entities (excluding 5.7% of our share capital held as trea-
sury shares by Novartis AG or its fully owned subsidiar-
ies), and 54.2% by nominees, 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.
The tables below set forth information with respect
to our major shareholders according to our share regis-
ter as of December 31, 2019, excluding 5.7% of our share
capital held as treasury shares by Novartis AG or its fully
owned subsidiaries. The following registered sharehold-
ers (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 registered for their own account:
Emasan AG, Basel, Switzerland
Novartis Foundation for Employee Participation, Basel, Switzerland 1
UBS Fund Management (Switzerland) AG, Basel, Switzerland
% of respective share capital beneficially owned
as of:
Ordinary shares
beneficially owned as of
Dec 31, 2019 Dec 31, 2019
Dec 31, 2018
Dec 31, 2017
89 193 765
53 983 628
52 845 411
3.5
2.1
2.1
3.5
2.3
2.2
3.4
2.5
2.0
1 The Novartis Foundation for Employee Participation (the “Employee Foundation”) is a special purpose entity that was founded by, but is
independent from, Novartis.
Shareholders registered as nominees:
Chase Nominees Ltd., London, England
The Bank of New York Mellon, New York, NY
Through The Bank of New York Mellon, Everett, MA
Through The Bank of New York Mellon, New York, NY
Through The Bank of New York Mellon, SA/NV, Brussels, Belgium
Nortrust Nominees Ltd., London, England
Shareholder acting as American Depositary Share (ADS) depositary:
% of respective share capital held as of:
Ordinary shares
held as of
Dec 31, 2019 Dec 31, 2019
Dec 31, 2018
Dec 31, 2017
264 073 363
10.4
95 456 296
50 207 591
29 356 938
15 891 767
98 354 215
3.8
2.0
1.2
0.6
3.9
9.8
4.1
2.1
1.3
0.7
3.6
7.8
4.3
2.0
–
2.3
3.8
JPMorgan Chase Bank, N.A., New York, NY
314 717 099
12.5
13.3
12.3
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, or
54 217 976 shares, as of December 31, 2019, with the
right to vote all its Novartis shares, but was not regis-
tered in our share register as of December 31, 2019.
but was not registered, or was registered with less than
2%, of the share capital of Novartis AG in our share reg-
ister as of December 31, 2019.
As of December 31, 2019, no other shareholder was
registered as owner of more than 2% of the registered
share capital.
According to a disclosure notification filed with
Novartis AG and the SIX Swiss Exchange, each of Black-
Rock, Inc., New York, NY, and The Capital Group Com-
panies, Inc., Los Angeles, CA, held between 3% and 5%,
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
196
Item 7. Major Shareholders and Related Party Transactions
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.
7.B Related party transactions
The information set forth under “Item 18. Financial Statements—Note 27. Transactions with related parties” is incor-
porated by reference.
7.C Interests of experts and counsel
Not applicable.
197
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 2.95 per
share to the shareholders for approval at the Annual
General Meeting to be held on February 28, 2020.
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.”
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 for many years maintained 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 2019, 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 2019, 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 hospitals and
research institutes are owned or controlled by the gov-
ernment of Iran, and some doctors and healthcare pro-
fessionals 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.
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.
198
Item 8. Financial Information
8.B Significant changes
None.
199
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).
Our ADRs have been listed on the NYSE since May 2000
and are traded under the symbol NVS.
ADSs, each representing one share, have been avail-
able in the US through an ADR program since Decem-
ber 1996. This program was established pursuant to a
deposit agreement that we entered into with JPMorgan
Chase Bank, N.A., as depositary (Deposit Agreement).
The depositary has informed us that as of January 23,
2020, there were 318 million ADRs outstanding, each
representing one Novartis share (approximately 12.6%
of total Novartis shares issued). On January 23, 2020,
the closing price per share on the SIX was CHF 91.82
and USD 94.92 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.
200
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 (and therefore not purported
to be complete) of certain provisions of our Articles of
Incorporation (“Articles”), our Regulations of the Board
of Directors (“Board Regulations”) and of Swiss law, par-
ticularly the Swiss Code of Obligations (“Swiss CO”), and
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
According to our Articles, the Board of Directors
(“Board”) consists of a minimum of eight and a maximum
of 16 members. The members of the Board and the Chair-
man of the Board are elected individually by the General
Meeting of Shareholders for a term of office lasting until
completion of the next Annual General Meeting of Share-
holders.
(a) A Board resolution requires the affirmative majority
of the votes cast. According to our Board Regulations,
a member of our Board (“Director”) may not partici-
pate in deliberations or resolutions on matters that
affect, or reasonably might affect, the Director’s inter-
ests or the interests of a person close to the Direc-
tor.
(b) 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 (the “Com-
pensation Ordinance”).
(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.
10.B.3 Shareholder rights
Because Novartis AG has only one class of registered
shares, the following information applies to all sharehold-
ers.
(a) Under the Swiss CO, we may only pay dividends out
of balance sheet profits or out of distributable
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. Furthermore, the
Swiss CO requires us to accrue general legal reserves
under certain circumstances so long as these
reserves amount to less than 20% of our registered
share capital, and Swiss law and the Articles permit
us to accrue additional reserves beyond the statutory
reserves. Our auditors must confirm that the dividend
proposal of our Board conforms with the Swiss CO
and the Articles. Our Board intends to propose a div-
idend once each year. See “Item 3. Key Information—
Item 3.A. Selected financial data—Cash dividends per
share” and “Item 8. Financial Information—Item 8.A.
Consolidated statements and other financial informa-
tion—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
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 registered its shares,
then the shareholder may not vote at, or participate
in, General Meetings of Shareholders.
201
Item 10. Additional Information
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 auditor;
(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.
According to the Articles and Swiss law, the fol-
lowing matters require the approval of a “superma-
jority” of at least two-thirds of the votes present at a
General Meeting of Shareholders: (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 restrictions; (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 acqui-
sition of property or the grant of special rights; (6) a
restriction or an exclusion of shareholders’ pre-emp-
tive rights; (7) a change of our registered office; (8) our
dissolution; or (9) any amendment to the Articles that
would create or eliminate a supermajority require-
ment. As a matter of Swiss law, certain other matters
require a supermajority as well, including certain
mergers, scissions and transformations under the
Swiss Merger Act.
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, the statutory auditor and the Indepen-
dent Proxy. The Articles do not provide for cumula-
tive 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-
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
202
Item 10. Additional Information
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 sufficient
freely disposable equity in the amount of the pur-
chase price of the acquired shares. The aggregate
nominal value of all Novartis AG shares held by us and
our subsidiaries may not exceed 10% of our regis-
tered share capital. However, it is accepted that a
Swiss corporation may repurchase its own shares
beyond the statutory limit of 10% if the repurchased
shares are clearly earmarked for cancellation. In addi-
tion, we are required to recognize a negative position
or if our subsidiaries acquire our shares, to create a
special reserve on our balance sheet in the amount
of the purchase price of the acquired shares. Repur-
chased shares held by us or our subsidiaries do not
carry any rights to vote at a General Meeting of Share-
holders, but are entitled to the economic benefits gen-
erally connected with the shares. The definition of
subsidiaries, and therefore, treasury shares, for pur-
poses of the above described reserves requirement
and voting restrictions differs from the definition of
subsidiaries for purposes of consolidation in our con-
solidated financial statements. The definition in the
consolidated financial statements requires consoli-
dation for financial reporting purposes of special pur-
pose entities in instances where we have the power
to govern the financial and operating policies of the
entity so as to obtain benefits from its activities.
Therefore, our consolidated financial statements
include special purpose entities, mainly foundations,
which do not qualify as subsidiaries subject to the
reserve requirements and voting restrictions of the
Swiss CO because we do not hold a majority partic-
ipation in these special purpose entities. 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, our shareholders are not obliged to
make further contributions with respect to their
shares.
(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 excluded 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-
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
203
Item 10. Additional Information
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 33 1/3% 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.
10.B.8 Disclosure of shareholdings
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
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.10 Changes in capital
The requirements of the Articles regarding changes in
capital are not more stringent than the requirements of
Swiss law.
10.C Material contracts
Alcon spin-off
In connection with the spin-off of our Alcon business, we
entered into a Separation and Distribution Agreement, a
Tax Matters Agreement and several other agreements
with Alcon to effect the separation of the Alcon business
and provide a framework for our relationship with Alcon
after the spin-off.
The Separation and Distribution Agreement sets
forth the parties’ agreements regarding the principal
actions to be taken in connection with the separation of
the Alcon business and the spin-off, including the con-
ditions of the spin-off and the rights and obligations of
the parties with respect to the distribution. The Separa-
tion and Distribution Agreement identifies the assets to
be transferred, liabilities to be assumed and contracts
to be assigned to each of Novartis and Alcon as part of
the internal transactions effected prior to the distribution
and provides for when and how such transfers, assump-
tions and assignments should occur.
The Tax Matters Agreement imposes certain restric-
tions and indemnity obligations on Alcon designed to
preserve the tax-neutral nature of the spin-off for Swiss
tax and US federal income tax purposes. The Tax Mat-
ters Agreement also provides that Alcon will generally
indemnify Novartis for any taxes of Novartis and its sub-
sidiaries to the extent such taxes are attributable to the
Alcon business, and Novartis will generally indemnify
Alcon for any of Alcon’s or its subsidiaries’ taxes to the
extent such taxes are attributable to the Novartis retained
businesses.
In connection with the spin-off, we also entered into
an employee matters agreement, a transition services
agreement, forward and reverse manufacturing supply
agreements, and certain intellectual property agree-
ments, each of which is not material to Novartis.
Acquisition of The Medicines
Company
On November 23, 2019, we entered into an Agreement
and Plan of Merger (the Merger Agreement) with
US-based pharmaceutical company The Medicines
Company. Pursuant to the Merger Agreement, on Decem-
ber 5, 2019, Novartis, through a subsidiary, commenced
a tender offer to acquire all outstanding shares of The
Medicines Company for USD 85 per share, or a total con-
sideration of approximately USD 9.7 billion in cash on a
fully diluted basis. The tender offer expired on January
3, 2020, and on January 6, 2020, the acquiring subsid-
iary merged with and into The Medicines Company,
resulting in The Medicines Company becoming an indi-
rect wholly owned subsidiary of Novartis. This merger
broadens our cardiovascular portfolio by adding incli-
siran, an investigational cholesterol-lowering therapy.
204
Item 10. Additional Information
10.D Exchange controls
There are no Swiss governmental laws, decrees or reg-
ulations that affect – in a manner material to Novartis AG
– the export or import of capital, including the availabil-
ity of cash and cash equivalents for use by Novartis or
any foreign exchange controls that affect the remittance
of dividends, interest or other payments to non-residents
or non-citizens of Switzerland who hold Novartis AG
securities.
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 Withholding Tax due 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 tax 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 tax resident who
receives dividends and similar distributions (including
stock dividends and liquidation surplus) on shares or
ADRs is required to include such amounts in the share-
holder’s personal income tax return. However, distribu-
tions out of qualified capital contribution reserves are
not subject to income tax. A corporate shareholder may
claim substantial relief from taxation of dividends and
similar distributions 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.
205
Item 10. Additional Information
As of January 1, 2020, 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
Georgia
Germany
Ghana
Greece
Hong Kong
Hungary
Iceland
India
Indonesia
Iran
Republic of Ireland
Israel
Italy
Ivory Coast
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
Zambia
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 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-
itary, will comply with these Swiss procedures on behalf
of the holders, and will remit the net amount to the hold-
ers.
206
Item 10. Additional Information
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.
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
(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
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.
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
207
Item 10. Additional Information
creditability of the Withholding Tax could be affected by
future actions that may be taken by the US Treasury.
result in the realization of gain or loss for US federal
income tax purposes.
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
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.
Tax consequences of the Alcon spin-
off
To implement the Alcon spin-off, we distributed all of the
Alcon shares held by Novartis to Novartis shareholders,
pro rata to their respective holdings. Each Novartis
shareholder received one Alcon share for every five
Novartis shares or five Novartis ADRs they held or had
acquired prior to the close of business on April 8, 2019.
The following statements are based on the require-
ment of the continuing effectiveness and validity of the
written confirmations (the Swiss Tax Rulings) from the
Swiss Federal Tax Administration and from the tax
administration of the Canton of Basel-Stadt, a private
letter ruling from the IRS (the IRS Ruling) and a written
opinion of Cravath, Swaine & Moore LLP, counsel to
Novartis (the Tax Opinion), each to the effect that the
spin-off qualifies as a tax-neutral transaction.
Material tax consequences to Novartis
The following is a summary of the material tax conse-
quences to Novartis in connection with the spin-off that
may be relevant to holders of Novartis shares.
The spin-off was preceded by several internal restruc-
turing steps to separate the Alcon business from Novartis.
Novartis has received the Swiss Tax Rulings, the IRS Rul-
ing and the Tax Opinion, providing that the spin-off and
certain internal restructuring steps taken prior to the
spin-off should qualify for nonrecognition of gain or loss
for US federal income tax purposes or preserve the
tax-neutral nature for Swiss tax purposes, as applicable.
In addition, the Swiss Tax Rulings provide that no Swiss
withholding tax or stamp duty should apply to the distri-
bution of Alcon shares in the spin-off. The Tax Opinion
and IRS Ruling are subject to the qualifications and lim-
itations set forth below under “—Consequences to US
208
Item 10. Additional Information
Holders of Novartis shares.” Additionally, Novartis has
entered into the Tax Matters Agreement with Alcon,
which restricts Alcon from taking certain actions that
could affect the qualification of the spin-off and certain
internal restructuring steps taken prior to the spin-off for
nonrecognition of gain or loss or as tax neutral, as appli-
cable.
Consequences to Swiss Holders of Novartis shares
General
Subject to the qualifications and limitations set forth
herein (including the discussion below relating to the
receipt of cash in lieu of fractional shares), for Swiss tax
purposes no gain or loss should be recognized by, or be
includible in the income of, a Swiss Holder as a result of
the tax neutral spin-off, provided that Swiss Holders who
hold Novartis shares as business assets accurately main-
tain the tax and book values of their Novartis and Alcon
shares. This means that for Swiss Holders who hold
Novartis shares as business assets, the aggregate tax
basis of the Novartis shares and Alcon shares immedi-
ately after the distribution should be the same as the
aggregate tax basis of the Novartis shares held imme-
diately before the distribution, allocated between the
Novartis shares and Alcon shares.
If a Swiss Holder that holds Novartis shares as busi-
ness assets is classified as a “professional securities
dealer” or is a legal entity and receives cash in lieu of a
fractional share, such Swiss Holder will generally recog-
nize a capital gain or loss measured by the difference
between the cash received for such fractional share and
the Swiss Holder’s tax basis in that fractional share. The
same Swiss income tax treatment applies to Swiss Hold-
ers of Novartis physical share certificates (Heimver-
wahrer) held as business assets who receive cash due
to non-response by March 18, 2019.
If a Swiss Holder who holds Novartis shares as pri-
vate assets receives cash in lieu of fractional shares, the
receipt of such cash will be tax-free to the holder. The
same Swiss income tax treatment applies to Swiss Hold-
ers of Novartis physical share certificates (Heimver-
wahrer) held as private assets who receive cash due to
non-response by March 18, 2019.
Novartis has received the Swiss Tax Rulings that
cover the relevant Swiss tax aspects of the separation
and spin-off. The Swiss Tax Rulings rely upon certain
facts, assumptions, representations and undertakings
from Novartis and Alcon regarding the past and future
conduct of Novartis and Alcon businesses and other
matters. If any of the facts, assumptions, representations
or undertakings described therein are incorrect or not
otherwise satisfied, Novartis may not be able to rely upon
the Swiss Tax Rulings.
Accordingly, notwithstanding the Swiss Tax Rulings,
there can be no assurance that the relevant Swiss tax
authorities will not assert, or that a court would not sus-
tain, a position contrary to one or more of the conclu-
sions set forth above.
Consequences to US Holders of Novartis shares
The following is a summary of the material US federal
income tax consequences to holders of Novartis shares
or ADRs in connection with the Alcon distribution. For
purposes of the following discussion, any reference to
Novartis shares includes Novartis ADRs. This summary
does not address any US state or local or foreign tax
consequences or any estate, gift or other non-income
tax consequences.
General
The IRS Ruling and the Tax Opinion, described below,
rely upon certain facts, assumptions, representations
and undertakings from Novartis and Alcon regarding the
past and future conduct of Novartis and Alcon busi-
nesses and other matters. If any of the facts, assump-
tions, representations or undertakings described therein
are incorrect or not otherwise satisfied, Novartis may not
be able to rely upon the IRS Ruling or the Tax Opinion.
Accordingly, notwithstanding the Tax Opinion and the
IRS Ruling, there can be no assurance that the IRS will
not assert, or that a court would not sustain, a position
contrary to one or more of the conclusions set forth
below.
Novartis has received an IRS Ruling and a Tax Opin-
ion providing, in each case, that the distribution should
qualify for nonrecognition of gain or loss under Section
355 of the Internal Revenue Code. As a result:
• No gain or loss should be recognized by, or be includi-
ble in the income of, a US Holder as a result of the dis-
tribution.
• The aggregate tax basis of the Novartis shares and
Alcon shares held by each US Holder immediately after
the distribution should be the same as the aggregate
tax basis of the Novartis shares held by the US Holder
immediately before the distribution, allocated between
the Novartis shares and Alcon shares in proportion to
their relative fair market values on the date of the dis-
tribution.
• The holding period of Alcon shares received by each
US Holder should include the holding period of its
Novartis shares.
Generally, if a Novartis shareholder holds different blocks
of Novartis shares (generally Novartis shares purchased
or acquired on different dates or at different prices), a
US Holder must perform the tax basis allocation
described above with respect to each block and will have
a holding period in Alcon shares determined with respect
to the holding period of such block.
A US Holder that received cash in lieu of a fractional
share as part of the distribution will be treated as though
it first received a distribution of the fractional share in
the distribution and then sold it for the amount of cash
actually received. The US Holder will generally recog-
nize a capital gain or loss measured by the difference
between the cash received for such fractional share and
the US Holder’s tax basis in that fractional share, as
determined above. Such capital gain or loss will be a
long-term capital gain or loss if the US Holder’s holding
period for the Novartis shares is more than one year on
the date of the distribution. Certain US Holders are eli-
gible for reduced rates of taxation on their long-term
capital gains.
A US Holder of Novartis physical share certificates
(Heimverwahrer) who received cash due to non-re-
sponse by March 18, 2019, will be treated as if the US
209
Item 10. Additional Information
Holder received Alcon shares with respect to its physi-
cal share certificates in the distribution and then sold
such shares for the cash actually received. The deemed
receipt and sale of Alcon shares for cash will be subject
to the same treatment as the receipt of cash in lieu of a
fractional share for US federal income tax purposes as
described above.
Backup Withholding
Payments of cash in lieu of a fractional share and cash
payments to a US Holder of Novartis physical share cer-
tificates (Heimverwahrer) who receives cash due to
non-response by March 18, 2019, may, under certain cir-
cumstances, be subject to “backup withholding,” unless
the US Holder provides proof of an applicable exemp-
tion or a correct taxpayer identification number, and oth-
erwise complies with the requirements of the backup
withholding rules.
Information Reporting
Treasury regulations require each Novartis shareholder,
that immediately before the distribution, owned 5% or
more (by vote or value) of the total outstanding stock of
Novartis to attach to such shareholder’s US federal
income tax return for the year in which the distribution
occurs a statement setting forth certain information
related to the distribution.
10.F Dividends and paying agents
Not applicable.
10.G Statement by experts
Not applicable.
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 Exchange Act and
regulations under that act. As a foreign private issuer, we
are exempt from the rules under the Exchange Act pre-
scribing the form and content of proxy statements, and
our officers, directors and principal shareholders are
exempt from the reporting and short swing profit recov-
ery provisions contained in Section 16 of the Exchange
Act.
10.I Subsidiary information
Not applicable.
210
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 29. Financial instruments—additional
disclosures” is incorporated by reference.
211
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
212
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.
213
Item 13. Defaults, Dividend Arrearages and Delinquencies
PART II
Item 13. Defaults, Dividend Arrearages and
Delinquencies
None.
214
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.
215
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, 2019. 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, 2019, 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 28, 2020
216
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 SEC. The Board of Directors has also
determined that Srikant Datar and Elizabeth Doherty are
each “independent” in accordance with the applicable
requirements of Rule 10A‑3 of the Exchange Act, and
that other members of the Audit and Compliance Com‑
mittee have sufficient experience and ability in finance
and compliance matters to enable them to adequately
discharge their responsibilities.
217
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
218
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—Auditors” is incorporated by reference.
219
Item 16D. Exemptions from the Listing Standards for Audit Committees
Item 16D. Exemptions from the Listing
Standards for Audit Committees
Not applicable.
220
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
1 913 205
87.38
830 000
203 399
81 551
88.31
92.09
0
0
3 687 215
80.82 3 452 000
15 719 319
83.55 15 695 000
12 852 939
90.27 12 840 000
23 550 117
92.10 23 538 500
3 966 974
91.76 3 958 400
36 197
2 031
16 065
18 567
89.69
84.92
87.12
90.12
0
0
0
0
62 047 579
88.70 60 313 900
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
2 137
10 000
10 000
9 716
8 392
7 247
5 106
4 752
4 752
4 752
4 752
4 752
2 152
10 027
10 042
9 539
8 338
7 433
5 156
4 809
4 790
4 811
4 758
4 903
2019
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 repurchased on the SIX Swiss Exchange second trading line plus shares we purchased from employees who had
obtained the shares through a Novartis Employee Ownership Plan. See “Item 18. Financial Statements – Note 26 Equity‑based participation
plans for associates.”
2 Column (c) shows shares repurchased on the SIX Swiss Exchange second trading line under the seventh CHF 10 billion share buyback
authority approved at the 2016 Annual General Meeting (AGM) for transactions before February 28, 2019 and under the eighth CHF 10 billion
share buyback authority approved at the 2019 AGM for transactions after such date. 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
221
Item 16F. Change in Registrant’s Certifying Accountant
Item 16F. Change in Registrant’s Certifying
Accountant
Not applicable.
222
Item 16G. Corporate Governance
Item 16G. Corporate Governance
Novartis AG is subject to and compliant with the laws
and regulations of Switzerland (in particular, Swiss com‑
pany and securities laws, SIX Swiss Exchange rules and
the Swiss Code of Best Practice for Corporate Gover‑
nance) and the securities laws of the United States,
including New York Stock Exchange (NYSE) rules, as
applicable to foreign private issuers of securities. The
following summarizes some significant ways in which our
corporate governance practices differ from those fol‑
lowed by domestic listed US companies under the list‑
ing standards of the NYSE:
• 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
oversees the risk management system and processes,
as opposed to delegating this responsibility to the Audit
and Compliance 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 rel‑
evant to the CEO’s compensation and for evaluating
his performance.
223
Item 16H. Mine Safety Disclosure
Item 16H. Mine Safety Disclosure
Not applicable.
224
Item 17. Financial Statements
PART III
Item 17. Financial Statements
See response to “Item 18. Financial Statements.”
225
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 2019, 2018 and 2017
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. Right‑of‑use assets and lease liabilities
11. Goodwill and intangible assets
12. Deferred tax assets and liabilities
13. Financial and other non‑current assets
14. Inventories
15. Trade receivables
16. Marketable securities, commodities, time deposits, derivative financial instruments,
and cash and cash equivalents
17. Other current assets
18. Equity
19. Non‑current financial debt
20. Provisions and other non‑current liabilities
21. Current financial debt and derivative financial instruments
22. Provisions and other current liabilities
23. Details to the consolidated statements of cash flows
24. Acquisitions of businesses
25. Post‑employment benefits for associates
26. Equity‑based participation plans for associates
27. Transactions with related parties
28. Commitments and contingencies
29. Financial instruments – additional disclosures
30. Discontinued operations
31. Events subsequent to the December 31, 2019, consolidated balance sheet date
32. Principal Group subsidiaries and associated companies
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‑17
F‑22
F‑32
F‑33
F‑34
F‑35
F‑36
F‑39
F‑41
F‑43
F‑46
F‑48
F‑49
F‑49
F‑50
F‑51
F‑51
F‑53
F‑55
F‑59
F‑59
F‑61
F‑64
F‑65
F‑69
F‑72
F‑73
F‑75
F‑84
F‑88
F‑89
F‑91
A‑1
A‑3
A‑11
A‑12
226
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 February 28, 2019 (English translation).
1.2 Regulations of the Board of Directors, the Board Committees and the Executive Committee of Novartis
AG, effective May 1, 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, JPMorgan 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.
2.8 Description of Securities registered under Section 12 of the Exchange Act.
4.1 Separation and Distribution Agreement by and between Novartis AG and Alcon Inc., dated as of April 8,
2019 (incorporated by reference to Exhibit 99.1 to the Current Report on Form 6‑K of Alcon Inc. (File No.
001‑31269) as filed with the SEC on April 9, 2019).
4.2 Tax Matters Agreement by and between Novartis AG and Alcon Inc., dated as of April 8, 2019 (incorpo‑
rated by reference to Exhibit 99.2 to the Current Report on Form 6‑K of Alcon Inc. (File No. 001‑31269)
as filed with the SEC on April 9, 2019).
4.3 Agreement and Plan of Merger, dated as of November 23, 2019, by and among The Medicines Company,
Novartis AG and Medusa Merger Corporation (incorporated by reference to Exhibit 2.1 to the Current
Report on Form 8‑K of The Medicines Company (File No. 000‑31191) as filed with the SEC on Novem‑
ber 25, 2019).
8.1 For a list of all of our principal Group subsidiaries and associated companies, see “Item 18. Financial
Statements—Note 32. Principal Group subsidiaries and associated companies.”
227
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
228
(This page has been left blank intentionally.)
229
Novartis Group consolidated financial statements
Novartis Group
consolidated financial statements
Consolidated income statements
(For the years ended December 31, 2019, 2018 and 2017)
(USD millions unless indicated otherwise)
Net sales to third parties from continuing operations
Sales to discontinued segment
Net sales from continuing operations
Other revenues
Cost of goods sold
Gross profit from continuing operations
Selling, general and administration
Research and development
Other income
Other expense
Operating income from continuing operations
Income from associated companies
Interest expense
Other financial income and expense
Income before taxes from continuing operations
Taxes
Net income from continuing operations
Net (loss)/income from discontinued operations before gain on
distribution of Alcon Inc. to Novartis AG shareholders
Gain on distribution of Alcon Inc. to Novartis AG shareholders
Net income/(loss) from discontinued operations
Net income
Attributable to:
Shareholders of Novartis AG
Non-controlling interests
Basic earnings per share (USD) from continuing operations
Basic earnings per share (USD) from discontinued operations
Total basic earnings per share (USD)
Diluted earnings per share (USD) from continuing operations
Diluted earnings per share (USD) from discontinued operations
Total diluted earnings per share (USD)
The accompanying Notes form an integral part of the consolidated financial statements.
Note
2019
2018
2017
3
47 445
44 751
42 338
53
82
43
47 498
44 833
42 381
3
1 179
1 266
1 023
– 14 425
– 14 510
– 13 633
34 252
31 589
29 771
– 14 369
– 13 717
– 12 465
– 9 402
– 8 489
– 8 389
2 031
1 629
1 922
– 3 426
– 2 609
– 2 137
9 086
659
– 850
45
8 403
6 438
– 932
186
8 702
1 108
– 750
42
8 940
14 095
9 102
4
5
5
6
– 1 793
– 1 295
– 1 603
7 147
12 800
7 499
30
2
30
– 101
4 691
4 590
– 186
204
– 186
204
11 737
12 614
7 703
11 732
12 611
7 703
5
3
0
3.12
2.00
5.12
3.08
1.98
5.06
5.52
– 0.08
5.44
5.46
– 0.08
5.38
3.20
0.08
3.28
3.17
0.08
3.25
7
7
F-1
Novartis Group consolidated financial statements
Consolidated statements of comprehensive income
(For the years ended December 31, 2019, 2018 and 2017)
(USD millions)
Net income
Note
2019
2018
11 737
12 614
Other comprehensive income to be eventually recycled into the consolidated income statement:
8.1
8.1
8.1
4
8
8.2
8.3
8.1
1
1
2
– 94
44
352
304
– 467
– 47
– 514
12
12
– 482
95
315
– 60
– 359
13
– 346
2017
7 703
39
– 1
12
50
– 37
– 237
2 210
1 986
851
851
11 527
12 208
10 540
11 525
12 210
10 538
6 948
12 417
10 211
4 577
– 207
2
– 2
327
2
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
Continuing operations
Discontinued operations
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, 2019 and 2018)
(USD millions)
Assets
Non-current assets
Property, plant and equipment
Right-of-use assets
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
Lease liabilities
Deferred tax liabilities
Provisions and other non-current liabilities
Total non-current liabilities
Current liabilities
Trade payables
Financial debts and derivative financial instruments
Lease liabilities
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
2019
2018
9
10
11
11
4
12
13
13
14
15
16
16
17
12 069
15 696
1 677
26 524
35 294
28 787
38 719
8 644
7 909
2 518
738
8 352
8 699
2 345
895
88 866
110 000
5 982
8 301
254
334
6 956
8 727
248
2 693
11 112
13 271
2 680
2 861
28 663
34 756
2
841
807
29 504
35 563
118 370
145 563
18
18
936
– 80
944
– 69
54 618
77 739
55 474
78 614
77
78
55 551
78 692
19
10
12
20
21
10
20 353
22 470
1 703
5 867
6 632
7 475
7 319
34 555
37 264
5 424
7 031
246
5 556
9 678
2 194
2 038
22
13 338
12 284
28 233
29 556
2
31
51
28 264
29 607
62 819
66 871
118 370
145 563
Novartis Group consolidated financial statements
Consolidated statements of changes in equity
(For the years ended December 31, 2019, 2018 and 2017)
(USD millions)
Total equity at January 1, 2017
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
Impact of change in accounting policies
Restated equity at January 1, 2018
Net income
Other comprehensive income
Total comprehensive income
Dividends
Purchase of treasury shares
Reduction of share capital
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, net of taxes
Fair value adjustments on financial assets sold
Note
8
18.1
18.2
18
18.2
18.2
18.6
1
8
18.1
18.2
18
18.2
18.2
18.2
18.3
18.4
8
Impact of change in ownership of consolidated entities 18.5
Changes in non-controlling interests
Other movements
Total of other equity movements
Total equity at December 31, 2018, as
previously reported
Impact of change in accounting policies
Restated equity at January 1, 2019
Net income
Other comprehensive income
Total comprehensive income
Dividends
Dividend in kind to effect the
spin-off of Alcon Inc.
Purchase of treasury shares
Reduction of share capital
Exercise of options and employee transactions
Equity-based compensation
Shares delivered to Alcon employees
as a result of the Alcon spin-off
Taxes on treasury share transactions
Decrease of treasury share repurchase
obligation under a share buyback trading plan
Transaction costs, net of taxes
Fair value adjustments on financial assets sold
18.6
18.7
1
8
18.1
2
18.2
18
18.2
18.2
18.2
18.3
18.4
8
Impact of change in ownership of consolidated entities 18.5
Changes in non-controlling interests
Fair value adjustments related to divestments
Other movements
Total of other equity movements
Total equity at December 31, 2019
18.6
8
18.7
Share
capital
972
Treasury
shares
– 76
– 3
– 36
– 5 538
5
2
5
– 2
253
607
Issued share
capital and
reserves
attributable
Retained Total value
to Novartis
earnings adjustments shareholders
81 148
7 703
– 37
7 666
– 6 495
– 7 212
2 872
2 872
Non-
controlling
interests
59
2
2
– 2
Total
equity
74 891
7 703
2 837
10 540
– 6 495
– 5 574
255
612
– 2
74 832
7 703
2 835
10 538
– 6 495
– 5 574
255
612
– 3
– 24 – 11 175
– 11 202
– 2 – 11 204
969
– 100
969
– 100
77 639
237
77 876
12 611
– 482
12 129
– 6 966
– 4 340
– 177
– 4 517
81
81
– 13
– 1 960
– 25
34
4
2
4
– 9
430
261
752
– 284
– 79
16
– 13
38
– 16
74 168
60
74 228
12 611
– 401
12 210
– 6 966
– 1 973
434
263
756
– 284
– 79
– 13
38
59
59
3
– 5
– 2
22
– 1
74 227
60
74 287
12 614
– 406
12 208
– 6 966
– 1 973
434
263
756
– 284
– 79
9
– 1
38
– 25
31
– 7 814
– 16
– 7 824
21
– 7 803
944
– 69
82 191
– 4 452
78 614
78
944
– 69
3
82 194
11 732
– 94
11 638
– 6 645
– 4 452
– 113
– 113
3
78 617
11 732
– 207
11 525
– 6 645
78
5
– 3
2
78 692
3
78 695
11 737
– 210
11 527
– 6 645
– 23 434
– 23 434
– 23 434
– 31
– 5 480
– 5 511
– 5 511
– 8
12
3
5
– 4
207
828
18
– 189
284
– 253
95
– 3
– 3
22
210
833
18
– 189
284
– 253
– 3
22
210
833
18
– 189
284
– 253
– 5
– 1
22
– 2
– 1
– 95
3
– 8
936
– 11 – 34 557
59 275
– 80
– 92 – 34 668
55 474
– 4 657
– 3 – 34 671
55 551
77
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, 2019, 2018 and 2017)
(USD millions)
Net income from continuing operations
Adjustments to reconcile net income from continuing operations to
net cash flows from operating activities from continuing operations
Note
2019
2018
7 147
12 800
2017
7 499
Reversal of non-cash items and other adjustments
23.1
9 122
1 486
5 787
Dividends received from associated companies and others
Interest received
Interest paid
Other financial receipts
Other financial payments
Taxes paid
Net cash flows from operating activities from continuing operations before
working capital and provision changes
463
214
719
241
987
97
– 793
– 816
– 697
28
– 33
218
– 31
– 270
23.2
– 1 876
– 1 506
– 1 487
14 272
13 111
11 916
Payments out of provisions and other net cash movements in non-current liabilities
– 924
– 638
Change in net current assets and other operating cash flow items
23.3
199
576
– 829
332
Net cash flows from operating activities from continuing operations
Net cash flows from operating activities from discontinued operations
Total 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
Acquisitions and divestments of interests in associated companies, net
Acquisitions and divestments of businesses, net
Purchase of marketable securities and commodities
Proceeds from sales of marketable securities and commodities
23.4
23.5
13 547
13 049
11 419
78
1 223
1 202
13 625
14 272
12 621
– 1 379
– 1 254
– 1 325
857
102
– 878
– 1 394
973
– 302
1 152
– 60
3
– 6
823
– 205
165
– 39
9
12 854
– 3 760
– 13 683
– 228
– 2 440
2 561
472
91
– 969
640
– 354
328
– 40
1
29
– 714
– 580
549
Net cash flows used in investing activities from continuing operations
– 1 067
– 4 590
– 2 344
Net cash flows used in investing activities from discontinued operations
30
– 1 159
– 1 001
– 775
Total net cash flows used in investing activities
Dividends paid to shareholders of Novartis AG
Acquisition of treasury shares
Proceeds from exercise of options and other treasury share transactions
Increase in non-current financial debts
Repayment of non-current financial debts
Change in current financial debts
Payments of lease liabilities, net
Impact of change in ownership of consolidated entities
Other financing cash flows, net
– 2 226
– 5 591
– 3 119
– 6 645
– 6 966
– 6 495
– 5 533
– 2 036
– 5 490
201
93
– 3 195
– 1 582
– 273
– 6
56
700
2 856
– 366
1 687
– 19
67
252
4 933
– 188
– 644
0
314
23.6
23.6
23.6
23.6
Net cash flows used in financing activities from continuing operations
– 16 884
– 4 077
– 7 318
Net cash flows from/used in financing activities from discontinued operations
30
3 257
– 167
– 415
Total net cash flows used in financing activities
– 13 627
– 4 244
– 7 733
Net change in cash and cash equivalents before effect of exchange
rate changes
Effect of exchange rate changes on cash and cash equivalents
Total 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.
– 2 228
4 437
1 769
69
– 2 159
13 271
– 26
4 411
8 860
11 112
13 271
84
1 853
7 007
8 860
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 cost-saving generic pharmaceuticals. 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, the distribution
liability recognized in connection with the distribution of
Alcon Inc. to Novartis AG shareholders, 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
For subsidiaries operating in hyperinflationary econo-
mies, 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.
Non-current assets held for sale or
held for distribution to owners
Non-current assets are classified as assets held for sale
or related to discontinued operations when their carry-
ing amount is to be recovered principally through a sale
transaction or distribution to owners, and a sale or dis-
tribution to owners is considered highly probable. They
are stated at the lower of carrying amount and fair value
less costs to sell with any resulting impairment recog-
nized. Assets related to discontinued operations and
assets of disposal group held for sale are not depreci-
F-6
Notes to the Novartis Group consolidated financial statements
ated or amortized. The prior-year consolidated balance
sheet is not restated.
Acquisition of assets
Distribution of Alcon Inc. to Novartis
AG shareholders
During the first quarter of 2019, at the Annual General
Meeting (AGM) of Novartis AG shareholders, held on
February 28, 2019, the Novartis AG shareholders
approved a special distribution by way of a dividend in
kind to effect the spin-off of Alcon Inc.
The February 28, 2019, shareholder approval for the
spin-off required the Alcon Division and selected por-
tions of corporate activities attributable to Alcon’s busi-
ness (the “Alcon business”) to be reported as discontin-
ued operations.
The shareholder approval to spin off the Alcon busi-
ness also required the recognition of a distribution liabil-
ity at the fair value of the Alcon business. The Group
elected to measure the distribution liability at the fair
value of the Alcon business net assets taken as a whole.
The distribution liability was recognized through a reduc-
tion in retained earnings. It was required to be adjusted
at each balance sheet date for changes in its estimated
fair value, up to the date of the distribution to sharehold-
ers through retained earnings. Any resulting impairment
of the business assets to be distributed would have been
recognized in the consolidated income statements in
“Other expense” of discontinued operations, at the date
of initial recognition of the distribution liability or at sub-
sequent dates resulting from changes of the distribution
liability valuation. At the April 8, 2019 distribution settle-
ment date, the resulting gain, which was measured as
the excess amount of the distribution liability over the
then-carrying value of the net assets of the business dis-
tributed, was recognized on the line “Gain on distribution
of Alcon Inc. to Novartis AG shareholders” in the income
statement of discontinued operations.
The recognition of the distribution liability required
the use of valuation techniques for purposes of impair-
ment testing of the Alcon business’ assets to be distrib-
uted and for the measurement of the fair value of the dis-
tribution liability. These valuations required the use of
management assumptions and estimates related to the
Alcon business’ future cash flows, market multiples to
estimate day one market value, and control premiums to
apply in estimating the Alcon business fair value. These
fair value measurements were classified as “Level 3” in
the fair value hierarchy. The section “—Impairment of
goodwill and intangible assets” in this Note 1 provides
additional information on key assumptions that are highly
sensitive in the estimation of fair values using valuation
techniques.
Transaction costs that were directly attributable to
the distribution (spin-off) of Alcon to the Novartis share-
holders, and that would otherwise have been avoided,
were recorded as a deduction from equity.
For additional disclosures, refer to “Note 2. Signifi-
cant transactions—Significant transactions in 2019—
Completion of the spin-off of the Alcon business through
a dividend in kind distribution to Novartis AG sharehold-
ers,” and “Note 30. Discontinued operations.”
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
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.
Leases and right-of-use assets
From January 1, 2019, with the adoption of IFRS 16
Leases, the Group adopted the following accounting pol-
icies for leases and right-of-use assets:
As lessee, the Group assesses whether a contract
contains a lease at inception of a contract and upon the
modification of a contract. The Group elected to allocate
the consideration in the contract to the lease and non-
lease components on the basis of the relative standalone
price.
The Group recognizes a right-of-use asset and a cor-
responding lease liability for all arrangements in which
it is a lessee, except for leases with a term of 12 months
or less (short-term leases) and low-value leases. For
these short-term and low-value leases, the Group rec-
ognizes the lease payments as an operating expense on
a straight-line basis over the term of the lease.
The lease liability is initially measured at the present
value of the future lease payments as from the com-
F-7
Notes to the Novartis Group consolidated financial statements
mencement date of the lease to end of the lease term.
The lease term includes the period of any lease exten-
sion that in management’s assessment is highly proba-
ble to be exercised by the Group. The lease payments
are discounted using the interest rate implicit in the lease
or, if not readily determinable, the Novartis incremental
borrowing rate for the asset subject to the lease in the
respective markets.
The Group remeasures the lease liability (and makes
a corresponding adjustment to the related right-of-use
asset) whenever there is a change to the lease terms or
expected payments under the lease, or a modification
that is not accounted for as a separate lease.
The portion of the lease payments attributable to the
repayment of lease liabilities is recognized in cash flows
used in financing activities, and the portion attributable
to the payment of interest is included in cash flows from
operating activities.
Right-of-use assets are initially recognized on the bal-
ance sheet at cost, which comprises the amount of the
initial measurement of the corresponding lease liability,
adjusted for any lease payments made at or prior to the
commencement date of the lease, any lease incentive
received and any initial direct costs incurred by Novartis,
and expected costs for obligations to dismantle and
remove right-of-use assets when they are no longer
used.
Right-of-use assets are depreciated on a straight-line
basis from the commencement date of the lease over
the shorter of the useful life of the right-of-use asset or
the end of the lease term.
Right-of-use assets 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.
In arrangements where the Group is the lessor, it
determines at lease inception whether the lease is a
finance lease or an operating lease. Leases that trans-
fer substantially all of the risk and rewards incidental to
ownership of the underlying asset to the counterparty
(the lessee) are accounted for as finance leases. Leases
that do not transfer substantially all of the risks and
rewards of ownership are accounted for as operating
leases. Lease payments received under operating leases
are recognized on a straight-line basis over the lease
term in the consolidated income statement in either “net
sales” or “other income,” depending on the nature of and
underlying asset to the lease arrangement.
Prior to January 1, 2019, the Group applied the following
accounting policies for leases:
Leases that transferred substantially all of the risks
and rewards of ownership were recognized as finance
leases, with the leased asset measured initially at an
amount equal to the lower of their fair value and the pres-
ent value of the minimum lease payments. Minimum lease
payments were the payments over the lease term that
the Group, as leasee, was required to make, excluding
contingent rent. The underlying asset was accounted for
in accordance with the accounting policy applicable to
that asset.
Leases that did not transfer substantially all of the
risks and rewards of ownership were accounted for as
operating leases and were not recognized in the consol-
idated balance sheet. Payments made under operating
leases were recognized in the consolidated income
statement on a straight-line basis over the term of the
lease. Lease incentives received were deferred and rec-
ognized as a component of lease expense over the term
of the lease. The future undiscounted lease payments
under operating leases were disclosed as commitments
in the notes to the consolidated financial statements.
Lessor accounting policies were not substantially dif-
ferent from those applied upon the adoption of IFRS 16
Leases, as described above.
The section “—Impact of adopting significant new IFRS
standards in 2019” in this Note 1 provides additional dis-
closures on the impact of adoption of IFRS 16 Leases.
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; technol-
ogies; other intangible assets (including computer soft-
ware); and up to the spin-off date of Alcon business, mar-
keting know-how and the Alcon brand name.
Currently marketed products represent the compos-
ite value of acquired intellectual property (IP), 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 was shown separately, as it
was the only Novartis intangible asset that was available
for use with an indefinite useful life. Novartis considers
that it was appropriate that the Alcon brand name had
an indefinite life since Alcon-branded products had a
history of strong revenue and cash flow performance,
and Novartis had the intent and ability to support the
brand with spending to maintain its value for the fore-
seeable 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
F-8
Notes to the Novartis Group consolidated financial statements
indicate that their carrying value may not be recoverable.
The Alcon brand name was not amortized, but evaluated
for potential impairment annually.
• Amount and timing of projected future cash flows
• Long-term sales forecasts
• Actions of competitors (launch of competing products,
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
that 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 is 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
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:
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
• Profit margins
• 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 discount rate that mar-
ket participants would use to value the asset.
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
Cash and cash equivalents include highly liquid invest-
ments with original maturities of three months or less,
which are readily convertible to known amounts of cash.
Bank overdrafts are usually presented within current
financial debts on the consolidated balance sheet,
except in cases where a right of offset has been agreed
with a bank, which then allows for presentation on a net
basis.
F-9
Notes to the Novartis Group consolidated financial statements
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 both
the “solely payment of principal and interest” and the
business model criteria. Unrealized gains and losses,
except exchange gains and losses, are recorded as a
fair value adjustment in the consolidated statement of
comprehensive income. They are recognized in the
consolidated income statement when the debt instru-
ment 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
recognized in the consolidated income statement to
“Other financial income and expense.”
• Fund investments, equity securities of the Novartis ven-
ture fund and derivative assets are valued at fair value
through profit and loss (FVPL). Unrealized gains and
losses, including exchange gains and losses, are rec-
ognized in the consolidated income statement, for all
fund investments and for equity securities of the
Novartis venture fund, to “Other income” for gains and
“Other expense” for losses, and for derivative assets
to “Other financial income and expense.”
• Equity securities held as strategic investments, typi-
cally held outside of the Novartis venture fund, are gen-
erally 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.
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 instru-
ments, were recorded as a fair value adjustment in the
consolidated statement of comprehensive income.
They were recognized in the consolidated income
statement when the financial asset was sold, at which
time the gain was transferred either to “Other financial
income and expense,” for the marketable securities
held for short-term non-strategic 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 con-
solidated income statement under “Other financial
income and expense.”
• A security was assessed for impairment when its mar-
ket 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.”
F-10
Notes to the Novartis Group consolidated financial statements
Impairments were recorded for all other equity secu-
rities 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 amor-
tized 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 inter-
est income using the effective interest rate method
were included in “Other income” in the consolidated
income statement.
The section “—Impact of adopting significant new IFRS
standards in 2018” provides additional 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 to various
business related 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 rate risk of positions that
are contractually agreed, and to partially mitigate the
exposure risk of selected anticipated transactions.
Certain derivative financial instruments meet the
criteria for hedge accounting treatment. A prerequisite
for obtaining this accounting-hedge relationship is exten-
sive documentation on inception and proving on a regu-
lar basis that the economic hedge is effective for account-
ing purposes. Other derivative financial instruments do
not meet the criteria to qualify for hedge accounting.
Changes in the fair value of those derivative instruments
are recognized immediately in “Other financial income
and expense” in the consolidated income statement.
In addition, the Group has designated certain long-
term debt components as hedges of the translation risk
arising on certain net investments in foreign operations.
On consolidation, foreign currency differences arising
on long-term debt designated as net investment hedges
of a foreign operation are recognized in other compre-
hensive income and accumulated in currency translation
effects, to the extent that the hedge is effective. The for-
eign currency differences arising from hedge ineffective-
ness are recognized in the income statement in “Other
financial income and expense.”
When a hedged net investment is disposed of, the
proportionate portion of the cumulative amount recog-
nized in equity in relation to the hedged net investment
is transferred to the consolidated income statement as
an adjustment to the gain or loss on disposal.
Inventories
Inventory is valued at the lower of acquisition or produc-
tion cost determined on a first-in, first-out basis and net
realizable value. 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, the provisions for doubtful trade
receivable 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.
The section “—Impact of adopting significant new IFRS
standards in 2018” provides additional disclosure on the
impact of adoption of IFRS 9 Financial Instruments.
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
F-11
Notes to the Novartis Group consolidated financial statements
other product-related litigation, commercial litigation,
and governmental investigations and proceedings.
Provisions are recorded where a reliable estimate can
be made of the probable outcome of legal or other dis-
putes against the subsidiary.
Contingent consideration
In a business combination or divestment of a business,
it is necessary to recognize contingent future amounts
due 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 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 in which associates are employed, while the net
interest on the net defined benefit liability or asset is
recognized as “Other expense” or “Other income.”
Treasury shares
Treasury shares are initially recorded at fair value on their
trade date, which is different from the settlement date,
when the transaction is ultimately effected. Treasury
shares are deducted from consolidated equity at their
nominal value of CHF 0.50 per share. Differences
between the nominal amount and the transaction price
on purchases or sales of treasury shares with third par-
ties, or the value of services received for the shares allo-
cated to associates as part of share-based compensa-
tion arrangements, are recorded in “Retained earnings”
in the consolidated statement of changes in equity.
Revenue recognition
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 is recognized upon the satisfaction
of the acceptance criteria. If products are stockpiled at
the request of the customer, revenue is only recognized
once the products have been inspected and accepted
by the customer, and there is no right of return or replen-
ishment on product expiry. The amount of revenue rec-
ognized is based on the consideration Novartis expects
to receive in exchange for its goods and services, when
it is highly probable that a significant reversal will not
occur. If a contract contains more than one performance
obligation, the consideration is allocated based on the
standalone selling price of each performance obligation.
In the Alcon Division, which is reported as discontin-
ued operations, surgical equipment may be sold together
with other products and services under a single contract.
Revenues were recognized upon satisfaction of each of
the performance obligations in the contract and the con-
sideration was allocated based on the standalone sell-
ing price of each performance obligation.
For surgical equipment, in addition to cash and install-
ment sales, revenue was recognized under finance and
operating lease arrangements. Arrangements in which
substantially all the risks and rewards incidental to own-
ership transfers to the customer were treated as finance
lease arrangements. Revenue from finance lease
arrangements was recognized at amounts equal to the
fair value of the equipment, which approximated the
present value of the minimum lease payments under the
arrangements. As interest rates embedded in lease
arrangements were approximately market rates, revenue
under finance lease arrangements was comparable to
revenue for outright sales. Finance income for arrange-
ments longer than 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.
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
F-12
Notes to the Novartis Group consolidated financial statements
the incentives are offered. They are calculated on the
basis of historical experience, regulations, the specific
terms in the individual agreements, product pricing and
the mix of products, contracts, channels and payors.
• Refunds granted to healthcare providers under
innovative pay-for-performance agreements (i.e. out-
come based arrangements) are provisioned and
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 experi-
ence and clinical data are not sufficient for a reliable
estimation of the outcome, revenue recognition 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 the time a 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, refunds, discounts and returns are
processed. The provision represents estimates of the
related obligations, requiring the use of judgment when
estimating the effect of these sales deductions.
“Other revenue” includes income from profit-sharing
arrangements with our collaboration partners, and roy-
alty and milestone income from the out-licensing of intel-
lectual property 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 relevant milestone
event criteria is met, and the risk of reversal of revenue
recognition is remote. Other revenue also includes rev-
enue from activities such as manufacturing or other ser-
vices rendered, to the extent such revenue is not recorded
under net sales, and is recognized when control trans-
fers to the third party and our performance obligations
are satisfied.
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.
In the Alcon Division, which is reported as discontin-
ued operations, 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
recognized 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
were recorded as a deduction from revenue at the time
the related revenues were recorded or when the incen-
tives were offered. They were calculated on the basis of
historical experience and the specific terms in the indi-
vidual agreements.
Provisions for refunds granted to healthcare provid-
ers under innovative pay-for-performance agreements
were recorded as a revenue deduction at the time the
related sales were recorded. They were calculated on
the basis of historical experience and clinical data avail-
able for the product, as well as the specific terms in the
individual agreements. In cases where historical experi-
ence and clinical data were not sufficient for a reliable
estimation of the outcome, revenue recognition was
deferred until such history was available.
Cash discounts were offered to customers to encour-
age prompt payment and were recorded as revenue
deductions.
F-13
Notes to the Novartis Group consolidated financial statements
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, were 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 could 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 were made on a resale or return basis, without
sufficient historical experience for estimating sales
returns, revenue was only recorded when there was evi-
dence 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.
The section “—Impact of adopting significant new IFRS
standards in 2018” provides additional 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 not to
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.
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 (RSs),
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 in which 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 at 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 forfeiture during the vesting period, is expensed on a
straight-line basis over the respective vesting period.
Payments made to third parties to in-license or
acquire intellectual property rights, compounds and
PSUs are subject to the achievement of certain per-
formance criteria during the vesting period and require
F-14
Notes to the Novartis Group consolidated financial statements
plan participants to provide services during this period.
The following paragraphs provide an overview of the
accounting policies for the share-based compensation
plans that grant PSUs.
For PSUs granted under plans that are subject to per-
formance criteria based on Novartis internal perfor-
mance metrics and that are conditional on the provision
of service by plan participants during the vesting period,
the expense is recognized on a straight-line basis over
the vesting period, and is determined based on assump-
tions concerning the expected performance against the
internal performance metrics throughout the vesting
period. The assumptions are based on the Group’s tar-
gets for those performance metrics, and the expected
forfeitures due to plan participants not meeting their ser-
vice conditions. The assumptions are periodically
adjusted over the vesting period. Any change in esti-
mates for past services is recorded immediately as an
expense or income in the consolidated income state-
ment, and amounts for the remaining vesting period are
expensed on a straight-line basis. As a result, at the end
of the vesting period, the charge during the entire vest-
ing period represents the amount that will finally vest.
The number of equity instruments that finally vest is
determined at the vesting date.
For PSUs granted under plans that are subject to per-
formance criteria based on variables that can be
observed in the market, which for Novartis plans is the
Novartis total shareholder return (TSR) relative to a spe-
cific peer group of companies over the vesting period,
and that are conditional on the provision of services by
the plan participants during the vesting period, the
expense is recognized on a straight-line basis over the
vesting period, and is determined based on the total fair
value of the grant over the vesting period. IFRS requires
that these variables that can be observed in the market
are taken into account in determining the fair value of the
PSUs at the grant date. Novartis determined the fair value
of these PSUs at the date of grant using a Monte Carlo
simulation model. Adjustments to the number of equity
instruments granted are only made if a plan participant
does not fulfill the service conditions.
For PSUs granted under plans that are subject to both
performance criteria based on Novartis internal perfor-
mance metrics and Novartis TSR relative to a specific
peer group of companies over the vesting period and
that are conditional on the provision of service by plan
participants during the vesting period, the expense is
recognized on a straight-line basis over the vesting
period, and is determined based on a bifurcation into the
components based on the performance criteria related
to Novartis internal performance metrics and TSR, as
described in the paragraphs above.
Measuring the fair values of PSUs granted that
include TSR performance criteria requires use of esti-
mates. The Monte Carlo simulation used to determine
the fair value of the PSUs TSR performance criteria
requires the probability 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 interest rate as input parameters.
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.
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.
F-15
Notes to the Novartis Group consolidated financial statements
Impact of adopting significant new
IFRS standard in 2019
The following new IFRS standard has been adopted by
Novartis from January 1, 2019:
IFRS 16 Leases
IFRS 16 Leases substantially changed the financial state-
ments, as the majority of leases for which the Group is
the lessee became on-balance sheet liabilities with cor-
responding right-of-use assets also recognized on the
balance sheet. The lease liability reflects the net pres-
ent 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 standard replaces IAS 17 Leases and
related interpretations.
Upon adoption of the new standard, a portion of the
annual operating lease costs, which was previously fully
recognized as functional expenses, as a component of
operating income, is recorded as interest expense. In
addition, the portion of the lease payments that rep-
resents the reduction of the lease liability is recognized
in the cash flow statement as an outflow from financing
activities, which was previously fully recognized as an
outflow from operating activities. Given the leases
involved, these effects are not significant to the consol-
idated income statement and consolidated statement of
cash flow.
The Group implemented the new standard on Janu-
ary 1, 2019, and applied 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 did not restate
prior years.
Results of our impact assessment:
The undiscounted operating lease commitments as of
December 31, 2018, amounted to USD 3.6 billion. This
includes approximately USD 0.1 billion of leases with a
commencement date in 2019, as well as short-term
leases and low-value leases that are recognized from
January 1, 2019, upon adoption of IFRS 16, on a straight-
line basis as expense in profit and loss. This also includes
USD 0.2 billion lease commitments related to the Alcon
Division, which is attributable to discontinued operation
in 2019. For the remaining undiscounted lease commit-
ments attributable to continuing operations of USD 3.3
billion, the Group recognized on January 1, 2019, lease
liabilities of USD 1.74 billion and right-of-use assets of
USD 1.55 billion (after the reclassification of USD 0.1 bil-
lion from property, plant & equipment, and net adjust-
ments for the USD 0.3 billion recognition of sublease
receivables, prepayments, and accrued lease payments
recognized as at December 31, 2018). For the lease com-
mitments attributable to discontinued operations, the
Group recognized on January 1, 2019, lease liabilities and
right-of-use assets of USD 0.2 billion. This does not
include the discontinued operations right-of-use assets
and lease liability on finance lease agreements of USD
75 million and USD 89 million, respectively. There was
an insignificant increase to retained earnings upon adop-
tion of IFRS 16 of USD 3 million that arose 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 had no significant impact upon
adoption.
For further information on the impact of adoption and
additional disclosures of IFRS 16 Leases, see Note 10.
Impact of adopting significant new
IFRS standards in 2018
The following 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 changed the
classification and measurement of financial instruments.
The standard requires impairments to be based on a for-
ward-looking model, changed the approach to hedging
financial exposures and related documentation, changed
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.
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.
F-16
Notes to the Novartis Group consolidated financial statements
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 standard amended revenue recognition
requirements and established principles for reporting
information about the nature, amount, timing and uncer-
tainty of revenue and cash flows arising from contracts
with customers. The standard replaced 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, which is
recognized as earned, and from manufacturing and
other services, where revenue is recognized when con-
trol transfers to the third party and our performance
obligations are satisfied. The adoption of IFRS 15 did
not significantly change the timing or amount of reve-
nue recognized from these manufacturing and other
services arrangements, nor did it change accounting
for these royalty arrangements, as the standard’s roy-
alty exception is applied for IP licenses. “Other reve-
nue” also includes revenue from profit-sharing arrange-
ments with our collaboration partners. Furthermore,
the Group receives milestone payments related to the
out-licensing of IP. The adoption of IFRS 15 did not sig-
nificantly change the timing or amount of revenue rec-
ognized 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.
New IFRS standard effective as of
January 1, 2020
IFRS 3 Business Combination amendments
The IASB issued an amendment to IFRS 3 Business
Combinations that revised the definition of a business,
which assist entities with the evaluation of when an asset
or group of assets acquired or disposed of should be
considered a business. This amended standard is effec-
tive for the Group as of January 1, 2020 and is applica-
ble to transactions entered into on or after January 1,
2020. The amended standard allows an entity to apply
an optional concentration test, on a transaction-by-trans-
action basis, to evaluate whether substantially all of the
fair value of the gross assets acquired is concentrated
in a single identifiable asset or group of similar identifi-
able assets. If this optional concentration test is met, the
entity may choose to consider the transaction an acqui-
sition of an asset or set of assets. The Group does not
expect the adoption of this amended standard on Jan-
uary 1, 2020 to have a significant impact on our consol-
idated financial statements in future periods. However,
this will depend on the facts and circumstances of future
transactions and if the Group decides to apply the
optional concentration test in the assessment of whether
an acquired set of activities and assets is or is not a busi-
ness.
There are no other IFRS standards or interpretations
not yet effective that would be expected to have a mate-
rial impact on the Group.
2. Significant transactions
Significant transactions in 2019
Completion of the spin-off of the Alcon business
through a dividend in kind distribution to Novartis
AG shareholders
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 structural separation of the Alcon
business into a standalone company (the Alcon business
or Alcon Inc.).
The Novartis AG shareholders approved the spin-off
of the Alcon business at the 2019 Annual General Meet-
ing held on February 28, 2019, subject to completion of
certain conditions precedent to the distribution. Upon
shareholder approval, the Alcon business was reported
as discontinued operations, and the fair value of the
Alcon business exceeded the carrying value of its net
assets.
The conditions precedent to the spin-off were met
and on April 8, 2019 the spin-off of the Alcon business
was effected by way of a distribution of a dividend in kind
of Alcon Inc. shares to Novartis AG shareholders and
ADR (American Depositary Receipt) holders (the Distri-
bution), which amounted to USD 23.4 billion and is rec-
ognized as a reduction to retained earnings. Through the
F-17
Notes to the Novartis Group consolidated financial statements
Distribution, each Novartis AG shareholder received one
Alcon Inc. share for every five Novartis AG shares/ADRs
they held on April 8, 2019, close of business. As of April
9, 2019, the shares of Alcon Inc. are listed on the SIX
Swiss Exchange (SIX) and on the New York Stock
Exchange (NYSE) under the symbol “ALC.”
The dividend in kind distribution liability to effect the
spin-off of the Alcon business (the distribution liability)
amounted to USD 26.4 billion at March 31, 2019,
unchanged from its initial recognition on February 28,
2019, and was in excess of the carrying value of the Alcon
business net assets as of February 28, 2019, and as of
March 31, 2019. The net assets of the Alcon business
amounted to USD 23.1 billion as at March 31, 2019.
On March 6, 2019, Alcon entered into financing
arrangements with a syndicate of banks under which it
borrowed on April 2, 2019, a total amount of USD 3.2 bil-
lion. These borrowings consisted of approximately USD
2.8 billion and the equivalent of USD 0.4 billion in EUR in
bridge and other term loans under such Alcon facilities
agreement. In addition, approximately USD 0.3 billion of
borrowings under a number of local bilateral facilities in
different countries, with the largest share of borrowings
in Japan, were raised. This resulted in a total gross debt
of USD 3.5 billion. These outstanding borrowings of the
Alcon legal entities were recorded in the balance sheet
and financing cash flow from discontinued operations.
Prior to the spin-off, through a series of intercompany
transactions, Alcon legal entities paid approximately
USD 3.1 billion in cash to Novartis and its affiliates.
At the April 8, 2019 Distribution, the fair value of the
distribution liability of the Alcon business amounted to
USD 23.4 billion, a decrease of USD 3.0 billion from
March 31, 2019. As mentioned above, prior to the spin-
off, through a series of intercompany transactions, Alcon
legal entities incurred additional net financial debt and
paid approximately USD 3.1 billion in cash to Novartis and
its affiliates. This additional net debt and transactions
resulted in a decrease in Alcon’s net assets to USD 20.0
billion at the date of the Distribution of the dividend in
kind to Novartis AG shareholders on April 8, 2019. The
distribution liability at April 8, 2019, remained in excess
of the then-carrying value of the Alcon business net
assets.
Certain consolidated foundations own Novartis AG
dividend-bearing shares restricting their availability for
use by the Group. These Novartis AG shares are
accounted for as treasury shares. Through the Distribu-
tion, these foundations received Alcon Inc. shares rep-
resenting an approximate 4.7% equity interest in Alcon
Inc. Upon the loss of control of Alcon Inc. through the
Distribution, the financial investment in Alcon Inc. was
recognized at its fair value based on the opening traded
share price of Alcon Inc. on April 9, 2019 (a Level 1 hier-
archy valuation). At initial recognition, its fair value of USD
1.3 billion was reported on the Group’s consolidated bal-
ance sheet as a financial asset. Management has des-
ignated this investment at fair value through other com-
prehensive income.
The total non-taxable, non-cash gain recognized at
the distribution date of the spin-off of the Alcon business
amounted to USD 4.7 billion consisting of:
(USD millions)
Net assets derecognized 1
Derecognition of distribution liability
Difference between net assets and distribution liability
Recognition of Alcon Inc. shares obtained
through consolidated foundations
Currency translation gains recycled into
the consolidated income statement
Transaction costs recognized in the
consolidated income statement
Gain on distribution of Alcon Inc. to
Novartis AG shareholders
1 See Note 30 for additional information.
April 8,
2019
– 20 025
23 434
3 409
1 273
123
– 114
4 691
For additional disclosures on discontinued operations,
refer to Note 30.
Innovative Medicines – acquisition of IFM Tre, Inc.
On May 7, 2019, Novartis acquired IFM Tre, Inc., a pri-
vately held, US-based biopharmaceutical company
focused on developing anti-inflammatory medicines tar-
geting the NLRP3 inflammasome. The acquisition gives
Novartis full rights to IFM Tre, Inc.’s portfolio of NLRP3
antagonists. The NLRP3 antagonists portfolio consists
of one clinical program and two preclinical programs:
IFM-2427, a first-in-class, clinical-stage systemic antag-
onist for an array of chronic inflammatory disorders,
including atherosclerosis and nonalcoholic steatohepa-
titis (NASH); a preclinical-stage gutdirected molecule for
the treatment of inflammatory bowel disease; and a pre-
clinical-stage central nervous system (CNS)-penetrant
molecule.
The previously held interest of 9% was adjusted to
its fair value of USD 33 million through the consolidated
income statement at acquisition date. This remeasure-
ment resulted in a gain of USD 14 million. The fair value
of the total purchase consideration for acquiring the 91%
stake Novartis did not already own amounted to USD 361
million. The amount consisted of an initial cash payment
of USD 285 million, and the fair value of the contingent
consideration of USD 76 million due to the IFM Tre, Inc.
shareholders, which they are eligible to receive upon the
achievement of specified development and commercial-
ization milestones. The purchase price allocation resulted
in net identifiable assets of USD 355 million, mainly intan-
gibles, and goodwill of USD 39 million. Results of oper-
ations since the date of acquisition were not material.
Innovative Medicines – acquisition of Xiidra
On May 8, 2019, Novartis entered into an agreement with
Takeda Pharmaceutical Company Limited (Takeda) to
acquire the assets associated with Xiidra (lifitegrast oph-
thalmic solution) 5% worldwide. Xiidra is the first and only
prescription treatment approved to treat both signs and
symptoms of dry eye by inhibiting inflammation caused
by the disease. The transaction bolsters the Novartis
front-of-the-eye portfolio and ophthalmic leadership.
The transaction closed on July 1, 2019. The purchase
price consists of a USD 3.4 billion upfront payment, cus-
tomary purchase price adjustments of USD 0.1 billion,
and the potential milestone payments of up to USD 1.9
billion, which Takeda is eligible to receive upon the
achievement of specified commercialization milestones.
F-18
Notes to the Novartis Group consolidated financial statements
The fair value of the total purchase consideration is
USD 3.7 billion. The amount consists of an initial cash
payment of USD 3.5 billion, and the net present value of
the contingent consideration of USD 0.2 billion, which
Takeda is eligible to receive upon the achievement of
specified commercialization milestones.
The purchase price allocation resulted in net identi-
fiable assets of approximately USD 3.6 billion, consist-
ing mainly of intangible assets of USD 3.6 billion, and
goodwill amounted to approximately USD 0.1 billion. In
2019, from the date of acquisition, the business gener-
ated net sales of USD 0.2 billion. Management estimates
that net sales for the entire year of 2019 would have
amounted to USD 0.3 billion, had the business been
acquired at the beginning of the 2019 reporting period.
Results of operations since the date of acquisition were
not material.
Significant transactions entered into
in 2019 and closed in January 2020
Innovative Medicines – acquisition of The
Medicines Company
On November 23, 2019, Novartis entered into an agree-
ment and plan of merger (the Merger Agreement) with
The Medicines Company, a US-based pharmaceutical
company headquartered in Parsippany, New Jersey USA.
Pursuant to the Merger Agreement, on December 5,
2019, Novartis, through a subsidiary, commenced a ten-
der offer to acquire all outstanding shares of The
Medicines Company for USD 85 per share, or a total con-
sideration of approximately USD 9.7 billion in cash on a
fully diluted basis. The tender offer expired on January
3, 2020, and on January 6, 2020, the acquiring subsid-
iary merged with and into The Medicines Company,
resulting in The Medicines Company becoming an indi-
rect wholly owned subsidiary of Novartis. Novartis will
finance the transaction through available cash and short-
and long-term borrowings. As the transaction closed on
January 6, 2020 the purchase price allocation is incom-
plete.
The Medicines Company is focused on the develop-
ment of inclisiran, a potentially first-in-class, twice-yearly
therapy that allows administration during patients’ rou-
tine visits to their healthcare professionals and will poten-
tially contribute to improved patient adherence and sus-
tained lower LDL-C levels.
Significant pending transactions
Sandoz – divestment of US dermatology business
and generic US oral solids portfolio
On September 6, 2018, Novartis announced that it has
agreed to sell selected portions of its Sandoz US port-
folio, specifically 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 earnouts.
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 be completed in the
first quarter of 2020, pending regulatory approval. 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 bil-
lion was recognized as a reduction to goodwill in 2018.
In the Group’s consolidated balance sheet at Decem-
ber 31, 2019 and 2018, the business assets and liabilities
of the Sandoz US dermatology business and generic US
oral solids portfolio are separately 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)
December 31, December 31,
2018
2019
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
169
475
11
2
181
3
841
148
478
8
1
165
7
807
(USD millions)
December 31, December 31,
2018
2019
Liabilities of disposal group classified as held for sale
Deferred tax liabilities
Provisions and other non-current
liabilities
Provisions and other current liabilities
Total
2
4
25
31
2
4
45
51
There are no cumulative income or expenses included
in other comprehensive income relating to the disposal
group.
Sandoz – acquisition of the Japanese business of
Aspen Global Incorporated
On November 11, 2019, Sandoz entered into an agree-
ment for the acquisition of the Japanese business of
Aspen Global Incorporated (AGI), a wholly owned sub-
sidiary of Aspen Pharmacare Holdings Limited. Under
the agreement, Sandoz will acquire the shares in Aspen
Japan K.K. and associated assets held by AGI. Pursuant
to the agreed terms of the transaction, on closing the
Group will pay an initial cash consideration of EUR 300
million (approximately USD 336 million). In addition,
deferred consideration is due to AGI, upon fulfillment of
certain conditions after closing, currently estimated at
approximately EUR 100 million (approximately USD 112
million).
F-19
Notes to the Novartis Group consolidated financial statements
We have received all relevant approvals and this
transaction is expected to be completed in the first quar-
ter of 2020.
Aspen’s portfolio in Japan consists of off-patent
medicines with a focus on anesthetics and specialty
brands. The acquisition will enable Sandoz to expand its
presence in the third-largest worldwide generics mar-
ketplace.
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 estimated that net sales for the
entire year of 2018 would have amounted to USD 0.4 bil-
lion had AAA been acquired at the beginning of 2018.
The 2018 results from operations since the acquisition
were not material.
As of December 31, 2019, Novartis held 99.2% 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. The 2018 results of operations since the date
of acquisition 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, Inc. (Endocyte),
a US-based biopharmaceutical company focused on
developing targeted 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 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 was preliminary at
December 31, 2018, as the transaction closed on Decem-
ber 21, 2018, which was close to the Group’s year-end
and therefore did not provide sufficient time to complete
the valuation of the intangible assets, deferred taxes,
assumed liabilities and goodwill. During 2019, there were
no significant revisions to the purchase price allocation.
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-
ment of metastatic castration-resistant prostate cancer
(mCRPC).
F-20
Notes to the Novartis Group consolidated financial statements
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 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 added a once-
daily oral H4 receptor antagonist in development for
atopic dermatitis, commonly known as eczema, to com-
plement 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 contingent consideration of USD 95 million, due to
Ziarco shareholders, which they are eligible to receive
upon the achievement of specified development mile-
stones. The purchase price allocation resulted in net
identifiable assets of USD 395 million and goodwill of
USD 25 million. 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.
For significant transactions in 2019 for discontinued
operations, see Note 30. There were no significant trans-
actions in 2018 and 2017 for discontinued operations.
F-21
Notes to the Novartis Group consolidated financial statements
3. Segmentation of key figures 2019, 2018 and 2017
The businesses of Novartis are divided operationally on
a worldwide basis into two identified reporting segments:
Innovative Medicines and Sandoz. In addition, we sepa-
rately report Corporate activities.
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.
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.
The reporting segments are as follows:
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; Cardiovas-
cular, Renal and Metabolism; 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 small molecule
pharmaceuticals to third parties across a broad range
of therapeutic areas, as well as finished dosage form of
anti-infectives sold to third parties. In Anti-Infectives,
Sandoz manufactures and supplies active pharmaceuti-
cal 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 biotechnol-
ogy-based products, including biosimilars, and provides
biotechnology manufacturing services to other compa-
nies.
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-
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 oversees
all drug development activities for our Innovative
Medicines Division and collaborates with our Sandoz
Division on development of its biosimilars portfolio.
• The Novartis Technical Operations organization man-
ages our manufacturing operations across our
Innovative Medicines and Sandoz Divisions.
• Novartis Business Services (NBS) is our shared ser-
vices organization that delivers business support ser-
vices across the Group, such as information technol-
ogy, real estate and facility services, procurement,
product lifecycle services, human resources, and finan-
cial reporting and accounting operations.
Following the February 28, 2019, shareholders’ approval
of the spin-off of the Alcon business (refer to Notes 1, 2
and 30 for further details), the Group reported its con-
solidated financial statements for the current and prior
years as “continuing operations” and “discontinued oper-
ations.”
Continuing operations comprise the activities of the
Innovative Medicines and Sandoz Divisions, and the con-
tinuing Corporate activities.
Discontinued operations include the operational
results from the Alcon eye care devices business and
certain corporate activities attributable to the Alcon busi-
ness prior to the spin-off, the gain on distribution of Alcon
Inc. to Novartis AG shareholders, and certain other
expenses related to the Distribution (refer to Notes 1, 2
and 30 for further details).
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; right-
of-use assets; intangible assets; goodwill; inventories;
and trade and other operating receivables less operat-
ing liabilities.
F-22
Notes to the Novartis Group consolidated financial statements
Segmentation – consolidated income statements
Innovative Medicines
Sandoz
Corporate
(including eliminations)
Group
(USD millions)
2019
2018
2019
2018
2019
2018
2019
2018
Net sales to third parties from continuing operations
37 714 34 892
9 731
9 859
47 445 44 751
Sales to continuing and discontinued segments
783
741
141
177
– 871
– 836
53
82
Net sales from continuing operations
38 497 35 633
9 872 10 036
– 871
– 836 47 498 44 833
Other revenues
Cost of goods sold
1 092
1 188
63
62
– 10 050 – 9 870 – 5 334 – 5 530
Gross profit from continuing operations
29 539 26 951
4 601
4 568
24
959
112
16
1 179
1 266
890 – 14 425 – 14 510
70 34 252 31 589
Selling, general and administration
– 11 617 – 10 907 – 2 218 – 2 305
– 534
– 505 – 14 369 – 13 717
Research and development
– 8 152 – 7 675 – 1 250
– 814
– 9 402 – 8 489
Other income
Other expense
1 586
977
167
505
278
147
2 031
1 629
– 2 069 – 1 475
– 749
– 622
– 608
– 512 – 3 426 – 2 609
Operating income from continuing operations
9 287
7 871
551
1 332
– 752
– 800
9 086
8 403
Income from associated companies
1
1
2
5
656
6 432
659
6 438
Interest expense
Other financial income and expense
Income before taxes from continuing operations
Taxes
Net income from continuing operations
Net loss from discontinued operations before gain on
distribution of Alcon Inc. to Novartis AG shareholders
Gain on distribution of Alcon Inc. to Novartis AG shareholders
Net income/(loss) from discontinued operations
Net income
Attributable to:
Shareholders of Novartis AG
Non-controlling interests
Included in net income from continuing operations are:
Interest income
– 850
– 932
45
186
8 940 14 095
– 1 793 – 1 295
7 147 12 800
– 101
– 186
4 691
4 590
– 186
11 737 12 614
11 732 12 611
5
3
245
292
Depreciation of property, plant and equipment
– 952 – 1 075
– 283
– 285
– 110
– 122 – 1 345 – 1 482
Depreciation of right-of-use assets 1
– 247
– 41
Amortization of intangible assets
– 2 509 – 2 214
– 315
– 366
Impairment charges on property, plant and equipment, net
– 100
– 239
– 101
– 60
– 17
– 12
– 1
– 305
– 7 – 2 836 – 2 587
– 2
– 202
– 301
Impairment charges on intangible assets, net
– 632
– 592
– 506
– 249
– 1 138
– 841
Impairment charges and fair value
changes on financial assets, net
18
107
20
– 113
38
– 6
Additions to restructuring provisions
– 229
– 395
– 165
– 32
– 98
– 94
– 492
– 521
Equity-based compensation of Novartis equity plans
– 761
– 645
– 67
– 53
– 239
– 220 – 1 067
– 918
1 Depreciation of right-of-use assets recognized from January 1, 2019, the date of implementation of IFRS 16 leases. Notes 1 and 10 provide additional disclosures.
F-23
Notes to the Novartis Group consolidated financial statements
Innovative Medicines
Sandoz
Corporate
(including eliminations)
Group
(USD millions)
2018
2017
2018
2017
2018
2017
2018
2017
Net sales to third parties from continuing operations
34 892 32 278
9 859 10 060
44 751 42 338
Sales to continuing and discontinued segments
741
668
177
118
– 836
– 743
82
43
Net sales from continuing operations
35 633 32 946 10 036 10 178
– 836
– 743 44 833 42 381
Other revenues
Cost of goods sold
1 188
898
62
37
16
88
1 266
1 023
– 9 870 – 8 650 – 5 530 – 5 800
890
817 – 14 510 – 13 633
Gross profit from continuing operations
26 951 25 194
4 568
4 415
70
162 31 589 29 771
Selling, general and administration
– 10 907 – 9 887 – 2 305 – 2 126
– 505
– 452 – 13 717 – 12 465
Research and development
– 7 675 – 7 615
– 814
– 774
– 8 489 – 8 389
Other income
Other expense
977
1 027
505
204
147
691
1 629
1 922
– 1 475 – 1 124
– 622
– 351
– 512
– 662 – 2 609 – 2 137
Operating income from continuing operations
7 871
7 595
1 332
1 368
– 800
– 261
8 403
8 702
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 from continuing operations
Taxes
Net income from continuing operations
Net (loss)/income from discontinued operations
Net income
Attributable to:
Shareholders of Novartis AG
Non-controlling interests
Included in net income from continuing operations are:
Interest income
– 932
– 750
186
42
14 095
9 102
– 1 295 – 1 603
12 800
7 499
– 186
204
12 614
7 703
12 611
7 703
3
0
292
110
Depreciation of property, plant and equipment
– 1 075
– 916
– 285
– 270
– 122
– 117 – 1 482 – 1 303
Amortization of intangible assets
– 2 214 – 2 167
– 366
– 447
Impairment charges on property, plant and equipment, net
– 239
– 84
– 60
Impairment charges on intangible assets, net
– 592
– 591
– 249
– 73
– 61
– 7
– 2
– 10 – 2 587 – 2 624
– 301
– 157
– 841
– 652
Impairment charges and fair value
changes on financial assets, net
Additions to restructuring provisions
Equity-based compensation of Novartis equity plans
107
– 42
– 113
– 185
– 6
– 227
– 395
– 122
– 645
– 593
– 32
– 53
– 61
– 94
– 3
– 521
– 186
– 52
– 220
– 208
– 918
– 853
F-24
Notes to the Novartis Group consolidated financial statements
Segmentation – consolidated balance sheets
(USD millions)
Total assets
Total liabilities
Total equity
Net debt
Innovative Medicines
Sandoz
Alcon1
Corporate
(including eliminations)
Group
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
71 225 67 055 16 468 17 328
25 971 30 677 35 209 118 370 145 563
– 15 332 – 13 056 – 3 804 – 3 377
– 1 964 – 43 683 – 48 474 – 62 819 – 66 871
55 551 78 692
15 938 16 184
71 489 94 876
Net operating assets
55 893 53 999 12 664 13 951
24 007
Included in assets and liabilities are:
Total property, plant and equipment
9 632 10 098
1 888
2 159
2 878
549
561 12 069 15 696
Additions to property, plant
and equipment 2
Total right-of-use assets 3
Additions to right-of-use assets 2, 3
1 114
822
1 487
454
217
136
49
294
519
143
139
1 474
1 774
54
34
83
1 677
537
130 55 311 74 013
Total goodwill and intangible assets
46 336 44 593
8 892
9 712
19 578
Additions to goodwill and
intangible assets 2
Total investment in associated
companies
647
1 265
68
107
196
52
24
767
1 592
128
81
7
7
8 509
8 264
8 644
8 352
Additions to investment in associated
companies
44
18
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
11
11
55
29
11 446 15 964 11 446 15 964
27 384 32 148 27 384 32 148
8 061
9 513
8 061
9 513
1 From February 28, 2019, the Alcon Division was reported as discontinued operations (see Notes 1, 2 and 30). In accordance with IFRS, the December 31, 2018, consolidated
balance sheet includes the assets and liabilities of the Alcon eye care devices business and certain Corporate assets and liabilities attributable to the Alcon business. Note 30
provides additional information on discontinued operations.
2 Excluding the impact of business combinations.
3 Total right-of-use assets and additions to right-of-use assets recognized in 2019 with the implementation of IFRS 16 Leases on January 1, 2019. See Notes 1 and 10 for additional
disclosures.
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, 2019, 2018 and 2017, and for selected
non-current assets for the years ended December 31, 2019 and 2018:
2019
%
2018
%
2017
%
2019
%
2018
Net sales1
Total of selected non-current assets2
(USD millions)
Country
Switzerland
%
43
40
4
3
10
100
57
40
3
United States
16 280
34
14 618
33
14 135
33
28 893
848
2
795
2
780
2
33 032
France
Germany
Japan
Other
Group
Region
Europe
Americas
2 442
4 120
2 656
21 099
47 445
17 933
19 713
Asia/Africa/Australasia
9 799
5
9
6
2 505
3 972
2 575
6
9
6
2 289
3 484
2 617
5
8
6
3 933
2 554
309
44
20 286
44
19 033
46
8 980
12
9 763
100
44 751
100
42 338
100
77 701
100
98 061
38
41
21
17 259
18 032
9 460
39
39
22
15 760
17 485
9 093
37
41
22
46 103
29 389
2 209
59
38
3
55 913
39 082
3 066
43
37
5
3
41 972
39 082
3 976
3 124
144
Group
47 445
100
44 751
100
42 338
100
77 701
100
98 061
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, and in 2019 right-of-use assets recognized with the implementation of
IFRS 16 Leases on January 1, 2019. See Notes 1 and 10 for additional disclosures.
F-25
Notes to the Novartis Group consolidated financial statements
The Group’s largest, second-largest and third-largest cus-
tomers account for approximately 23%, 17% and 10% of
net sales, respectively (2018: 18%, 14% and 8%, respec-
tively; 2017: 19%, 14% and 7%, respectively). All segments
had sales to these customers in 2019, 2018 and 2017. No
other customer accounted for 6% or more of net sales in
any year.
Segmentation – net sales by region1
The highest amounts of trade receivables outstanding
were for these same three customers and amounted to
14%, 12% and 7%, respectively, of the trade receivables at
December 31, 2019 (2018: 12%, 10% and 6%, respectively).
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
Group
Europe
US
Asia/Africa/Australasia
Canada and Latin America
Total
Of which in Established Markets
Of which in Emerging Growth Markets
2019
USD m
2018
USD m
12 818
12 296
13 789
11 864
8 458
2 649
8 097
2 635
37 714
34 892
28 573
26 258
9 141
8 634
5 115
2 491
1 341
784
9 731
7 111
2 620
4 963
2 754
1 363
779
9 859
7 233
2 626
17 933
17 259
16 280
14 618
9 799
3 433
9 460
3 414
47 445
44 751
35 684
33 491
11 761
11 260
Change
(2018
to 2019)
USD %
4
16
4
1
8
9
6
3
– 10
– 2
1
– 1
– 2
0
4
11
4
1
6
7
4
Change
(2017
to 2018)
USD %
11
9
5
2
8
9
7
7
– 16
– 2
3
– 2
– 2
– 2
10
3
4
2
6
6
4
2017
USD m
11 127
10 857
7 702
2 592
32 278
24 174
8 104
4 633
3 278
1 391
758
10 060
7 383
2 677
15 760
14 135
9 093
3 350
42 338
31 557
10 781
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.
F-26
Notes to the Novartis Group consolidated financial statements
Innovative Medicines Division net sales by business franchise
Change
(2018 to
2019)
USD m USD %
2018
Change
(2017 to
2017 2018)
USD m USD %
2019
USD m
Change
(2018 to
2019)
USD m USD %
2018
Change
(2017 to
2017 2018)
USD m USD %
2019
USD m
Oncology
Tasigna
Sandostatin
1 880
1 874
1 585
1 587
0
0
1 841
2
Respiratory
1 612
– 2
Xolair 1
1 173
1 039
Afinitor/Votubia
1 539
1 556
– 1
1 525
Promacta/Revolade
1 416
1 174
Tafinlar + Mekinist
1 338
1 155
21
16
867
873
2
35
32
Ultibro Breezhaler
Seebri Breezhaler
Onbrez Breezhaler
Gleevec/Glivec
1 263
1 561
– 19
1 943 – 20
Other
427
121
82
22
13
– 6
454
148
– 18
920
411
151
13
10
– 2
101
– 19
112 – 10
25
– 12
23
9
9
Jakavi
1 114
977
14
777
26
Total Respiratory
1 825
1 767
3
1 617
Exjade/Jadenu
975
1 099
– 11
1 059
828
235
167
76
755
480
441
278
116
1 190
1 139
– 9
808
104
164
nm
nm
4
76
0
6
887
4
2
nm
nm
nm
nm
28
Cardiovascular, Renal and Metabolism
Entresto
Other
1 726
1 028
24
22
68
9
507 103
17
29
Total Cardiovascular,
Renal and Metabolism 1 750
1 050
67
524 100
14 370 13 428
7 12 274
9
Established Medicines
Galvus Group
Diovan Group
1 297
1 284
1 064
1 023
Exforge Group
1 025
1 002
Votrient
Kisqali
Lutathera
Kymriah
Piqray
Other
Total Novartis
Oncology
business unit
Ophthalmology
Lucentis
2 086
2 046
2
1 888
8
517
– 16
589 – 12
Travoprost Group
Xiidra
Beovu
Other
433
192
35
Total Ophthalmology
4 776
4 558
2 030
1 995
nm
nm
2
5
2 144
4 621
Immunology, Hepatology and Dermatology
Cosentyx
3 551
2 837
25
2 071
671
554
1
21
nm
402
1
1
4
2
5
1 233
957
960
414
488
465
4
7
4
12
– 5
– 4
Zortress/Certican
Neoral/Sandimmun(e)
Voltaren/Cataflam
485
419
417
464
463
– 10
445
– 6
nm
nm
– 7
– 1
37
38
0
Other
2 291
2 587
– 11
2 964 – 13
Total Established
Medicines
Total Novartis
Pharmaceuticals
business unit
Total division
net sales
6 998
7 268
– 4
7 481
– 3
23 344 21 464
9 20 004
7
37 714 34 892
8 32 278
8
Ilaris
Other
Total Immunology,
Hepatology and
Dermatology
Neuroscience
Gilenya
Zolgensma
Aimovig
Mayzent
Other
4 222
3 392
24
2 474
37
nm = not meaningful
1 Net sales reflect Xolair sales for all indications.
3 223
3 341
– 4
3 185
361
103
26
60
8
nm
nm
nm
80
– 25
102 – 22
5
nm
nm
nm
Total Neuroscience
3 773
3 429
10
3 287
4
F-27
US
USD m
Rest of
world
USD m
2 220
1 331
1 736
1 487
2 086
804
1 076
925
881
1 003
801
704
536
Total
USD m
3 551
3 223
2 086
1 880
1 726
1 585
1 539
691
725
1 416
481
857
1 297
1 338
1 297
1 263
1 173
1 173
1 114
978
1 012
525
423
367
316
230
1 114
1 064
1 025
975
755
671
485
480
86
13
450
332
304
169
250
10 679
17 967
28 646
3 110
5 958
9 068
13 789
23 925
37 714
Promacta/Revolade
Oncology
Tafinlar + Mekinist
Oncology
Established Medicines
Diabetes
Oncology
Chronic myeloid leukemia and GIST
334
929
Notes to the Novartis Group consolidated financial statements
Top 20 Innovative Medicines Division product net sales – 2019
Brands
Business franchise
Indication
Immunology, Hepatology
and Dermatology
Psoriasis, ankylosing
spondylitis and psoriatic arthritis
Cosentyx
Gilenya
Lucentis
Tasigna
Entresto
Sandostatin
Afinitor/Votubia
Galvus Group
Gleevec/Glivec
Xolair 1
Jakavi
Diovan Group
Exforge Group
Exjade/Jadenu
Votrient
Ilaris
Neuroscience
Ophthalmology
Oncology
Cardiovascular, Renal
and Metabolism
Oncology
Oncology
Relapsing multiple sclerosis
Age-related macular degeneration
Chronic myeloid leukemia
Chronic heart failure
Carcinoid tumors and acromegaly
Breast cancer/TSC
Immune thrombocytopenia (ITP),
severe aplastic anemia (SAA)
BRAF V600+ metastatic and
adjuvant melanoma; advanced
non-small cell lung cancer (NSCLC)
Respiratory
Oncology
Severe Allergic Asthma (SAA)
and Chronic Spontaneous Urticaria
(CSU)
Myelofibrosis (MF),
polycytomia vera (PV)
Established Medicines
Established Medicines
Hypertension
Hypertension
Oncology
Oncology
Immunology, Hepatology
and Dermatology
Chronic iron overload
Renal cell carcinoma
Auto-inflammatory (CAPS,
TRAPS, HIDS/MKD, FMF, SJIA,
AOSD and gout)
Zortress/Certican
Established Medicines
Transplantation
Kisqali
Oncology
HR+/HER2- metastatic breast cancer
Top 20 products total
Rest of portfolio
Total division sales
1 Net sales reflect Xolair sales for all indications.
F-28
Business franchise
Neuroscience
Indication
US
USD m
Rest of
world
USD m
Total
USD m
Relapsing multiple sclerosis
1 765
1 576
3 341
1 674
1 163
806
817
440
929
2 046
1 068
770
1 121
627
1 284
2 837
2 046
1 874
1 587
1 561
1 556
1 284
581
593
1 174
457
521
698
578
1 155
1 099
1 039
1 039
472
939
983
977
424
1 028
1 023
1 002
977
828
556
84
19
404
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
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
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
Promacta/Revolade
Oncology
Tafinlar + Mekinist
Exjade/Jadenu
Oncology
Oncology
Xolair 1
Respiratory
Entresto
Diovan Group
Exforge Group
Jakavi
Votrient
Ilaris
Cardiovascular, Renal
and Metabolism
Established Medicines
Established Medicines
Oncology
Oncology
Immunology, Hepatology
and Dermatology
Travoprost Group
Ophthalmology
Immune thrombocytopenia (ITP),
severe aplastic anemia (SAA)
BRAF V600+ metastatic and
adjuvant melanoma; advanced
non-small cell lung cancer (NSCLC)
Chronic iron overload
Severe Allergic Asthma (SAA)
and Chronic Spontaneous Urticaria
(CSU)
Chronic heart failure
Hypertension
Hypertension
Myelofibrosis (MF),
polycytomia vera (PV)
Renal cell carcinoma
Auto-inflammatory (CAPS,
TRAPS, HIDS/MKD, FMF, SJIA,
AOSD and gout)
Reduction of elevated intraocular
pressure
Zortress/Certican
Established Medicines
Transplantation
Top 20 products total
Rest of portfolio
Total division sales
1 Net sales reflect Xolair sales for all indications.
F-29
Business franchise
Neuroscience
Indication
US
USD m
Rest of
world
USD m
Total
USD m
Relapsing multiple sclerosis
1 709
1 476
3 185
Notes to the Novartis Group consolidated financial statements
Top 20 Innovative Medicines Division product net sales – 2017
Brands
Gilenya
Cosentyx
Immunology, Hepatology
and Dermatology
Psoriasis, ankylosing
spondylitis and psoriatic arthritis
Gleevec/Glivec
Oncology
Chronic myeloid leukemia and GIST
Lucentis
Tasigna
Sandostatin
Afinitor/Votubia
Galvus Group
Exjade/Jadenu
Exforge Group
Diovan Group
Ophthalmology
Age-related macular degeneration
Oncology
Oncology
Oncology
Chronic myeloid leukemia
Carcinoid tumors and acromegaly
Breast cancer/TSC
Established Medicines
Diabetes
Oncology
Chronic iron overload
Established Medicines
Established Medicines
Hypertension
Hypertension
1 275
796
627
1 316
1 888
1 031
780
706
1 233
544
932
870
810
832
819
515
28
87
2 071
1 943
1 888
1 841
1 612
1 525
1 233
1 059
960
957
920
920
339
534
873
446
407
421
401
867
808
777
777
216
373
589
38
450
465
488
465
8 445
16 123
24 568
2 412
5 298
7 710
10 857
21 421
32 278
Severe Allergic Asthma (SAA)
and Chronic Spontaneous Urticaria
(CSU)
BRAF V600+ metastatic and
adjuvant melanoma; advanced
non-small cell lung cancer (NSCLC)
Immune thrombocytopenia (ITP),
severe aplastic anemia (SAA)
Renal cell carcinoma
Myelofibrosis (MF),
polycytomia vera (PV)
Reduction of elevated
intraocular pressure
Chronic heart failure
297
210
507
Xolair 1
Respiratory
Tafinlar + Mekinist
Oncology
Promacta/Revolade
Votrient
Jakavi
Oncology
Oncology
Oncology
Travoprost Group
Ophthalmology
Entresto
Neoral/Sandimmun(e)
Cardiovascular, Renal
and Metabolism
Immunology, Hepatology
and Dermatology
Transplantation
Voltaren/Cataflam
Established Medicines
Inflammation/pain
Top 20 products total
Rest of portfolio
Total division sales
1 Net sales reflect Xolair sales for all indications.
F-30
Notes to the Novartis Group consolidated financial statements
Sandoz Division net sales by business
franchise
Change
(2018 to
2019)
USD m USD %
2018
Change
(2017 to
2017 2018)
USD m USD %
2019
USD m
Retail Generics 1
7 590
7 880
– 4
8 409
Biopharmaceuticals
1 607
1 436
12
1 135
Anti-Infectives
534
543
– 2
516
– 6
27
5
Total division net sales 9 731
9 859
– 1 10 060
– 2
1 Of which USD 784 million (2018: USD 826 million; 2017: USD 880 million) represents
anti-infectives sold under the Sandoz name
The product portfolio of Sandoz is widely spread in 2019, 2018 and 2017.
Segmentation – other revenue
(USD millions)
Profit-sharing income
Royalty income
Milestone income
Other 1
Total other revenues
Innovative Medicines
Sandoz
Corporate
(including eliminations)
Group
2019
2018
2019
2018
2019
2018
2019
2018
732
104
201
55
874
162
128
24
1 092
1 188
2
19
30
12
63
3
10
45
4
62
24
16
734
147
231
67
877
188
173
28
24
16
1 179
1 266
1 Other includes revenue from activities such as manufacturing or other services rendered, to the extent such revenue is not recorded under net sales.
(USD millions)
Profit-sharing income
Royalty income
Milestone income
Other 1
Total other revenues
Innovative Medicines
Sandoz
Corporate
(including eliminations)
Group
2018
2017
2018
2017
2018
2017
2018
2017
874
162
128
24
648
186
28
36
1 188
898
3
10
45
4
62
4
24
9
37
16
88
877
188
173
28
652
298
28
45
16
88
1 266
1 023
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-31
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
2019
662
2018
526
5 910
– 3
2
2017
456
629
23
2019
– 94
2018
75
2017
108
2019
568
2018
601
– 557
– 145
5 353
– 3
2
2017
564
484
23
659
6 438
1 108
– 94
– 482
– 37
565
5 956
1 071
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 2019 and 2017.
Novartis has a significant investment 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.
A purchase price allocation was performed on the basis
of publicly available information at the time of acquisition
of the investment. The December 31, 2019, balance sheet
value allocation is as follows:
(USD millions)
Novartis share of Roche’s estimated net assets
(USD millions)
Roche Holding AG, Switzerland
Others
Total
Roche Holding AG
Balance sheet value
Novartis share of reappraised intangible assets
December 31, December 31,
2018
2019
8 445
8 195
199
157
8 644
8 352
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,
2019
2 404
297
2 939
5 640
2 805
8 445
The Group’s holding in Roche voting shares was 33.3%
at December 31, 2019, 2018 and 2017. This investment
represents approximately 6.2% of Roche’s total out-
standing voting and non-voting equity instruments at
December 31, 2019, 2018 and 2017.
Since full-year 2019 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 2020 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, 2018, and for
the six months ended June 30, 2019 (since full-year 2019
data is not yet available):
(CHF billions)
Current assets
Non-current
assets
Current Non-current
liabilities
liabilities
December 31, 2018
June 30, 2019
32.2
32.3
53.7
53.8
23.0
23.4
25.1
25.7
(CHF billions)
Total
comprehen- comprehen-
Revenue Net income sive income sive income
Other
December 31, 2018
June 30, 2019
59.5
31.8
8.6
8.3
– 0.1
– 0.6
8.5
7.7
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 2019, dividends received from Roche in relation to
the distribution of its 2018 net income amounted to
USD 460 million (2018: USD 464 million in relation to the
distribution of its 2017 net income).
The consolidated income statement effects from
applying Novartis accounting principles for this invest-
ment in 2019, 2018 and 2017 are as follows:
(USD millions)
2019
2018
2017
Novartis share of Roche’s
estimated current-year
consolidated net income
910
799
Prior-year adjustment
– 129
– 125
669
– 67
Amortization of fair value
adjustments relating to
intangible assets, net of taxes
of USD 24 million (2018: USD 40
million; 2017: USD 42 million)
Partial release of deferred tax
liability recognized
Net income effect
– 162
– 148
– 146
43
662
526
456
The publicly quoted market value of the Novartis inter-
est in Roche (SIX symbol: RO) at December 31, 2019,
was USD 16.9 billion (2018: USD 12.9 billion).
F-32
Notes to the Novartis Group consolidated financial statements
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, Novartis had a 36.5% interest
in GSK Consumer Healthcare and had four of 11 seats
on the GSK Consumer Healthcare board of directors.
Furthermore, Novartis had customary minority rights as
well as exit rights at a predefined, market-based pricing
mechanism.
In 2018, dividends received from GSK Consumer
Healthcare amounted to USD 252 million.
The consolidated income statement effects from
applying Novartis accounting principles for this invest-
ment in 2018 and 2017 are as follows:
(USD millions)
Novartis share of
GSK Consumer Healthcare’s
estimated current-year
consolidated net income
Prior-year adjustment
Amortization of fair value
adjustments relating to
intangible assets and inventory,
net of taxes of USD 1 million
(2017: USD 1 million)
Pre-tax gain on divestment of
GSK Consumer Healthcare
Net income effect
2018
2017
119
4
589
47
– 3
– 7
5 790
5 910
629
5. Interest expense
and other financial income and expense
Interest expense
Other financial income and expense
(USD millions)
Interest expense
2019
– 714
2018
– 877
2017
(USD millions)
– 741
Interest income
Interest expense on lease liabilities
– 66
Expense arising from
discounting long-term liabilities
and capitalized borrowing costs
Total interest expense
from continuing operations
– 70
– 55
– 9
– 850
– 932
– 750
Other financial income
Financial expense
Currency result, net
Total other financial income
and expense from
continuing operations
2019
245
12
– 52
– 160
2018
292
1
– 39
– 68
2017
110
1
– 11
– 58
45
186
42
F-33
Notes to the Novartis Group consolidated financial statements
6. Taxes
Income before taxes
(USD millions)
Switzerland
Foreign
Income before taxes
from continuing operations
2019
2018
8 097
11 887
843
2 208
2017
5 385
3 717
(As a percentage)
Applicable tax rate
2019
2018
2017
11.7 14.3 14.3
Effect of disallowed expenditures
4.8
1.7
3.1
Effect of utilization of tax losses
brought forward from prior periods
– 0.1 – 0.1 – 0.1
Effect of income taxed at reduced rates
– 0.7 – 0.4 – 0.2
8 940
14 095
9 102
Effect of income not subject to tax 1
0.0 – 3.7
0.0
Effect of tax credits and allowances
– 2.3 – 2.3 – 2.1
Current and deferred income tax expense
(USD millions)
Switzerland
Foreign
2019
– 1 186
2018
– 615
2017
– 462
– 961
– 988
– 1 451
Current income tax expense
– 2 147
– 1 603
– 1 913
Switzerland
Foreign
Deferred tax income
Income tax expense
from continuing operations
– 93
447
354
– 120
– 305
428
308
615
310
– 1 793
– 1 295
– 1 603
Analysis of tax rate
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 are taxed at different rates in those tax juris-
dictions. This results in a difference between our appli-
cable tax rate and effective 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 shown
in the table below:
– 0.5 – 0.2 – 1.3
Effect of release of
contingent consideration liability
Effect of tax rate change
on current and deferred
tax assets and liabilities 2
– 1.4 – 0.1
4.8
0.0
Effect of write-off of deferred tax assets 3
4.0
0.2
Effect of write-down and reversal of
write-down of investments in subsidiaries
– 0.6
0.0 – 1.1
Effect of tax benefits expiring in 2017
0.0
0.0 – 0.9
Effect of prior-year items
Effect of other items 4
2.2 – 0.5
1.2
3.0
0.3 – 0.1
Effective tax rate for continuing operations 20.1
9.2 17.6
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 2019 is mainly related to the revaluation of the deferred tax assets and liabilities
resulting from the tax reforms enacted in Switzerland in 2019, refer to Note 12 for
additional disclosures.
Included in 2017 is a 4.8% 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 12 for
additional disclosures.
3 2019 is primarily related to a non-cash, one-time deferred tax expense for the
write-off of a deferred tax asset resulting from legal entity reorganizations.
4 In 2019, other items (+3.0%) include changes in uncertain tax positions (+2.6%) and
other items (+0.4%).
The utilization of tax-loss carry-forwards lowered the tax
charge by USD 11 million in 2019, by USD 19 million in
2018, and by USD 7 million in 2017.
For the amount of taxes attributable to discontinued
operations, see Note 30.
F-34
Notes to the Novartis Group consolidated financial statements
7. Earnings per share
Net income attributable to shareholders of Novartis AG (USD millions)
- Continuing operations
- Discontinued operations
Total
Number of shares (in millions)
2019
2018
2017
7 142
12 797
7 499
4 590
– 186
11 732
12 611
204
7 703
Weighted average number of shares outstanding used in basic earnings per share
2 291
2 319
2 346
Adjustment for vesting of restricted shares, restricted share units and dilutive shares from options
28
25
25
Weighted average number of shares in diluted earnings per share
2 319
2 344
2 371
Basic earnings per share (USD)
- Continuing operations
- Discontinued operations
Total
Diluted earnings per share (USD)
- Continuing operations
- Discontinued operations
Total
3.12
2.00
5.12
3.08
1.98
5.06
5.52
– 0.08
5.44
5.46
– 0.08
5.38
3.20
0.08
3.28
3.17
0.08
3.25
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 2019, 2018 or 2017, as all options were
dilutive in all years.
F-35
Notes to the Novartis Group consolidated financial statements
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.
The following table summarizes these value adjustments and currency translation effects attributable to Novartis
shareholders:
(USD millions)
Fair value
adjustments
on marketable
securities
Fair value
Fair value
adjustments adjustments on
on debt deferred cash
flow hedges
securities
Value adjustments at January 1, 2017
Fair value adjustments on financial instruments
349
39
– 1
– 1
– 3
12
Fair value
Actuarial
adjustments gains/(losses)
on equity
from defined
securities benefit plans
Cumulative
currency
translation
effects
Total value
adjustments
– 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
– 45
– 95
44
– 466
354
– 208
3
95
320
415
744
44
354
398
– 359
– 359
– 5 423
– 466
– 466
– 30
– 5 919
1 142
– 4 657
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 1
– 1
– 2
39
388
– 177
– 211
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
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 2019
Fair value adjustments related to divestments
12
9
9
12
12
21
1
211
211
13
– 16
– 3
208
– 47
– 95
– 2
1
1
1
– 142
33
99
Value adjustments at December 31, 2019
– 1
22
1 Note 1 provides additional disclosures related to the impact of adoption of IFRS 9 Financial Instruments. OCI: other comprehensive income
F-36
Notes to the Novartis Group consolidated financial statements
8.1) The 2019, 2018 and 2017 changes in the fair value of financial instruments were as follows:
(USD millions)
Fair value
adjustments
on equity
securities 1
Fair value
Fair value
adjustments adjustments on
on debt deferred cash
flow hedges
securities
Fair value adjustments at January 1, 2019
208
– 2
21
Changes in fair value:
– Debt securities sold
– 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 related to divestments
Fair value adjustments at December 31, 2019
– 94
47
– 95
– 142
33
99
1
1
1
1
– 1
22
Total
227
1
– 94
1
47
– 95
– 140
33
120
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
(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 Note 1 provides aditional disclosures on the impact of adoption of IFRS 9 Financial Instruments.
(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 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 related to continuing operrations. This revaluation resulted from the US tax reform legislation enacted on December 22, 2017. Refer to Note
12 for additional disclosures.
F-37
Notes to the Novartis Group consolidated financial statements
8.2) In 2019, cumulative currency translation gains of
USD 129 million were recycled through the income state-
ment mainly as a result of the spin-off of the Alcon busi-
ness through a dividend in kind distribution to Novartis
AG shareholders. See Notes 2 and 30.
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.
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
2019
– 119
– 35
– 313
– 467
2018
– 482
54
69
– 359
2017
1 367
76
– 592
851
– 466
– 359
851
– 1
1 Included in 2019 is a USD -358 million impact related to the revaluation of deferred tax assets on Swiss post-employment benefits that were previously recognized through other
comprehensive income. This revaluation resulted from the Swiss tax reforms enacted by the voters in 2019. Refer to Note 12 for additional disclosures.
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 (continuing operations USD-259 million and discontinued operations USD -13 million). This revaluation resulted from the US tax reform legislation enacted
on December 22, 2017. Refer to Note 12 for additional disclosures.
F-38
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 2019:
(USD millions)
Cost
January 1, 2019
Cost of assets related to discontinued operations 1
Reclassification to right-of-use assets 2
Cost of assets related to disposal group held for sale 3
Impact of business combinations
Reclassifications 4
Additions 5
Disposals and derecognitions 6
Currency translation effects
December 31, 2019
Accumulated depreciation
January 1, 2019
Accumulated depreciation on assets related to discontinued operations 1
Reclassification to right-of-use assets 2
Accumulated depreciation on assets related to disposal group held for sale 3
Accumulated depreciation on disposals and derecognitions 6
Depreciation charge 7
Impairment charge 8
Reversal of impairment charge
Currency translation effects
December 31, 2019
Net book value at December 31, 2019
Commitments for purchases of property, plant and equipment
Capitalized borrowing costs
Land
Buildings
Construction
in progress
Machinery
and other
equipment
Total
696
– 61
– 122
10
57
6
14 135
2 042
17 155
34 028
– 1 615
– 655
– 2 678
– 5 009
– 3
– 3
24
332
112
– 12
1
– 1 019
1 001
– 2
– 8
9
630
355
– 127
– 23
44
1 474
– 75
– 1 551
– 9
– 1 774
– 3 409
1
32
1
– 13
21
512
11 463
1 350
13 674
26 999
– 43
– 6 328
– 37
– 11 924
– 18 332
8
26
– 10
– 1
562
7
1 541
2 118
2
1 170
– 447
– 51
1
– 33
26
2
2
1 674
2 846
– 898
– 1 345
– 34
– 110
– 205
2
– 9
3
– 43
– 20
– 5 124
– 60
– 9 726
– 14 930
492
6 339
1 290
3 948
12 069
220
4
1 Represents the cost of assets and accumulated depreciation at January 1, 2019 related to the Alcon business reported as discontinued operations. Notes 1, 2 and 30 provide
information related to discontinued operations.
2 Reclassification to right-of-use assets at January 1, 2019, upon adoption of IFRS 16 Leases. Refer to Notes 1 and 10 for additional disclosure.
3 Note 2 provides additional disclosures related to disposal group held for sale.
4 Reclassifications between various asset categories due to completion of plant and other equipment under construction
5 Additions in the disposal group held for sale for the period from January 1, 2019, to December 31, 2019 were USD 23 million.
6 Derecognition of assets that are no longer used and are not considered to have a significant disposal value or other alternative use
7 No depreciation charge in the disposal group held for sale for the period from January 1, 2019, to December 31, 2019 was recorded.
8 Impairments in the disposal group held for sale for the period from January 1, 2019, to December 31, 2019 were USD 2 million.
F-39
Notes to the Novartis Group consolidated financial statements
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
115
8
2
12
361
1
– 43
653
– 6 328
– 37
– 11 924
– 18 332
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 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. For
depreciation charge related to discontinued operations, refer to Note 30.
F-40
Notes to the Novartis Group consolidated financial statements
10. Right-of-use assets and lease liabilities
The adoption of IFRS 16 on January 1, 2019 had an impact
on the classification of the annual lease expense in the
consolidated income statement, the recognition of right-
of-use assets and lease liabilities in the balance sheet
and the classification of the annual lease payments in
the consolidated statement of cash flows.
The adoption of IFRS 16 on January 1, 2019 did not
significantly impact the individual lines of the consoli-
dated income statement.
The following table shows the adjustments to the line
items of the January 1, 2019, consolidated balance sheet,
due to the implementation of IFRS 16:
Impact of adoption of IFRS 16 Leases
Note 1 explains the changes and new accounting policy
introduced on January 1, 2019, resulting from the adop-
tion of the new accounting standard IFRS 16 Leases.
On transition to IFRS 16, the Group elected to apply
the practical expedient to not reassess whether a con-
tract is, or contains, a lease at January 1, 2019, the imple-
mentation date of IFRS 16. As a result, at the date of
implementation, the Group applied IFRS 16 only to con-
tracts that were previously identified as leases under IAS
17 Leases and related interpretations, and the definition
of a lease under IFRS 16 was applied only to contracts
entered into or changed on or after January 1, 2019.
The impact on retained earnings upon implementa-
tion of IFRS 16 was USD 3 million arising from subleases
that were accounted for as operating lease agreements
under IAS 17 and are accounted for as finance leases
under IFRS 16.
The Group has entered into various fixed-term leases,
mainly for vehicles and real estate.
The lease liabilities recorded in continuing operations
on January 1, 2019, were USD 1.7 billion and the right-of-
use assets were USD 1.6 billion.
Reconciliation of lease commitment disclosed on
December 31, 2018, and lease liability recorded in con-
tinuing operations on January 1, 2019, is as follows:
(USD millions)
Operating lease commitments December 31, 2018 1
3 612
(USD millions)
Assets
Non-current assets
Property, plant and equipment
Right-of-use assets
Other non-current assets
Total non-current assets
Total assets
Equity and liabilities
Equity
Reserves
Total equity
Liabilities
Operating lease commitments December 31, 2018
related to discontinued operations
Operating lease commitments December 31, 2018
related to continuing operations
Recognition exemption for short-term leases
Recognition exception for low-value leases
Lease arrangements with commencement date
after December 31, 2018
Undiscounted future lease payments continuing
operations as of January 1, 2019
Effect of discounting
Lease liabilities recognized as of January 1, 2019 2
– 222
Non-current liabilities
Financial debts
3 390
Lease liabilities
– 30
– 12
– 65
Provision and other non-current liabilities
Total non-current liabilities
Current liabilities
Financial debts and derivative financial instruments
3 283
– 1 547
1 736
Lease liabilities
Total current liabilities
Total liabilities
Total equity and liabilities
1 As reported in Annual Report 2018 Note 27
2 The weighted average incremental borrowing rate at January 1, 2019, the date of
implementation of IFRS 16 Leases, was 3.5%.
The right-of-use assets of continuing operations at Jan-
uary 1, 2019, by underlying class of asset comprise the
following:
(USD millions)
Land
Buildings
Vehicles
Machinery and equipment, and other assets
Right-of-use assets 1
January 1, 2019
536
848
147
23
1 554
1 Right-of-use assets were lower than the lease liability at the date of implementation of
IFRS 16 by USD 182 million, due to adjustments made for recognition of sublease
receivables, prepayments and accrued lease payments and transfers from leased
assets recorded in property, plant and equipment at December 31, 2018.
As a result of applying the modified retrospective method
at the date of implementation of IFRS 16 on January 1,
2019, whereby the right-of-use assets were measured
at the amount equal to the lease liabilities, there is no
impact to the reported deferred tax assets and deferred
tax liabilities on the consolidated balance sheet, as the
corresponding deferred tax assets and deferred tax lia-
bilities attributable to the lease liability and right-of-use
asset relate to income taxes levied by the same taxation
authority within the same legal entity, and were there-
fore offset.
The adoption of IFRS 16 on January 1, 2019 had no
significant impact on the individual lines of the consoli-
dated statement of cash flows, except for the principal
portion of the lease payments (USD 0.3 billion for the
year ended December 31, 2019) that is recognized as an
F-41
January 1, 2019
– 101
1 554
74
1 527
1 527
3
3
– 2
1 471
– 212
1 257
– 1
268
267
1 524
1 527
Notes to the Novartis Group consolidated financial statements
outflow in the cash flow from financing activities and the
interest portion of the lease payment (USD 0.1 billion for
the year ended December 31, 2019) is recognized as an
outflow in the cash flow from operating activities. Prior
to the adoption of IFRS 16, the full amount of the lease
payments was recognized as an outflow in the cash flow
from operating activities.
Current year disclosures
The following table summarizes the movements of the
right-of-use assets of continuing operations:
(USD millions)
Right-of-use assets at January 1, 2019
Additions
Depreciation charge
Lease contract terminations 1
Impact of divestments
Currency translation effects
Total right-of-use assets at December 31, 2019
1 554
537
– 305
– 98
– 17
6
1 677
At January 1, 2019 and December 31, 2019, there were
no material future cash outflows, including extension
options, excluded from the measurement of lease liabil-
ities. The Group’s most material lease with a lease term
extension, representing a lease liability value of USD 0.6
billion, has a determined lease term end date of 2071.
In 2019, the Group completed sale and leaseback
transactions for certain property, plant and equipment
as part of its plans to consolidate sites. Transactions
resulted in net cash inflows of USD 0.7 billion and the
recognition of USD 96 million of lease liabilities, and USD
37 million of right-of-use assets. The right-of-use assets
value reflects the proportion of the property, plant and
equipment retained for a period of one to five years, with
two five-year extension periods for certain right-of-use
assets. The liabilities reflect the net present value of
future lease payments. The net gain on the sale and
leaseback transactions amounted to USD 478 million.
The following table provides additional disclosures
related to right-of-use assets and lease liabilities of con-
tinuing operations:
No impairments were recorded in the period.
1 Lease contract terminations also includes modifications to existing leases that result
(USD millions)
in reductions to the right-of-use assets, and reductions due to sub-leasing.
The right-of-use assets carrying value and depreciation
charge of continuing operations at December 31, 2019,
are shown below by underlying class of asset:
Interest expense on lease liabilities 1
Expense on short-term leases
Expense on low-value leases
Total cash outflows for leases
Thereof:
Cash outflows for short-term leases
and low-value leases 2
Payments of interest 3
Payments of lease liabilities 4
December 31, 2019
carrying value
Depreciation
charge
2019
(USD millions)
Land
Buildings
Vehicles
Machinery and equipment, and other assets
Total right-of-use assets
537
990
129
21
1 677
14
194
87
10
305
1 The weighted average interest rate is 3.9%.
2 Cash flows from short-term and low-value leases are included within total net cash
flows from operating activities. The portfolio of short-term leases to which the Group
is committed to at December 31, 2019, is similar to the portfolio of short-term leases
the Group entered into during 2019.
3 Included within total net cash flows from operating activities.
4 Reported as cash outflows used in financing activities net of lease incentives received
of USD 33 million.
2019
66
7
8
339
15
51
273
The lease liabilities of continuing operations at Decem-
ber 31, 2019, by maturity are as follows:
The net investment held and the income from subleas-
ing right-of-use assets was not significant.
(USD millions)
Less than one year
Between one and two years
Between two and three years
Between three and four years
Between four and five years
After five years
Total lease liabilities
Less current portion of lease liabilities
Non-current portion of lease liabilities
Lease liabilities
Lease liabilities undiscounted
2019
2019
Note 30 provides additional disclosures on discontinued
operations.
246
202
163
138
119
1 081
1 949
– 246
1 703
295
246
202
173
150
2 419
3 485
– 295
3 190
F-42
Notes to the Novartis Group consolidated financial statements
11. Goodwill and intangible assets
The following table summarizes the movements of goodwill and intangible assets in 2019:
Goodwill
Intangible assets other than goodwill
(USD millions)
Cost
January 1, 2019
Cost of assets related to
discontinued operations 1
In-process
research and
Alcon
Total development brand name Technologies
Currently
marketed Marketing
know-how
products
Other
intangible
assets
Total
35 700
16 167
2 980
6 253
35 412
5 960
2 253
69 025
– 9 000
– 249
– 2 980
– 5 369
– 4 440
– 5 960
– 572 – 19 570
Cost of assets related to disposal group
held for sale, net 2
Impact of business combinations
186
Reclassifications 3
Additions 4
Disposals and derecognitions 5
Currency translation effects
– 61
– 1
342
– 9 069
265
– 75
49
4
3 550
9 069
243
– 544
254
December 31, 2019
26 825
7 429
884
43 548
3
22
3 914
259
767
– 436
– 1 055
32
335
1 558
53 419
Accumulated amortization
January 1, 2019
Accumulated amortization/impairments
on assets related to discontinued operations 1
Amortization charge 6
Accumulated impairments on disposals
and derecognitions 5
Impairment charge 6
Reversal of impairment charge
Currency translation effects
– 406
– 1 120
– 4 758 – 21 218
– 1 906
– 1 304 – 30 306
101
3
4 184
2 592
1 906
128
8 813
– 42
– 2 657
– 137
– 2 836
70
– 984
37
– 11
4
– 105
494
– 54
– 126
419
983
– 32
– 1 175
37
– 11
– 148
– 937 – 24 632
621
28 787
December 31, 2019
– 301
– 2 005
Net book value at December 31, 2019
26 524
5 424
– 721 – 20 969
163
22 579
1 Represents the cost of assets and accumulated amortization at January 1, 2019, related to the Alcon business reported as discontinued operations. Notes 1, 2 and 30 provide
information related to discontinued operations.
2 Note 2 provides additional disclosures related to assets of disposal group held for sale.
3 Reclassifications between various asset categories as a result of product launches of acquired in-process research and development, and completion of software development
4 No addition in the disposal group held for sale for the period from January 1, 2019 to December 31, 2019
5 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
6 No amortization or impairment charges related to the disposal group held for sale for the period from January 1, 2019, to December 31, 2019.
F-43
Notes to the Novartis Group consolidated financial statements
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 6
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 and 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 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). For amortization related to discontinued
operations, refer to Note 30.
6 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.
The following table summarizes the allocation of the net book values of goodwill and intangible assets by report-
ing segment at December 31, 2019:
Goodwill
Intangible assets other than goodwill
(USD millions)
Innovative Medicines
Sandoz
Corporate
In-process
research and
Total development Technologies
Currently
marketed
products
Other
intangible
assets
Total
18 750
5 339
7
21 720
520
27 586
7 767
85
156
859
7
25
76
1 125
76
Net book value at December 31, 2019
26 524
5 424
163
22 579
621
28 787
F-44
Notes to the Novartis Group consolidated financial statements
The following table summarizes the allocation of the net book values of goodwill and intangible assets by report-
ing segment at December 31, 2018:1
Goodwill
Intangible assets other than goodwill
(USD millions)
Innovative Medicines
Sandoz
Alcon 1
Corporate
In-process
research and
Alcon
Total development brand name Technologies
Currently
marketed Marketing
know-how
products
6
11 228
304
1 115
Other
intangible
assets
Total
431
26 042
37
1 875
2 980
1 185
1 851
4 054
363
10 679
118
123
18 551
14 377
7 837
8 899
7
419
246
5
Net book value at December 31, 2018
35 294
15 047
2 980
1 495
14 194
4 054
949
38 719
1 From February 28, 2019, the Alcon Division was reported as discontinued operations (see Notes 1, 2 and 30). In accordance with IFRS, the December 31, 2018, consolidated
balance sheet includes the assets and liabilities of the Alcon eye care devices business and certain Corporate assets and liabilities attributable to the Alcon business. Note 30
provides additional information on discontinued operations.
The Innovative Medicines and Sandoz 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.
disclosures on how the Group performs goodwill and
intangible asset impairment testing.
The following table shows the intangible asset and
goodwill impairment charges for continuing opera-
tions for 2019, 2018 and 2017:
The following assumptions are used in the calcula-
(USD millions)
tions:
(As a percentage)
Terminal growth rate
Discount rate (post-tax)
Innovative
Medicines
1.5
6.5
Sandoz
2.0
6.5
The discount rates for all divisions consider the Group’s
weighted average cost of capital, adjusted to approxi-
mate the weighted average cost of capital of a compa-
rable market participant.
The fair value less costs of disposal, for all groupings
of cash-generating units containing goodwill, is reviewed
for the impact of reasonably possible changes in key
assumptions. In particular, we considered an increase in
the discount rate, a decrease in the terminal growth rate,
and certain negative impacts on the forecasted cash
flows. These reasonably possible changes in key assump-
tions did not indicate an impairment.
Innovative Medicines 1
Sandoz 2
Total
2019
– 669
– 506
– 1 175
2018
– 592
– 249
– 841
2017
– 591
– 61
– 652
1 2019 includes an impairment of USD 416 million related to the write-down of IPR&D
acquired through the 2015 Spinifex Pharmaceuticals Inc. acquisition and USD 108
million write-down related to cessation of clinical development program MOR106 for
atopic dermatitis.
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 2019 includes impairment of USD 442 million related to the write-down of IPR&D
related to the discontinuation of the generic Advair® development program.
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.
In 2019, the reversal of prior year impairment charges
amounted to USD 37 million (2018: nil, 2017: nil).
“Note 1. Significant accounting policies—Impairment
of goodwill and intangible assets” provides additional
Note 30 provides additional disclosures on discontinued
operations.
F-45
Notes to the Novartis Group consolidated financial statements
12. Deferred tax assets and liabilities
(USD millions)
Property,
plant and
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, 2019
191
1 233
1 188
3 722
273
2 175
8 782
Gross deferred tax liabilities at January 1, 2019
– 622
– 5 384
– 273
– 474
– 805
– 7 558
Net deferred tax balance at January 1, 2019
– 431
– 4 151
915
3 248
273
1 370
1 224
At January 1, 2019
– 431
– 4 151
915
3 248
1 370
1 224
Net deferred tax balance related to discontinued operations 1
Credited/(charged) to income
Charged to equity
Charged to other comprehensive income
Impact of business combinations
Other movements 2
82
74
1 403
– 123
– 248
– 217
605
308
– 818
– 113
298
273
– 39
8
– 313
75
– 166
24
– 289
3
– 10
– 45
39
– 23
21
31
– 26
– 12
– 47
25
858
354
– 83
Net deferred tax balance at December 31, 2019
– 282
– 2 141
787
2 159
248
1 271
2 042
Gross deferred tax assets at December 31, 2019
108
1 469
1 078
2 446
255
2 596
7 952
Gross deferred tax liabilities at December 31, 2019
– 390
– 3 610
– 291
– 287
– 7
– 1 325
– 5 910
Net deferred tax balance at December 31, 2019
– 282
– 2 141
787
2 159
248
1 271
2 042
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, 2019
Deferred tax liabilities at December 31, 2019
Net deferred tax balance at December 31, 2019
43
7 909
– 5 867
2 042
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
191
1 233
1 188
3 722
273
2 175
8 782
Gross deferred tax liabilities at December 31, 2018
– 622
– 5 384
– 273
– 474
– 805
– 7 558
Net deferred tax balance at December 31, 2018
– 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
1 Notes 1, 2 and 30 provide information related to discontinued operations.
2 Includes USD 3 million net deferred tax movement related to disposal group held for sale
83
8 699
– 7 475
1 224
F-46
Notes to the Novartis Group consolidated financial statements
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)
2019
2018
Expected to have an impact on current tax
payable after more than 12 months
– Deferred tax assets
– Deferred tax liabilities
4.3
5.2
3.9
6.7
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)
2019
2018
Unremitted earnings that have been retained
by consolidated entities for reinvestment
61
73
Temporary differences on which no deferred tax has
been provided as they are permanent in nature related
to:
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.
The Basel-Stadt cantonal tax reform was approved by
voters in February 2019, with parts of the reform retro-
actively enacted per January 1, 2019. The newly enacted
tax rate resulted in a decrease of the blended cantonal
and federal tax rate from 22% to 13%. This change
impacts the Group’s Basel-Stadt-domiciled operating
subsidiaries.
The Swiss federal tax reform was approved by vot-
ers in May 2019. The enactment of the Swiss federal tax
reform requires the abolishment of the holding company
tax regimes as of January 1, 2020. As a result, the hold-
ing company tax rate will increase from the current 8%
to 13%, effective January 1, 2020.
The enactment of these Swiss tax reforms required
a revaluation of the deferred tax assets and liabilities 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 in 2019, as at the
respective dates of the enactment of the Swiss tax
reforms:
(USD billions)
Investments in subsidiaries
Goodwill from acquisitions
2019
3
– 24
2018
3
– 33
(USD millions)
Deferred tax asset
and liability revaluation
Income
statement
continuing
operations
Equity
Total
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
2019 total
14
28
28
16
127
435
648
0
0
6
46
37
2 249
2 338
14
28
34
62
164
2 684
2 986
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
(USD millions)
2019
2018
2017
Tax losses carried forward
that expired
9
8
1
Items previously recognized
in consolidated income statement 234
234
Items previously recognized
in other comprehensive income 1
Total revaluation of deferred
tax assets and liabilities
1 Related to post-employment benefits
– 358
– 358
234
– 358
– 124
On December 22, 2017, the US enacted tax reform leg-
islation (the 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
portion of current tax payables to the newly enacted tax
rates at the date of enactment.
The enacted US tax reform legislation includes a pro-
vision 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-47
Notes to the Novartis Group consolidated financial statements
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 1
Items previously recognized
in other comprehensive income 2
Items previously recognized
in retained earnings 3
Total revaluation of deferred
tax assets and liabilities
Total revaluation of current
tax payables 4
Total revaluation of deferred
tax assets and liabilities, and
current income tax liabilities
Income
statement
continuing
operations
Equity
Total
– 440
– 440
– 254 – 254
– 71
– 71
– 440 – 325 – 765
– 34
– 34
– 474 – 325 – 799
1 Items previously recognized in discontinued operations amounted to USD 416 million
2 Related to post-employment benefits and available-for-sale financial investments
(attributable to continuing operations USD -241 million and attributable to
discontinued operations USD -13 million)
3 Related to equity-based compensation plans (attributable to continuing operations
USD -66 million and attributable to discontinued operations USD -5 million)
4 Revaluation of current tax payable attributable to discontinued operations amounted
to USD -3 million.
13. Financial and other non-current assets
Financial assets
Other non-current assets
(USD millions)
Equity securities
Debt securities
Fund investments
2019
2018
(USD millions)
2019
2018
1 524
1 155
Deferred compensation plans
33
233
31
251
Prepaid post-employment benefit plans
Other non-current assets
414
148
176
738
468
137
290
895
Total financial investments
1 790
1 437
Total other non-current assets
Long-term receivables from customers
Minimum lease payments
from finance lease agreements 1
Long-term receivables from finance subleases
Other long-term receivables
Contingent consideration receivables 2
66
104
399
Long-term loans, advances and security deposits 159
164
91
3
396
254
Total financial assets
2 518
2 345
1 Note 30 provides additional disclosures on minimal lease payments from finance
lease agreements that relate to discontinued operations.
2 Note 29 provides additional disclosures related to contingent considerations.
F-48
Notes to the Novartis Group consolidated financial statements
14. Inventories
(USD millions)
Raw material, consumables
Work in progress
Finished products
Total inventories
2019
751
3 024
2 207
5 982
2018
931
3 087
2 938
6 956
The following table shows the amount of inventory rec-
ognized as an expense in “Cost of goods sold” in the
consolidated income statements from continuing oper-
ations:
(USD billions)
Cost of goods sold
2019
– 8.5
2018
– 8.3
2017
– 8.2
The following table shows the recognized amount of
inventory provision and reversals of inventory provision
recorded in the consolidated income statements from
continuing operations:
(USD millions)
Inventory provisions
2019
– 752
Reversals of inventory provisions
218
2018
– 603
216
2017
– 416
172
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.
15. Trade receivables
(USD millions)
Total gross trade receivables
Provisions for doubtful trade receivables
Total trade receivables, net
2019
8 396
– 95
8 301
2018
8 853
– 126
8 727
The following table summarizes the movement in the provision for doubtful trade receivables:
(USD millions)
January 1
Provisions related to discontinued operations 1
Impact of divestments
Impact of business combination
Provisions for doubtful trade receivables charged to the consolidated income statement 2
Utilization of provisions for doubtful trade receivables
Reversal of provisions for doubtful trade receivables credited to the consolidated income statement 3
Currency translation effects
December 31
2019
– 126
54
– 89
12
53
1
2018
– 190
– 1
– 47
39
61
12
2017
– 162
12
– 119
12
76
– 9
– 95
– 126
– 190
1 Notes 1, 2 and 30 provide information related to discontinued operations.
2 Provisions charged to the consolidated income statement from continuing operations were USD 30 million in 2018 and USD 94 million in 2017.
3 Reversal of provisions credited to the consolidated income statement from continuing operations were USD 44 million in 2018 and USD 60 million in 2017.
The following sets forth the trade receivables that are
not overdue as specified in the payment terms and con-
ditions established with Novartis customers, as well as
an analysis of overdue amounts and related provisions
for doubtful trade receivables:
(USD millions)
Not overdue
Past due for not more than one month
Past due for more than one month
but less than three months
Past due for more than three months
but less than six months
Past due for more than six months
but less than one year
Past due for more than one year
Provisions for doubtful trade receivables
2019
7 763
161
123
103
96
150
– 95
Total trade receivables, net
8 301
2018
7 916
296
194
136
98
213
– 126
8 727
F-49
Notes to the Novartis Group consolidated financial statements
Trade receivable balances include sales to drug whole-
salers, retailers, private health systems, government
agencies, managed care providers, pharmacy benefit
managers and government-supported healthcare sys-
tems. Novartis continues to monitor sovereign debt
issues and economic conditions in the countries it oper-
ates, particularly in Argentina, Brazil, Greece, Italy, Por-
tugal, Russia, Saudi Arabia, Spain and Turkey, and eval-
uates trade receivables in these countries for potential
collection risks. The majority of the outstanding trade
receivables from Portugal, Saudi Arabia and Spain are
due directly from local governments or from govern-
ment-funded entities. Deteriorating credit and economic
conditions as well as other factors in these closely mon-
itored 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, 2019 and 2018; 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
2019
2018
1 588
1 729
61
24
97
44
At December 31, 2019, 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)
Russian ruble (RUB)
Chinese yuan (CNY)
British pound (GBP)
Brazilian real (BRL)
Canadian dollar (CAD)
Australian dollar (AUD)
Swiss franc (CHF)
Other currencies
Total trade receivables, net
2019
3 466
1 384
2018
3 510
1 551
466
341
279
202
165
129
125
89
658
247
282
183
206
136
161
100
1 655
8 301
1 693
8 727
16. Marketable securities, commodities, time deposits,
derivative financial instruments, and cash and cash
equivalents
Marketable securities, commodities, time deposits and derivative financial instruments
(USD millions)
Debt securities
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
2019
24
37
61
110
61
102
2018
325
35
360
104
2 087
130
12
Total marketable securities, commodities, time deposits and derivative financial instruments
334
2 693
The following table provides a breakdown of debt securities by currency:
(USD millions)
US dollar (USD)
Euro (EUR)
Japanese yen (JPY)
Total debt securities
2019
13
11
24
2018
302
12
11
325
F-50
Notes to the Novartis Group consolidated financial statements
Cash and cash equivalents
(USD millions)
Current accounts
Time deposits and short-term investments with original maturity less than 90 days
Total cash and cash equivalents
17. Other current assets
(USD millions)
VAT receivable
Withholding tax recoverable
Prepaid expenses
– Third parties
– Associated companies
Receivables from associated companies
Other receivables and current assets
Total other current assets
2019
3 247
2018
3 121
7 865
10 150
11 112
13 271
2019
508
108
2018
588
99
898
811
1
1 165
2 680
1
2
1 360
2 861
18. Equity
The following table shows the movement in the share capital:
(USD millions)
Share capital
Treasury shares
Outstanding share capital
Jan 1, 2017
Movement
in year
Dec 31, 2017
Movement
in year
Dec 31, 2018
Movement
in year
Dec 31, 2019
972
– 76
896
– 3
– 24
– 27
969
– 100
869
– 25
31
6
944
– 69
875
– 8
– 11
– 19
936
– 80
856
F-51
Notes to the Novartis Group consolidated financial statements
The following table shows the movement in the shares:
2019
2018
2017
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
2 550.6
– 239.4 2 311.2 2 616.8
– 299.3 2 317.5 2 627.1
– 253.0 2 374.1
Shares canceled for capital
reduction 2
Shares acquired to be
canceled 3
Other share purchases 4
Exercise of options
and employee transactions 5 18.8
Equity-based compensation 5
Shares delivered to Alcon
employees
Other share sales
Total movements
– 23.3
23.3
– 66.2
66.2
– 10.3
10.3
– 60.3
– 60.3
– 1.7
– 1.7
– 23.3
– 23.3
– 1.2
– 1.2
5.5
9.4
5.5
9.4
0.9
0.9
7.8
7.4
7.8
7.4
3.0
3.0
– 66.2
– 66.2
– 3.8
– 3.8
4.6
8.8
4.6
8.8
– 23.3
– 22.9
– 46.2
– 66.2
59.9
– 6.3
– 10.3
– 46.3
– 56.6
Balance at end of year
2 527.3
– 262.3 2 265.0 2 550.6
– 239.4 2 311.2 2 616.8
– 299.3 2 317.5
1 Approximately 117.6 million treasury shares (2018: 121.6 million; 2017: 131.3 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 a CHF 10 billion share buyback authority approved at the 2016 Annual General Meeting (AGM) for
transactions before February 28, 2019, and under a new CHF 10 billion share buyback authority approved at the 2019 AGM for transactions after such date
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
18.1) 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)
2019
2.85
2018
2.80
2017
2.75
6.6
7.0
6.5
18.2) The following table summarizes the treasury shares movements:
2019
2018
2017
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
– 60.3
– 5 351
– 23.3
– 1 859
– 66.2
– 5 270
Other share purchases 2
Purchase of treasury shares
– 1.7
– 160
– 1.2
– 114
– 3.8
– 304
– 62.0
– 5 511
– 24.5
– 1 973
– 70.0
– 5 574
Exercise of options and employee transactions 3
18.8
Equity-based compensation 4,5
Shares delivered to Alcon employees
Other share sales
Total
5.5
9.4
0.9
210
833
18
– 46.2
– 4 450
7.8
7.4
3.0
– 6.3
4.6
8.8
255
612
434
756
263
– 520
– 56.6
– 4 707
1 Shares repurchased on the SIX Swiss Exchange second trading line under a CHF 10 billion share buyback authority approved at the 2016 AGM for transactions before February
28, 2019, and under a new CHF 10 billion share buyback authority approved at the 2019 AGM for transactions after such date
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 12 for additional disclosures.
18.3) In 2019, 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 was able
to cancel this arrangement at any time but could be sub-
ject to a 90-day waiting period. The commitment under
F-52
Notes to the Novartis Group consolidated financial statements
this arrangement therefore reflects the obligated pur-
chases by the bank under such trading plan over a roll-
ing 90-day period, or if shorter, until the maturity date of
such trading plan.
As of December 31, 2019, this trading plan commit-
ment was fully executed and expired, and as a conse-
quence, there is no contingent liability related to this plan
recognized.
In 2018 and 2017, Novartis entered into a similar irre-
vocable, non-discretionary arrangements with a bank to
repurchase Novartis shares. The commitments under
these arrangements reflected the expected purchases
by the bank under such trading plans over a rolling
90-day period.
The commitment under this arrangement amounted
to USD 284 million as of December 31, 2018.
As of December 31, 2017, this trading plan commit-
ment was fully executed and expired, and as a conse-
quence, there was no contingent liability related to this
plan recognized.
18.4) Transaction costs of USD 253 million (2018: USD
79 million; 2017: USD nil) net of tax of USD 36 million
(2018: USD 20 million; 2017: USD nil), that are directly
attributable to the distribution (spin-off) of Alcon Inc. to
Novartis shareholders and that would otherwise have
been avoided, are recorded as a deduction from equity.
See Note 1.
18.5) 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.
18.6) 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.
18.7) 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 2019, the amount recorded in equity related to
hyperinflation accounting was USD 22 million (2018: USD
38 million; 2017: USD nil). See Note 29 for additional dis-
closures.
18.8) At December 31, 2019, the market maker held 13
million (2018: 11 million; 2017: 12 million) written call
options, originally issued as part of the share-based
compensation for associates, that have not yet been
exercised. The weighted average exercise price of these
options is USD 63.90 (2018: USD 62.70; 2017: USD 62.17),
and they have contractual lives of 10 years, with remain-
ing lives up to four years (2018: five years; 2017: six years).
In December 2018, Novartis entered into an agree-
ment 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. During 2019, this agreement was fully executed.
19. Non-current financial debt
(USD millions)
Straight bonds
Liabilities to banks and other financial institutions 1
Finance lease obligations
Total, including current portion of non-current financial debt
Less current portion of non-current financial debt
Total non-current financial debt
1 Average interest rate 0.2% (2018: 0.3%)
2019
2018
22 167
25 283
188
285
92
22 355
25 660
– 2 002
– 3 190
20 353
22 470
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 82% at December 31, 2019, and 80%
at December 31, 2018.
The average interest rate on total financial debt in
2019 was 2.4% (2018: 2.7%).
Note 29 contains a maturity table of the Group’s
future contractual interest payments commitments.
F-53
Notes to the Novartis Group consolidated financial statements
The following table provides a breakdown of straight bonds:
Nominal
Currency amount
Issuance
year
Maturity
year
Issuer
2018
(USD
Issue price millions) millions)
2019
(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
2020 Novartis Capital Corporation, New York, United States
99.237% 1 000
998
2022 Novartis Capital Corporation, New York, United States
99.225% 1 495 1 493
2042 Novartis Capital Corporation, New York, United States
98.325%
489
489
2024 Novartis Capital Corporation, New York, United States
99.287% 2 139 2 137
2044 Novartis Capital Corporation, New York, United States
99.196% 1 825 1 825
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%
670
670
517
568
336
683
684
508
558
330
2025 Novartis Capital Corporation, New York, United States
99.010% 1 735 1 732
2045 Novartis Capital Corporation, New York, United States
98.029% 1 219 1 219
2023 Novartis Finance S.A., Luxembourg, Luxembourg
99.127% 1 392 1 419
2028 Novartis Finance S.A., Luxembourg, Luxembourg
98.480%
553
2020 Novartis Capital Corporation, New York, United States
99.609% 1 000
2022 Novartis Capital Corporation, New York, United States
99.449%
2027 Novartis Capital Corporation, New York, United States
99.109%
996
990
563
998
995
989
2021 Novartis Finance S.A., Luxembourg, Luxembourg
99.133% 1 396 1 421
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
99.874%
99.655%
99.957%
99.217%
670
837
838
832
684
853
856
849
22 167 25 283
The following tables provide a breakdown of total non-current financial debt, including current portion by maturity
and currency:
Breakdown by maturity:
(USD millions)
2019
2020
2021
2022
2023
2024
After 2024
Total
Breakdown by currency:
(USD millions)
US dollar (USD)
Euro (EUR)
Japanese yen (JPY)
Swiss franc (CHF)
Total
2019
2 002
2 067
2 583
2 321
2 139
2018
3 190
2 006
2 111
2 585
2 278
2 137
11 243
11 353
22 355
25 660
The following table shows the comparison of balance
sheet and fair value of total non-current financial debt,
including current portion:
(USD millions)
2019
Balance
sheet
2019
Fair
values
2018
Balance
sheet
2018
Fair
values
Straight bonds
22 167
23 701
25 283
25 438
Others
Total
188
188
377
377
22 355
23 889
25 660
25 815
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.
2019
2018
The following table shows the pledged assets:
12 889
15 964
7 861
8 028
(USD millions)
184
272
1 421
1 396
22 355
25 660
Total net book value of property,
plant and equipment pledged as
collateral for non-current financial debts
2019
2018
3
96
F-54
Notes to the Novartis Group consolidated financial statements
20. 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
2019
2018
3 469
3 546
546
612
592
200
958
255
600
954
634
214
874
497
Total provisions and other non-current liabilities
6 632
7 319
1 Note 25 provides additional disclosures related to post-employment benefits.
2 Note 29 provides additional disclosures related to contingent consideration.
Novartis believes that its total provisions are adequate
based upon currently available information. However,
given the inherent difficulties in estimating liabilities in
this area, Novartis may incur additional costs beyond the
amounts provided. Management believes that such addi-
tional amounts, if any, would not be material to the
Group’s financial condition but could be material to the
results of operations or cash flows in a given period.
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, 2019, is currently projected as follows:
Environmental remediation
provisions
The following table shows the movements in the envi-
ronmental liability provisions:
(USD millions)
January 1
Cash payments
Releases 1
Additions 2
Currency translation effects
December 31
2019
692
– 30
– 83
124
11
714
Less current provision
– 122
2018
761
– 48
– 21
7
– 7
692
– 58
2017
773
– 46
– 153
154
33
761
– 55
Non-current environmental
remediation provisions
at December 31
592
634
706
1 Releases of provisions credited to the consolidated income statement from
continuing operations were USD 21 million in 2018 and USD 153 million in 2017.
2 Provisions charged to the consolidated income statement from continuing operations
were USD 7 million in 2018 and USD 154 million in 2017.
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 reassessed 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
(USD millions)
Due within two years
Due later than two years, but within five years
Due later than five years, but within 10 years
Due after 10 years
Total environmental remediation liability provisions
Expected
cash outflows
141
210
258
105
714
Provisions for product liabilities,
governmental investigations and
other legal matters
Novartis has established provisions for certain product
liabilities, governmental investigations and other legal
matters where a potential cash outflow is probable and
Novartis can make a reliable estimate of the amount of
the outflow. These provisions represent the Group’s cur-
rent best estimate of the total financial effect for the mat-
ters described below and for other less significant mat-
ters. Potential cash outflows reflected in a provision
might be fully or partially offset 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 3 000 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 the current best belief of Novartis, approx-
imately USD 0.9 billion. In addition, in some of these mat-
ters there are claims for punitive or multiple (treble) dam-
F-55
Notes to the Novartis Group consolidated financial statements
ages, civil penalties and disgorgement of profits that in
the view of Novartis are either wholly or partially unspec-
ified, or wholly or partially unquantifiable at present; the
Group believes that information about these amounts
claimed by plaintiffs generally is not meaningful for pur-
poses of determining a reliable estimate of a loss that is
probable or more than remote.
A number of other legal matters are in such early
stages or the issues presented are such that the Group
has not made any provisions since it cannot currently
estimate either a potential outcome or the amount of any
potential losses. For these reasons, among others, the
Group generally is unable to make a reliable estimate of
possible loss with respect to such cases. It is therefore
not practicable to provide information about the poten-
tial financial impact of those cases.
There might also be cases for which the Group was
able to make a reliable estimate of the possible loss or
the range of possible loss, but the Group believes that
publication of such information on a case-by-case basis
would seriously prejudice the Group’s position in ongo-
ing legal proceedings or in any related settlement dis-
cussions. Accordingly, in such cases, information has
been disclosed with respect to the nature of the contin-
gency, but no disclosure is provided as to an estimate of
the possible loss or range of possible loss.
Note 28 contains additional information on contin-
gencies.
Alcon spin-off
On April 9, 2019, the Alcon spin-off was completed (see
Note 2). Under the Separation and Distribution Agree-
ment that Novartis entered into with Alcon in connection
with the separation and the spin-off, Novartis and Alcon
each agreed, subject to certain conditions and exclu-
sions, and except to the extent otherwise described
below with respect to any matter, to indemnify the other
party and its directors, officers, employees and agents
against any pending or future liabilities that constitute
either a Novartis liability, in the case of Novartis, or an
Alcon liability, in the case of Alcon, with the nature of any
relevant liability being determined based on whether
such claim or liability relates to the Novartis or the Alcon
business and products.
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 2019.
Investigations and related litigations
Southern District of New York (S.D.N.Y.) marketing
practices investigation and litigation
In 2013, the US government filed a civil complaint in inter-
vention to an individual qui tam action against Novartis
Pharmaceuticals Corporation (NPC) in the United States
District Court (USDC) for the S.D.N.Y. The complaint, as
subsequently amended, asserts federal False Claims Act
(FCA) and common law claims with respect to speaker
programs and other promotional activities for certain
NPC cardiovascular medications (Lotrel, Starlix and
Valturna) allegedly serving as mechanisms to provide
kickbacks to healthcare professionals (HCPs). Also in
2013, New York State filed a civil complaint in interven-
tion asserting similar claims. Neither government com-
plaint in intervention adopted the individual relator’s
claims with respect to off-label promotion of Valturna,
which were subsequently dismissed with prejudice by
the court. The individual relator continues to litigate the
kickback claims on behalf of other states and municipal-
ities. Novartis is engaged in settlement discussions to
resolve the above-described claims, and recorded a pro-
vision in the amount of USD 0.7 billion in 2019 in the
Innovative Medicines Division.
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, the 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. has received grand jury subpoe-
nas and a civil investigative demand and interrogatories
from the Antitrust and Civil Divisions of the US Depart-
ment of Justice (DoJ), and a subpoena and interrogato-
ries from the Attorney General of the State of Connecti-
cut in connection 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 pharma-
ceutical products sold by Sandoz Inc. and its subsidiary,
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 numerous individual and putative class
action complaints by direct and indirect purchasers and
Attorneys General for 54 states and territories. Plaintiffs
claim that defendants, including Sandoz, engaged in
price fixing and market allocation of generic drugs in the
US market, and seek damages and injunctive relief. The
actions contain product-specific complaints as well as
complaints alleging the existence of an overarching
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
received document requests and subpoenas from the
DoJ and the US Securities and Exchange Commission
(SEC) requesting information concerning Alcon account-
ing, internal controls and business practices in Asia and
F-56
Notes to the Novartis Group consolidated financial statements
Russia, including revenue recognition for surgical equip-
ment and related products and services, as well as rela-
tionships with third-party distributors, both before and
after Alcon became part of the Novartis Group. Alcon
and Novartis are cooperating with this investigation. Pur-
suant to the terms of the Separation and Distribution
Agreement, and subject to the conditions and exclusions
therein, Novartis will indemnify Alcon in respect of cer-
tain fines or other monetary penalties that arise out of
the investigations by the DoJ and the SEC at the time of
the separation.
Lucentis/Avastin® matters
In connection with an investigation into whether Novartis
entities, 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 (ICA) imposed a fine equivalent
to USD 125 million on the Novartis entities. Novartis paid
the fine, subject to the right to later claim recoupment,
and appealed before the Consiglio di Stato (CdS). In 2014
and 2015, the Italian Ministry of Health and the Lombar-
dia region sent letters with payment requests for a total
equivalent of approximately USD 1.3 billion in damages
from Novartis and Roche entities based on the above
allegations. In 2019, the CdS upheld the ICA decision
and fine. Following the CdS decision, several additional
Italian regions and hospitals sent letters claiming dam-
ages for an aggregate amount of approximately USD
330 million. None of these claims has been asserted in
legal proceedings. Novartis has filed a further appeal of
the CdS decision. In 2019, the French Competition
Authority (FCA) issued a Statement of Objections against
Novartis entities alleging anti-competitive practices on
the French market for anti-vascular endothelial growth
factor treatments for wet age-related macular degener-
ation from 2008 to 2013, and is expected to issue its final
decision in the course of 2020. Novartis continues to
vigorously contest all claims in Italy and France. Also,
Novartis is challenging policies and regulations allowing
off-label/unlicensed use and reimbursement for eco-
nomic reasons in various countries, including Italy, the
UK, Turkey and Brazil.
Japan investigation
In 2015, a trial started against a former Novartis Pharma
K.K. (NPKK) employee, and also against 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 publica-
tions 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
former NPKK employee and NPKK. A further appeal by
the Tokyo District Public Prosecutor Office remains
pending.
South Korea investigation
In 2016, the Seoul Western District Prosecutor initiated
a criminal investigation into, among other things, allega-
tions that Novartis Korea utilized medical journals to pro-
vide inappropriate economic benefits to HCPs, which
resulted in a non-material fine in January 2020. Novartis
has received requests for information from the DoJ and
the SEC regarding this matter, and is cooperating with
their ongoing inquiry.
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 Prose-
cution of Financial Crime, from which it received a sum-
mons in 2018. Novartis is also responding to subpoenas
and document requests from the SEC and DoJ that it
received beginning in 2016 in connection with such alle-
gations, and is cooperating with their investigation.
Antitrust class actions
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. The same allegations
were made by Amphastar in a lawsuit filed in federal court
in California and subsequently moved to federal court in
Massachusetts. In 2019, Sandoz resolved both matters,
with Sandoz agreeing to pay USD 85 million to resolve
the Tennessee class action and paying Amphastar
approximately USD 39 million to resolve the Massachu-
setts case. The class action settlement is contingent
upon, among other conditions, court approval and the
class participants not exceeding an opt-out threshold.
Sandoz, Momenta and Amphastar were also engaged in
patent litigation concerning enoxaparin that concluded
in June 2019.
Exforge
Since 2018, Novartis Group companies as well as other
pharmaceutical companies have been sued by various
direct and indirect purchasers of Exforge in multiple US
individual 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 anti-
trust, consumer protection and common laws, and seek-
ing damages as well as injunctive relief. The cases have
been consolidated in the S.D.N.Y. and the claims are
being vigorously 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.
F-57
Notes to the Novartis Group consolidated financial statements
Taxotere® (docetaxel)
Sandoz is a defendant in more than 2 900 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.
Sartans and Ranitidine
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 and/or losartan marketed or
manufactured by Sandoz, including several putative
class actions in Canada and a Multidistrict Litigation in
New Jersey. Claims have also been brought alleging
injury from carcinogenic impurities in ranitidine-contain-
ing medicines, including several putative class actions in
Canada. All of these claims are being vigorously con-
tested.
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 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 a
putative class action brought by private payors in New
Jersey, and vigorously contests those claims. NPC
resolved an action brought by the state of Illinois for
approximately USD 21 million.
Aimovig–Amgen Dispute
In 2015 and 2017, Novartis and Amgen entered into
agreements regarding the development and commer-
cialization of Aimovig, which the companies co-commer-
cialize in the US and to which Novartis has exclusive
rights in all territories outside of the US, excluding Japan.
Amgen issued a termination notice in April 2019, based
on an alleged material breach of the collaboration agree-
ments, and this notice, as well as other ancillary matters,
are the subject of legal proceedings between Novartis
and Amgen. Novartis disputes Amgen’s allegations vig-
orously. The collaboration continues during the litigation
between the companies, and will remain in force until
and unless a final court decision terminates the agree-
ments.
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
copayment assistance to Medicare patients who are pre-
scribed 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 healthcare laws, including the
Anti-Kickback Statute and FCA. In 2019, NPC agreed in
principle to pay an additional USD 28 million to resolve
related allegations. These settlements are subject to
mutually agreeable terms and finalization of the docu-
mentation. Novartis considers this matter concluded for
the purpose of reporting legal proceedings.
MIVS platform patent infringement litigation
In 2015, Johns Hopkins University (JHU) filed a patent
infringement lawsuit against certain Alcon entities alleg-
ing that the use of certain Alcon surgical products, prin-
cipally by third parties, infringes a patent directed to cer-
tain methods of ocular surgery. In 2019, JHU and Alcon
entered into a confidential resolution of the litigation.
Novartis considers this matter concluded.
Summary of product liability, governmental
investigations and other legal matters provision
movements
(USD millions)
January 1
Provisions related to
discontinued operations 1
Impact of business combinations
Cash payments
Releases of provisions 2
Additions to provisions 3
Currency translation effects
December 31
2019
340
– 42
10
– 116
– 52
1 230
– 1
1 369
2018
351
2017
395
– 118
– 107
220
– 6
340
– 69
– 70
93
2
351
– 121
Less current portion
– 1 169
– 126
Non-current product
liabilities, governmental
investigations and other
legal matters provisions
at December 31
200
214
230
1 Notes 1, 2 and 30 provide information related to discontinued operations.
2 Releases of provisions credited to the consolidated income statement from
continuing operations were USD 107 million in 2018 and USD 63 million in 2017.
3 Provisions charged to the consolidated income statement from continuing operations
were USD 220 million in 2018 and USD 47 million in 2017.
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-58
Notes to the Novartis Group consolidated financial statements
21. 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
2019
2018
1 836
1 778
719
2 289
2 002
185
701
3 951
3 190
58
Total current financial debt and derivative
financial instruments
7 031
9 678
1 Weighted average interest rate 0.5% (2018: 0.5%)
2 Weighted average interest rate 12.9% (2018: 9.6%)
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 and short term bor-
rowings are provided under “Liquidity risk” in Note 29.
22. Provisions and other current liabilities
(USD millions)
Taxes other than income taxes
Restructuring provisions
Accrued expenses for goods and services received but not invoiced
Accruals for royalties
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 20 provides additional disclosures related to legal provisions.
2 Note 29 provides additional disclosures related to contingent considerations.
3 Note 18 provides additional disclosures related to commitment for repurchase of own shares.
2019
471
438
1 046
653
98
5 595
2 464
122
114
1 169
326
78
764
2018
528
507
970
651
156
5 262
2 527
58
236
126
273
33
284
673
13 338
12 284
Provisions are based upon management’s best estimate and adjusted for actual experience. Such adjustments to
the historic estimates have not been material.
F-59
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:
Revenue
deductions
provisions
related to
Revenue
deductions
Effect of
currency
translation
provisions at discontinued and business
operations1 combinations
January 1
Income statement charge2
Payments/ Adjustments
utilizations of prior years Current year
Change in
provisions
offset against
Revenue
deductions
gross trade provisions at
receivables December 31
1 883
0
– 5 183
– 193
5 474
1 981
1 625
– 28
– 19
– 2 467
– 2
2 659
1
1 769
1 754
5 262
– 166
– 194
9
– 11 698
– 25
11 868
– 10
– 19 348
– 220
20 001
103
104
1 845
5 595
1 590
1 356
1 726
4 672
1 461
1 020
1 702
4 183
– 4 158
– 90
4 541
1 883
– 78
– 2 182
83
2 555
– 109
1 625
– 51
– 12 227
– 129
– 18 567
– 91
– 98
11 956
19 052
441
332
1 754
5 262
– 3 684
– 62
3 875
1 590
131
– 1 954
80
2 186
– 107
1 356
65
– 11 814
– 127
12 045
196
– 17 452
– 109
18 106
– 145
– 252
1 726
4 672
(USD millions)
2019
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 2019
2018
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 2018
2017
US-specific healthcare plans
and program rebates
Non-US-specific healthcare plans
and program rebates
Non-healthcare plans
and program-related rebates,
returns and other deductions
Total 2017
1 Notes 1, 2 and 30 provide information related to discontinued operations.
2 Charges to the consolidated income statement from continuing operations were USD 18 248 million in 2018 and USD 17 772 million in 2017.
Restructuring provisions movements
(USD millions)
January 1
Provisions related to
discontinued operations 1
Additions 2
Cash payments
Releases 3
Transfers
Currency translation effects
December 31
2019
507
– 8
492
– 479
– 72
– 2
438
2018
153
2017
222
534
– 145
– 33
– 2
507
194
– 200
– 64
– 7
8
153
1 Notes 1, 2 and 30 provide information related to discontinued operations.
2 Provisions charged to the consolidated income statement from continuing operations
were USD 521 million in 2018 and USD 186 million in 2017.
3 Reversal of provisions credited to the consolidated income statement from continuing
operations were USD 31 million in 2018 and USD 59 million in 2017.
In 2019, additions to provisions of USD 492 million were
mainly related to the following reorganizations:
• The Innovative Medicines Division restructured its field
force and supporting functions in Latin America, and
following the Xiidra acquisition, its Ophthalmology field
force in the US.
• The Sandoz Division initiatives to realign its organiza-
tional structures to improve competiveness. These ini-
tiatives include reduction in its headquarters, global
functions and countries workforce, and the closure of
its development center in Holzkirchen, Germany.
• Group-wide initiatives to streamline Novartis Technical
Operations and implement new technologies, mainly
in the Innovative Medicines Division and in the Sandoz
Division, continued. In addition, Novartis Business Ser-
vices launched the next phase of the new operating
model to change outsourcing structures and transition
activities to service centers.
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,
F-60
Notes to the Novartis Group consolidated financial statements
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 was to speed up patient access.
• Group-wide initiatives to streamline Novartis Technical
Operations and implement new technologies, mainly
in the Innovative Medicines Division and in the Sandoz
Division, continued. In addition, Novartis Business Ser-
vices launched an initiative to reorganize its organiza-
tional structure to achieve cost efficiencies by shifting
activities to global service centers.
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 former 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.
23. Details to the consolidated statements of cash flows
23.1) Reversal of non-cash items and other adjustments from continuing operations
(USD millions)
Depreciation, amortization and impairments on:
Property, plant and equipment
Right-of-use assets 1
Intangible assets
Financial assets 2
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 3
Taxes
Net financial expense
Total
2019
2018
2017
1 547
1 783
1 460
305
3 974
3 428
3 276
– 38
1 871
6
895
227
86
– 1 234
– 902
– 1 077
758
673
612
– 659
– 6 438
– 1 108
1 793
1 295
1 603
805
746
708
9 122
1 486
5 787
1 Depreciation of right-of-use assets recognized from January 1, 2019, the date of implementation of IFRS 16 leases. Notes 1 and 10 provide additional disclosures.
2 Includes fair value adjustments
3 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 was included in the consolidated statements of cash flows in the line “Acquisitions and divestments of interests in associated
companies, net.”
23.2) Total amount of taxes paid
In 2019, the total amount of taxes paid was USD 2.0 billion (2018: USD 1.8 billion, 2017: USD 1.6 billion), of which
USD 1.9 billion (2018: USD 1.5 billion, 2017: USD 1.5 billion) was included within “Net cash flows from operating activ-
ities from continuing operations”, USD 38 million (2018: USD 164 million, 2017: USD 124 million) was included within
“Net cash flows from operating activities from discontinued operations,” and USD 79 million (2018: nil, 2017: nil) was
included within “Net cash flows used in investing activities from discontinued operations.” In 2018, USD 139 million
(2019: nil, 2017: nil) was included within “Net cash flows used in investing activities from continuing operations.”
F-61
Notes to the Novartis Group consolidated financial statements
23.3) Cash flows from changes in working capital and other operating items included in
the net cash flows from operating activities from continuing operations
(USD millions)
(Increase) in inventories
(Increase) in trade receivables
Increase in trade payables
Change in other current assets
Change in other current liabilities
Other adjustments, net
Total
2019
– 382
– 980
553
– 160
1 167
1
199
2018
– 387
– 544
252
316
941
– 2
576
2017
– 203
– 655
82
– 303
1 410
1
332
23.4) Cash flows arising from acquisitions and divestments of interests in associated
companies
In 2018, acquisitions and divestments 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).
23.5) Cash flows arising from acquisitions and divestments of businesses, net
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
Payments, deferred consideration and other adjustments, net
Cash flows used for acquisitions of businesses
Cash flows from divestments of businesses, net 1
Cash flows used for acquisitions and divestments of businesses, net
Note
2019
2018
24
– 4 124
– 13 660
33
242
– 2
– 5
– 36
2017
– 874
151
– 36
– 3 851
– 13 701
– 759
91
18
45
– 3 760
– 13 683
– 714
1 In 2019, the USD 91 million included USD 4 million net cash outflows from previous years divestments and USD 95 million net cash inflows from business divestments in 2019. The
net identifiable assets of the 2019 divested businesses amounted to USD 196 million, comprised of non-current asset of USD 159 million, current assets of USD 96 million including
USD 11 million cash and cash equivalents, non-current liabilities USD 18 million and current liabilities of USD 41 million.
In 2018, USD 18 million represented the net cash inflows from previous years divestments.
In 2017, the USD 45 million net cash inflows related to the net identifiable assets from a 2017 divestment. The 2017 divested business amounted to USD 48 million, comprised of
non-current assets of USD 29 million, current assets of USD 34 million and current liabilities of USD 15 million.
Notes 2 and 24 provide further information regarding acquisitions and divestments of businesses. All acquisitions
were for cash.
F-62
Notes to the Novartis Group consolidated financial statements
23.6) Reconciliation of liabilities arising from financing activities
(USD millions)
January 1, 2019
Impact of adoption of IFRS 16 Leases continuing operations 1
Impact of adoption of IFRS 16 Leases discontinued operations 2
Financial debts and lease liabilities related to discontinued operations 3
Increase in non-current financial debts
Repayment of non-current financial debts
Change in current financial debts
Payments of lease liabilities, net
Interest payments for amounts included in lease liabilities
classified as cash flows from operating activities
New leases
Impact of business combinations and divestments
Changes in fair values, and other changes, net
Amortization of bonds discount
Currency translation effects
Reclassification from non-current to current, net
December 31, 2019
Current
financial
debts and
derivative
financial Non-current Current lease
liabilities
instruments lease liabilities
Non-current
financial
debts
22 470
9 678
– 2
– 89
93
– 1
1 471
246
– 47
– 246
268
40
– 40
– 3 195
– 1 582
2
129
44
2 003
7 031
– 273
– 51
131
– 6
20
1
156
246
362
– 11
33
4
– 156
1 703
25
– 141
– 2 003
20 353
1 Lease liabilties recognized on January 1, 2019, the date of implementation of IFRS 16 Leases. Note 10 provides additional disclosure.
2 In 2018, financial debts included USD 89 million for previously reported finance lease obligations of the Alcon business that have been reclassified on January 1, 2019, to lease
liabilities, with the adoption of IFRS 16 Leases. Note 30 provides additional disclosures.
3 Represents the financial debts and lease liabilities at January 1, 2019, related to the Alcon business reported as discontinued operations. See Notes 1, 2 and 30.
(USD millions)
January 1, 2018
Increase in non-current financial debts 1
Repayment of non-current financial debts 2
Change in current financial debts 3
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
1 Increases in non-current financial debts were only recorded in the consolidated statements of cash flows from continuing operations.
2 Repayment of non-current financial debts were only recorded in the consolidated statements of cash flows from continuing operations.
3 Changes in current financial debts included in the consolidated statements of cash flows from continuing operations were USD 1 687 million.
Current
financial
debts and
derivative
financial
instruments
Non-current
financial
debts
23 224
5 308
2 856
– 366
1 681
4
– 48
2
– 93
3 190
9 678
10
5
27
– 462
– 3 190
22 470
F-63
Notes to the Novartis Group consolidated financial statements
(USD millions)
January 1, 2017
Increase in non-current financial debts 1
Repayment of non-current financial debts 2
Change in current financial debts 3
Changes in fair values, and other changes
Amortization of bonds discount
Currency translation effects
Current portion of non-current financial debt
December 31, 2017
1 Increases in non-current financial debts were only recorded in the consolidated statements of cash flows from continuing operations.
2 Repayment of non-current financial debts were only recorded in the consolidated statements of cash flows from continuing operations.
3 Changes in current financial debts included in the consolidated statements of cash flows from continuing operations were USD 644 million.
For net cash flows used in investing activities from discontinued operations, see Note 30.
Current
financial
debts and
derivative
financial
instruments
Non-current
financial
debts
17 897
5 905
4 933
– 1
– 6
16
744
– 359
– 187
– 755
– 140
126
359
23 224
5 308
24. 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
Cash and cash equivalents
Non-controlling interests
Goodwill
Net assets recognized as a result of business combinations 1
2019
44
2018
137
3 550
2 531
2017
342
10 224
1 223
22
60
8
195
4
1
381
19
20
90
8
1 112
20
– 107
– 2 874
– 325
– 2
– 178
– 14
– 627
3 938
11 000
– 1 112
– 26
186
4 084
4 124
13 946
– 1
925
– 20
94
999
1 Net assets recognized as a result of business combinations in the consolidated balance sheet from continuing operations were USD 13 660 million in 2018 and USD 874 million in
2017.
Note 2 details significant acquisitions of businesses, spe-
cifically, Xiidra and IFM Tre, Inc. in 2019; AAA, AveXis and
Endocyte in 2018; and Ziarco and Encore in 2017. 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. Goodwill of USD 98 million from 2019 is tax
deductible. No goodwill from 2018 and 2017 is tax-de-
ductible.
F-64
Notes to the Novartis Group consolidated financial statements
25. Post-employment benefits for associates
Defined benefit plans
In addition to the legally required social security schemes,
the Group has numerous independent pension and other
post-employment benefit plans. In most cases, these
plans are externally funded in entities that are legally
separate from the Group. For certain Group companies,
however, no independent plan assets exist for the pen-
sion and other post-employment benefit obligations of
associates. In these cases, the related unfunded liability
is included in the balance sheet. The defined benefit obli-
gations (DBOs) of all major pension and other post-em-
ployment benefit plans are reappraised annually by inde-
pendent actuaries. Plan assets are recognized at fair
value. The major plans are based in Switzerland, the
United States, the United Kingdom, Germany and Japan,
which represent 95% of the Group’s total DBO for pen-
sion plans. Details of the plans in the two most signifi-
cant countries, Switzerland and the United States, which
represent 81% of the Group’s total DBO for post-employ-
ment 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 from being
categorized as defined contribution plans. These factors
include a minimum interest guarantee on retirement sav-
ings accounts, a predetermined factor for converting the
accumulated savings account balance into a pension,
and embedded death and disability benefits.
All benefits granted under Swiss-based pension
plans are vested, and Swiss legislation prescribes that
the employer has to contribute a fixed percentage of an
associate’s pay to an external pension fund. Additional
employer contributions may be required whenever the
plan’s statutory funding ratio falls below a certain level.
The associate also contributes to the plan. The pension
plans are run by separate legal entities, each governed
by a board of trustees that – for the principal plans – con-
sists of representatives nominated by Novartis and the
active insured associates. The boards of trustees are
responsible for the plan design and asset investment
strategy.
In September 2017, the pension regulations in Swit-
zerland were amended, which resulted in a change in
accounting from defined benefit to defined contribution
for a component of the Swiss pension plans. This change
resulted in a reduction to the defined benefit pension
plans liability and in a corresponding net pre-tax gain of
USD 225 million (CHF 216 million).
The United States pension plans represent the sec-
ond-largest component of the Group’s total DBO and
plan assets. The principal plans (Qualified Plans) are
funded, whereas plans providing additional benefits for
executives (Restoration Plans) are unfunded. Employer
contributions are required for Qualified Plans whenever
the statutory funding ratio falls below a certain level.
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-65
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, 2019 and 2018:
(USD millions)
Benefit obligation at January 1
Benefit obligations related to discontinued operations 1
Current service cost
Interest cost
Past service costs and settlements
Administrative expenses
Remeasurement losses/(gains) arising from changes in financial assumptions
Remeasurement (gains)/losses arising from changes in demographic assumptions
Experience-related remeasurement losses/(gains)
Currency translation effects
Benefit payments
Contributions of associates
Effect of acquisitions, divestments or transfers
Benefit obligation at December 31
Fair value of plan assets at January 1
Plan assets related to discontinued operations 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
1 115
34
39
– 31
1
– 32
– 7
– 46
1 073
162
5
– 8
6
– 46
119
– 954
2019
2018
22 179
23 210
– 662
336
330
– 168
24
1 791
– 193
184
283
378
321
– 1
26
– 567
5
264
– 374
2019
1 073
– 385
13
29
76
– 9
– 22
– 1 256
– 1 263
– 30
169
49
169
11
23 066
22 179
18 838
20 275
– 424
257
1 656
304
420
169
– 193
249
– 805
– 310
520
169
– 3
– 1 256
– 1 263
39
6
19 810
18 838
1
746
119
– 40
3
10
74
– 30
– 2
134
– 3 256
– 3 341
– 612
– 68
7
– 4
– 65
– 89
25
– 4
– 68
Net liability in the balance sheet at December 31
– 3 321
– 3 409
– 612
– 954
1 Notes 1, 2 and 30 provide information related to discontinued operations.
F-66
Notes to the Novartis Group consolidated financial statements
The reconciliation of the net liability from January 1 to December 31 is as follows:
(USD millions)
Net liability at January 1
Less: net liability related to discontinued operations 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
1 Notes 1, 2 and 30 provide information related to discontinued operations.
Pension plans
Other post-employment
benefit plans
2019
2018
– 3 409
– 3 024
238
– 336
– 378
– 77
– 24
– 25
– 76
– 26
– 2
2019
– 954
345
– 13
– 26
– 126
– 507
– 35
21
420
– 10
7
64
520
– 5
25
74
– 3
2018
– 953
– 34
– 34
54
7
6
– 3 321
– 3 409
– 612
– 954
148
137
– 3 469
– 3 546
– 612
– 954
The following table shows a breakdown of the DBO for pension plans by geography and type of member, and the
breakdown of plan assets into the geographical locations in which they are held:
(USD millions)
Switzerland
United
States
Rest of
the world
Total Switzerland
United
States
Rest of
the world
Total
Benefit obligation at December 31
15 106
3 552
4 408
23 066
14 263
3 348
4 568
22 179
2019
2018
Thereof unfunded
By type of member
Active
Deferred pensioners
Pensioners
670
466
1 136
649
491
1 140
6 167
630
1 400
8 197
5 618
653
1 616
7 887
1 205
1 517
2 722
1 131
1 531
2 662
8 939
1 717
1 491
12 147
8 645
1 564
1 421
11 630
Fair value of plan assets at December 31
14 457
2 311
3 042
19 810
13 470
2 160
3 208
18 838
Funded status
– 649
– 1 241
– 1 366
– 3 256
– 793
– 1 188
– 1 360
– 3 341
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
658
524
121
15
522
134
2019
Rest of
the world
88
88
36
0
52
0
United
States
1 001
882
270
18
713
119
2018
Rest of
the world
72
72
25
0
47
0
Total
746
612
157
15
574
134
Total
1 073
954
295
18
760
119
Funded status
– 524
– 88
– 612
– 882
– 72
– 954
F-67
Notes to the Novartis Group consolidated financial statements
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
2019
2018
2017
2019
2018
2017
1.0%
0.3%
2.8%
0.3%
22
24
1.6%
0.4%
2.8%
0.8%
22
24
1.5%
0.5%
2.8%
0.6%
22
24
3.6%
4.4%
3.7%
21
23
21
23
21
23
Changes in the aforementioned actuarial assumptions
can result in significant volatility in the accounting for the
Group’s pension plans in the consolidated financial state-
ments. This can result in substantial changes in the
Group’s other comprehensive income, long-term liabili-
ties and prepaid pension assets.
The DBO is significantly impacted by assumptions
regarding the rate that is used to discount the actuari-
ally determined post-employment benefit liability. This
rate is based on yields of high-quality corporate bonds
in the country of the plan. Decreasing corporate bond
yields decrease the discount rate, so that the DBO
increases and the funded status decreases.
In Switzerland, an increase in the DBO due to lower
discount rates is slightly offset by lower future benefits
expected to be paid on the associate’s savings account
where the assumption on interest accrued changes in
line with the discount rate.
The impact of decreasing interest rates on a plan’s
assets is more difficult to predict. A significant part of
the plan assets is invested in bonds. Bond values usually
rise when interest rates decrease and may therefore par-
tially compensate for the decrease in the funded status.
Furthermore, pension assets also include significant
holdings of equity instruments. Share prices tend to rise
when interest rates decrease and therefore often coun-
teract the negative impact of the rising defined benefit
obligation on the funded status (although the correlation
of interest rates with equities is not as strong as with
bonds, especially in the short term).
The expected rate for pension increases significantly
affects the DBO of most plans in Switzerland, Germany
and the United Kingdom. Such pension increases also
decrease the funded status, although there is no strong
correlation between the value of the plan assets and
pension/inflation increases.
Assumptions regarding life expectancy significantly
impact the DBO. An increase in longevity increases the
DBO. There is no offsetting impact from the plan assets,
as no longevity bonds or swaps are held by the pension
funds. Generational mortality tables are used where this
data is available.
The following table shows the sensitivity of the
defined benefit pension obligation to the principal actu-
arial assumptions for the major plans in Switzerland, the
United States, the United Kingdom, Germany and Japan
on an aggregated basis:
Change in 2019 year-end
defined benefit pension obligation
(USD millions)
25 basis point increase in discount rate
25 basis point decrease in discount rate
One-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
– 787
837
848
546
– 135
62
– 60
54
– 55
The healthcare cost trend rate assumptions used for
other post- employment benefits are as follows:
Healthcare cost trend rate
assumed for next year
Rate to which the cost trend
rate is assumed to decline
Year that the rate reaches
the ultimate trend rate
2019
2018
2017
6.5% 7.0% 6.5%
4.5% 4.5% 4.5%
2028 2028 2025
The following table shows the weighted average plan
asset allocation of funded defined benefit pension plans
at December 31, 2019 and 2018:
(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
2019
2018
15
20
5
0
0
40
60
20
20
15
27
36
17
15
5
28
35
17
16
4
100
100
Cash and most of the equity and debt securities have a
quoted market price in an active market. Real estate and
F-68
Notes to the Novartis Group consolidated financial statements
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:
December 31, December 31,
2018
2019
The expected future cash flows in respect of pension
and other post-employment benefit plans at December
31, 2019, were as follows:
(USD millions)
Pension plans
Novartis Group contributions
2020 (estimated)
Expected future benefit payments
2020
2021
2022
2023
2024
2025–2029
410
1 201
1 116
1 106
1 096
1 087
5 270
Other post-
employment
benefit plans
46
46
47
48
48
48
231
Investment in shares of Novartis AG
Number of shares (in millions)
Market value (in USD billions)
2.3
0.2
11.0
0.9
Defined contribution plans
The weighted average duration of the defined benefit
obligation is 15.2 years (2018: 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.
In many subsidiaries, associates are covered by defined
contribution plans. Contributions charged to the consol-
idated income statement for the defined contribution
plans were:
(USD millions)
2019
2018
2017
Contributions for defined contribution plans
continuing operations
422
443
307
For defined contribution plans for discontinued opera-
tions, see Note 30.
26. 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)
2019
2018
2017
Expense related to equity-based
participation plans
1 067
918
Liabilities arising from equity-based
payment transactions
326
273
853
261
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 (ECN) is paid 50%
in cash and 50% in Novartis restricted shares (RSs) or
restricted share units (RSUs). For the Novartis Top Lead-
ers (NTLs), the Annual Incentive is paid 70% in cash and
30% in RSs or RSUs. Both the ECN and NTLs can opt
to invest up to the maximum cash portion of their Annual
Incentive to receive further RSs or RSUs. Any 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.
Share savings plans
Associates in certain countries and certain key execu-
tives worldwide are encouraged to invest their Annual
Incentive 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.
F-69
Notes to the Novartis Group consolidated financial statements
Novartis operates share savings plans for which associ-
ates may only participate in one of the share savings
plans in any given year. The most significant are listed
below:
• 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.
• 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.
Novartis equity plan “Select”
The equity plan “Select” is a global equity incentive plan
under which eligible associates may annually be awarded
a grant subject to a three-year, and for selected units a
four-year, staggered vesting period. No awards are
granted for performance ratings below a certain thresh-
old. Executive Committee members are not eligible to
participate 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, RSs
or RSUs are granted unilaterally. 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. As the
exercise price does not reflect the decrease in the
Novartis share due to the Alcon spin, one-fifth of an Alcon
share will also be awarded to the option holder upon
exercise.
Options under Novartis equity plan “Select”
outside North America
The following table shows the activity associated with
the share options during the period. The weighted aver-
age prices in the table below are translated from Swiss
francs into USD at historical rates.
2019
2018
Weighted
average
exercise
Options
(millions)
price Options
(USD) (millions)
Weighted
average
exercise
price
(USD)
Options outstanding
at January 1
5.6
59.9
7.4
59.5
Sold or exercised
– 2.2
58.4
– 1.8
58.2
Outstanding at December 31
Exercisable at December 31
3.4
3.4
60.9
60.9
5.6
5.6
59.9
59.9
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 89.9.
The following table summarizes information about
share options outstanding at December 31, 2019:
Options outstanding
Total/
weighted
average
Number outstanding (millions)
0.3
0.7
0.9 1.5
Remaining contractual life (years) 0.0
1.0
2.0 3.0
3.4
2.1
Exercise price (USD)
54.5 57.0 57.6 66.0 60.9
Options under Novartis equity plan “Select” for
North America
The following table shows the activity associated with
the ADR options during the period:
2019
2018
Weighted
average
ADR exercise
options
(millions)
price options
(USD) (millions)
Weighted
average
ADR exercise
price
(USD)
Options outstanding
at January 1
15.2
60.7
20.3
59.9
Sold or exercised
– 5.6
58.6
– 5.1
57.4
Outstanding at December 31
Exercisable at December 31
9.6
9.6
61.9
15.2
60.7
61.9
15.2
60.7
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 85.1.
The following table summarizes information about
ADR options outstanding at December 31, 2019:
ADR options outstanding
Total/
weighted
average
Number outstanding (millions)
0.4
1.2
2.9 5.1
Remaining contractual life (years) 0.0
1.0
2.0 3.0
9.6
2.3
Exercise price (USD)
54.5 57.0 57.6 66.0 61.9
F-70
Notes to the Novartis Group consolidated financial statements
Long-Term Performance Plan
Long-Term Relative Performance Plan
The Long-Term Performance Plan (LTPP) is an equity plan
for the ECN, the NTLs and employees of Group units with
specific targets.
Participants are granted a target number of perfor-
mance share units (PSUs) at the beginning of every per-
formance period, which are converted into unrestricted
Novartis shares after the performance period. The actual
payout depends on the achievement of the performance
measures and ranges between 0% and 200% of the
granted amount. PSUs granted under the LTPP do not
carry voting rights, but do carry dividend equivalents that
are paid in unrestricted Novartis shares at the end of the
performance period.
The LTPP awards are subject to a three-year perfor-
mance and vesting period. Until 2018, the performance
criteria were based on Novartis internal performance
metrics. Starting in 2019, for new grants the performance
criteria are based on both Novartis internal performance
metrics and variables that can be observed in the mar-
ket, which is the ranking of the Novartis total shareholder
return (TSR) relative to a global healthcare peer group
of 14 companies (updated in November 2019 from 15
companies following the acquisition of one of the com-
panies by another company within the peer group) other
companies, 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 relevant exchange rate, includ-
ing 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.
The LTRPP is an equity plan for the Novartis ECN and
NTLs. The last grant under this plan was made in 2018.
The LTRPP performance criteria is based on variables
that can be observed in the market, which is the ranking
of the Novartis TSR relative to a global healthcare peer
group of 15 other companies, over rolling three-year per-
formance periods. The TSR for Novartis and the peer
companies is calculated as described in the LTPP sec-
tion above.
Other share awards
Selected associates, excluding the ECN members, may
exceptionally receive Special Share Awards of RSs or
RSUs. These Special Share Awards provide an oppor-
tunity to reward outstanding achievements or excep-
tional performance, and aim to retain key contributors.
They are based on a formal internal selection process,
through which the individual performance of each can-
didate is thoroughly assessed at several management
levels. Special Share Awards have a minimum three-year
vesting period. In exceptional circumstances, Special
Share Awards may be awarded to attract special exper-
tise and new talents to the organization.
Worldwide, associates at different levels in the orga-
nization were awarded RSs and RSUs in 2019, 2018 and
2017.
In addition, in 2019, 2018 and 2017, Board members
received unrestricted shares as part of their regular com-
pensation.
Summary of non-vested share movements
The table below provides a summary of non-vested share
movements (RSs, RSUs and PSUs) for all plans. At the
Alcon spin-off date, all RSU and PSU holders, who were
not entitled to the dividend in kind in the form of Alcon
shares received keep whole awards in Novartis shares
to compensate for the loss of the Alcon value from their
Novartis shares. These keep whole awards were
accounted for as a modification. As they did not increase
the value of the original grant, they did not lead to addi-
tional expense. In the table below, this is reflected by a
zero fair grant date fair value:
F-71
Notes to the Novartis Group consolidated financial statements
Non-vested shares at January 1
25.7
77.1
1 981
23.9
80.6
1 926
2019
Number
Weighted
Fair value at
average fair
of shares value at grant grant date in
date in USD USD millions
in millions
2018
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
1.1
4.2
5.3
2.6
2.5
0.1
1.9
– 13.3
– 4.3
25.8
78.4
83.0
64.0
67.4
68.9
0.0
67.7
80.3
76.3
71.1
86
349
339
175
172
0
129
1.3
4.1
3.9
2.1
1.5
0.3
1.2
– 1 068
– 10.7
– 328
1 835
– 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
– 965
– 145
1 981
27. Transactions with related parties
Genentech/Roche
Novartis has two agreements with Genentech, Inc.,
United States, and one agreement with Spark Therapeu-
tics, Inc., United States. Both companies are subsidiaries
of Roche Holding AG (Roche), which is indirectly included
in the consolidated financial statements using equity
accounting since Novartis holds 33.3% of the outstand-
ing voting shares of Roche (see Note 4).
Lucentis
Novartis has licensed from Genentech/Roche the exclu-
sive rights to develop and market Lucentis outside the
United States for indications related to diseases of the
eye. Novartis pays royalties on the net sales of Lucentis
products outside the United States. In 2019, Lucentis
sales of USD 2.1 billion (2018: USD 2.0 billion; 2017:
USD 1.9 billion) were recognized by Novartis.
Xolair
Novartis and Genentech/Roche are co-promoting Xolair
in the United States, where Genentech/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 2019, Novartis recognized
total sales of Xolair of USD 1.2 billion (2018: USD 1.0 bil-
lion; 2017: USD 920 million), including sales to Genen-
tech/Roche for the United States market.
Luxturna
In 2018, Novartis entered into an exclusive licensing and
commercialization agreement and a supply agreement
with Spark Therapeutics, Inc. (Spark) for Luxturna out-
side the United States. The agreements include regula-
tory and sales milestones as well as royalties payable to
Spark on ex-US sales. On December 17, 2019, Roche
acquired Spark.
The net income for royalties, cost sharing and profit shar-
ing arising out of the Lucentis, Xolair and Luxturna agree-
ments with Roche totaled USD 101 million in 2019 (net
income in 2018: USD 34 million; net expense in 2017:
USD 33 million).
Furthermore, Novartis has several patent license,
supply and distribution agreements with Roche.
Novartis Pension Fund
In 2018, a Group subsidiary provided an uncommitted
overnight credit facility to the Novartis Pension Fund,
Switzerland, for up to USD 500 million with interest at
the US Federal Funds Rate. This credit facility was not
utilized during the years 2019 and 2018.
F-72
Notes to the Novartis Group consolidated financial statements
Executive Officers and Non-Executive Directors compensation
During 2019, there were 15 Executive Committee
members (“Executive Officers”), including those who
stepped down during the year (there were 17 members
in 2018 and 11 members in 2017, including those who
stepped down).
The total compensation for Executive Committee members and the 13 Non-Executive Directors (13 in 2018 and
2017) using the Group’s accounting policies for equity-based compensation and pension benefits was as follows:
(USD millions)
Cash and other compensation
Post-employment benefits
Equity-based compensation
Total
Executive Officers
Non-Executive Directors
Total
2019
20.7
2.6
40.6
63.9
2018
22.5
2.5
42.5
67.5
2017
18.4
2.0
49.9
70.3
2019
4.1
2018
2017
4.0
4.0
4.6
8.7
4.8
8.8
4.8
8.8
2019
24.8
2.6
45.2
72.6
2018
26.5
2.5
47.3
76.3
2017
22.4
2.0
54.7
79.1
During 2019, the IFRS compensation expense decreased
due to lower cash buyout payments to new executive
officers and the forfeiture of equity-based compensa-
tion as a result of the resignation of an executive officer.
These effects were partially offset by higher equity based
compensation of executive officers appointed over the
last three years.
During 2018, there was a decrease in the IFRS com-
pensation expense for Executive Officers, mainly due to
the higher pro-rata accelerated vesting of equity com-
pensation in 2017, required by IFRS, in accordance with
the plan rules. This was partly offset by the cash portion
of buyout payments for new Executive Officers.
The Annual Incentive award, which is fully included
in equity- based compensation even when paid out in
cash, is granted in January in the year following the
reporting period.
The disclosures on Board and executive compensa-
tion required by the Swiss Code of Obligations and in
accordance with the Swiss Ordinance against Excessive
Compensation in Stock Exchange Listed Companies are
shown in the Compensation Report of the Group.
Transactions with former members of the Board of
Directors
During 2019, 2018 and 2017, the following payments (or
waivers of claims) were made to former Board members
or to “persons closely” linked to them:
Currency
2019
2018
2017
Dr. Krauer
Dr. Vasella
CHF
CHF
60 000
60 000
60 000
0
18 228
26 279
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 reim-
bursable costs under his agreement with the Company,
which expired on December 31, 2019.
28. Commitments and contingencies
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, 2019, the Group’s
commitments to make payments under those agree-
ments, and their estimated timing, were as follows:
(USD millions)
2020
2021
2022
2023
2024
Thereafter
Total
2019
809
442
319
724
167
1 943
4 404
F-73
Notes to the Novartis Group consolidated financial statements
Commitments for capital calls
The Group holds investments in funds in which it has
committed to invest further upon future capital calls. As
of December 31, 2019, the total uncalled capital commit-
ments for the Group’s investments in funds amounts to
USD 79 million.
Note 29 contains further information on the Group’s
investments in funds.
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 and equipment purchase commit-
ments, see Note 9.
Guarantees issued
The Group has issued guarantees to third parties in the
ordinary course of business, mostly for tax, customs or
other governmental agencies.
In addition, Novartis AG is guarantor of the Group’s
issued bonds, credit facilities and commercial paper pro-
gram.
Contingencies
Group companies have to observe the laws, government
orders and regulations of the country in which they
operate.
A number of Novartis companies are, and will likely
continue to be, subject to various legal proceedings and
investigations that arise from time to time, including pro-
ceedings regarding product liability; sales and market-
ing practices; commercial disputes; employment and
wrongful discharge; 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 20 contains additional information on these
matters.
A number of Group companies are involved in legal
proceedings concerning intellectual property rights. The
inherent unpredictability of such proceedings means
that there can be no assurances as to their ultimate out-
come. A negative result in any such proceeding could
potentially adversely affect the ability of certain Novartis
companies to sell their products, or require the payment
of substantial damages or royalties.
In the opinion of management, however, the outcome
of these actions will not materially affect the Group’s
financial position but could be material to the results of
operations or cash flow in a given period.
The Group’s potential environmental remediation lia-
bility is assessed based on a risk assessment and inves-
tigation of the various sites identified by the Group as at
risk for environmental remediation exposure. The Group’s
future remediation expenses are affected by a number
of uncertainties. These uncertainties include, but are not
limited to, the method and extent of remediation, the per-
centage of material attributable to the Group at the reme-
diation sites relative to that attributable to other parties,
and the financial capabilities of the other potentially
responsible parties.
Note 20 contains additional information on environ-
mental liabilities.
F-74
Notes to the Novartis Group consolidated financial statements
29. Financial instruments – additional disclosures
(USD millions)
Cash and cash equivalents
Financial assets – measured at fair value through other comprehensive income
Marketable securities
Debt securities
Long-term financial investments
Equity securities
Debt securities
Total long-term financial investments – fair value through other comprehensive income
Note
16
2019 1
2018 1
11 112
13 271
16
24
325
13
13
1 158
33
1 191
802
31
833
Total financial assets – measured at fair value through other comprehensive income
1 215
1 158
Financial assets – measured at amortized costs
Trade receivables, income tax receivables and other current assets (excluding pre-payments)
15/17
10 337
11 024
Accrued interest on debt securities, time deposits and short-term investments
Time deposits and short-term investments with original maturity more than 90 days
Long-term loans, advances, security deposits and other long-term receivables
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
16
16
13
61
329
12
2 087
512
10 727
13 635
13
13/16
16
13
366
270
186
102
399
353
286
145
130
396
Total financial assets – measured at fair value through the consolidated income statement
1 323
1 310
Total financial assets
24 377
29 374
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 20/22) and other financial liabilities
Derivative financial instruments
Total financial liabilities – measured at fair value through the consolidated income statement
Lease liabilities
Total financial liabilities
1 Except for straight bonds (see Note 19), the carrying amount is a reasonable approximation of fair value.
2 Notes 18 and 22 provide additional disclosures related to commitment for repurchase of own shares.
F-75
21
21
21
21
19
19
19
19
1 836
719
2 289
2 002
6 846
1 778
701
3 951
3 190
9 620
22 167
25 283
188
285
92
– 2 002
– 3 190
20 353
22 470
5 424
5 840
32 623
37 930
21
1 065
185
1 250
917
58
975
10
1 949
35 822
38 905
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, 2019 and 2018. 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, 2019 and 2018.
Contract or underlying
principal amount
Positive fair values
Negative fair values
(USD millions)
2019
2018
2019
Forward foreign exchange rate contracts
10 779
10 823
96
6
2018
130
2019
– 75
– 110
2018
– 58
Commodity purchase contract
Options on equity securities
Total derivative financial instruments included in
marketable securities and in current financial debts
9
269
11 057
10 823
102
130
– 185
– 58
The following table shows by currency contract or underlying principal amount the derivative financial instruments
at December 31, 2019 and 2018:
(USD millions)
Forward foreign exchange rate contracts
Commodity purchase contract
Options on equity securities
Total derivative financial instruments
(USD millions)
Forward foreign exchange rate contracts
Total derivative financial instruments
EUR
2019
USD
Other
Total
1 373
7 760
1 646
10 779
9
250
19
9
269
1 373
8 019
1 665
11 057
EUR
2 989
2 989
2018
USD
6 558
6 558
Other
Total
1 276
10 823
1 276
10 823
Derivative financial instruments effective for hedge
accounting purposes
At the end of 2019 and 2018, 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-76
Notes to the Novartis Group consolidated financial statements
Level 1
Level 2
2019
Valued at
Level 3 amortized cost
24
24
102
126
37
37
37
976
976
61
61
329
329
581
233
399
1 213
186
– 1 036
– 29
– 185
– 185
– 1 065
Level 1
Level 2
2018
Valued at
Level 3 amortized cost
Total
24
37
61
61
102
224
1 557
233
399
329
2 518
186
– 1 036
– 29
– 185
– 1 250
Total
325
35
360
302
35
337
337
698
23
23
130
153
– 58
– 58
2 087
2 087
12
2 099
512
512
130
12
2 589
1 186
251
396
512
2 345
145
– 907
– 10
– 58
– 975
488
251
396
1 135
145
– 907
– 10
– 917
(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
Total marketable securities, time deposits and derivative financial instruments
Debt and equity securities
Fund investments
Contingent consideration receivables
Long-term loans, advances, security deposits and other long-term receivables
Total financial investments and long-term loans
Associated companies at fair value through profit and loss
Financial liabilities
Contingent consideration payables
Other financial liabilities
Derivative financial instruments
Total financial liabilities at fair value
(USD millions)
Financial assets
Debt securities
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
Debt and equity securities
Fund investments
Contingent consideration receivables
Long-term loans and receivables from customers
and finance lease, advances, security deposits
Total financial investments and long-term loans
698
Associated companies at fair value through profit and loss
Financial liabilities
Contingent consideration payables
Other financial liabilities
Derivative financial instruments
Total financial liabilities at fair value
The analysis above includes all financial instruments
measured at fair value as well as certain financial assets
measured at amortized cost.
F-77
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:
2019
(USD millions)
January 1
Impact from discontinued operations 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
Total of fair value gains and losses recognized
in the consolidated income statement for assets
and liabilities held at December 31, 2019
1 Notes 1, 2 and 30 provide information related to discontinued operations.
(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
profit and loss investments investments receivables
Fund
Long-term Contingent Contingent
financial consideration consideration
payables
Other
financial
liabilities
145
251
– 28
488
– 19
396
– 907
– 10
163
12
6
35
195
1
– 15
– 89
– 48
49
28
– 30
– 3
10
186
233
– 6
229
– 53
– 64
581
– 401
– 32
3
– 5
33
399
– 1 036
– 29
– 15
12
6
35
106
– 47
2018
Associated
companies at
fair value through
profit and loss investments investments receivables
Fund
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
During 2019, there were several individually non-signifi-
cant transfers of financial investments from Level 3 to
Level 1 for USD 64 million (2018: USD 78 million), mainly
due to initial public offerings of the invested companies.
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. Realized gains
and losses associated with Level 3 long-term financial
investments measured at fair value through other com-
prehensive income are not recycled through the consol-
idated income statement but are instead reclassified to
retained earnings.
During the year, the net loss and net gain recorded
on associated companies, fund investments and long-
term financial investments at fair value through profit and
loss were USD 72 million and USD 110 million, respec-
tively.
F-78
Notes to the Novartis Group consolidated financial statements
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 long-term financial
investments by 10% positively or negatively, this would
change the amounts recorded in the 2019 consolidated
statement of comprehensive income by USD 100 million.
To determine 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 and
timing 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 2019 consolidated income
statement by USD 267 million and USD 202 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.
Except for the investment in Alcon Inc. with a fair value
of USD 382 million at December 31, 2019, these are made
up of individually non-significant investments. At Decem-
ber 31, 2019, the Group holds 53 non-listed equity secu-
rities (December 31, 2018: 41) and 29 listed equity secu-
rities (December 31, 2018: 26) in this category with the
following fair values:
(USD millions)
Listed equity securities
Non-listed equity securities
Total equity securities
2019
843
315
1 158
2018
597
205
802
There were no dividends recognized during 2019 and
2018 from these equity securities. In 2019, in accordance
with the consolidated foundations Alcon Inc. shares
divestment plans, Alcon Inc. shares with a fair value of
USD 976 million were sold, and the USD 62 million gain
on disposal was transferred from other comprehensive
income to retained earnings during 2019. In addition, in
2019, equity securities that were no longer considered
strategic, with a fair value of USD 33 million (2018: USD 21
million), were sold, and the USD 33 million gain on dis-
posal (2018: USD 16 million gain) was transferred from
other comprehensive income to retained earnings (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.
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.
Certain countries have legal or economic restrictions
on the ability of subsidiaries to transfer funds to the
Group in the form of cash dividends, loans or advances,
but these restrictions do not have an impact on the abil-
ity of the Group to meet its cash obligations.
The most significant countries in this respect are
Argentina and Venezuela, where the governments have
F-79
Notes to the Novartis Group consolidated financial statements
implemented capital controls. The net outstanding inter-
company payable balance of Argentina and Venezuela
Subsidiaries were not material for the Group at Decem-
ber 31, 2019 and at December 31, 2018.
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”. The
hyperinflationary economies in which Novartis operates
are Argentina and Venezuela. Venezuela was hyperinfla-
tionary for all years presented, and Argentina became
hyperinflationary effective July 1, 2018, requiring retro-
active implementation of hyperinflation accounting as of
January 1, 2018. The impacts of applying IAS 29 was not
significant in all years presented.
The Group manages its global currency exposure by
engaging in hedging transactions where management
deems appropriate. Novartis may enter into various con-
tracts that reflect the changes in the value of foreign cur-
rency exchange rates to preserve the value of assets,
commitments and anticipated transactions. Novartis also
uses forward contracts and foreign currency option con-
tracts to hedge.
Net investments in subsidiaries in foreign countries
are long-term investments. Their fair value changes
through movements of foreign currency exchange rates.
The Group has designated a certain portion of its long-
term euro-denominated straight bonds as hedges of the
translation risk arising on certain of these net invest-
ments in foreign operations with euro functional cur-
rency. As of December 31, 2019, long-term financial debt
with a carrying amount of EUR 1.8 billion (USD 2.1 billion)
(December 31, 2018: USD 2.1 billion), has been desig-
nated as a hedge instrument. During 2019, USD 44 mil-
lion of unrealized income (unrealized income in 2018:
USD 95 million) was recognized in other comprehensive
income and accumulated 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
2019, 2018 and 2017.
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 or 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
receivables.
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.
The Group’s largest customer accounted for approx-
imately 23% of net sales, and the second largest and
third largest customers accounted for 17% and 10% of
net sales, respectively (2018: 18%, 14% and 8%, respec-
tively; 2017: 19%, 14% and 7%, respectively). No other
customer accounted for 6% or more of net sales in either
year.
The highest amounts of trade receivables outstand-
ing were for these same three customers and amounted
to 14%, 12% and 7%, respectively, of the Group’s trade
receivables at December 31, 2019 (2018: 12%, 10% and
6%, respectively). There is no other significant concen-
tration of customer credit risk.
Counterparty risk
Counterparty risk encompasses issuer risk on market-
able securities and money market instruments; credit risk
on cash, time deposits and derivatives; as well as settle-
ment risk for different instruments. Issuer risk is reduced
by only buying securities that are at least A- rated. Coun-
terparty credit risk and settlement risk are reduced by a
policy of entering into transactions with counterparties
(banks or financial institutions) that feature a strong
credit rating. Exposure to these risks is closely moni-
tored and kept within predetermined parameters. The
limits are regularly assessed and determined based upon
credit analysis, including financial statement and capital
adequacy ratio reviews. In addition, reverse repurchas-
ing agreements are contracted, and Novartis has entered
into credit support agreements with various banks for
derivative transactions. To further reduce the settlement
risk, the Group has implemented a multi-currency sys-
tem, CLS (Continuous Linked Settlement), providing mul-
tilateral netting (payment-versus-payment settlement)
of cash flows from foreign exchange transactions.
F-80
Notes to the Novartis Group consolidated financial statements
The Group’s cash and cash equivalents are held with
major regulated financial institutions; the three largest
ones hold approximately 12.6%, 10.4% and 8.3%, respec-
tively (2018: 9.4%, 7.6% and 7.0%, 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 associated
with financial liabilities that are settled by delivering cash
or another financial asset. Group Treasury is responsi-
ble for liquidity, funding and settlement management. In
addition, liquidity and funding risks, and related pro-
cesses and policies, are overseen by management.
Novartis manages its liquidity risk on a consolidated
basis according to business needs and tax, capital or
regulatory considerations, if applicable, through numer-
ous 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 2.3 billion
under these three programs were outstanding as per
December 31, 2019 (2018: USD 4.0 billion). Novartis fur-
ther has a committed credit facility of USD 6.0 billion,
which was renewed in September 2019. This credit facil-
ity is provided by a syndicate of banks and is intended
to be used as a backstop for the US commercial paper
programs. The renewed facility matures in September
2024 and was undrawn as per December 31, 2019, and
December 31, 2018.
In December 2019, Novartis entered into a short-term
credit facility of USD 7 billion, with a maturity date of June
30, 2020 with a syndicate of banks. On January 7, 2020,
Novartis borrowed USD 7 billion under the facility with
interest based on the USD LIBOR.
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, 2019, and December 31, 2018:
2019
(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, time deposits and short-term
investments with original maturity more than 90 days
20
26
16
Due after
five years
57
110
3
Total
122
110
102
11 112
170
11 446
3
3
6
14
9 712
9 746
79
1 400
1 505
3
19
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
– 9 110
– 11 243
– 20 353
– 9 150
– 11 355
– 20 505
– 9 110
– 11 243
– 20 353
– 4 243
– 1 373
– 1 230
– 4 243
– 1 373
– 1 230
– 130
– 29
– 26
– 4 373
– 1 402
– 1 256
– 6 846
– 6 846
– 185
– 7 031
Net debt
5 373
103
– 1 237
– 9 104
– 11 073
– 15 938
F-81
Notes to the Novartis Group consolidated financial statements
(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
2018
Due later than Due later than Due later than
one year
one month three months
Due within but less than but less than but less than
five years
one month three months
one year
Due after
five years
Total
39
56
2 091
198
40
3 571
3 650
75
9 700
9 831
27
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
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
2019
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
– 814
– 4 624
– 952
– 6 390
Potential inflows in various currencies – from financial derivative assets
807
4 656
922
6 385
(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 three months
one year
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
F-82
Notes to the Novartis Group consolidated financial statements
Other contractual liabilities that are not part of management’s monitoring of the net debt or liquidity consist of the
following items:
2019
(USD millions)
Contractual interest on non-current liabilities
Lease liabilities
Trade payables
Contingent consideration liabilities
(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
– 36
– 65
– 5 222
– 428
– 1 531
– 3 439
– 5 434
– 181
– 202
– 622
– 1 081
– 1 949
– 5 424
– 62
– 9
– 582
– 383
– 1 036
2018
one month three months
Due later than Due later than Due later than
one year
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
Contingent consideration liabilities
– 5 556
– 5 556
– 98
– 470
– 339
– 907
Capital risk management
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, 2019, Moody’s
Investor Service rated the Company A1 for long-term
maturities and P-1 for short-term maturities and S&P
Global Ratings rated the company AA- for long-term
maturities and A-1+ for short-term maturities.
Value at risk
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-75, except:
• Trade receivables, income tax receivables and other
current assets
stock markets and various currencies. These interrela-
tionships are determined by observing interest rate
movements, stock market movements and 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
2019
355
2018
337
89
31
187
217
122
221
• Long-term loans and receivables, advances and secu-
The average, high and low VAR amounts are as follows:
rity deposits
• Contingent considerations
• Finance lease obligations
• Lease liabilities
• Trade payables and commitment for repurchase of own
shares
The VAR estimates are made assuming normal market
conditions, using a 95% confidence interval. The Group
uses a “Delta Normal” model to determine the observed
interrelationships between movements in interest rates,
(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
348
2019
High
385
143
195
36
81
Low
303
86
16
233
303
187
F-83
Notes to the Novartis Group consolidated financial statements
(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
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.
30. Discontinued operations
Discontinued operations include the operational results
from the Alcon eye care devices business and certain
Corporate activities attributable to the Alcon business
prior to the spin-off, the gain on distribution of Alcon Inc.
to Novartis AG shareholders, and certain other expenses
related to the Distribution (refer to Notes 1 and 2 for fur-
ther details).
The Alcon eye care devices business researched,
discovered, developed, manufactured, distributed and
sold a broad range of eye care products. Alcon was orga-
nized into two global business franchises, Surgical and
Vision Care. Alcon also provided services, training, edu-
cation and technical support for both the Surgical and
Vision Care businesses.
Consolidated income statement
(USD millions)
Net sales to third parties from
discontinued operations
Sales to continuing segments
Net sales from discontinued operations
Other revenues
Cost of goods sold
Gross profit from discontinued operations
Selling, general and administration
Research and development
Other income
Other expense
Operating income/(loss) from discontinued operations
Interest expense
Other financial income and expense
Income/(loss) before taxes from discontinued operations
Taxes
Net (loss)/income from discontinued operations
before gain on distribution of Alcon Inc.
to Novartis AG shareholders
Gain on distribution of Alcon Inc.
to Novartis AG shareholders 2
Net income/(loss) from discontinued operations
1 The consolidated income statement amounts are for the period from January 1, 2019, to the completion of the spin-off.
2 See Note 2 for further details on the non-taxable non-cash gain on distribution of Alcon Inc. to Novartis AG shareholders.
F-84
2019 1
2018
2017
1 777
7 149
6 771
32
4
3
1 809
7 153
6 774
3
– 860
– 3 983
– 3 588
949
3 170
3 189
– 638
– 2 754
– 2 532
– 142
– 585
– 583
15
– 113
71
– 10
– 3
58
– 159
61
– 126
– 234
– 25
– 1
– 260
74
47
– 194
– 73
– 27
– 3
– 103
307
– 101
– 186
204
4 691
4 590
– 186
204
Notes to the Novartis Group consolidated financial statements
Supplemental disclosures related to the Alcon business distributed to
Novartis AG shareholders
Net income
Included in net income from discontinued operations are:
(USD millions)
Interest income
Depreciation of property, plant and equipment
Depreciation of right-of-use assets 1
Amortization of intangible assets
Impairment charges on property, plant and equipment
Impairment charges on intangible assets 2
Additions to restructuring provisions
2019
2018
2017
2
– 235
– 217
– 42
– 9
– 174
– 1 052
– 1 066
– 3
– 391
– 13
– 93
– 57
– 8
– 71
Equity-based compensation of Novartis equity plans
– 9
1 Depreciation of right-of-use assets recognized from January 1, 2019, the date of implementation of IFRS 16 leases. See Note 1 for additional disclosures.
2 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.
Balance sheet
The following were in the balance sheet from discontinued operations for the period from January 1, 2019, to the
date of reclassification:
(USD millions)
Additions to property, plant and equipment
Additions to right-of-use assets 1
Additions to goodwill and intangible assets
2019
113
3
36
2018
519
196
1 Additions to right-of-use assets recognized in 2019 with the implementation of IFRS 16 Leases on January 1, 2019. See Note 1 for additional disclosures.
Cash flows used in investing activities
from discontinued operations
Cash flows from financing activities
from discontinued operations
In 2019, the net cash inflows from financing activities
from discontinued operations of USD 3.3 billion (2018:
USD 167 million net cash outflows, 2017: USD 415 million
net cash outflows) included USD 3.5 billion cash inflows
from borrowings in connection with the distribution (spin-
off) of the Alcon business to Novartis AG shareholders
and USD 212 million (2018: USD 57 million, 2017: nil) trans-
action cost payment directly attributable to the distribu-
tion (spin-off) of the Alcon business to Novartis share-
holders (see Notes 1 and 2).
Cash flows used in investing activities from discontinued
operations include the investing activities of the Alcon
business, and in addition in 2017 USD 140 million cash
outflows for transaction-related expenditures attribut-
able to the series of portfolio transformation transac-
tions completed in 2015.
(USD millions)
2019
2018
2017
Payments out of provisions for
transaction costs attributable
to the spin-off of the
Alcon business
– 29
Divested cash and cash equivalents – 628
Cash flows attributable to the
spin-off of the Alcon business
– 657
Other cash flows used in
investing activities, net
Net cash flows used in investing
activities from discontinued
operations
– 502
– 1 001
– 775
– 1 159
– 1 001
– 775
F-85
Notes to the Novartis Group consolidated financial statements
Intangible assets
The 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 allo-
cated, is based on the fair value less costs of dis-
posal.
In 2017, the Alcon brand name indefinite life intan-
gible 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 spin-off of the Alcon Division, the Novartis Group
transferred the full rights of the Alcon brand name to
the Alcon Division. As a result, the Innovative
Medicines Division started the process of rebranding
the products within its Ophthalmology business fran-
chise and is no longer using the Alcon brand name.
The Alcon brand name indefinite life intangible asset
is therefore reported in the Alcon Division in 2018. In
2018, net sales of the Alcon Division products
together are the grouping of cash-generating units,
which were used to determine the recoverable
amount. In the year before, net sales of products
within the Innovative Medicines Ophthalmology busi-
ness franchise as well as Alcon Division products,
which used the Alcon brand name, together were the
grouping of cash-generating units, which were used
to determine the recoverable amounts. The valuation
method is based on the fair value less costs of dis-
posal.
The assumptions used in the calculations of fair
value were a discount rate (post-tax) of 7.5% and a
terminal growth rate of 3%. 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 indus-
try. The growth rates are expected to exceed this
long-term inflation rate, as the aging population to
which Alcon’s products are prescribed is growing
faster than the general population. The discount rates
consider the Group’s weighted average cost of cap-
ital, adjusted to approximate the weighted average
cost of capital of a comparable market participant.
The fair value less costs of disposal, for all group-
ings of cash-generating units containing goodwill or
indefinite life intangible assets, is reviewed for the
impact of reasonably possible changes in key assump-
tions. In particular, we considered an increase in the
discount rate, a decrease in the terminal growth rate,
and certain negative impacts on the forecasted cash
flows. These reasonably possible changes in key
assumptions did not indicate an impairment.
“Note 1. Significant accounting policies—Impair-
ment of goodwill and intangible assets” provides
additional disclosures on how the Group performs
goodwill and intangible asset impairment testing.
The 2018 intangible asset and goodwill impair-
ment charges were USD 391 million, including 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.
Leases
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 Alcon’s surgical equipment lease
arrangements. The finance income was recorded in “Other income.”
(USD millions)
Not later than one year 1
Between one and five years
Later than five years
Total
2018
Total
future
payments
Unearned
finance
income
64
117
48
229
– 5
– 9
– 2
– 16
Present
value
Provision
Net book
value
59
108
46
213
– 2
– 28
– 35
– 65
57
80
11
148
1 The current portion of the minimum lease payments was recorded in trade receivables or other current assets (to the extent not invoiced).
The lease liabilities recorded in discontinued operations on January 1, 2019, the date of implementation of IFRS 16
leases (see Note 1), were USD 286 million, and the right-of-use assets were USD 276 million, including USD 89 mil-
lion and USD 75 million, respectively, for the previously reported finance lease obligations. For discontinued oper-
ations, there were no impairments or significant contract terminations of right-of-use assets for the period from
January 1, 2019, to February 28, 2019, the date of shareholder approval for the Alcon spin-off.
F-86
Notes to the Novartis Group consolidated financial statements
Net assets derecognized
The following table presents the Alcon business net assets at the date of spin-off at April 8, 2019:
(USD millions)
Property, plant and equipment
Right-of-use assets
Goodwill
Intangible assets other than goodwill
Deferred tax assets
Financial and other non-current assets
Inventories
Trade receivables and other current assets
Cash and cash equivalents
Deferred tax liabilities
Current and non-current lease liabilities
Current and non-current financial debts
Trade payables, provisions and other liabilities
Net assets derecognized
2019
2 858
269
8 906
11 121
732
526
1 469
1 787
628
– 1 713
– 269
– 3 538
– 2 751
20 025
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:
(USD millions)
2019
2018
2017
Contributions for defined
contribution plans
discontinued operations
33
104
99
Significant transactions
In March 2019, Alcon acquired PowerVision, Inc.
(PowerVision), a privately held, US-based medical device
development company focused on developing accom-
modative, implantable intraocular lenses. The fair value
of the total purchase consideration was USD 424 million.
The amount consisted of an initial cash payment of USD
289 million and the net present value of the contingent
consideration of USD 135 million, due to PowerVision
shareholders, which they are eligible to receive upon the
achievement of specified regulatory and commercializa-
tion milestones. The purchase price allocation resulted
in net identifiable assets of USD 418 million, consisting
of intangible assets of USD 505 million, net deferred tax
liabilities of USD 93 million, other net assets of USD 6
million, and goodwill of USD 6 million. The 2019 results
of operations since the date of the acquisition are not
material.
For additional information related to the distribution
(spin-off) of the Alcon business to Novartis AG
shareholders, effected through a dividend in kind
distribution that was completed on April 8, 2019, refer to
Note 1 and Note 2.
F-87
Notes to the Novartis Group consolidated financial statements
31. Events subsequent to the December 31, 2019,
consolidated balance sheet date
Significant transaction closed in January 2020
On November 23, 2019, Novartis entered into an agree-
ment and plan of merger with The Medicines Company,
New Jersey, USA. The transaction was completed on
January 6, 2020. For details see Note 2, significant trans-
action entered into in 2019 and closed in 2020.
Increase in current financial debts
On January 7, 2020, Novartis borrowed USD 7 billion
under a short-term credit facility with a syndicate of
banks. For additional information, see Note 29.
Dividend proposal for 2019 and approval of the
Group’s 2019 consolidated financial statements
On January 28, 2020, the Novartis AG Board of Direc-
tors proposed the acceptance of the 2019 consolidated
financial statements of the Novartis Group for approval
by the Annual General Meeting on February 28, 2020.
Furthermore, also on January 28, 2020, the Board pro-
posed a dividend of CHF 2.95 per share to be approved
at the Annual General Meeting on February 28, 2020. If
approved, total dividend payments would amount to
approximately USD 7.0 billion (2018: USD 6.6 billion),
using the CHF/USD December 31, 2019, exchange rate.
F-88
Notes to the Novartis Group consolidated financial statements
32. 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.
Share
capital
Equity
1 interest
As at December 31, 2019
Share
capital
Equity
1 interest
As at December 31, 2019
Algeria
Société par actions SANDOZ, Algiers
Argentina
Novartis Argentina S.A., Buenos Aires
Australia
Novartis Australia Pty Ltd, Macquarie Park, NSW
Novartis Pharmaceuticals
Australia Pty Ltd, Macquarie Park, NSW
Sandoz Pty Ltd, Macquarie Park, NSW
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
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
DZD
650.0 m
100%
ARS
906.1 m
100%
AUD
AUD
AUD
EUR
EUR
EUR
EUR
2
100%
3.8 m
11.6 m
100%
100%
1.0 m
1.1 m
32.7 m
1.0 m
100%
100%
100%
100%
BDT
162.5 m
60%
EUR
EUR
EUR
7.1 m
19.2 m
110.6 m
100%
100%
100%
12 000
30 000
20 000
USD
CHF
CHF
CHF
USD 370 000
1.0 m
100%
100%
100%
100%
100%
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%
Canada
Novartis Pharmaceuticals Canada Inc., Dorval, Quebec
Sandoz Canada Inc., Boucherville, Quebec
CIBA Vision Canada Inc., Mississauga, Ontario
Chile
Novartis Chile S.A., 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 Technical
Development Co., Ltd., Changshu
Shanghai Novartis Trading Ltd., Shanghai
Sandoz (China) Pharmaceutical
Co., Ltd., Zhongshan
Colombia
Novartis 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
Denmark
Novartis Healthcare A/S, Copenhagen
Sandoz A/S, Copenhagen
Ecuador
Novartis Ecuador S.A., Quito
Egypt
Novartis Pharma S.A.E., Cairo
Sandoz Egypt Pharma S.A.E., New Cairo City
Finland
Novartis Finland Oy, Espoo
CAD
CAD
CAD
1.2 m
80.8 m
82 886
100%
100%
100%
CLP
2.0 bn
100%
USD
HKD
30.0 m
200
100%
100%
USD
320.0 m
100%
USD
USD
12.0 m
3.2 m
100%
100%
USD
57.6 m
100%
COP
7.9 bn
100%
HRK
25.6 m
100%
CZK
CZK
DKK
DKK
51.5 m
44.7 m
100%
100%
14.0 m
12.0 m
100%
100%
USD
4.0 m
100%
EGP
EGP 250 000
193.8 m 99.77%
100%
EUR 459 000
100%
France
Novartis Groupe France S.A., Rueil-Malmaison
Novartis Pharma S.A.S., Rueil-Malmaison
Advanced Accelerator Applications S.A., Saint-Genis-Pouilly
CELLforCURE, Les Ulis
Sandoz S.A.S., Levallois-Perret
EUR
EUR
EUR
EUR
EUR
903.0 m
43.4 m
100%
100%
9.6 m 99.2%
100%
4.2 m
100%
5.4 m
Germany
Novartis Deutschland GmbH, Nuremberg
Novartis Pharma GmbH, Nuremberg
Novartis Pharma Produktions GmbH, Wehr
Novartis Manufacturing GmbH, Marburg
Sandoz International GmbH, Holzkirchen
1 A Pharma GmbH, Oberhaching
HEXAL AG, Holzkirchen
Salutas Pharma GmbH, Barleben
Aeropharm GmbH, Rudolstadt
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
Indonesia
PT. Novartis Indonesia, Jakarta
Ireland
Novartis Ireland Limited, Dublin
Novartis Ringaskiddy Limited, Ringaskiddy, County Cork
Israel
Novartis Israel Ltd., Tel Aviv
Italy
Novartis Farma S.p.A., Origgio
Advanced Accelerator Applications (Italy) S.r.l., Pozzilli
Sandoz S.p.A., Origgio
Japan
Novartis Holding Japan K.K., Tokyo
Novartis Pharma K.K., Tokyo
Ciba-Geigy Japan Limited, Tokyo
Sandoz K.K., Tokyo
Latvia
Novartis Baltics SIA, Riga
Luxembourg
Novartis Investments S.à r.l., Luxembourg City
Novartis Finance S.A., Luxembourg City
155.5 m
25.6 m
2.0 m
EUR
EUR
EUR
EUR
25 000
EUR 100 000
EUR
26 000
EUR
EUR
EUR
26 000
93.7 m
42.1 m
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
123.5 m 70.68%
100%
60.0 m
100%
32.0 m
IDR
7.7 bn
100%
EUR
EUR
25 000
2.0 m
100%
100%
ILS
1 000
100%
EUR
EUR
EUR
18.2 m
119 000
1.7 m
100%
99.2%
100%
JPY
JPY
JPY
JPY
10.0 m
6.0 bn
8.5 m
100.0 m
100%
100%
100%
100%
EUR
3.0 m
100%
USD
USD 100 000
100.0 m
100%
100%
Malaysia
Novartis Corporation (Malaysia) Sdn. Bhd., Kuala Lumpur
MYR
3.3 m
100%
Mexico
Novartis Farmacéutica, S.A. de C.V., Mexico City
Sandoz, S.A. de C.V., Mexico City
Morocco
Novartis Pharma Maroc SA, Casablanca
Netherlands
Novartis Netherlands B.V., Amsterdam
Novartis Pharma B.V., Amsterdam
IDB Holland BV, Baarle-Nassau
Sandoz B.V., Almere
New Zealand
Novartis New Zealand Ltd, Auckland
MXN
MXN
205.0 m
468.2 m
100%
100%
MAD
80.0 m
100%
1.4 m
4.5 m
EUR
EUR
EUR
18 000
EUR 907 560
100%
100%
99.2%
100%
NZD 820 000
100%
F-89
Notes to the Novartis Group consolidated financial statements
As at December 31, 2019
Taiwan
Novartis (Taiwan) Co., Ltd., Taipei
Thailand
Novartis (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
Ukraine
Sandoz Ukraine LLC, Kyiv
United Arab Emirates
Novartis Middle East FZE, Dubai
United Kingdom
Novartis UK Limited, London
Novartis Pharmaceuticals UK Limited, London
Novartis Grimsby Limited, London
Imaging Equipment Ltd, London
Vivacta Limited, Frimley / Camberley
Ziarco Group Limited, London
Sandoz Limited, Frimley / Camberley
Share
capital
Equity
1 interest
TWD
170.0 m
100%
THB
302.0 m
100%
TRY
TRY
TRY
98.0 m
6.7 m
100%
100%
165.2 m 99.99%
TRY
50.0 m
100%
UAH
8.0 m
100%
AED
7.0 m
100%
GBP
GBP
GBP
GBP
GBP
GBP
GBP
100%
25.5 m
100%
5.4 m
100%
250.0 m
99.2%
100
2.9 m 100.0%
100%
100%
2.0 m
3 904
USD
USD
USD
USD
--
USD
USD
USD
USD
--
United States of America
Novartis Corporation, East Hanover, NJ
Novartis Finance Corporation, East Hanover, NJ 3
Novartis Capital Corporation, East Hanover, NJ
Novartis Services, Inc., East Hanover, NJ
Novartis US Foundation, East Hanover, NJ
Novartis Pharmaceuticals Corporation, East Hanover, NJ
Advanced Accelerator Applications USA, Inc., Millburn, NJ
AveXis, Inc., Bannockburn, IL
Novartis Inflammasome Research, Inc., East Hanover, NJ
Novartis Technology LLC, East Hanover, NJ
Novartis Institutes for BioMedical
USD
Research, Inc., Cambridge, MA
USD
CoStim Pharmaceuticals Inc., Cambridge, MA
USD
Encore Vision, Inc., East Hanover, NJ
USD
Endocyte, Inc., East Hanover, NJ
USD
Navigate BioPharma Services, Inc., Carlsbad, CA
USD
Reprixys Pharmaceuticals Corporation, East Hanover, NJ
Spinifex Pharmaceuticals, Inc., East Hanover, NJ
USD
Novartis Institute for Functional Genomics, Inc., San Diego, CA USD
USD
Sandoz Inc., Princeton, NJ
USD
Oriel Therapeutics, Inc., Durham, NC
USD
Fougera Pharmaceuticals Inc., Melville, NY
USD
Eon Labs, Inc., Princeton, NJ
USD
Novartis Vaccines and Diagnostics, Inc., East Hanover, NJ
72.2 m
1 000
1
1
--
650
1
1
1
--
1
1
1
1
1
1
1
1 000
25 000
1
1
1
3
100%
100%
100%
100%
100%
100%
99.2%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Venezuela
Novartis de Venezuela, S.A., Caracas
VES
14
100%
In addition, the Group is represented by subsidiaries and associated companies with
total assets or net sales to third parties below USD 25 million in the following countries:
Bosnia/Herzegovina, Bulgaria, Dominican Republic, Guatemala, Kenya, North
Macedonia, Nigeria, Puerto Rico, Uruguay and Vietnam
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
As at December 31, 2019
Norway
Novartis Norge AS, Oslo
Pakistan
Novartis Pharma (Pakistan) Limited, Karachi
Panama
Novartis Pharma (Logistics), Inc., Panama City
Peru
Novartis Biosciences Perú S.A., Lima
Philippines
Novartis Healthcare Philippines, Inc., Makati City
Sandoz Philippines Corporation, Makati City
Poland
Novartis Poland Sp. z o.o., Warsaw
Sandoz Polska Sp. z o.o., Warsaw
Lek S.A., Strykow
Portugal
Novartis Portugal SGPS Lda., Porto Salvo
Novartis Farma – Produtos Farmacêuticos S.A., Porto Salvo
Sandoz Farmacêutica 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
Saudi Arabia
Novartis Saudi Ltd., Riyadh
Singapore
Novartis (Singapore) Pte Ltd., Singapore
Novartis Singapore Pharmaceutical
Manufacturing Pte Ltd, Singapore
Novartis Asia Pacific Pharmaceuticals
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
South Korea
Novartis Korea Ltd., Seoul
Spain
Novartis Farmacéutica, S.A., Barcelona
Advanced Accelerator Applications
Iberica, S.L.U., Esplugues de Llobregat
Sandoz Farmacéutica S.A., Madrid
Sandoz Industrial Products
S.A., Les Franqueses del Vallés / Barcelona
Alcon Cusi S.A., El Masnou / 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
6.7 bn 99.99%
USD
10 000
100%
PEN
6.1 m
100%
PHP
PHP
PLN
PLN
PLN
298.8 m
30.0 m
100%
100%
44.2 m
25.6 m
11.4 m
100%
100%
100%
EUR 500 000
EUR
EUR 499 900
2.4 m
100%
100%
100%
RON
RON
3.0 m
105.2 m
100%
100%
RUB
RUB
RUB
20.0 m
500.0 m
57.4 m
100%
100%
100%
SAR
26.8 m
75%
SGD 100 000
100%
SGD
45.0 m
100%
SGD
39.0 m
100%
EUR
2.0 m
100%
EUR
EUR
ZAR
ZAR
48.4 m
1.5 m
100%
100%
86.3 m
3.0 m
100%
100%
KRW
24.5 bn 98.55%
EUR
63.0 m
100%
EUR
EUR 270 450
22.6 m 99.2%
100%
EUR
EUR
EUR
9.3 m
10.1 m
6.0 m
100%
100%
100%
SEK
5.0 m
100%
10.0 m
100.2 m
100%
100%
100%
100%
100%
100%
100%
100%
--
--
--
--
CHF
CHF
CHF 100 000
CHF 100 000
--
--
--
--
Switzerland
Novartis International AG, Basel
Novartis Holding AG, Basel 3
Novartis International Pharmaceutical Investment AG, Basel
Novartis Bioventures AG, Basel
Novartis Forschungsstiftung, Basel
Novartis Stiftung für Kaderausbildung, Basel
Novartis Mitarbeiterbeteiligungsstiftung, Basel
Novartis Stiftung für Mensch und Umwelt, Basel
Stiftung der Novartis AG für Erziehung,
Ausbildung und Bildung, Basel
Novartis Overseas Investments AG, Basel
Japat AG, Basel
Novartis Pharma AG, Basel 3
Novartis International Pharmaceutical AG, Basel 3
Novartis Pharma Services AG, Basel
Novartis Pharma Schweizerhalle AG, Muttenz
Novartis Pharma Stein AG, Stein
Novartis Pharma Schweiz AG, Risch
Novartis Ophthalmics AG, Fribourg
Advanced Accelerator Applications International SA, Geneva CHF
CHF
Sandoz AG, Basel
CHF 100 000
Sandoz Pharmaceuticals AG, Risch
CHF
Roche Holding AG, Basel
--
CHF
CHF
CHF
CHF 100 000
CHF
CHF
CHF 251 000
CHF
CHF 100 000
50 000
350.0 m
20.0 m
18.9 m
--
1.0 m
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
9.3 m 99.2%
100%
5.0 m
100%
33/6
5.0 m
160.0 m
2
F-90
Report of the statutory auditor
Report of the statutory auditor
to the General Meeting of
Novartis AG,
Basel
Report on the audit of the
consolidated financial statements
Opinion
We have audited the consolidated financial statements
of Novartis AG and its subsidiaries (the “Group”), which
comprise the consolidated balance sheet as at Decem-
ber 31, 2019 and the consolidated income statement,
consolidated statement of comprehensive income, con-
solidated statement of changes in equity, and consoli-
dated statement of cash flows, and notes to the consol-
idated financial statements, including a summary of
significant accounting policies, for the year ended
December 31, 2019.
In our opinion, the consolidated financial statements
(pages F-1 to F-90) give a true and fair view of the con-
solidated financial position of the Group as at December
31, 2019, and its consolidated financial performance and
its consolidated cash flows for the year then ended in
accordance with International Financial Reporting Stan-
dards (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.
• In addition, specified procedures or full scope audit
work on account balances was performed at 18 report-
ing entities in 13 countries.
• Our audit scope addressed 67% of the Group’s net
sales and 81% of Group’s total assets.
As key audit matters, the following areas of focus have
been identified:
• Valuation of the dividend in kind distribution liability of
the Alcon business
• Carrying value of the Innovative Medicines division
intangible assets
• Valuation of the US Managed Care, Medicare Part D,
Medicaid and indirect rebates
Context of our audit 2019
The context of our audit is set by the Group’s major activ-
ities in the reporting period during which the Alcon busi-
ness was distributed to the shareholders in the form of
a dividend in kind. The fair value of the Alcon business
at the time of the distribution was USD 23.4 billion and
the total gain recognized amounted to USD 4.7 billion
upon distribution. As the transaction is significant and
involved judgment, we placed additional focus on the val-
uation of the Alcon business for the purpose of the dis-
tribution. The rest of the audit process was largely
unchanged as compared to the prior year.
Materiality
The scope of our audit was influenced by our applica-
tion of materiality. Our audit opinion aims to provide rea-
sonable assurance that the consolidated financial state-
ments are free from material misstatement. Misstatements
may arise due to fraud or error. They are considered
material if, individually or in aggregate, they could rea-
sonably be expected to influence the economic deci-
sions of users taken on the basis of the consolidated
financial statements.
Based on our professional judgment, we determined
certain quantitative thresholds for materiality, including
the overall Group materiality for the consolidated finan-
cial statements as a whole, as set out below. These,
together with qualitative considerations, helped us to
determine the scope of our audit and the nature, timing
and extent of our audit procedures, and to evaluate the
effect of misstatements, if any, both individually and in
aggregate, on the consolidated financial statements as
a whole.
Our audit approach
Overall Group materiality
USD 400 million
Overview
• Overall Group materiality was USD 400 million, which
represents slightly less than 5% of income before taxes
from continuing operations.
• We conducted full scope audit work at the Group’s two
operating divisions and at seven reporting entities in
five countries.
How we determined it
Materiality was determined provisionally as 5% of esti-
mated 2019 income before taxes from continuing oper-
ations. This level was reassessed and confirmed as part
of our completion procedures.
F-91
Report of the statutory auditor
Rationale for the materiality benchmark applied
We chose income before taxes from continuing opera-
tions as the materiality measure because, in our view, it
is the measure against which the performance of the
Group is most commonly assessed and is a generally
accepted benchmark.
We agreed with the Audit and Compliance Committee
that we would report to them misstatements identified
during our audit above USD 20 million as well as any mis-
statements below that amount which, in our view, war-
ranted reporting for qualitative reasons.
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 200 reporting entities. We identified seven report-
ing entities that, in our view, required an audit of their
complete financial 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 and Sandoz, each being a global
business with headquarters based in Switzerland and
Germany, respectively. To obtain appropriate coverage
of material balances, we also received one specified pro-
cedures report and 17 full scope reports from reporting
entity audit teams for the full scope audit work performed
on account balances. None of the reporting entities
excluded from our Group audit scope individually con-
tributed more than 5% to net sales or total assets. Audit
procedures were also performed by the Group audit
team over the Group’s Corporate activities, certain Group
functions (including accounting for associated compa-
nies, taxation, treasury, certain employee benefits, gov-
ernment investigations and litigation) and Group consol-
idation.
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 man-
agement and divisional audit teams. In addition, we
hosted a planning workshop in September 2019 for the
teams auditing the divisional and reporting entities.
F-92
Report of the statutory auditor
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
Addressing the matter involved performing procedures and
evaluating audit evidence in connection with forming our
overall opinion on the consolidated financial statements.
These procedures included testing the effectiveness of con-
trols relating to management’s valuation of the distribution
liability, including controls over the key assumptions used
in the projected future cash flows and the discount rate.
These procedures also included, among others, testing
management’s process for developing the fair value esti-
mate; evaluating the appropriateness of the discounted
cash flow model; testing the completeness, accuracy, and
relevance of underlying data used in the model; and evalu-
ating the significant assumptions, including the amount and
timing of projected future cash flows (specifically the ter-
minal growth rate, long-term sales forecasts and profit mar-
gin assumptions) and the discount rate. Evaluating manage-
ment’s assumptions related to the amount and timing of
projected future cash flows and the discount rate involved
evaluating whether the assumptions used by management
were reasonable considering the current and past perfor-
mance of the Alcon business, the consistency with external
market and industry data, and whether these assumptions
were consistent with evidence obtained in other areas of
the audit. Professionals with specialized skill and knowledge
were used to assist in the evaluation of Alcon’s discounted
cash flow model and certain significant assumptions, includ-
ing the terminal growth rate and the discount rate.
As a result of our procedures, we did not propose any
adjustment to the valuation of the dividend in kind distribu-
tion liability. We found that the assessment made by man-
agement was based upon reasonable assumptions.
Valuation of the dividend in kind distribution liability of
the Alcon business
As described in Notes 1 and 2 to the consolidated financial
statements, the shareholder approval to spin off the Alcon
business required the recognition of a distribution liability
at the fair value of the Alcon business. At the April 8, 2019
distribution date, the fair value of the distribution liability of
the Alcon business amounted to USD 23.4 billion. The total
non-taxable, non-cash gain recognized at the completion
of the spin-off of the Alcon business on April 8, 2019,
amounted to USD 4.7 billion. The recognition of the distri-
bution liability required the use of valuation techniques for
purposes of impairment testing of the Alcon business’
assets to be distributed and for the measurement of the fair
value of the distribution liability. These valuations required
the use of management assumptions and estimates related
to the Alcon business’ future cash flows, market multiples
to estimate day one market value, and control premiums to
apply in estimating the Alcon business fair value. The esti-
mates used in calculating the Alcon business’ future cash
flows depend on assumptions specific to the nature of
Alcon’s activities with regard to the amount and timing of
projected future cash flows; long-term sales forecasts;
actions of competitors (launch of competing products, mar-
keting 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 (compound efficacy,
results of clinical trials, etc.); amount and timing of projected
costs to develop IPR&D into commercially viable products;
profit margins; probability of obtaining regulatory approval;
future tax rate; terminal growth rate; and discount rate.
The principal considerations for our determination that
performing procedures relating to the valuation of the divi-
dend in kind distribution liability of the Alcon business is a
key audit matter are there was significant judgment by man-
agement when developing the amount and timing of pro-
jected future cash flows (specifically the terminal growth
rate, long-term sales forecasts and profit margin assump-
tions) and the discount rate. This in turn led to a high degree
of auditor judgment, subjectivity, and effort in performing
procedures to evaluate these assumptions. In addition, the
audit effort involved the use of professionals with special-
ized skill and knowledge to assist in performing these pro-
cedures and evaluating the audit evidence obtained.
F-93
Report of the statutory auditor
Key audit matter
How our audit addressed the key audit matter
Addressing the matter involved performing procedures and
evaluating audit evidence in connection with forming our
overall opinion on the consolidated financial statements.
These procedures included testing the effectiveness of con-
trols relating to the key assumptions used in the impairment
testing of the intangible assets. These procedures also
included, among others, testing management’s process for
developing the fair value estimate; evaluating the appropri-
ateness of the discounted cash flow model; testing the com-
pleteness, accuracy, and relevance of underlying data used
in the model; and evaluating the significant assumptions
used by management, including the amount and timing of
projected future cash flows and the discount rate. Evaluat-
ing management’s assumptions related to the amount and
timing of projected future cash flows and the discount rate
involved evaluating whether the assumptions used by man-
agement were reasonable considering the current and past
performance of the intangible, the consistency with exter-
nal market and industry data, and whether these assump-
tions were consistent with evidence obtained in other areas
of the audit. Professionals with specialized skill and knowl-
edge were used to assist in the evaluation of the discount
rate.
As a result of our procedures, we did not propose any
adjustments to the amount of impairment recognized in
2019. For intangible assets other than goodwill where man-
agement determined that no impairment was required, we
found that the assessments made by management were
based upon reasonable assumptions, consistently applied.
Carrying value of the Innovative Medicines division
intangible assets
As described in Notes 1 and 11 to the consolidated financial
statements, the Group has intangible assets in its Innovative
Medicines division other than goodwill totaling USD 27.6 bil-
lion at December 31, 2019, comprising in-process research
and development (IPR&D), currently marketed products, and
other intangible assets. The Group recognized impairments
of intangible assets in its Innovative Medicines division other
than goodwill of USD 669 million during the year. In most
cases, no directly observable market inputs are available to
measure the fair value less costs of disposal that is used to
determine if the asset is impaired. Therefore, an estimate is
derived indirectly and is based on net present value tech-
niques utilizing post-tax cash flows and discount rates. The
estimates used in calculating the net present values depend
on assumptions specific to the nature of the Innovative
Medicines division’s activities with regard to the amount and
timing of projected future cash flows; long-term sales fore-
casts; 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 (compound efficacy,
results of clinical trials, etc.); amount and timing of projected
costs to develop IPR&D into commercially viable products;
profit margins; probability of obtaining regulatory approval;
future tax rate; and discount rate.
The principal considerations for our determination that
performing procedures relating to the carrying value of the
Innovative Medicines division intangible assets is a key audit
matter are there was significant judgment by management
when developing the amount and timing of projected future
cash flows (specifically the long-term sales forecasts and
the probability of obtaining regulatory approval) and the dis-
count rate. This in turn led to a high degree of auditor judg-
ment, subjectivity, and effort in performing procedures to
evaluate these assumptions. In addition, the audit effort
involved the use of professionals with specialized skill and
knowledge to assist in performing these procedures and
evaluating the audit evidence obtained.
Key audit matter
How our audit addressed the key audit matter
Addressing the matter involved performing procedures and
evaluating audit evidence in connection with forming our
overall opinion on the consolidated financial statements.
These procedures included testing the effectiveness of con-
trols relating to provisions for the US Managed Care, Medi-
care Part D, Medicaid and indirect rebate programs, includ-
ing controls over the assumptions used to estimate these
rebates. These procedures also included, among others,
developing an independent estimate of the rebates by uti-
lizing third-party information, the terms and regulation of
the specific rebate programs, and the historical trend of
actual rebate claims paid; comparing the independent esti-
mate to management’s estimates; and testing rebate claims
processed by the Group, including evaluating those claims
for consistency with the contractual and mandated terms
of the Group’s rebate arrangements. Professionals with spe-
cialized skill and knowledge were used to evaluate whether
the policy is in compliance with government regulations.
We did not identify any material differences between our
expectations and the accruals, and we found the judgments
made by management to be reasonable.
Valuation of the US Managed Care, Medicare Part D,
Medicaid and indirect rebates
As described in Note 1 and 22 to the consolidated financial
statements, the consideration Novartis receives in exchange
for its goods or services may be fixed or variable. Variable con-
sideration is only recognized when it is highly probable that a
significant reversal will not occur. Rebates and discounts
granted to government agencies, wholesalers, retail pharma-
cies, managed healthcare organizations and other customers
are provisioned and recorded as a deduction from revenue at
the time the related revenues are recorded or when the incen-
tives are offered. They are calculated on the basis of historical
experience, regulations, the specific terms in the individual
agreements, product pricing and the mix of products, con-
tracts, channels and payors. The provision reported as of
December 31, 2019 for revenue deductions amounted to USD
5.6 billion, with a significant portion of which related to US Man-
aged Care, Medicare Part D, Medicaid and indirect rebates.
The principal considerations for our determination that
performing procedures relating to the valuation of the US
Managed Care, Medicare Part D, Medicaid and indirect
rebates is a key audit matter are there was significant judg-
ment by management due to the measurement uncertainty
involved in developing these provisions, as the provisions
are based on assumptions developed using historical expe-
rience, regulations, the specific terms in the individual
agreements, product pricing and the mix of products, con-
tracts, channels and payors. This in turn led to a high degree
of auditor judgment, subjectivity and effort in applying pro-
cedures relating to these assumptions. In addition, the audit
effort involved the use of professionals with specialized skill
and knowledge to assist in performing these procedures
and evaluating the audit evidence obtained.
F-94
Report of the statutory auditor
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 standalone financial statements, the compensation
report of Novartis AG 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
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.
F-95
Report of the statutory auditor
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
Kris Muller
Global relationship
partner
Basel, January 28, 2020
F-96
Financial statements of Novartis AG
Financial statements of Novartis AG
Income statements
(For the years ended December 31, 2019 and 2018)
(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
Extraordinary expenses
Income before taxes
Direct taxes
Net income of the year
The accompanying Notes form an integral part of these financial statements.
Note
2019
2018
15 318
10 761
221
1 475
2
91
8
15 541
12 335
– 474
– 1 140
– 11
– 2
– 263
– 23
– 2
– 487
– 1 428
15 054
10 907
512
– 260
– 86
488
– 231
15 220
11 164
– 40
– 197
15 180
10 967
3
4
5
5
6
A-1
Financial statements of Novartis AG
Balance sheets
(At December 31, 2019 and 2018)
(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
Interest-bearing current liabilities
Group subsidiaries
Other current liabilities
Group subsidiaries
Third parties
Accrued expenses
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 legal reserve
Total legal reserves
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
Legal reserve for treasury shares held by subsidiaries
10
Note
2019
2018
3
3
4 078
4 574
64
1
102
7
4 146
4 686
14 966
14 966
7
3
14 251
13 011
2 671
13 226
31 888
41 203
36 034
45 889
4 635
42
4
118
4 799
37
30
201
268
8
1 377
1 377
482
486
1 859
1 863
9
1 264
1 275
179
320
1 984
2 304
198
320
2 596
2 916
11
6 949
25 433
8 844
4 833
15 180
10 967
24 024
15 800
30 973
41 233
10
– 5 344
– 1 864
29 376
43 758
36 034
45 889
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. Therefore, Novartis AG
has applied the exemption included in Art. 961d para. 1
SCO and has not prepared additional disclosures, a sep-
arate cash flow statement and a management report for
SCO purposes.
The Novartis AG shareholders approved the spin-off
of the Alcon business at the 2019 Annual General Meet-
ing held on February 28, 2019, subject to completion of
certain conditions precedent to the distribution.
The conditions precedent to the spin-off were met
and on April 8, 2019 the spin-off of the Alcon business
was effected by way of a distribution of a dividend in kind
of Alcon Inc. shares to Novartis AG shareholders and
ADR (American Depositary Receipt) holders (the Distri-
bution).
Through the Distribution, each Novartis AG share-
holder received one Alcon Inc. share for every five
Novartis AG shares/ADRs they held on April 8, 2019,
close of business. As of April 9, 2019, the shares of Alcon
Inc. are listed on the SIX Swiss Exchange (SIX) and on
the New York Stock Exchange (NYSE) under the sym-
bol “ALC.”
At the date of the distribution, the book value of Alcon
Inc. was CHF 17 288 million and consisted of Goodwill
(CHF 10 081 million), Investments in Group subsidiaries
(CHF 7 188 million) and cash (CHF 19 million). The Dis-
tribution was made at the book value of Alcon Inc. and
is recognized as a reduction to free reserves (CHF 17 269
million) and legal capital reserves – capital contribution
reserves (CHF 19 million).
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
January 1
Derecognition as a result of the Alcon Inc. spin-off
December 31
Accumulated amortization
January 1
2019
2018
22 350
22 350
– 17 411
4 939
22 350
– 9 124
– 7 984
Accumulated amortization on assets related to derecognition as a result of the Alcon Inc. spin-off
7 330
Amortization charges
December 31
Net book value at December 31
Other intangible assets
Cost
January 1
Transfer to Group subsidiaries
December 31
Accumulated amortization
January 1
Transfer to Group subsidiaries
Net book value at December 31
Goodwill and other intangible assets
Net book value at December 31
– 474
– 1 140
– 2 268
– 9 124
2 671
13 226
11
– 11
– 11
11
2 671
13 226
4. Impairment of investment in Group subsidiaries
In 2018, Novartis AG impaired certain Group participations in conjunction with the separation of the Alcon business
as described in Note 7.
5. Financial income and expenses
(CHF millions)
Interest
Foreign exchange
Others
Total
2019
2018
Income
Expenses
Income
Expenses
512
– 191
– 69
-0
488
– 114
– 116
– 1
512
– 260
488
– 231
6. Extraordinary expenses
In 2019, extraordinary expenses are related to the transaction costs attributable to the spin-off of Alcon Inc.
A-4
Notes to the financial statements of Novartis AG
. 7. Investments
The principal direct and indirect subsidiaries and other
holdings of Novartis AG are shown in Note 32 to the
Group’s consolidated financial statements.
In 2018, 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 spin-off of Alcon Inc. 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 transac-
tion, the dividend income and the related NOAG invest-
ment value (with an approximate book value of CHF 4.3
billion) were offset, ensuring that Novartis AG’s combined
carrying value of NOAG and APL equals the previous
carrying value of APL.
In 2019, various participations in Group companies,
including Alcon related participations, were distributed
by subsidiaries to Novartis AG, which in turn contributed
them to Alcon Inc. The participation in Alcon Inc. was
distributed as a dividend in kind to the Novartis AG share-
holders and ADR (American Depositary Receipt) hold-
ers on April 8, 2019.
8. 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 2024
Total
2018
(CHF
Issue price millions) millions)
2019
(CHF
100.640%
100.502%
100.479%
501
551
325
501
551
325
1 377 1 377
2019
1 377
1 377
2018
1 377
1 377
Comparison of balance sheet and fair value
(CHF millions)
Straight bonds
Total
2019
Balance sheet
2019
2018
Fair value Balance sheet
2018
Fair value
1 377
1 377
1 454
1 454
1 377
1 377
1 373
1 373
A-5
Notes to the financial statements of Novartis AG
9. Share capital
January 1
2 550 624 820
1 275.3
2 616 844 820
Number of shares canceled/capital reduced during the period
– 23 250 000
– 11.6
– 66 220 000
December 31
2 527 374 820
1 263.7
2 550 624 820
2019
Number
of shares
Share capital
CHF millions
2018
Number
of shares
Share capital
CHF millions
1 308.4
– 33.1
1 275.3
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 1 275.3
million at December 31, 2018, to CHF 1 263.7 million at
December 31, 2019, due to a share capital reduction as
a result of the cancellation of 23.3 million repurchased
shares with a nominal value of CHF 11.6 million. The
cancellation was approved at the Annual General Meeting
of February 28, 2019, and became effective on May 8,
2019. During 2018, 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 effec-
tive on May 9, 2018.
10. Treasury shares
Treasury shares held by subsidiaries 1
January 1
Number of shares purchased/sold; reserves transferred
December 31
1 Excluding foundations
2019
2018
Legal reserve for
treasury shares
held by subsidiaries
CHF millions
Number
of shares
Legal reserve for
treasury shares
held by subsidiaries
CHF millions
Number
of shares
43 229 470
– 10 132 468
33 097 002
2 596
– 612
1 984
50 506 375
– 7 276 905
43 229 470
3 005
– 409
2 596
2019
2018
Deduction from equity
for treasury shares
held by Novartis AG
CHF millions
Number
of shares
Deduction from equity
for treasury shares
held by Novartis AG
CHF millions
Number
of shares
Treasury shares held by Novartis AG
January 1
Number of shares purchased/canceled; reserves transferred
December 31
74 557 458
37 063 900
111 621 358
1 864
3 480
5 344
117 527 458
– 42 970 000
74 557 458
5 213
– 3 349
1 864
Total treasury shares 1
January 1
Total number of shares purchased/sold or canceled;
reserves transferred
December 31
1 Excluding foundations
2019
Number of
shares
Total
treasury shares
CHF millions
2018
Number
of shares
Total
treasury shares
CHF millions
117 786 928
4 460
168 033 833
8 218
26 931 432
144 718 360
2 868
– 50 246 905
7 328
117 786 928
– 3 758
4 460
A-6
Notes to the financial statements of Novartis AG
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 2019 totaled 62.0
million (2018: 24.4 million), with an average purchase
price of CHF 88 (2018: CHF 79). Treasury share sales
totaled 1.7 million (2018: 0.8 million), with an average sale
price of CHF 62 (2018: CHF 67), and share-based
compensation transactions totaled 10.2 million shares
(2018: 7.6 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, 2019,
treasury shares held by Novartis AG and its subsidiaries
totaled 144 718 360. As per the dividend payment date,
Novartis AG and its subsidiaries are expected to hold
133 714 574 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.
11. Free reserves
(CHF millions)
January 1
Special distribution by way of a dividend in kind to effect the spin-off of Alcon Inc.
Free reserves after Alcon Inc. spin-off
Reduction due to cancellation of treasury shares (CHF 1 839 million / CHF 5 188 million of repurchased shares
less their nominal value of CHF 12 million / CHF 33 million)
Transfer from legal reserve for treasury shares
December 31
2019
2018
25 433
30 178
– 17 269
8 164
– 1 827
– 5 154
612
409
6 949
25 433
12. Contingent liabilities
(CHF millions)
Dec 31, 2019 Dec 31, 2018
Guarantees in favor of subsidiaries to cover capital and interest of bonds, credit facilities and commercial paper programs –
total maximum amount CHF 41 356 million (2018: CHF 45 768 million)
22 471
27 635
Other guarantees in favor of subsidiaries, associated companies and others –
total maximum amount CHF 1 870 million (2018: CHF 3 379 million)
Total contingent liabilities
495
1 649
22 966
29 284
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.
In December 2019, a US subsidiary of Novartis AG
entered into a short-term credit facility of USD 7 billion,
with a maturity date of June 30, 2020 with a syndicate
of banks related to the acquisition of The Medicines
Company. The facility is guaranteed by Novartis AG. On
January 7, 2020, USD 7 billion were borrowed under the
facility.
A-7
Notes to the financial statements of Novartis AG
13. 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, 2019, 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 % holding of
share capital share capital
Dec 31, 2019 Dec 31, 2018
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
Through The Bank of New York Mellon,
SA/NV, Brussels
Nortrust Nominees Ltd., London
10.4
3.8
2.0
1.2
0.6
3.9
9.8
4.1
2.1
1.3
0.7
3.6
Shareholder acting as American Depositary Share (ADS) depositary:
JPMorgan Chase Bank, N.A., New York
12.5
13.3
Shareholders registered for
their own account:
Emasan AG, Basel
Novartis Foundation for Employee
Participation, Basel
UBS Fund Management
(Switzerland) AG, Basel
% holding of % holding of
share capital share capital
Dec 31, 2019 Dec 31, 2018
3.5
2.1
2.1
3.5
2.3
2.2
Furthermore, there are the following other significant
share holders:
The following shareholder is disclosed through a notifi-
cation filed with Novartis AG, but is not registered as of
December 31, 2019, in the Novartis Share Register:
• Norges Bank (Central Bank of Norway), Oslo, holds
2.1% (2018: 2.1%).
The following shareholders are disclosed through
notifications filed with Novartis AG and the SIX Swiss
Exchange, but are not registered or registered with less
than 2% of the share capital as of December 31, 2019,
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-8
Notes to the financial statements of Novartis AG
14. 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, 2019, all current and former members of the Board
of Directors who were required to meet the minimum
share ownership requirements did so.
Shares, ADRs and share options owned by Board
members
As at December 31, 2019, 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,
2019 and 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,
2018
2019
Joerg Reinhardt
Enrico Vanni
Nancy Andrews
Ton Buechner
Patrice Bula
Srikant Datar
Elizabeth Doherty
Ann Fudge
Frans van Houten
Andreas von Planta
Charles L. Sawyers
William T. Winters
Total 3
563 697
542 199
26 645
23 500
7 265
10 950
1 946
5 739
8 069
0
41 334
39 383
6 765
14 114
4 764
4 882
14 818
2 728
161 035
133 493
10 986
18 170
9 460
15 371
867 671
799 642
NA – Not applicable.
1 Includes holdings of “persons closely linked” to Board members (see definition in
“—Persons closely linked.”)
2 Each share provides entitlement to one vote.
3 Dimitri Azar stepped down from the Board of Directors on February 28, 2019. On
February 28, 2019, Mr. Azar owned 18 750 shares. His shares are not included in the
total.
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 RSUs within five years of hire or pro-
motion, 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 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 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.
As at December 31, 2019, all members who have served
at least five years on the Executive Committee have met
or exceeded their personal Novartis share ownership
requirements.
Shares, ADRs, equity rights and share options
owned by Executive Committee members
As at December 31, 2019, 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, 2019 and 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-9
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,
2019
equity rights 2
Vested
shares
Unvested
shares
Total at
and other December 31,
2018
and ADRs equity rights 2
Vasant Narasimhan
Steven Baert
Bertrand Bodson
James Bradner
Harry Kirsch
Shannon Thyme Klinger
Steffen Lang
Klaus Moosmayer
Susanne Schaffert
Richard Saynor
(from July 15, 2019)
John Tsai
Marie-France Tschudin
(from June 7, 2019)
Robert Weltevreden
Total 3
59 983
209 934
269 917
25 240
117 855
143 095
39 785
96 428
136 213
23 365
62 059
85 424
4 600
26 529
31 129
0
8 514
8 514
21 794
150 910
172 704
924
90 190
91 114
108 193
143 452
251 645
97 081
100 302
197 383
12 193
58 633
70 826
14 007
40 111
54 118
56 063
51 565
107 628
23 793
33 577
57 370
0
15 050
15 050
43 770
64 082
107 852
0
11 001
11 001
0
0
0
3 274
3 274
0
0
0
0
11 859
42 057
53 916
6 429
18 634
25 063
5 500
69 793
75 293
0
0
0
150
19 137
19 287
150
3 690
3 840
363 890
958 571 1 322 461
190 989
478 206
669 195
NA – Not applicable.
1 Includes holdings of “persons closely linked” to Executive Committee members (see definition in this Note 14)
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 Richard Francis stepped down from the Executive Committee in 2019 and Paul Hudson resigned.
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)
2019
2018
8 844 268 955
4 833 109 672
15 179 937 729
10 966 901 239
24 024 206 684
15 800 010 911
Payment of a gross dividend (before taxes and duties) of CHF 2.95 (2018: CHF 2.85) on 2 393 660 246
(2018: 2 443 373 372) dividend-bearing shares1 with a nominal value of CHF 0.50 each
– 7 061 297 726
– 6 963 614 110
Total available earnings after appropriation of cash dividends
16 962 908 958
8 836 396 801
Dividend waived for additional treasury shares held by the Company
7 872 154
Balance to be carried forward after cash dividends
16 962 908 958
8 844 268 955
1 No dividend will be declared on treasury shares held by Novartis AG or its fully owned subsidiaries.
If this proposal is approved, the dividend will be paid as from March 5, 2020. The last trading day with entitlement
to receive the dividend is March 2, 2020. As from March 3, 2020 the shares will be traded ex-dividend.
2. Special distribution by way of a dividend in kind to
effect the spin-off of Alcon Inc.
(CHF)
Available reserves before special distribution
Capital contribution reserves
Free reserves
Special distribution by way of a dividend in kind to effect the spin-off of Alcon Inc.
Thereof appropriation from capital contribution reserves
Thereof appropriation from free reserves
Total distributable reserves after special distribution by way of dividend in kind to effect the spin-off of Alcon Inc.
Capital contribution reserves
Free reserves
2019
198 385 279
25 432 646 806
– 19 548 000
– 17 269 355 019
178 837 279
8 163 291 787
Novartis shareholders approved the proposed 100%
spin-off of the Alcon Inc. at the Annual General Meeting
on February 28, 2019. The conditions precedent to the
spin-off were met and on April 8, 2019, the spin-off of
Alcon Inc. was affected by the way of a distribution of
dividend in kind of Alcon Inc. shares to Novartis AG
shareholders and ADR (American Depository Receipt)
holders. Through the distribution, each Novartis AG
shareholder received one Alcon Inc. share for every five
dividend bearing shares of Novartis AG/ADRs they held
on April 8, 2019, close of business.
A-11
Report of the statutory auditor
Report of the statutory auditor
to the General Meeting of
Novartis AG,
Basel
Report on the audit of the financial
statements
Opinion
We have audited the financial statements of Novartis AG,
which comprise the balance sheet as at December 31,
2019, income statement, and notes to the financial state-
ments for the year then ended, including a summary of
significant accounting policies.
In our opinion, the financial statements (pages A-1 to
A-10) as at December 31, 2019, 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
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% of income before taxes and for consistency
with the Novartis Group consolidated financial state-
ments, we determined materiality at CHF 400 million,
which is 2.6% 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.
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.
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 entity, the accounting processes and
controls, and the industry in which the entity operates.
Report on key audit matters based on
the circular 1/2015 of the Federal
Audit Oversight Authority
We have determined that there are no key audit matters
to communicate 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
A-12
Report of the statutory auditor
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.
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.
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
Kris Muller
Global relationship
partner
Basel, January 28, 2020
A-13