Novartis AG
Annual Report 2022

Plain-text annual report

Annual Report 2022 Annual Report 2022 Chair’s letter Medical progress and innovation are evolving with impres- sive speed even in a  world of increasing volatility and uncertainty. In 2022, we initiated a major transformation of our organization to further improve our innovation capa- bilities and align with our growth strategy as a pure-play medicines company. We expect these changes to simplify our business, enhance accountabilities and strengthen our commer- cial activities by enabling us to better focus on our in-mar- ket products and high-value pipeline assets. Overall, our efforts are set to support our long-term sales and profit growth and help us create sustainable shareholder value. As part of this transformation, which includes our inten- tion to spin off our Sandoz generics and biosimilars Divi- sion, we merged our Oncology and Pharmaceuticals com- mercial organizations and created a new Operations organization that combines our manufacturing and ser- vices activities. Besides sub stantial cost savings, we expect these steps to increase our operational agility and strengthen our business in key markets such as the United States and China. The organizational changes, which we expect to finalize in 2023, complete the portfolio shift we started in 2014. Over this time, we have divested several non-core busi- nesses and spun off our eye-care division Alcon. With a view to boosting our innovation power, we have also made substantial investments in cutting-edge technology plat- forms, including gene and cell therapy, radioligand ther- apy and RNA technology. Novartis delivered on its sales and operating profit tar- gets in 2022 despite the challenges of a volatile macro- economic environment and while executing on our ongo- ing transformation, which entailed job reductions due to structural changes. This performance was supported by cost discipline and continued operational streamlining, as well as the strong uptake of  recently launched medicines, such as multiple sclerosis treatment Kesi- mpta, and continued strong demand for our cardiovas- cular medicine Entresto and psoriasis treatment Cosentyx. Last year also saw new leadership at the Novartis Insti- tutes for BioMedical Research and our Global Drug Development organization, the research and develop- ment (R&D) engines of Novartis, and a renewed focus on improving governance and speeding up the transition between early drug discovery and clinical development. These measures should help further strengthen our port- folio of medicines, which we have consistently broadened in recent years with launches including cancer treat- ments Pluvicto and Scemblix. We have also further intensified our efforts to integrate our environmental, social and governance (ESG) activi- ties into our daily business, which we believe is vital for the success of Novartis. Among a variety of steps aimed at reaching as many patients as possible, we renewed our commitment to continue our R&D efforts in neglected tropical diseases and to work further toward the elimi- nation of malaria. In addition, we are partnering with the American Society of Hematology to deepen our efforts to fight against sickle cell disease in Africa. The Board of Directors also remained vigilant in its gov- ernance oversight efforts by putting added emphasis on values such as integrity as Novartis pivots towards becoming a high-performance, pure-play medicines company. Likewise, the Executive Committee and the Board of Directors are keeping up the intensive dialogue with stake holder groups and working towards achieving our vision to be the most valued and trusted medicines companies in the world. I thank you for the confidence you have placed in our company and am pleased to be able to propose a divi- dend increase of 3.2% to CHF 3.20 at the next Annual General Meeting. Sincerely, Joerg Reinhardt Chair of the Board of Directors I CEO’s letter 2022 was a year of transformation for Novartis. After more than USD 100 billion in acquisitions and divestures over the last several years, our structural transformation from a diversified healthcare conglomerate into a focused, innovative medicines company will be largely complete after the planned spin-off of Sandoz in 2023. We also begin 2023 with a simplified organizational struc- ture that will spur innovation and give us a stronger foun- dation for growth in a rapidly changing global business environment. While Novartis has pursued bold portfolio change, core elements of our company remain the same. Our vision is to become the most trusted and valued medicines com- pany in the world – valued not only for our business per- formance, but also for the difference our innovation makes for patients and society. The world is counting on us to succeed. Fewer than 10% of diseases known to affect humans are currently treat- able, and globally, people live an average of 10 years with a disease or disability. Yet new treatments broadly still reach only a fraction of eligible patients, and manageable conditions like heart disease cause millions of avoidable deaths each year. Our performance in 2022 showed that we are making progress in addressing society’s greatest disease bur- dens. Our focus on cardiovascular disease, for example, gives countries and healthcare systems solutions to address the world’s leading cause of death and disability. Entresto, our medicine for heart failure and hypertension, is estimated to be treating around 10 million patients worldwide, while our cholesterol-lowering siRNA treat- ment Leqvio is now approved in 70 countries. We saw robust growth momentum across our in-market medicines. This includes stronger-than-expected uptake in the US for Pluvicto, our novel radioligand therapy for advanced prostate cancer, highlighting our ability to turn the promise of next-generation medicines into a reality for patients. Despite challenging macroeconomic conditions and an unstable geopolitical environment, we delivered a solid financial performance that underscores the progress we are making, with 4% growth in net sales in constant cur- rencies (cc) and 8% growth (cc) in core operating income compared with the previous year. Looking ahead, we aim to generate sales growth of 4% CAGR over the next five years, and grow above peer median beyond 2027. Our investments in R&D are key to achieving these ambi- tions. In 2022, we saw a positive Phase III readout for ipta- copan, which was discovered at NIBR, in a rare and deadly blood disorder. We saw an important positive Phase III result for Pluvicto in earlier lines of prostate cancer. And II we also reported positive Phase III results for Cosentyx in hidradenitis suppurativa, offering the potential to expand one of our most successful medicines and bring a new treatment option to patients with this painful skin disease. As we continue innovating for patients, millions around the world are still without proper access to healthcare. Trans- lating the latest science into lasting progress requires us to work with healthcare systems and other stakeholders to advance access for underserved patients in low- and mid- dle-income countries, while also tackling access barriers in some of the wealthiest countries in the world. In the US, for example, we expanded our 10-year Beacon of Hope initiative, which seeks to address racial dispari- ties in healthcare, including by increasing diversity among clinical trial participants and investigators. We also pledged to invest USD 250 million in R&D for the treatment of malaria and neglected tropical diseases, building on our decades-long commitment to global health priorities. We continue to make progress in other aspects of our ESG agenda, including reducing greenhouse gas emissions from our own operations by nearly half since 2016. As we look to the future as a focused medicines company, our dedication to innovation and excellence will drive us forward. We have set clear growth ambitions and we are confident we will meet them. Through reshaping Novartis, we are set to reimagine medicine for decades to come. Sincerely, Vas Narasimhan Chief Executive Officer 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 [Reserved] ..................................................................................................................................................................................................9 3.B Capitalization and indebtedness .....................................................................................................................................................9 3.C Reasons for the offer and use of proceeds ..............................................................................................................................9 3.D Risk factors ................................................................................................................................................................................................9 Information on the Company ..........................................................................................................................................................21 4.A History and development of Novartis ........................................................................................................................................21 4.B Business overview ...............................................................................................................................................................................21 Innovative Medicines ..........................................................................................................................................................................22 Sandoz ...................................................................................................................................................................................................... 40 4.C Organizational structure ...................................................................................................................................................................46 4.D Property, plants and equipment ...................................................................................................................................................46 Item 4A. Unresolved Staff Comments ......................................................................................................................................................... 48 Item 5. Operating and Financial Review and Prospects ..................................................................................................................49 5.A Operating results..................................................................................................................................................................................49 5.B Liquidity and capital resources ..................................................................................................................................................... 74 5.C Research and development, patents and licenses .............................................................................................................85 5.D Trend information .................................................................................................................................................................................85 5.E Critical accounting estimates ........................................................................................................................................................85 Item 6. Directors, Senior Management and Employees ..................................................................................................................89 6.A Directors and senior management .............................................................................................................................................89 6.B Compensation .......................................................................................................................................................................................90 6.C Board practices..................................................................................................................................................................................123 6.D Employees ............................................................................................................................................................................................158 6.E Share ownership................................................................................................................................................................................158 Item 7. Major Shareholders and Related Party Transactions ....................................................................................................159 7.A Major shareholders ..........................................................................................................................................................................159 7.B Related party transactions ...........................................................................................................................................................160 Interests of experts and counsel ..............................................................................................................................................160 7.C Financial Information .......................................................................................................................................................................161 8.A Consolidated statements and other financial information ...........................................................................................161 8.B Significant changes .........................................................................................................................................................................162 The Offer and Listing ......................................................................................................................................................................163 9.A Offer and listing details ..................................................................................................................................................................163 9.B Plan of distribution ............................................................................................................................................................................163 9.C Markets ...................................................................................................................................................................................................163 9.D Selling shareholders ........................................................................................................................................................................163 9.E Dilution ....................................................................................................................................................................................................163 9.F Expenses of the issue ....................................................................................................................................................................163 Item 10. Additional Information .....................................................................................................................................................................164 10.A Share capital ........................................................................................................................................................................................164 10.B Memorandum and articles of association ............................................................................................................................164 10.C Material contracts .............................................................................................................................................................................167 10.D Exchange controls............................................................................................................................................................................168 10.E Taxation ..................................................................................................................................................................................................168 10.F Dividends and paying agents ...................................................................................................................................................... 171 10.G Statement by experts ..................................................................................................................................................................... 171 Item 8. Item 9. * “Item 5. Operating and Financial Review and Prospects,” together with the sections on compounds in development and selected 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.H Documents on display .................................................................................................................................................................... 172 10.I Subsidiary information .................................................................................................................................................................... 172 Item 11. Quantitative and Qualitative Disclosures About Market Risk .................................................................................... 173 Item 12. Description of Securities Other Than Equity Securities............................................................................................... 174 12.A Debt securities ................................................................................................................................................................................... 174 12.B Warrants and rights.......................................................................................................................................................................... 174 12.C Other securities ................................................................................................................................................................................. 174 12.D American Depositary Shares ...................................................................................................................................................... 174 PART II 176 Item 13. Defaults, Dividend Arrearages and Delinquencies .......................................................................................................... 176 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds .............................................177 Item 15. Controls and Procedures .............................................................................................................................................................. 178 Item 16A. Audit Committee Financial Expert ........................................................................................................................................... 179 Item 16B. Code of Ethics ....................................................................................................................................................................................180 Item 16C. Principal Accountant Fees and Services .............................................................................................................................. 181 Item 16D. Exemptions from the Listing Standards for Audit Committees ................................................................................182 Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers .............................................................183 Item 16F. Change in Registrant’s Certifying Accountant ..................................................................................................................184 Item 16G. Corporate Governance ..................................................................................................................................................................185 Item 16H. Mine Safety Disclosure ..................................................................................................................................................................186 Item 16I. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections .................................................................187 188 PART III Item 17. Financial Statements.......................................................................................................................................................................188 Item 18. Financial Statements.......................................................................................................................................................................189 Item 19. Exhibits ...................................................................................................................................................................................................190 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, references to “CHF” are to Swiss francs, and references to “euro” or “EUR” are to the lawful currency of 27 member states participating in the European Union; 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 27 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 “Roche” are to Roche Holding AG; references to “Gyroscope Therapeutics” are to Gyroscope Therapeutics Holdings plc; references to “AAA” are to Advanced Accelerator Applications S.A., references to “Novartis Gene Therapies” are to Novartis Gene Thera- pies, Inc., and references to “Endocyte” are to Endocyte, Inc. All product names appearing in italics are trademarks owned by or licensed to Group companies. Product names identified by a “®” or a “™” are trademarks that are not owned by or licensed to Group companies and are the prop- erty of their respective owners. 4 Forward-looking statements Forward-looking statements This Annual Report contains certain forward-looking statements within the meaning of Section 27A of the Securi- ties Act of 1933, 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 any of the 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 share- holder returns; or regarding potential future credit ratings of the Group; or by discussions of strategy, plans, expec- tations or intentions. Such forward-looking statements are based on the current beliefs and expectations of man- agement regarding future events, and are subject to significant known and unknown risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those set forth in the forward-looking statements. You should not place undue reli- ance on these statements. In particular, our expectations could be affected by, among other things: • Uncertainties regarding the success of key products and commercial priorities; • Uncertainties in the research and development of new healthcare products, including clinical trial results and additional analysis of existing clinical data; • Global trends toward healthcare cost-containment, including ongoing government, payer and general public pric- ing and reimbursement pressures and requirements for increased pricing transparency; • The potential that the strategic benefits, operational efficiencies or opportunities expected from our external busi- ness opportunities, our intention to separate our Sandoz Division into a new publicly traded standalone company by way of a 100% spin-off, or the implementation of our new organizational structure and operating model, may not be realized or may take longer to realize than expected; • 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; • Our performance on environmental, social and governance matters; • Uncertainties in the development or adoption of potentially transformational digital technologies and business models; • Uncertainties regarding potential significant breaches of information security or disruptions of our information technology systems; • Uncertainties surrounding the implementation of our new Enterprise Resource Planning system and other IT proj- ects; • Our reliance on outsourcing key business functions to third parties; • Uncertainties regarding actual or potential legal proceedings, including, among others, litigation and other legal disputes with respect to our recent transactions, product liability litigation, litigation and investigations regarding sales and marketing practices, intellectual property disputes and government investigations generally; • Safety, quality, data integrity or manufacturing issues; • Our ability to attract, integrate and retain key personnel and qualified individuals; • Regulatory actions or delays or government regulation generally, including potential regulatory actions or delays with respect to the development of the products described in this Annual Report; 5 Forward-looking statements • Our ability to comply with data privacy laws and regulations, and uncertainties regarding potential significant breaches of data privacy; • Our ability to adapt to major geopolitical and macroeconomic developments, including the effects of and efforts to mitigate pandemic diseases such as COVID-19, and the impact of the war in Ukraine; • Uncertainties involved in predicting shareholder returns; • 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 [Reserved] 3.B Capitalization and indebtedness Not applicable. 3.C Reasons for the offer and use of proceeds Not applicable. 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 reputation, financial condition, results of oper- ations, and share price, could be materially adversely affected by any of these risks, as well as other risks and uncertainties not currently known to us or not currently considered material. reasons, including if they perceive them to be better in terms of efficacy, safety, cost, convenience or other rea- sons. The commercial success of our key products and launches in the face of increasing competition requires significant attention and management focus. Such com- petition could significantly affect the revenue from our products and our results of operations. This impact could also be compounded to the extent that such competi- tion results in us making significant additional invest- ments in research and development, marketing or sales. Strategic risks Key products and commercial priorities Risk description Failure to deliver key commercial priorities and success- fully launch new products Context and potential impact Our ability to maintain and grow our business and to replace revenue and income lost to generic, biosimilar and other competition depends heavily on the commer- cial success of our new or existing key products. The commercial success of these products could be impacted at any time by a number of factors, including pressure from new or existing competitive products, changes in the prescribing habits of healthcare professionals, unex- pected side effects or safety signals, supply chain issues or other product shortages, pricing pressure, regulatory proceedings, changes in labeling, loss of intellectual property protection, and global pandemics. In addition, our revenue and margins could be significantly impacted by the timing and rate of commercial acceptance of new products. Healthcare professionals, patients and payers may choose competitor products instead of ours for various Research and development Risk description Failure to successfully prioritize, integrate and execute our research and development programs for new prod- ucts or new indications for existing products, given our focus on innovative medicines Context and potential impact We engage in extensive and costly research and devel- opment activities, both through our own internal resources and through collaborations with third parties, in an effort to identify and develop new products and new indications for existing products that address unmet and changing medical needs, and that are commercially successful. Our ability to grow our business and our product pipeline; to replace sales lost due to branded competition, entry of generics, or other reasons; and to bring to market products that take advantage of new and potentially disruptive technologies, including cell, gene and radioligand therapies, depends in significant part on the success of these efforts. Failure to successfully develop our pipeline products is typically the result of the inherent uncertainty of sci- ence, suboptimal internal execution, or both. Key ele- ments of internal execution include our ability to priori- tize our investments on our highest potential value assets, optimize the transition of assets from research to 9 Item 3. Key Information development, integrate externally acquired assets in an efficient way, and execute the steps in our drug develop- ment process that enable our assets to be approved and reimbursed in a timely manner to positively impact clin- ical practice. See also “Item 4. Information on the Com- Item 4.B Business overview—Innovative pany— Medicines—Research and development” with regards to the research and development efforts of our Innovative Medicines Division. Our new products must undergo intensive preclinical and clinical testing and are approved by means of a highly complex, lengthy, and expensive approval process that varies substantially from country to country and may have very specific requirements for the recruitment of patients for clinical trials. We face increasing and evolv- ing regulatory approval and reimbursement require- ments. If we fail to successfully progress late-stage assets and the core elements of drug development for key programs, this could have a negative impact on the development of our product pipeline, and ultimately on the success of our business and our financial results. In addition, in the US it is becoming increasingly chal- lenging to adequately recruit a sufficient number of US patients in clinical trials due to new and changing require- ments for recruitment of patients into such trials. As a result, we may be unable to develop the necessary clin- ical evidence to support the desired indications and product profile for a particular disease that is needed to drive clinical adoption of our new products, and thereby achieve the full potential of our assets (also known as the “target product profile”). Similarly, the post-approval regulatory burden has also increased. These require- ments make the maintenance of regulatory approvals for our products increasingly expensive, and further heighten the risk of recalls, product withdrawals, change to prod- uct specifications, loss of market share, and loss of rev- enue and profitability. The clinical testing, regulatory processes and post-approval activities described above become more difficult during pandemics, such as the COVID-19 pan- demic, as well as during periods of geopolitical and eco- nomic uncertainty. This is due to challenges related to recruiting, enrolling and treating patients in clinical trials, as well as ensuring the supply of trial materials. For a fur- ther description of the research and development of, and approval processes for, the products of our Innovative Medicines Division, see the sections headed “Research and development” and “Regulation” included in the description of our Innovative Medicines Division under “Item 4. Information on the Company—Item 4.B Business overview—Innovative Medicines.” Our Sandoz Division has made, and expects to continue to make, significant investments in the devel- opment of biotechnology-based, “biologic” medicines that are intended for sale as bioequivalent or “biosimilar” versions of currently marketed biotechnology products. While the development of such products is typically significantly less costly and complex than the develop- ment of the equivalent originator medicines, it is nonetheless significantly more costly and complex than that for typical small-molecule generic products. For more information about the research and develop- ment efforts of our Sandoz Division, see “Item 4. Information on the Company—Item 4.B Business overview— Sandoz—Development and registration.” In addition, many countries do not yet have fully developed legislative or regulatory pathways to facilitate the devel- opment of biosimilars, and to permit their sale in such a way that they are readily substitutable alternatives to the originator product. Further delays or difficulties in the development or marketing of biosimilars could put at risk the significant investments that Sandoz has made, and will continue to make, in its Biopharmaceuticals business. Failure 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. For more information about the approval processes that must be followed to market Sandoz Division products, see “Item 4. Information on the Company—Item 4.B Business over- view—Sandoz—Regulation.” Furthermore, our research and development activi- ties must be conducted in an ethical and compliant man- ner. Among other things, we are concerned with patient safety (both pre- and post-product approval), data pri- vacy, current Good Clinical Practices (cGCP) require- ments, data integrity, the fair treatment of patients, diver- sity and inclusion in the recruitment of patients to clinical trials, and animal welfare. Should we fail to properly man- age such issues, we risk injury to third parties, damage to our reputation, negative financial consequences as a result of potential claims for damages, sanctions and fines, and the potential that investments in research and development activities may not bring the expected ben- efits to the Group. Pricing, reimbursement and access Risk description Pricing and reimbursement pressure, including pricing transparency and access to healthcare Context and potential impact Our business has continuously experienced significant pressures on the pricing of our products and on our abil- ity to obtain and maintain satisfactory rates of reimburse- ment for our products by governments, insurers and other payers. These pressures have many sources, including growth of healthcare costs as a percentage of gross domestic product; funding restrictions and policy changes; and public controversies, political debate, investigations and legal proceedings regarding pharma- ceutical pricing. Pressures on pricing may negatively impact both our product pricing and the availability of our products. In addition, we face numerous cost-containment measures imposed by governments and other payers. These include government-imposed industrywide price reductions, mandatory pricing systems, reference pric- ing systems, payers limiting access to treatments based on cost-benefit analyses, the importation of drugs from lower-cost countries to higher-cost countries, the shift- ing of the payment burden to patients through higher co-payments and co-pay accumulator programs, the lim- iting of physicians’ ability to choose among competing medicines, the mandatory substitution of generic drugs for the patented equivalent, pressure on physicians to reduce the prescribing of patented prescription medicines, increasing pressure on intellectual property 10 Item 3. Key Information protections, and growing requirements for increased transparency on pricing. For more information on price controls, see “Item 4. Information on the Company—Item 4.B Business overview—Innovative Medicines—Price controls.” Recent trends in the external environment may have an impact on the likelihood of these pricing and reim- bursement pressures occurring. A worldwide slowdown in economic growth following the COVID-19 pandemic and the war in Ukraine (contributing to challenges such as high energy costs and inflation) has led to increased strain on fiscal budgets in many major economies. In addition, legislative developments such as those in the US (e.g., the Inflation Reduction Act) and in Europe (e.g., the EU Joint Health Technology Assessment) pose potential further pressures on pricing and timelines for reimbursement in these countries. These external fac- tors may materially affect our ability to achieve val- ue-based prices; to achieve and maintain an acceptable return on our investments in the research and develop- ment of our products; and may impact our ability to research and develop new products. In addition, our Sandoz Division has faced and may continue to face intense competition from other generic and biosimilar pharmaceutical companies that aggres- sively compete for market share, including through sig- nificant price competition. Such competitive actions may increase the costs and risks associated with our efforts to introduce and market generic and biosimilar products, may delay the introduction or marketing of such prod- ucts, and may further limit the prices at which we are able to sell these products. 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. Alliances, acquisitions and divestments Risk description Failure to identify, execute, and/or realize the expected benefits from our external business opportunities Context and potential impact 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, in Feb- ruary 2022, we closed the acquisition of Gyroscope Therapeutics. This strategy is partly dependent on our ability to identify strategic external business opportuni- ties and to close transactions with third parties on acceptable terms. Once the terms of a strategic transaction have been agreed with a third party, we may not be able to com- plete the transaction in a timely manner or at all, nor can we be sure that pre-transaction due diligence will iden- tify all possible issues that might arise during and after the transaction. Our efforts on such transactions can also divert management’s attention from our existing businesses. After a transaction is closed, efforts to develop and market acquired or licensed products, to integrate the acquired business or to achieve expected synergies may fail or may not fully meet expectations. This may occur due to difficulties in retaining key personnel, customers and suppliers; failure to obtain marketing approval or reimbursement within expected time frames or at all; dif- ferences in corporate culture, standards, controls, pro- cesses and policies; or other factors. Transactions 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 Novartis standards, including, for example, Current Good Manu- facturing Practices (cGMP) or cGCP standards, which can be costly and time-consuming to remediate. Further- more, our strategic alliances and collaborations with third parties may not achieve their intended goals and objec- tives within expected time frames, 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. Intellectual property Risk description Expiry, assertion or loss of intellectual property protec- tion Context and potential impact Many products of our Innovative Medicines Division are protected by intellectual property rights, which may pro- vide us with exclusive rights to market those products for a limited time, and to enable our purpose of reimag- ining medicine by sustainably financing our research and development. However, the strength and duration of those rights can vary significantly from product to prod- uct and from country to country, and they may be suc- cessfully challenged by third parties or governmental authorities. Loss of intellectual property protection and the intro- duction of generic or biosimilar competition for a pat- ented branded medicine in a country typically result in a significant and rapid reduction in net sales and operat- ing income for the branded product. Such competition can occur after successful challenges to intellectual property rights or the regular expiration of the patent term or other intellectual property rights. Such compe- tition can also result from the entry of generic or biosim- ilar versions of another medicine in the same therapeu- tic class as one of our drugs or in a competing therapeutic class, from a Declaration of Public Interest or the compulsory licensing of our intellectual property by governmental authorities, or as a result of a general weakening of intellectual property and governing laws in certain countries around the world. In addition, generic or biosimilar 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 res- olution of legal proceedings. We also rely in all aspects of our businesses on unpat- ented proprietary technology, know-how, trade secrets, 11 Item 3. Key Information 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 had 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. We may also be subject to assertions of intellectual property rights against our innovative medicines by third parties. If successful, these actions may involve payment of future royalties or damages, for example for patent infringement, and may also involve injunctive relief requir- ing the removal of one or more dosage strengths of a product from the market (or removal of a therapeutic indication from the product’s approved labeling) for some period of time or throughout the life of the asserted intel- lectual property right. Such damages or such an injunc- tion may have a material impact on our operating income and net sales. In any given year, we may experience a potentially significant impact on our net sales from products that have already lost intellectual property protections, as well as products that may lose protection during the year. Because we may have substantially reduced marketing and research and development expenses related to products that are in their final years of exclusivity, the initial loss of protection for a product during a given 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. These include, with respect to income in a given year, the time of year at which the generic or biosimilar competitor is launched; the ease or difficulty of manufacturing a competitor prod- uct and obtaining regulatory approval to market it; the number of generic or biosimilar competitor products approved, including whether, in the US, a single compet- itor is granted an exclusive marketing period; whether an authorized generic is launched; the geographies in which generic or biosimilar competitor products are approved, including the strength of the market for generic or bio- similar pharmaceutical products in such geographies, and the comparative profitability of branded pharmaceu- tical products in such geographies; and our ability to suc- cessfully develop and launch new products for patients that may also offset the income lost to generic or bio- similar competition. For more information on the patent and generic competition status of our Innovative Medicines Division products, see “Item 4. Information on the Company—Item 4.B Business overview—Innovative Medicines—Intellectual property.” Strategic transformations Risk description Failure to meet organizational transformation programs objectives and/or unintended adverse impacts on our business Context and potential impact From time to time, we reassess our business organiza- tion to ensure we have the optimal structure with which to execute our strategy. In April 2022, we announced a new organizational structure and operating model designed to support our innovation, growth, and produc- tivity ambitions as a focused medicines company. See “Item 4. Information on the Company—Item 4.B Over- view.” In addition, in October 2021 we announced the com- mencement of a strategic review of our Sandoz Division. After exploring all options, ranging from retaining the business to separation, on August 25, 2022, we announced our intention to separate our Sandoz Division into a new publicly traded standalone company, by way of a 100% spin-off in order to maximize shareholder value. See “Item 4. Information on the Company—Item 4.B Sandoz.” Our inability to successfully implement our new orga- nizational structure and operating model or to success- fully complete the spin-off of our Sandoz Division could have a material adverse effect on the success of the Group as a whole, and could have a material adverse effect on our results of operations and financial condi- tion. The overall extent and pace of these organizational changes, and the additional workload and complexity for our employees in some areas, could trigger uncertainty, stress and fatigue among employees, potentially result- ing in instability within the organization that could lead to failure of these organizational changes to succeed or to achieve the desired benefits. As a result, the expected benefits of these organizational changes may never be fully realized or may take longer to realize than expected. Environmental, social and governance matters Risk description Failure to meet environmental, social and governance expectations Context and potential impact Increasingly, in addition to financial results, companies are being judged by performance on a variety of envi- ronmental, social and governance (ESG) matters, which can contribute to the long-term sustainability of our com- pany’s performance. An inability to successfully perform on ESG matters and to meet societal expectations can result in negative impacts on our recruitment, retention, operations, financial results, reputation, and share price. Topics related to large societal changes such as social inequity, access to medicines and climate change are increasingly important to a wide range of our stake- holders. For example, a variety of organizations measure the performance of companies on ESG topics, and the results of these assessments are widely publicized. In addition, investments in funds that specialize in compa- nies that perform well in such assessments are increas- ingly popular, and major institutional investors have pub- licly emphasized the importance of such ESG measures in making their investment decisions. Our actions related 12 Item 3. Key Information to ESG topics may in the long-term therefore impact our operations and ability to achieve our strategic goals, and ultimately could have a potential negative impact on the value of Novartis. For this reason, the role of our Board of Directors and executive officers in supervising various sustainability issues is becoming increasingly important. We actively manage a broad range of ESG matters, taking into consideration their expected impact on the sustainability of our business over time, and the poten- tial impact of our business on society and the environ- ment. We have created a Sustainability & ESG Office, which, in coordination with the ESG Committee of the Executive Committee of Novartis, is tasked with devel- oping our ESG strategy and tracking our performance against our ESG targets. However, considering investors’ increasing focus on ESG matters, the fast pace of change of external expectations, and a range of upcoming reg- ulations, there can be no certainty that we will manage such issues successfully, that the ESG standards we cur- rently use to measure our performance against will remain the same, or that we will successfully meet soci- ety or investors’ expectations. Operational risks Cybersecurity and IT systems Risk description Cybersecurity breaches, data loss and catastrophic loss of IT systems Context and potential impact We are heavily dependent on critical, complex and inter- dependent information technology (IT) systems, includ- ing internet-based systems to support our business pro- cesses. We have also outsourced significant parts of our IT infrastructure to third-party providers, and we cur- rently use these providers to perform business-critical IT services for us. We are therefore vulnerable to cyber- security attacks and incidents on such networks and systems, whether our own or those of the third-party providers we contract, and we have experienced and may in the future experience such cybersecurity threats and attacks. Cybersecurity threats and attacks take many forms, and the size, age and complexity of our IT systems make them potentially vulnerable to external and internal security threats; outages; malicious intru- sions and attacks; cybercrimes, including state-spon- sored cybercrimes; malware; misplaced data, lost data or data errors; programming or human errors; or other similar events. In the context of the COVID-19 pandemic, the risk of such threats and attacks has increased, as virtual and remote working has become more widely used, and sensitive data is accessed by employees work- ing in less secure, home-based environments. In addi- tion, due to our reliance on third-party providers, we have experienced and may in the future experience interrup- tions, delays or outages in IT service availability due to a variety of factors outside of our control, including tech- nical failures, natural disasters, fraud, or security attacks experienced by or caused by third-party providers. Inter- ruptions in the service provided by these third parties could affect our ability to perform critical tasks. A significant information security or other event, such as a disruption or loss of availability of one or more of our IT systems, whether managed by us or a third-party service provider, has previously and could in the future negatively impact important business processes, such as the conduct of scientific research and clinical trials, the submission of data and information to health author- ities, our manufacturing and supply chain processes, our shipments to customers, our compliance with legal obli- gations, and communication between employees and with third parties. IT issues have previously led to, and could in the future lead to, the compromise of trade secrets or other intellectual property that could be sold and used by competitors to accelerate the development or manufacturing of competing products; to the compro- mise of personal financial and health information; and to the compromise of IT security data such as usernames, passwords and encryption keys, as well as security strat- egies and information about network infrastructure, which could allow unauthorized parties to gain access to additional systems or data. In addition, malfunctions in software or medical devices that make significant use of IT could lead to a risk of direct harm to patients. Although we have experienced some of the events described above, to date they have not had a material impact on our operations. Nonetheless, the occurrence of any of the events described above in the future could disrupt our business operations and result in enforce- ment actions or liability, including potential government fines and penalties, claims for damages, and shareholder litigation or allegations that the public health, or the health of individuals, has been harmed. Any significant events of this type could require us to expend significant resources beyond those we already invest to remediate any damage, to further modify or enhance our protective measures, and to enable the con- tinuity of our business. Fragmented IT landscape and strategic technology programs implementation Risk description Failure to address fragmented business processes, unclear data ownership, and IT applications and infra- structure nearing their end-of-life, may disrupt our core business processes Context and potential impact We rely on various IT systems to operate our complex global business. Historically, while highly overlapping data strategy and architectural needs exist across our businesses, in the past we built distinct solutions across both prior business units and our various geographies, which have led to a fragmented and complex landscape of IT systems. Additionally, several of our current IT sys- tems are reaching the end of their useful life, which, together with our fragmented IT landscape, may cause disruptions to our operational stability. As a result, we started to implement several companywide IT programs with a view toward replacing and consolidating outdated IT systems. For example, we have completed the con- ceptual design phase and started to build a new global Enterprise Resource Planning (ERP) system that seeks to simplify, standardize and digitize processes in our 13 Item 3. Key Information commercial, finance and operations functions, thereby helping to ensure efficient and compliant business oper- ations across our businesses and geographies, as well as the availability of high-quality data necessary to aid our decision-making. We expect the first implementation of our new ERP system to begin in the first quarter of 2024, with full implementation by 2028. In addition, we are also implementing other IT projects, seeking to sim- plify and standardize our processes, systems and tools, and create a unified data marketplace. Implementation and operation of the new ERP system and other IT proj- ects involves certain risks, including a failure of the new ERP system and other IT projects to operate as expected, a failure to properly integrate with other systems we use, potential loss of data or information, compliance issues, or cost overruns and delays. Any disruptions or malfunc- tions of the new ERP system and other IT projects could cause critical information to be delayed, lost, defective, corrupted, or rendered inadequate or inaccessible, which could negatively impact our operations and the effectiveness of our internal controls. Talent management Risk description Inability to attract, retain and motivate qualified individ- uals in key roles and markets Context and potential impact We rely on attracting and retaining a diverse, highly skilled workforce across our businesses and functions to achieve our business objectives. If we are unable to sustain our supply of key personnel – including senior members of our scientific and management teams, high-quality researchers and development specialists and skilled employees in key markets – our ability to achieve our major business objectives may be adversely affected. In addition, our brand and reputation could be negatively impacted, and the diversity of our workforce may decline. The market for skilled talent has become increasingly competitive, and we anticipate this trend will persist long- term. We face a challenge to attract and retain top tal- ent in several areas, including biology, chemistry, clinical development, drug manufacturing, IT, oncology, and advanced therapy platforms (i.e., gene and cell therapy, radioligand therapy and “xRNA”). In addition, many bio- technology companies have received significant inflows of capital and are not only competing with us to attract the same skilled talent but are also aggressively pursu- ing our experienced talent. In recent years, we have adopted new ways of work- ing that include location flexibility and increasingly recruiting from a global pool of talent. However, the suc- cess of our business continues to depend on having employees who possess local knowledge of, and expe- rience in, our key markets. The external talent supply is especially limited in many of the geographies that are expected to be sources of growth for Novartis. In the United States, China and several other markets, the geo- graphic mobility of talent is decreasing, as they find ample career opportunities available closer to home. In addition, in April 2022 we announced a new, inte- grated organizational structure and operating model. The corporate reorganization undertaken to implement this new organizational structure has resulted in significant redundancies and senior leadership changes that may reduce morale, increase employee distraction and prompt higher voluntary turnover, any of which could negatively impact our competitiveness and ability to achieve strategic objectives. For more information on this new organizational structure see “Item 4. Informa- tion on the Company—Item 4.B Overview.” The risks associated with the challenging external talent market and the implementation of our new orga- nizational structure will be exacerbated if we are unable to retain and effectively develop employees and main- tain an internal pipeline with critical skills, experiences, and leadership to deliver our business priorities. As a result, development, engagement, motivation, succes- sion planning and performance rewards for our critical talent are essential to achieve our business priorities. Third-party management Risk description Failure to maintain adequate governance and oversight over third-party relationships, and failure of third parties to meet their contractual, regulatory or other obligations Context and potential impact We outsource the performance of certain key business functions and services to third parties. Such activities include research and development collaborations, man- ufacturing operations, warehousing and distribution, cer- tain finance functions, sales and marketing activities, data management and others. Some third parties, par- ticularly those in developing countries, do not have inter- nal compliance systems or resources comparable to those of Novartis. As a result, our investment and efforts in relation to third party management include focusing on risk management and the oversight of such third par- ties. Our reliance on third parties poses certain risks, including the misappropriation of our intellectual prop- erty, the failure of the third party to comply with regula- tory and quality assurance requirements, the failure of the third party to comply with environmental, anti-brib- ery and human rights standards and regulations, unex- pected supply disruptions, breach of our agreement by the third party, and the unexpected termination or non- renewal of our agreement by the third party. In addition, governments require, and the public expects, Novartis to take responsibility for and report on compliance with various human rights, responsible sourcing and environmental practices, as well as other actions of our third-party contractors around the world. Ultimately, if third parties fail to meet their obligations to us, we may lose our investment in the relationship with the third parties 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 inap- propriately while performing 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 on us. 14 Item 3. Key Information Legal, ethics and compliance Risk description Challenges posed by evolving legal and regulatory requirements and societal expectations regarding ethi- cal behavior Context and potential impact We must comply with the laws of all countries in which we operate, and we sell products with respect to a wide and growing range of activities. Such legal requirements are extensive and complex. The laws and regulations relevant to the healthcare industry and applicable to us are broad in scope, are sub- ject to change, and have evolving interpretations, which could require us to incur substantial costs associated with compliance or to alter one or more of our business practices. For example, we have been, are currently, and may in the future be, subject to various significant legal proceedings, such as private party litigation, government investigations and law enforcement actions worldwide. These types of matters may take various forms based on evolving government enforcement and private party litigation priorities, and could include, for example, mat- ters pertaining to pricing; bribery and corruption; trade regulation and embargo legislation; product liability; commercial disputes; employment and wrongful dis- charge; antitrust and competition; securities; govern- ment benefit programs; reimbursement; rebates; health- care fraud; sales and marketing practices; insider trading; occupational health and safety; environmental regula- tions; tax; cybersecurity; data privacy; regulatory inter- actions; and intellectual property. Such matters can involve civil and/or criminal proceedings and can retro- actively challenge practices previously considered to be legal. There is also a risk that governance for our medical and patient support activities, and our interactions with governments, public officials/institutions, healthcare professionals, healthcare organizations and patient organizations may be inadequate or fail, or that we may undertake activities based on improper or inadequate scientific justification. 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 in which we believe 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. Legal proceedings and investigations are inherently unpredictable, and large judgments sometimes occur. Consequently, we may in the future incur judgments that could involve large payments, including the potential 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 and/or criminal exposure. As a result, having considered all relevant factors, we have in the past and may again in the future enter into major settle- ments of such claims without bringing them to final legal adjudication by courts or other such bodies, despite hav- ing potentially significant defenses against them, to limit the risks they pose to our business and reputation. Such settlements may require us to pay significant sums of money and to enter into corporate integrity or similar agreements, which are intended to regulate company behavior for extended periods. 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- tingent liabilities.” New requirements may also be imposed on us due to changing government and societal expectations regarding the healthcare industry, and acceptable cor- porate behavior generally. For example, we are faced with laws and regulations requiring changes in how we do business, including with respect to disclosures con- cerning our interactions with healthcare professionals, healthcare organizations and patient 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 prod- ucts, which represent evolving standards of acceptable corporate behavior. These requirements may incur sig- nificant costs, including substantial time and additional resources, that are necessary to bring our interactions with healthcare professionals and organizations into compliance with these evolving standards. In addition to legal and regulatory requirements, we aim to meet the evolving societal expectations of the public and our investors regarding ethical behavior and the increasing importance placed on ESG matters. To support 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 we conduct business in a lawful manner, and in line with society’s expectations. Despite our efforts, an actual or alleged failure to comply with the law or with heightened public expectations could lead to substantial liabilities that may not be covered by insurance, or to other signif- icant losses. Manufacturing and product quality Risk description Inability to ensure proper controls in product develop- ment and product manufacturing, and failure to comply with applicable regulations and standards Context and potential impact The development and manufacture of our products is complex and heavily regulated by governmental health authorities around the world. Whether or not our prod- ucts and the related raw materials are developed and manufactured at our own manufacturing sites or by third 15 Item 3. Key Information parties, we must ensure that all development and man- ufacturing processes comply with regulatory require- ments, as well as our own quality standards in order to deliver novel therapies to patients with unmet needs while ensuring patient safety. Failure to comply with reg- ulatory requirements has resulted in, and may in the future result in, warning letters, suspension of manufac- turing, seizure of products, injunctions, product recalls, failure to secure product approvals, or debarment. In recent years, global health authorities have sub- stantially intensified their scrutiny of manufacturers’ compliance with regulatory requirements. Any significant failure by us or our third-party suppliers to comply with regulatory requirements, or with health authorities’ expectations, may create the need to suspend clinical trials, shut down production facilities or production lines, and recall commercial products. A failure to fully comply with regulatory requirements could also lead to a delay in the approval of new products, an inability to ship or import our products, and significant penalties and repu- tational harm. In addition, the technically complex manufacturing processes required to manufacture many of our prod- ucts increase the risk of both production failures and product recalls and can increase the cost of producing our goods. Some of our products require a supply of highly specialized raw materials, such as cell lines, tis- sue samples, bacteria, viral strains and radioisotopes. In addition, we manufacture and sell a number of sterile products, biologic products and products that involve advanced therapy platforms, such as CAR-T therapies, gene therapies and radioligand therapy products, all of which are particularly complex and involve highly spe- cialized manufacturing technologies. As a result, even slight deviations at any point in their production pro- cesses or in material used have led to, and may in the future lead to, production failures or recalls. See “Item 4. Information on the Company—Item 4.B. Business over- view—Sandoz—Production.” Supply chain Risk description Inability to maintain continuity of product supply Context and potential impact Many of our products are produced using technically complex manufacturing processes and require a supply of highly specialized raw materials. For some of our prod- ucts and raw materials, we may rely on a single source of supply. In addition, we manufacture and sell a number of sterile products, biologic products, and products that involve advanced therapy platforms, such as gene and cell therapy, radioligand therapy, and “xRNA”, all of which are particularly complex and involve highly specialized manufacturing technologies. Due to this complexity, there is a risk of production and supply of critical raw materials failures, which may result in supply interrup- tions or product recalls due to manufactured products not meeting required specifications. In addition, due to the inherent complexities of our manufacturing processes and the supply chains for advanced therapy platforms, we are required to plan our production activities and purchase of materials well in advance. If we suffer from third-party raw material short- ages, underestimate market demand for a product, or fail to accurately predict when a new product will be approved for sale, then we may not be able to produce sufficient product to meet demand. These issues could be made worse during a pandemic, such as the COVID- 19 pandemic, or geopolitical events, such as the war in Ukraine, and could lead to (i) a sudden increase in demand for selected medicinal products, resulting in the short-term unavailability of critical materials; (ii) logisti- cal and supply challenges that may lead to our inability to ship products from one place to another due to restric- tions imposed as a result of a pandemic or geopolitical events and any related sanctions, which can also impact transportation and warehousing costs; or (iii) our inabil- ity to properly operate a manufacturing site due to restric- tions imposed as the result of a pandemic or any issues arising from geopolitical events. Our or our third-party suppliers’ inability to manage such issues could lead to shutdowns, product shortages, or to us being entirely unable to supply products to patients for an extended period of time. Furthermore, as our products are intended to promote the health of patients, such shortages or shutdowns could endanger our reputation and have led to, and could continue to lead to, significant losses of sales revenue, potential litigation or allegations that the public health, or the health of indi- viduals, has been harmed. Data privacy Risk description Noncompliance with personal data protection laws and regulations Context and potential impact We operate in an environment that relies on the collec- tion, processing, analysis and interpretation of large sets of patients and other individuals’ personal information, including via social media and mobile technologies. In addition, the operation of our business requires data to flow across the borders of numerous countries in which there are different, potentially conflicting, and frequently changing, data privacy laws in effect. Examples of such laws include: the EU General Data Protection Regulation (GDPR), which took effect in May 2018; the California Consumer Privacy Act, which took effect in January 2020; Brazil’s General Personal Data Protection Law, which entered into force in September 2020; and the Personal Information Protection Law in China, which took effect in November 2021. Such laws impose stringent requirements on how we and third parties with whom we contract 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. Events involving the substantial loss of personal infor- mation, use of personal information without a legal basis, or other privacy violations could give rise to significant liability, reputational harm, damaged relationships with business partners, and potentially substantial monetary 16 Item 3. Key Information penalties and other sanctions under laws enacted or being enacted around the world. Such events could also lead to restrictions on our ability to use personal infor- mation and/or transfer personal information across country borders. In addition, there is a trend of increas- ing divergence of data privacy legal frameworks, not only across these frameworks but also within individual legal frameworks themselves. This divergence may constrain the implementation of global business processes and may lead to different approaches on the use of health data for scientific research, which may have a negative impact on our business and operations. ingredients (APIs) were increased, this could impact the profitability of our products and disrupt our supply chain. Increasing opposition to free trade may increase the risks we face in our efforts to improve and harmonize standards in regulation and intellectual property. Furthermore, significant 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 inter- national transactions, which could in turn significantly impact time to market and our ability to supply our prod- ucts to patients in an undisrupted fashion, and further erode reimbursement levels for innovative therapies. Falsified medicines Risk description Impact of falsified medicines on patient safety, and rep- utational and financial harm to Novartis and our products Risk description Impact of macroeconomic developments Macroeconomic developments Context and potential impact We continue to be challenged by the vulnerability of dis- tribution channels to falsified medicines, which include counterfeit, stolen, tampered and illegally diverted medicines as defined by the World Health Organization. Falsified medicines pose patient safety risks and can be seriously harmful or life-threatening. Reports of adverse events related to falsified medicines and increased levels of falsified medicines in the healthcare system affect patient confidence in 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 gen- uine one. Stolen or illegally diverted medicines that are not properly stored and later sold through unauthorized channels, could adversely impact patient safety, our rep- utation and our business. Furthermore, there is a direct financial loss when, for example, falsified medicines replace sales of genuine medicines, or genuine medicines are recalled following the discovery of falsified products. Emerging risks Geopolitical developments Risk description Impact of geo- and socio-political threats Context and potential impact Challenging political conditions currently exist in various parts of the world, including an economic downturn; risk of direct conflicts between nations, such as the war in Ukraine; a global pandemic; resistance in certain areas against free trade; anti-corporate sentiment; and social unrest. The imposition of tariffs, including those imposed by the US and China, and the possibility of additional tariffs or other trade restrictions relating to trade could have a material negative impact on our business. Given that the outcome of ongoing trade negotiations remains uncer- tain, we cannot yet determine the nature or extent of the potential impact on our business. For example, if tariffs on pharmaceutical products or active pharmaceutical Context and potential impact Our business may be impacted by deteriorating macro- economic and financial conditions directly affecting con- sumers. Given that patients, in many countries, directly pay a sizable portion of their own healthcare costs, there is a risk that consumers may cut back on prescription drugs due to financial constraints. Negative macroeconomic developments may also adversely affect the ability of payers, as well as our dis- tributors, customers, suppliers, and service providers, to pay for our products, or otherwise to buy necessary inventory or raw materials, and to perform their obliga- tions under agreements with us. Although we make efforts to monitor the financial condition and liquidity of these third parties, 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. These risks may be elevated with respect to our interactions with fiscally challenged government payers, or with third parties with substantial exposure to such payers. At the same time, significant changes, and potential future volatility in financial markets, the consumer and business environment, the competitive landscape, and the global political and security landscape make it increasingly difficult for us to predict our revenues and earnings. As a result, any revenue or earnings guidance or outlook that we have given or might give may be over- taken by events or may otherwise prove to be inaccu- rate. Although we endeavor to give reasonable estimates of future revenues and earnings at the time at which we give such guidance, based on then-current knowledge and conditions, there is a risk that such guidance or out- look will prove to be incorrect. Asset price corrections in financial markets may also result in lower returns on our financial investments. In addition, pricing pressures in developed markets result- ing from efforts to reduce the cost of healthcare (e.g., the Inflation Reduction Act in the US, which targets drug prices) may have a negative impact on our revenue and our net sales. In addition, inflation has an impact on our operating costs due to the increased cost of supplies. Higher costs for energy, raw materials, wages, and cap- ital will increase our operating costs, potentially reduc- ing our net sales. 17 Item 3. Key Information Uncertainties around future central bank and other economic policies in the US and EU, as well as high debt levels in some countries could also impact world trade. Sudden increases in economic, currency or financial market volatility in different countries, such as the recent appreciation of the US dollar, have also impacted, and may continue to have an unpredictable impact on our business, or results of operations, including the conver- sion of our operating results into our reporting currency, the US dollar, as well as the value of our investments in our pension plans. For a discussion on the effect of price controls on our business, see “Item 4. Information on the Company— Item 4.B—Business overview—Innovative Medicines— Price controls.” See also “Item 5. Operating and Finan- cial Review and Prospects—Item 5.B Liquidity and capital 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.” Climate change 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 areas that, due to increasingly violent weather events, rising sea levels, or both, are increasingly at risk of sub- stantial flooding. In regions where such a risk is present, this has an impact not only on our own operations but also our distributed supply chain. Such events may result in the loss of life, increased costs, business interruptions, destruction of facilities, and disruption to healthcare sys- tems that patients use to access our medicines. Furthermore, our corporate headquarters, the head- quarters of our Innovative Medicines and Sandoz Divi- sions, and a number of major Innovative Medicines Divi- sion production and research facilities are located near earthquake fault lines in Basel, Switzerland. Other major facilities are located near major earthquake fault lines in various locations around the world. A major earthquake could result in loss of life, business interruptions and the destruction of our facilities. Tax laws and developments Risk description Changes in tax laws or their application Risk description Impact of climate change and increased risk of major natural disasters Context and potential impact Novartis is exposed to a broad range of climate risks such as transition risks (e.g., regulatory frameworks, car- bon pricing, and the cost of and access to capital) and physical risks (e.g., heat, water scarcity, sea level rise, and flooding from severe weather events), which could vary in magnitude and impact across different countries. Climate change has triggered, and may continue to trigger, the adoption of new regulatory requirements across the globe. To comply with such legislation, we may be required to increase our investment in technol- ogy to reduce our energy use, water use and greenhouse gas emissions. In addition, legislative and regulatory action, both current and in the future, includes or could include carbon pricing, climate risk related disclosures, and changes in zoning or building codes to increase cli- mate resilience. As a result, the combined impact of these transition risks could increase our direct operat- ing costs and impact our supply chain. We have also com- mitted to incorporating the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) framework into our business, which includes providing qualitative and quantitative disclosures on climate-re- lated topics on a recurring basis. As a result of these transition risks, we are committed to becoming carbon neutral in our own operations by 2025, and carbon neu- tral across our value chain by 2030. In addition, we are committed to achieving net zero across our value chain by 2040. Any failure to achieve these commitments in the expected time frame, or at all, could result in nega- tive impacts on our reputation, our operations, and the price of our shares. Climate change has created, and will continue to create, physical risks to our business. Some of our Context and potential impact Our multinational operations are taxed under the laws of the countries and other jurisdictions in which we oper- ate. Changes in tax laws or in their application could lead to an increased risk of international tax disputes and an increase in our effective tax rate, which could adversely affect our financial results. 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 disputes relating to the prices our subsidiaries charge one another for intercompany transactions, known as transfer pricing. Most of the jurisdictions in which we operate have double tax treaties with other foreign jurisdictions, which provide a framework for mit- igating 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. Accruals for tax con- tingencies are made based on experience, interpreta- tions of tax law, and judgments about potential actions by tax authorities. However, due to the complexity of tax contingencies, the ultimate resolution of any tax matter may result in payments materially different from the amounts accrued. In 2019, the Organization for Economic Co-operation and Development (OECD) launched a new initiative on behalf of the G20 to minimize profit shifting by working toward a global tax framework that ensures that corpo- rate income taxes are paid where consumption takes place, in addition to introducing a global standard on min- imum taxation combined with new tax dispute resolution processes. This project achieved OECD political con- sensus in October 2021, and the detailed principles are still under discussion by the OECD and political leaders. The OECD expects that the implementation of these new principles will begin globally in 2024. Once changes to the tax laws in any jurisdiction in which the Group 18 Item 3. Key Information operates are enacted or substantially enacted, the Group may be subject to the OECD top-up tax, the aim of which is to bring the total amount of taxes paid on our profit in a jurisdiction up to a minimum rate of 15%. In 2020, the EU announced that it would introduce new centralized taxation powers (which have not yet been introduced) to address the financial impact of the COVID-19 pandemic. In addition, the European Commission continues to extend the application of its policies seeking to limit fis- cal aid by member states to particular companies, together with the related investigation into member states’ practices regarding the issuance of rulings on tax matters relating to individual companies. Although we have taken steps to comply with evolving initiatives such as these of the OECD and the EU, and we will continue to do so, significant uncertainties remain as to the out- come of our efforts. For more information, see “Item 18. Financial Statements—Note 6. Income taxes” and “Item 18. Financial Statements—Note 12. Deferred tax assets and liabilities.” General risks Indebtedness Risk description Our indebtedness could adversely affect our operations Context and potential impact As of December 31, 2022, we had USD 20.2 billion of non-current financial debt, and USD 5.9 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. Goodwill and intangible assets Risk description Goodwill and intangible assets resulting in significant impairment charges Context and potential impact We carry a significant amount of goodwill and other intangible assets on our consolidated balance sheet, including, in particular, substantial goodwill and other intangible assets obtained through acquisitions, includ- ing most recently through our acquisitions of Gyroscope Therapeutics, The Medicines Company, Xiidra, Endo- cyte, Novartis Gene Therapies, and AAA. As a result, we may incur significant impairment charges in the future if the fair value of the intangible assets and the groupings of cash-generating units containing goodwill would be less than their carrying value on the Group’s consolidated balance sheet at any point in time. We regularly review our intangible and tangible assets for impairment, including identifiable intangible assets and goodwill. Any significant impairment charges could have a material adverse effect on our results of opera- tions and financial condition. In 2022, for example, we recorded intangible asset impairment charges of USD 1.3 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 18. Finan- cial Statements—Note 1. Significant accounting policies” and “Item 18. Financial Statements—Note 11. Goodwill and intangible assets.” Foreign currency exchange rates Risk description Negative effect on financial results due to foreign cur- rency exchange rate fluctuations Context and potential impact 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. Currency exchange controls and sanctions could limit our ability to distribute retained earnings from our local affiliates, or to pay intercompany payables due from those countries. Despite measures undertaken to reduce or hedge against foreign currency exchange risks, as a significant portion of our earnings and expenditures are in curren- cies other than the US dollar, including expenditures in Swiss francs that are significantly higher than our reve- nue in Swiss francs, any such exchange rate volatility may negatively and materially impact our results of oper- ations and financial condition, and may impact the reported value of our net sales, earnings, assets and lia- bilities. In addition, the timing and extent of such volatil- ity can be difficult to predict. Furthermore, depending on the movements of particular foreign exchange rates, we may be materially adversely affected at a time when the same currency movements are benefiting some of our competitors. 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 19 Item 3. Key Information fluctuations” and “Item 18. Financial Statements—Note 29. Financial instruments – additional disclosures.” Key customers Risk description Ongoing consolidation among our distributors and retail- ers, and the concentration of credit risk Context and potential impact A significant portion of our global sales is made to a rel- atively small number of drug wholesalers, retail chains and other purchasing organizations. For example, our three most important customers globally accounted for approximately 16%, 11% and 7%, respectively, of net sales in 2022. The largest trade receivables outstanding were for these three customers, amounting to 16%, 14% and 7%, respectively, of the Group’s trade receivables at December 31, 2022. The trend has been toward further consolidation among some distributors and retailers. As a result, we may be affected by fluctuations in the buy- ing patterns of such customers. Furthermore, these cus- tomers are gaining additional purchasing leverage, increasing the pricing pressures facing our businesses. These pressures can impact our Sandoz Division in par- ticular, 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 concentration among our customers. If one or more of our major customers experienced financial difficulties, the effect on us would be substantial, and could include a substantial loss of sales and an inability to collect amounts owed to us. Environmental matters Risk description Impact of environmental liabilities Context and potential impact The environmental laws of various jurisdictions impose actual and potential obligations on us to investigate and remediate contaminated sites, including in connection with activities in the past by businesses that are no lon- ger part of Novartis. In some cases, these remediation efforts may take many years. While we have set aside provisions for known worldwide environmental liabilities that are probable and estimable, there is no guarantee that additional costs will not be incurred beyond the amounts for which we have provided in the Group consolidated financial statements. If environmental con- tamination resulting from our facility operations, busi- ness activities or products adversely impacts third par- ties or if we fail to properly manage the safety of our facilities, including the safety of our employees and con- tractors, and the environmental risks, we may face sub- stantial one-time and recurring costs and other penal- ties, and be required to increase our provisions for environmental liabilities. See also “Item 4. Information on the Company—Item 4.D Property, plants and equipment” and “Item 18. Finan- cial Statements—Note 20. Provisions and other non-cur- rent liabilities.” Pension plans Risk description Inaccuracies in the assumptions and estimates used to calculate our pension plan and other post-employment obligations Context and potential impact We sponsor pension and other post-employment bene- fit plans in various forms that cover a significant portion of our current and former employees. 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 discount 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 that we use 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. Depending on events, such differences could have a material effect on our total equity, and may require us to make additional contributions to our pension funds. For more information on obligations under retirement and other post-employment benefit plans and underly- ing actuarial assumptions, see “Item 18. Financial State- ments—Note 25. Post-employment benefits for employ- ees.” 20 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 a broad range of innovative pharmaceuticals 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 become the most valued and trusted medicines company in the world. Our strategy is to deliver high-value medicines that alleviate society’s greatest disease burdens through technology leadership in research and development (R&D) and novel access approaches. To support this strategy, we have clear focus areas and priorities, ensuring we deliver on our purpose and continue to create value for both stakehold- ers and society. See, “Item 5. Operating and Financial Review and Prospects—Item 5.A Operating Results— Overview—Our strategy.” In 2022, Novartis achieved net sales from continuing operations of USD 50.5  billion, and total net income amounted to USD 7.0 billion. Headquartered in Basel, Switzerland, our Group companies employed approxi- mately 102 000 full-time equivalent employees as of December 31, 2022. Our products are sold in approxi- mately 140 countries around the world. The Group comprises two global operating divisions: 21 and cost-saving generic medicines. Novartis AG, our Swiss holding company, owns, directly or indirectly, all of our significant operating companies. For a list of our significant operating subsidiaries, see “Item 18. Financial Statements—Note 31. Principal Group subsidiaries and associated companies.” For a description of important corporate developments since January 1, 2020, see “Item 18. Financial State- ments—Note 2. Significant transactions.” For information regarding the Company’s material commitments for cap- ital expenditures, see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources— Material short- and long-term cash requirements.” 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. • Innovative Medicines: innovative patent-protected pre- scription medicines For a description of our Innovative Medicines Division, see “—Innovative Medicines—Overview” below. • Sandoz: generic pharmaceuticals and biosimilars For a description of our Sandoz Division, see “— Sandoz” below. In April 2022, we announced a new, integrated organi- zational structure and operating model designed to sup- port our innovation, growth, and productivity ambitions as a focused medicines company. As part of this new organizational structure, we have integrated our former Pharmaceuticals and Oncology business units and cre- ated two separate commercial organizations—Innovative Medicines US and Innovative Medicines International. The Innovative Medicines Division focuses on five core therapeutic areas—cardiovascular, immunology, neuro- science, solid tumor, and hematology—as well as other promoted brands (in the therapeutic areas of ophthal- mology and respiratory) and established brands. For more information, see “Item 4. Information on the Com- pany—Item 4.B Innovative Medicines.” We have also cre- ated a new Strategy and Growth function that combines corporate strategy, R&D portfolio strategy and business development. The purpose of our Strategy and Growth function is to help drive the company’s growth strategy   Item 4. Information on the Company end-to-end and look across internal and external oppor- tunities to strengthen the Novartis pipeline with medicines that are both transformational and can make significant contributions to growth. Finally, we have combined our former Novartis Technical Operations and Customer & Technology Solutions units to create a new operations unit called Operations. This new unit seeks to provide a stronger and simpler operational backbone that can accelerate multiple technology transformation initiatives more efficiently, create novel digital solutions at scale, and increase productivity, while maintaining indus- try-leading quality and service levels. Under this new organizational structure, our divisions are supported by the following organizational units: the Novartis Institutes for BioMedical Research (NIBR), Global Drug Development (GDD), and Operations. The financial results of these organizational units are included in the results of the divisions for which their work is per- formed. For more information about NIBR, see “— Innovative Medicines—Research and development— Research program” below. For more information about GDD, see “—Innovative Medicines—Research and devel- opment—Development program” below. For more infor- mation about Operations, see “—Item 4.D Property, plants and equipment” and “Item 18. Financial State- ments—Note 3. Segmentation of key figures 2022, 2021 and 2020.” 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. Innovative Medicines 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. The Innovative Medicines Division is organized into two commercial organizational units— Innovative Medicines US and Innovative Medicines Inter- national. These units were created in April 2022 as part of our new, integrated organizational structure. Prior to April 2022, the Innovative Medicines Division was orga- nized into two global business units: Novartis Oncology and Novartis Pharmaceuticals. See “Item 4. Information on the Company—Item 4.B Overview.” The Innovative Medicines Division focuses on core therapeutic areas—cardiovascular, immunology, neuro- science, solid tumor, and hematology—as well as other promoted brands (in the therapeutic areas of ophthal- mology and respiratory) and established brands. The Innovative Medicines Division is the larger of our two divisions in terms of consolidated net sales. It reported consolidated net sales of USD 41.3 billion in 2022, which represented 81.7% 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 therapeutic area or reporting category. Some of the products described below have lost patent protection or are oth- erwise subject to generic competition. Others are sub- ject to patent challenges by potential generic competi- tors. Please see “—Intellectual property” for general information on intellectual property and regulatory data protection, and for more information on the status of pat- ents and exclusivity for Innovative Medicines Division products. While we typically seek to sell our marketed products throughout the world, not all products and indications are available in every country. The indications described in these summaries may therefore vary by country. In addition, a product may be available under different brand names depending on country and indication. Key marketed products Cardiovascular • Entresto (sacubitril/valsartan) is an oral, first-in-class angiotensin receptor neprilysin inhibitor. Entresto enhances the protective effects of a hormone system called the natriuretic peptide system, and simultane- ously suppresses the harmful effects of a hormone sys- tem called the renin-angiotensin-aldosterone system. It is approved: • In the US, the EU and other countries to treat adults who have symptomatic heart failure with reduced ejection fraction (HFrEF). HFrEF is a disease in which the heart cannot pump enough blood. • In the US and other countries to treat most heart fail- ure patients with preserved ejection fraction (HFpEF). HFpEF is another disease in which the heart cannot pump enough blood. • In the US and other countries to treat children aged 1 year and older who have symptomatic heart failure with systemic left ventricular systolic dysfunction 22 Item 4. Information on the Company • In China and Japan to treat patients with essential hypertension (a type of high blood pressure) • Leqvio (inclisiran) is the first and only small-interfering RNA therapy to reduce LDL cholesterol, a risk factor for atherosclerotic cardiovascular disease (ASCVD), which is caused by plaque buildup in the arteries. Leqvio is administered by a healthcare professional twice a year as an injection, following an initial dose and a dose at three months. It is approved: • In the EU and other countries to treat adults with pri- mary hypercholesterolemia (heterozygous familial and non-familial) or mixed dyslipidemia. In patients unable to reach LDL cholesterol goals, Leqvio is used in combination with the maximum tolerated dose of a statin, or alone or in combination with other lip- id-lowering therapies in patients who are statin-in- tolerant or for whom a statin is contraindicated. Pri- mary hypercholesterolemia and mixed dyslipidemia are disorders characterized by high levels of fats in the blood. • In the US to treat adults with clinical ASCVD or het- erozygous familial hypercholesterolemia (HeFH), as an adjunct to diet and maximally tolerated statin ther- apy, who require additional lowering of LDL choles- terol. HeFH is an inherited disorder that causes dan- gerously high levels of LDL cholesterol. (The effect of Leqvio on cardiovascular morbidity and mortality has not yet been determined). Novartis obtained global rights to develop, manufac- ture and commercialize Leqvio under a license and col- laboration agreement with Alnylam Pharma ceuticals, Inc. Immunology • Cosentyx (secukinumab) is an injectable, fully human monoclonal antibody that selectively inhibits interleu- kin-17A (IL-17A), a cytokine involved in several immuno- logical diseases. It is approved in the US, the EU and other countries to treat: • Adults and children aged 6 years and older with mod- erate-to-severe plaque psoriasis. Psoriasis is a debil- itating systemic inflammatory disease that is charac- terized by the appearance of raised, red patches on the skin. • Adults with active ankylosing spondylitis (AS). AS is a progressive inflammatory disease that is charac- terized by chronic back pain, is generally visible on X-rays, and can cause structural damage to the bones and joints. • Adults with active non-radiographic axial spondy- loarthritis (nr-axSpA). This is a long-term inflamma- tory disease that is characterized by chronic back pain and is not visible on X-rays. • Adults and children (aged 2 years and older in the US and 6 years and older in the EU) with active pso- riatic arthritis (PsA). PsA is a type of progressive inflammatory arthritis that results in swollen and pain- ful joints and tendons, which can cause structural damage to the bones and joints. • Children (aged 4 years and older in the US and 6 years and older in the EU) with enthesitis-related arthritis (ERA) and children (aged 2 years and older in the US and 6 years and older in the EU) with juve- nile psoriatic arthritis (JPsA). ERA and JPsA are sub- types of juvenile idiopathic arthritis. If left untreated, they can lead to high levels of pain and disability. • Xolair (omalizumab) is an injectable prescription med- icine and the only approved antibody designed to tar- get and block immunoglobulin E (IgE). It is approved in the US, the EU and other countries to treat: • 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) • Adults with nasal polyps or severe chronic rhinosi- nusitis with nasal polyps (CRSwNP). CRSwNP is a chronic inflammation of the nose and the sinuses with the presence of benign lesions (nasal polyps) on the lining of the nasal sinuses or nasal cavity. Approved indications vary by country. Xolair is provided as lyophilized powder for reconstitution, and as liquid formulation in a pre-filled syringe. Novartis co-pro- motes 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 more information, see “Item 18. Financial Statements—Note 27. Transactions with related parties—Roche Holding AG.” • Ilaris (canakinumab) is an injectable, selective, high-af- finity, fully human monoclonal antibody that inhibits interleukin-1 beta (IL-1 beta), a key cytokine in the inflammatory pathway. It is approved in the US, the EU and other countries to treat patients with certain debil- itating autoinflammatory disorders, including: • Adults and children with periodic fever syndromes. Periodic fever syndromes are a set of rare disorders characterized by recurrent episodes of illness, with fever as the main symptom. • Patients with Still’s disease, including systemic juve- nile idiopathic arthritis and adult-onset Still’s disease. Still’s disease is a disorder that causes fevers, rash and joint pain. • Adults with acute gouty arthritis. Gouty arthritis is a type of arthritis characterized by pain, redness, ten- derness and swelling in one or more joints. Approved indications vary by country. Neuroscience • Gilenya (fingolimod) is an oral sphingosine-1-phos- phate (S1P) receptor modulator that inhibits the move- ment of lymphocytes (a type of white blood cell) out of the lymph nodes into the central nervous system, thereby preventing nerve inflammation and nervous tis- sue damage. It is approved: • In the US to treat adults and children aged 10 years and older with relapsing forms of multiple sclerosis, including clinically isolated syndrome, relapsing-re- mitting multiple sclerosis (RRMS) and active second- ary progressive multiple sclerosis (SPMS). Multiple 23 Item 4. Information on the Company sclerosis is a disease in which the immune system attacks the protective covering of nerves (known as myelin). • In the EU to treat adults and children aged 10 years and older who have highly active RRMS despite treat- ment 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) is a one- time intravenous gene therapy designed to address the genetic root cause of spinal muscular atrophy (SMA) by replacing the function of the missing or nonworking SMN1 gene. Zolgensma delivers a new working copy of the SMN1 gene into a patient’s cells. It is approved in the US, the EU and other countries to treat: • Babies and young children who have SMA with bial- lelic mutations in the SMN1 gene. SMA is a rare, genetic neuromuscular disease resulting in the pro- gressive and irreversible loss of motor neurons, which causes muscle weakness and atrophy. • Kesimpta (ofatumumab) is an anti-CD20 monoclonal antibody that enables the targeted depletion of B-cells, specifically in lymph nodes. Kesimpta is self-adminis- tered as a once-monthly injection via the Sensoready autoinjector pen. It is approved: • In the US to treat adults with relapsing forms of mul- tiple sclerosis, including clinically isolated syndrome, relapsing-remitting multiple sclerosis (RRMS) and active secondary progressive multiple sclerosis (SPMS). Multiple sclerosis is a disease in which the immune system attacks the protective covering of nerves (known as myelin). • In the EU to treat adults with relapsing forms of mul- tiple sclerosis with active disease defined by clinical or imaging features (i.e., relapse, disability, or lesions detected by MRI scans) Approved indications vary across other countries. Ofa- tumumab was originally developed by Genmab and licensed to GlaxoSmithKline (GSK). Novartis obtained the rights to ofatumumab from GSK across all indica- tions. Solid Tumor • 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 and other countries to treat patients who have certain types of cancer with a change in the BRAF gene (called a BRAF V600 mutation), including: • Adults with unresectable or metastatic melanoma with a BRAF V600 mutation. Melanoma is a form of skin cancer; unresectable melanoma cannot be removed with surgery and metastatic melanoma has spread to other parts of the body. Tafinlar and Mekinist are also approved as single agents for this indication. • Adults with stage III melanoma with a BRAF V600 mutation as an adjuvant treatment (following surgery) • Adults with advanced non-small cell lung cancer (NSCLC) with a BRAF V600 mutation. NSCLC is the most common type of lung cancer. • Adults with locally advanced or metastatic anaplas- tic thyroid cancer (ATC) with a BRAF V600 mutation whose cancer has progressed following treatment, and who have no satisfactory alternative treatment options (US). ATC is a rare and aggressive form of thyroid cancer. Approved indications vary by country. Novartis has worldwide exclusive rights to develop, manufacture and commercialize trametinib granted by Japan Tobacco Inc. • Kisqali (ribociclib) is a selective oral cyclin-dependent inhibitor of kinases 4 and 6 (CDK4/6) with somewhat greater inhibitory activity against CDK4 vs CDK6 – the two enzymes involved in the control of cell cycle pro- gression. Kisqali is approved in the US, the EU and other countries to treat: • Pre-, peri- and postmenopausal women, and men (US), with hormone receptor-positive (HR+)/human epidermal growth factor receptor 2-negative (HER2-) locally advanced or metastatic breast cancer, in com- bination with an aromatase inhibitor as initial endo- crine-based therapy. HR+/HER2- breast cancer is the most common subtype of breast cancer. • Pre-, peri- (EU) and postmenopausal women, and men (US), with HR+/HER2- locally advanced or met- astatic breast cancer, in combination with fulvestrant, as first- or second-line therapy Kisqali was developed by the Novartis Institutes for BioMedical Research under a research collaboration with Astex Pharmaceuticals. • Piqray (alpelisib) is an oral kinase inhibitor that specif- ically targets the PIK3CA gene. This is the most com- monly mutated gene in HR+/HER2- breast cancer, the most common subtype of breast cancer. Piqray is approved in the US, the EU and other countries to treat: • Postmenopausal women, and men, with hormone receptor-positive (HR+)/human epidermal growth factor receptor 2-negative (HER2-) locally advanced or metastatic breast cancer with a PIK3CA mutation. It is used in combination with fulvestrant after dis- ease progression while on or following an endo- crine-based regimen (US), or after disease progres- sion following endocrine therapy as monotherapy (EU). • Pluvicto (lutetium (177Lu) vipivotide tetraxetan) is an intravenous radioligand therapy combining a targeting compound (a ligand) with a therapeutic radionuclide (a radioactive particle, in this case lutetium-177). Pluvicto delivers radiation selectively to PSMA-positive cells and the surrounding cells. It is approved in the US, the EU and other countries to treat: • Adults with a type of advanced cancer that has spread to other parts of the body (metastatic) called prostate-specific membrane antigen–positive 24 Item 4. Information on the Company metastatic castration-resistant prostate cancer (PSMA-positive mCRPC) who have already been treated with other anticancer treatments (androgen receptor pathway inhibition and taxane-based che- motherapy) Hematology • 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 and other countries to treat: • Immune thrombocytopenia (ITP) in patients who have had an insufficient response to or have failed previ- ous therapies. ITP is a bleeding disorder caused by an unusually low number of platelets. • Thrombocytopenia in patients with chronic hepatitis C to allow them to initiate and maintain interfer- on-based therapy • Patients with severe aplastic anemia (SAA). SAA is a condition in which the body does not produce enough blood cells 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. • Tasigna (nilotinib) is a twice-daily oral tyrosine kinase inhibitor that acts by blocking the BCR-ABL protein. It is approved in the US, the EU and other countries to treat: • Patients with Philadelphia chromosome-positive chronic myeloid leukemia (Ph+ CML) in the chronic and/or accelerated phase who are resistant or intol- erant to existing treatment. Ph+ CML is a cancer that starts in the blood-forming cells of bone marrow. • Newly diagnosed adults and children with Ph+ CML in the chronic phase • Jakavi (ruxolitinib) is an oral inhibitor of the JAK1 and JAK2 tyrosine kinases. It is the first therapy approved in the EU and other countries to treat: • Adults with myelofibrosis (MF), including primary myelofibrosis, post-polycythemia vera myelofibrosis and post-essential thrombocythemia myelofibrosis. MF is a rare blood cancer characterized by abnor- mal blood cell production and scarring in the bone marrow, which can lead to an enlarged spleen. • Adults with polycythemia vera (PV) who are resistant or intolerant to a medication called hydroxyurea. PV is a rare blood cancer in which the bone marrow pro- duces too many red blood cells, resulting in serious problems like clots. • Patients aged 12 years and older with acute or chronic graft-versus-host disease (GvHD) and who have had an inadequate response to corticosteroids or other systemic therapies. GvHD occurs in stem-cell trans- plant patients when donor cells see the recipient’s healthy cells as foreign and attack them. Novartis licensed ruxolitinib from Incyte Corporation in the for development and commercialization indications of oncology, hematology and graft-versus- host disease outside the US. Incyte Corporation mar- kets ruxolitinib as Jakafi® in the US. • Scemblix (asciminib) is an oral kinase inhibitor that works by binding to the ABL myristoyl pocket. It is approved: • In the US, the EU and other countries to treat adults with Philadelphia chromosome-positive chronic myeloid leukemia (Ph+ CML) in chronic phase who have previously been treated with two or more tyro- sine kinase inhibitors (TKIs). CML is a type of cancer that starts in the blood-forming cells of the bone mar- row and invades the blood. There are three phases of CML: chronic phase, accelerated phase and blast phase. • In the US and other countries to treat adults with Ph+ CML in chronic phase with the T315I mutation. Some patients with CML develop mutations that cause resistance to TKI therapy, including the T315I muta- tion, which confers resistance to most available TKIs. As a result, patients with this mutation have limited treatment options. Other Promoted Brands • Lucentis (ranibizumab) is a humanized, high-affinity antibody fragment that binds to vascular endothelial growth factor A (VEGF-A), a protein that can cause the growth of blood vessels in the eye, potentially leading to vision loss. Lucentis is an anti-VEGF therapy that is injected into the eye. It is approved in the EU and other countries to treat patients with certain eye conditions, including: • Adults with neovascular (wet) age-related macular degeneration (AMD). Wet AMD develops when abnormal blood vessels grow under the macula and leak blood and other fluids in the back of the eye, which damages the macula. • Adults with proliferative diabetic retinopathy, moder- ately severe to severe non-proliferative diabetic ret- inopathy, and/or diabetic macular edema. These con- ditions are complications of diabetes. • Adults with visual impairment due to macular edema secondary to retinal vein occlusion (branch RVO or central RVO). Retinal vein occlusion is a blockage of the branch or central retinal veins, which carry blood away from the retina. Approved indications vary by country. Lucentis is licensed from Genentech, and Novartis holds the rights to commercialize the product outside the US. Genen- tech holds the rights to commercialize Lucentis in the US. For more information, see “Item 18. Financial State- ments—Note 27. Transactions with related parties— Roche Holding AG.” • Xiidra (lifitegrast 0.5%), an LFA-1 antagonist, is a pre- scription eye drop designed to block the interaction of two key proteins called ICAM-1 and LFA-1, thereby reducing inflammation. It is approved in the US and other countries to treat: • The signs and symptoms of dry eye disease in adults 25 Item 4. Information on the Company Established Brands • Sandostatin SC (octreotide acetate for injection) and Sandostatin LAR (octreotide acetate for injectable sus- pension) are somatostatin analogs approved in the US, the EU and other countries to treat: • Adults with acromegaly that is inadequately con- trolled by surgery or radiotherapy. Acromegaly is a chronic disease caused by the oversecretion of growth hormone. • Patients with certain symptoms associated with car- cinoid tumors and other types of functional gastro- intestinal and pancreatic neuroendocrine tumors Sandostatin LAR is also approved in the EU and other countries to treat patients with advanced neuroendo- crine tumors of the midgut or of unknown primary tumor origin. Compounds in development The following table provides an overview of the key Innovative Medicines Division projects currently in the Confirmatory Development stage and may also describe certain projects in the Exploratory Development stage. Projects typically enter Confirmatory Development and become the responsibility of our Global Drug Develop- ment organization during Phase II testing. (For more information about our drug development program, see “—Research and development—Development program.”) Projects are listed in alphabetical order by compound code, or by product name where applicable. Projects include those seeking to develop potential uses of new molecular entities as well as potential additional indica- tions or new formulations for already marketed products. The table below, entitled “Projects removed from the development table since 2021,” highlights changes to the table entitled “Selected development projects” from the previous year. The year that each project entered the current phase of development refers to the year of the first patient’s first visit in the first clinical trial of that phase. For proj- ects in Phase II, the year refers to the first patient’s first visit in the first Phase II trial, which can occur before the Confirmatory Development stage. Prior to 2020, we reported the current phase based on the year in which the decision to enter the phase was made. To maintain continuity, we have included certain previously disclosed projects, noted below, that have not yet achieved “first patient, first visit” in any Phase I-III study for the reported indication and route of administration. We have disclosed these projects using our previous reporting criteria. A reference to a project being in registration means that an application has been submitted to a health author- ity for marketing approval. Compounds and new indica- tions in development are subject to required regulatory approvals and, in certain instances, contractual limita- tions. 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 more information on the approval pro- cess. 26 Item 4. Information on the Company Selected development projects Compound/ Common product name Mechanism of action Potential indication Category Formulation/ route of administration Year project entered current Planned filing development dates/current phase phase AVXS-101 onasemno- Survival motor neuron Spinal muscular atrophy (OAV101) (IT formulation) gene abepar- (SMN) gene therapy vovec Neuroscience Intrathecal injection 2021 2025/III Beovu brolucizumab VEGF inhibitor Diabetic retinopathy Ophthalmology Intravitreal injection 2020 2025/III CFZ533 iscalimab CD40 inhibitor Sjögren’s syndrome Immunology Subcutaneous injection 2019 ≥2026/II Coartem artemether + PGH-1 (artemisinin lumefantrine combination therapy) Malaria, uncomplicated (<5 kg patients) Global Health Oral 2020 2024/III Cosentyx secukinumab IL-17A inhibitor Hidradenitis suppurativa Immunology Subcutaneous injection 2022 US/EU registration Giant cell arteritis Lupus nephritis Immunology Subcutaneous injection 2021 2025/III Immunology Subcutaneous injection 2020 ≥2026/III Psoriatic arthritis (IV formulation) Immunology Intravenous infusion 2022 US registration Ankylosing spondylitis (IV formulation) Immunology Intravenous infusion 2022 US registration JDQ443 TBD KRAS inhibitor Non-small cell lung cancer, 2/3L 1 Solid Tumor Oral KAE609 cipargamin PfATP4 inhibitor Malaria, uncomplicated Global Health Oral Malaria, severe Global Health Oral KAF156 ganaplacide Non-artemisinin Malaria, uncomplicated Global Health Oral 2022 2017 2022 2017 2024/III ≥2026/II ≥2026/II ≥2026/II plasmodium falciparum inhibitor Kisqali ribociclib CDK4 inhibitor Hormone receptor-positive (HR+)/human epidermal growth factor receptor 2-negative (HER2-) early breast cancer (adjuvant) Solid Tumor Oral 2018 2023/III Leqvio inclisiran siRNA (regulation of LDL-C) Secondary prevention of cardiovascular Cardiovascular Subcutaneous injection 2018 events in patients with elevated levels of LDL-C LNA043 TBD ANGPTL3 agonist Knee osteoarthritis Immunology Intra-articular LNP023 iptacopan CFB inhibitor IgA nephropathy C3 glomerulopathy Cardiovascular Oral Cardiovascular Oral Paroxysmal nocturnal hemoglobinuria Hematology Atypical hemolytic uremic syndrome Hematology Oral Oral Oral Oral Immunology Immunology Neuroscience Oral LOU064 remibrutinib BTK inhibitor Chronic spontaneous urticaria Lutathera Radioligand therapy targeting SSTR lutetium Lu 177 dotatate/ lutetium (177Lu) oxodotreotide Sjögren’s syndrome Multiple sclerosis Gastroenteropancreatic neuroendocrine tumors, 1st line in G2/3 tumors Solid Tumor Intravenous infusion 2020 2023/III LXE408 TBD Proteasome inhibitor Visceral leishmaniasis Global Health Oral 2022 ≥2026/II MBG453 sabatolimab TIM-3 antagonist Myelodysplastic syndrome Hematology Intravenous infusion 2020 2024/III Unfit acute myeloid leukemia Hematology Intravenous infusion 2020 MIJ821 onfasprodil NR2B negative Major depressive disorder Neuroscience Intravenous infusion 2021 allosteric modulator NIS793 TBD TGF-beta 1 inhibitor Pancreatic cancer, 1st line Solid Tumor Intravenous infusion 2021 Piqray alpelisib PI3K-alpha inhibitor Ovarian cancer Solid Tumor Oral 2021 Radioligand therapy targeting PSMA Metastatic castration-resistant prostate cancer, pre-taxane Solid Tumor Intravenous infusion 2021 Pluvicto lutetium Lu 177 vipivotide tetraxetan/ lutetium (177Lu) vipivotide tetraxetan ≥2026/II ≥2026/II 2025/III 2023/III 2023/III 1 Project added to selected development projects table in 2022 – entered Confirmatory Development Metastatic hormone-sensitive prostate cancer Solid Tumor Intravenous infusion 2021 2024/III 27 ≥2026/III ≥2026/II 2024/III 2024/III 2023/III ≥2026/III 2024/III ≥2026/II ≥2026/III 2021 2021 2021 2021 2021 2021 2019 2021 Item 4. Information on the Company Compound/ Common product name Mechanism of action PPY988 2 TBD Gene therapy - complement factor I modulation Potential indication Geographic atrophy Category Formulation/ route of administration Year project entered current Planned filing development dates/current phase phase Ophthalmology Subretinal injection 2022 ≥2026/II QGE031 ligelizumab IgE inhibitor Food allergy Immunology Subcutaneous injection 2021 ≥2026/III SAF312 libvatrep TRPV1 antagonist Chronic ocular surface pain Ophthalmology Topical Scemblix asciminib BCR-ABL inhibitor Chronic myeloid leukemia, 1st line Hematology Oral SKO136 3 ensovibep Multispecific DARPin Coronavirus infection Global Health Intravenous infusion 2016 2021 ≥2026/II 2025/III Not applicable TBD4/II (N/A) TQJ230 pelacarsen ASO targeting lipoprotein(a) Secondary prevention of cardiovascular Cardiovascular Subcutaneous injection 2019 events in patients with elevated levels of lipoprotein(a) 2025/III VAY736 ianalumab BAFF-R inhibitor Autoimmune hepatitis Immunology Subcutaneous injection 2018 ≥2026/II Lupus nephritis 5 Sjögren’s syndrome Warm autoimmune hemolytic anemia 5 (wAIHA) Immunology Subcutaneous injection 2022 ≥2026/III Immunology Subcutaneous injection 2022 ≥2026/III Hematology Intravenous infusion 2022 ≥2026/III VDT482 tislelizumab Anti-PD-1 monoclonal Esophageal cancer, 2nd line Solid Tumor Intravenous infusion N/A antibody Non-small cell lung cancer Solid Tumor Intravenous infusion Nasopharyngeal carcinoma, 1st line Solid Tumor Intravenous infusion Gastric cancer, 1st line Solid Tumor Intravenous infusion Esophageal cancer, 1st line Solid Tumor Intravenous infusion Localized esophageal cancer Solid Tumor Intravenous infusion Hepatocellular carcinoma, 1st line Solid Tumor Intravenous infusion Small cell lung cancer, 1st line Solid Tumor Intravenous infusion Urothelial cell carcinoma, 1st line 6 Solid Tumor Intravenous infusion N/A N/A N/A N/A N/A N/A N/A N/A VPM087 gevokizumab IL-1 beta antagonist Colorectal cancer, 1st line Solid Tumor Intravenous infusion 2019 Xolair omalizumab IgE inhibitor Food allergy Immunology Subcutaneous injection 2019 US/EU registration EU registration 2023/III 2023/III 2023/III 2024/III 2023/III 2024/III ≥2026/III ≥2026/I 2023/III XXB750 5 TBD NPR1 agonist Hypertension Cardiovascular Subcutaneous injection 2022 ≥2026/II 2 Entered confirmatory development following the acquisition of Gyroscope Thereapeutics. 3 In-licensed from Molecular Partners in 2021 (option deal) 4 No definite submission date can be provided at this time 5 Project added to selected development projects table in 2022 – entered Confirmatory Development 6 Formerly “bladder urothelial cell carcinoma”. Indication language updated in 2022 to reflect latest development plan 28 Reason Development discontinued Development discontinued Development discontinued Development discontinued Development discontinued Development discontinued Development discontinued Development discontinued Development discontinued Development discontinued Development discontinued Development discontinued Development discontinued Development discontinued Item 4. Information on the Company Change Removed Commercialized Removed Removed Removed Removed Commercialized Commercialized Commercialized Removed Removed Removed Projects removed from the development table since 2021 Compound/product Potential indication ACZ885 (canakinumab) Non-small cell lung cancer, adjuvant Beovu Diabetic macular edema CFZ533 (iscalimab) Liver transplantation Ankylosing spondylitis head-to-head study versus Sandoz biosimilar Hyrimoz (adalimumab) Lichen Planus Asthma Acute graft-versus-host disease Chronic graft-versus-host disease Relapsed/refractory follicular lymphoma Nonalcoholic steatohepatitis Huntington’s disease Membranous nephropathy Cosentyx Cosentyx CSJ117 Jakavi Jakavi Kymriah LJN452 LMI070 LNP023 Vijoice 1 Piqray Piqray PIK3CA-related overgrowth spectrum Commercialized Triple negative breast cancer Human epidermal growth factor receptor 2-positive (HER2+) advanced breast cancer Removed Removed Pluvicto Metastatic castration-resistant prostate cancer, post-taxane Commercialized QBW251 (icenticaftor) Chronic obstructive pulmonary disease QGE031 (ligelizumab) Chronic spontaneous urticaria QGE031 (ligelizumab) Chronic inducible urticaria Scemblix UNR844 Chronic myeloid leukemia, 3rd line Presbyopia 1 Formerly listed as BYL719 Removed Removed Removed Commercialized Removed 29 Item 4. Information on the Company Principal markets The Innovative Medicines Division sells products in approximately 130 countries worldwide. Net sales are primar- ily concentrated in the US and Europe. The following table sets forth the aggregate 2022 net sales of the Innovative Medicines Division by region: Innovative Medicines United States Europe Asia, Africa, Australasia Canada and Latin America Total Of which in Established Markets 1 Of which in Emerging Growth Markets 1 2022 net sales to third parties USD millions 15 899 13 554 8 929 2 914 41 296 30 548 10 748 % 39 33 22 6 100 74 26 1 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 cell and 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 and timely supply of medicines that meet all product speci- fications and quality standards, and that are produced in the most cost-effective and sustainable manner. The manufacturing of our products is highly regulated by gov- ernmental health authorities around the world, including the US Food and Drug Administration (FDA) and Euro- pean Medicines Agency (EMA). In addition to regulatory requirements, many of our products involve technically complex manufacturing processes or require highly spe- cialized raw materials. In 2022, we began to integrate Advanced Accelera- tor Applications (AAA), a Novartis company that focuses on radioligand therapies, into our existing manufacturing and supply structure. We manufacture our products across the following technologies at facilities worldwide: large molecules, small molecules, cell and gene therapy, RNA therapy and radioligand therapy (see also “—Item 4.D Property, plants and equipment”). In our manufac- turing network, we maintain state-of-the-art processes, with quality as a priority, and require our suppliers to adhere to the same high standards we expect from our own people and processes. These processes include: chemical and biological syntheses; radioisotope han- dling, which relates to our radioligand therapies; sterile processing, including CAR-T cell processing; and formu- lation and packaging. We are constantly working to improve our existing manufacturing processes, develop new and innovative technologies, and review and adapt our manufacturing network to meet our needs and those of our patients and customers. We produce raw materials for manufacturing in-house or purchase them from a number of third-party suppli- ers. Where possible, we maintain multiple supply sources so that the business is not dependent on a single or lim- ited number of suppliers. However, our ability to do so may at times be limited by regulatory or other require- ments. 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 stan- dards. 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 21 564 field force representatives, as of December 31, 2022, including supervisors and administrative person- nel. These trained representatives present the therapeu- tic benefits and risks of our products to physicians, phar- macists, hospitals, insurance groups, managed care organizations and other healthcare professionals. In the US, Novartis advertises certain products via digital and traditional media channels, including the internet, televi- sion, newspapers and magazines. Novartis also pursues co-promotion or co-marketing opportunities as well as licensing and distribution agreements with other com- panies in various markets. 30 Item 4. Information on the Company 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. The COVID-19 pandemic has accelerated additional changes related to marketing and sales techniques in the healthcare industry. For example, many healthcare professionals have increased their use of virtual plat- forms when interacting with pharmaceutical companies, and prefer to receive information in a more convenient and personalized way. In response, Novartis is working to implement a new customer engagement model that combines traditional face-to-face visits with digital and other methods of engaging healthcare professionals to improve the efficiency and effectiveness of every inter- action. We are similarly changing our approach to engag- ing healthcare systems, payers and other healthcare pro- viders. 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, 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 and across countries. This has increased our customers’ pur- chasing leverage and resulted in increased pricing pres- sure on our products. Moreover, we are exposed to increased concentration of credit risk as a result of the consolidation among our customers. Drug pricing is an increasingly prominent issue in many countries as healthcare spending continues to rise. This issue has received significant attention in the US, especially with the recent passage of the Inflation Reduction Act (please see “—Price controls” for more information). At Novartis, we are increasing our efforts to enable patient access through innovative pricing and access initiatives in the US, Europe and other markets. These include contract structures such as pay-over-time and outcome-based agreements. In 2021, Novartis reached an agreement with the National Health Service (NHS) in England to implement a first-of-its-kind population health management approach designed to provide faster and broader access to Leqvio for certain high-risk patients with atheroscle- rotic cardiovascular disease. Novartis is engaging in sim- ilar collaborations with other countries. Additionally, following conditional approval of Zolgensma in Europe in 2020, Novartis Gene Therapies established “Day One” early access agreements in mul- tiple European countries. These agreements support early patient access by allowing a variety of customiz- able options, including retroactive rebates, deferred pay- ments, installment options, outcome-based rebates, and collaborations with healthcare systems to optimize dis- ease management. These efforts have expanded glob- ally, and we now have multiple early access agreements and pay-for-performance agreements (i.e., out- come-based arrangements) in place in various markets around the world. Zolgensma is approved in 45 countries. 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 or regulatory exclusivities, and generic companies may also gain entry to the market through successfully challenging our intellectual property rights and exclusivities. We use appropriate, legally permissi- ble measures to defend those rights and exclusivities. (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 31 Item 4. Information on the Company 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 (i.e., drug or biologic) or other therapeutic candidate will not meet the require- ments to progress further. In such an event, we may be required to abandon the development of a potential ther- apy 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. Research program Our research program is conducted by the Novartis Insti- tutes for BioMedical Research (NIBR), which is the research and early development 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 fun- damental disease mechanisms that are relevant across different disease areas, continuous improvement in tech- nologies for drug discovery and potential therapies, working with patients to understand their diseases and the potential benefits of therapies, close alliances with clinical and commercial colleagues, and the establish- ment of strategic external alliances. Approximately 5 500 full-time-equivalent scientists, physicians and business professionals work at NIBR sites in Basel, Switzerland; Cambridge, Massachusetts; East Hanover, New Jersey; San Diego, California; and Emeryville, California. They contribute to research into disease areas such as cardiovascular, renal and meta- bolic diseases; neuroscience; oncology; hematology; muscle disorders; ophthalmology; autoimmune diseases; and respiratory and allergic diseases. Research at the Friedrich Miescher Institute 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 2022, we integrated the Genomics Institute of the Novartis Research Foundation (GNF), which is based in San Diego, US, into NIBR. This enables closer collabo- ration with colleagues across NIBR and gives greater access to biological, therapeutic, and translational plat- forms to researchers across Novartis. The NIBR San Diego site is focused on developing novel technology to drive drug discovery research, including regenerative medicine, small interfering RNA therapy and covalent drug discovery. Development program Our Global Drug Development (GDD) organization oversees and executes drug development activities, working collaboratively with NIBR, our commercial orga- nization and other parts of the Company on our overall pipeline strategy. The GDD organization includes centralized global functions such as Regulatory Affairs and Global Development Operations, and global Devel- opment Units, and has approximately 12 800 full-time equivalent employees worldwide. The traditional model of clinical 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 safety and efficacy of a potential new drug or indication. Although we use this traditional model, we have tai- lored the development process to be simpler, more flex- ible and more efficient. We divide the development pro- cess 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 clini- cal proof-of-concept (PoC) studies, which are small clin- ical trials (typically involving 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 indication. Once a positive proof of concept has been established, the 32 Item 4. Information on the Company drug moves to the Confirmatory Development stage and becomes the responsibility of GDD. Confirmatory Devel- opment 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 authorities 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 Confir- matory 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-approval studies may be required by the regulatory authorities to continue to gather important data to further support approval. 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) is respon- sible for all strategic aspects of our development port- folio and oversees our drug development budget as well as major project phase transitions and milestones fol- lowing a positive proof-of-concept outcome, including transitions to Confirmatory Development and the deci- sion to submit a regulatory application to the health authorities. The IMB is also responsible for the endorse- ment of overall development strategy, the endorsement of development project priorities, and decisions on proj- ect 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 membership. 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 February 2022, Novartis completed the acquisition of Gyroscope Therapeutics Holdings Plc. Through the acquisition, Novartis added PPY988 (GT005), an inves- tigational one-time gene therapy for geographic atrophy, to its portfolio. For more information about recent business acquisitions, see “Item 18. Financial Statements—Note 2. Significant transactions.” 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 and the EU, have high standards of technical evaluation. The introduction of new pharmaceutical products generally 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 and the EU have made efforts to harmonize reg- istration requirements in order to achieve shorter devel- opment and registration times for medical products. However, the requirement in many countries to negoti- ate selling prices or reimbursement levels with govern- ment regulators and other payers can substantially extend the time until a product may finally be available to patients. The following provides a summary of the regulatory processes in the principal markets served by Innovative Medicines Division affiliates: 33 Item 4. Information on the Company 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, the company may file a New Drug Application (NDA) or Bio- logics License Application (BLA), as applicable, for the compound. The NDA or BLA must contain all the scien- tific information that has been gathered about the com- pound. This typically includes information regarding the clinical experiences of patients tested in the drug’s clin- ical trials. A Supplemental New Drug Application (sNDA) or Supplemental Biologics License Application (sBLA) must be filed for new indications and dosage forms for a previously 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 sBLA, 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 reactions. For some med- ications, the FDA requires additional post-approval stud- ies (Phase IV) to evaluate long-term effects or to gather information on the use of the product under specified conditions. Throughout the life cycle of a product, the FDA requires compliance with standards relating to good lab- oratory, clinical and manufacturing practices. The FDA also requires compliance with rules pertaining to the manner in which we may promote our products. European Union In the EU, there are three main procedures for applica- tion for authorization to market pharmaceutical products in more than one EU member state at the same time: the centralized procedure, the mutual recognition procedure and the decentralized procedure. It is also possible to obtain a national authorization for products intended for commercialization in a single EU member state only. The procedure used for first authorization must continue to be followed for subsequent changes, e.g., to add an indi- cation 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. They use experts from their countries to carry out the assessment but can also draw on expertise from other member states (“multinational teams”). The entire review cycle must be completed within 210 days, although there are “clock stops” to allow the company to respond to questions set forth in the rapporteur and co-rapporteur’s assessment report and agreed with the CHMP. The first clock stop is at Day 120 and the clock restarts on Day 121, when the company’s complete response is received by the EMA. If there are further aspects of the dossier requiring clar- ification, the CHMP will issue further 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 jus- tify its responses. On Day 210, the CHMP will take a vote to recommend the approval or non-approval of the appli- cation, and their opinion is transferred to the EC. The final EC decision under this centralized procedure is a single decision that is applicable to all member states. This decision occurs 60 days, on average, after a posi- tive 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 undue risks to the pub- lic 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 34 Item 4. Information on the Company 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 performs 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, unless it is determined that the product must be further monitored for safety reasons. In this case, the authority may require another renewal at 10 years. If the holder does not apply for renewal, the marketing autho- rization automatically lapses. Any marketing authoriza- tion that is not followed within three years of its granting by the actual placing on the market of the correspond- ing medicinal product ceases to be valid. 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 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: The Inflation Reduction Act of 2022 (the “Act”) was signed into law, which mandates the negoti- ation of eligible Medicare Part B and Part D drugs; rede- signs the Medicare Part D benefit, including a USD 2 000 out-of-pocket cap for Medicare beneficiaries; and imposes penalties for Medicare drugs that increase in price faster than the rate of inflation. Under the Act, the US government is required to negotiate the Medicare prices of single-sourced small molecule drugs that have been on the market for seven years following FDA approval as well as single-sourced biologics that have been on the market for 11 years after FDA approval. Medicare drugs with the highest total cost to the US government will be selected for negotiation once they become eligible. Exemptions include orphan drugs with an indication for one rare disease or condition, drugs with a total cost to the US government of less than USD 200 million, and plasma-derived drugs. The negotiated price will be publicly available and will become effective for selected drugs nine years after FDA approval for eligible small molecules and 13 years after approval for eligible biologics. The negotiated price will be implemented as follows: • 10 eligible Medicare Part D drugs in 2026; • an additional 15 eligible Medicare Part D drugs in 2027; • an additional 15 eligible combined Medicare Part B and Part D drugs in 2028; • an additional 20 eligible combined Medicare Part B and Part D drugs in 2029; and • an additional 20 eligible combined Medicare Part B and Part D drugs each year after 2029 Novartis will participate in the Medicare negotiation pro- cess if Novartis drugs are selected. Pharmaceutical man- ufacturers that choose not to participate in the negotia- tion process will be subject to an excise tax of up to 95% of sales. Novartis may also be affected by other provi- sions of the Act, such as price increase penalties for Medicare Part D drugs starting in 2022 and for Medicare Part B drugs in 2023, and rebates on eligible Medicare Part D sales starting in 2025. In addition, by December 31, 2022, 20 US states had passed legislation intended to impact pricing or requir- ing manufacturer price transparency reporting, with eight of these states also allowing for drug affordability (i.e., price control) review boards. The disclosure require- ments vary by state. Many states require multiple types of reporting, including for new drug applications, new drug launches, prior notice of price increases, and quar- terly or annual reporting. It is expected that state legis- latures will continue to focus on drug pricing in 2023 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. 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 35 Item 4. Information on the Company 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 drug. Other countries, including many European countries, have similar laws. We expect that the pressure for generic substitution will continue to increase. In addition, the US, the EU and other jurisdictions are increasingly introducing laws and regu- lations encouraging the development of biosimilar ver- sions 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 in most states. However, six US states (Colorado, Florida, Minnesota, New Hamp- shire, New Mexico, and Vermont) have enacted laws allowing the import of pharmaceutical drugs from select foreign countries. The Secretary of the US Department of Health and Human Services (HHS) must certify that each state’s importation 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 (IP) rights – including patents, trademarks, copyrights, know-how, trade secrets and regulatory data protection – as essential to our purpose of reimagining medicine to improve and extend people’s lives, and to protect our investment in research and development, manufacturing and marketing. The IP system provides a means to attract the investments needed to conduct and sustainably finance innovative R&D, and to manage the risks inher- ent in our work. For example, we seek IP protection under applicable laws for significant product developments in major markets. Among other things, patents may cover the products themselves, including the product’s active ingredient or ingredients and its formulation. Patents may cover processes for manufacturing a product, including processes for manufacturing intermediate substances used in the manufacture of the product. Patents may also cover particular uses of a product, such as its use to treat a particular disease, or its dosage regimen. In addition, patents may cover tests for certain diseases or biomarkers – which can improve patient outcomes when administered with certain drugs – as well as assays, research tools and other techniques used to identify new drugs. The protection 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 pro- vides 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) or supplementary protec- tion certificates (SPCs) to not fully account for the time it took to develop the product and receive marketing authorization. As a result, it is rarely the case, for exam- ple, that a `product’s active ingredient(s) will have a full patent term at the time the product is approved by the FDA and other health authorities. In addition to patent protection, various countries pro- vide regulatory-based protection, including regulatory data protection (RDP) and/or other market exclusivities, for a prescribed period of time. RDP is a distinct type of IP right providing exclusivity that precludes a potential competitor from filing a regulatory application that relies on the sponsor’s clinical trial data, or that precludes the regulatory authority from approving the application for a set period of time. The RDP period can vary depend- ing on the type of data included in the sponsor’s appli- cation. When it is available, market exclusivity, unlike RDP, may preclude a competitor from obtaining marketing approval for a product even if a competitor’s application relies on its own data. RDP and market exclusivity peri- ods generally run from the date a product is approved, and so their expiration dates cannot be known with cer- tainty until the product approval date is known and exclu- sivity has been granted by the relevant authorities. United States Patents In the US, a patent issued from an application filed today will receive a term of 20 years from the earliest applica- tion filing date, subject to potential patent term adjust- ments for delays in patent issuance based upon certain delays in prosecution by the United States Patent and Trademark Office (USPTO). A US pharmaceutical patent that claims a product, method of treatment using a prod- uct, or method of manufacturing a product may also be eligible for a 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 a prod- uct based on FDA review. RDP and market exclusivity Separate from patent exclusivities, the FDA may provide regulatory-based protection, which runs in parallel to any patent protection. • A new small-molecule active pharmaceutical ingredi- ent receives five years of RDP, during which time a com- petitor generally may not obtain final approval of an 36 Item 4. Information on the Company application to the FDA based on a sponsor’s clinical data. • A new biologic active pharmaceutical ingredient receives 12 years of regulatory-based market exclusiv- ity, during which time a competitor generally may not market the same or similar drug. • The FDA may also request that a sponsor conduct pediatric studies and, in exchange, it will grant an addi- tional six-month period of pediatric market exclusivity if the sponsor makes a timely submission of the reports of the pediatric studies in response to the FDA’s Writ- ten Request. The sponsor must also have a pat- ent-based and/or regulatory-based exclusivity period for the product to which the pediatric market exclusiv- ity is appended. • 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. European Union Patents Patent applications in Europe may be filed in the Euro- pean Patent Office (EPO) or in a particular country or countries. The EPO system permits a single application to be granted for the EU plus other non-EU countries such as Switzerland, Turkey and the UK. When the EPO grants a patent, 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 20 years from the earliest application filing date. Phar- maceutical patents can be granted a further period of exclusivity under the SPC system. SPCs are designed, in part, to account for the time taken to receive market- ing authorization of a product by the European health authorities. An SPC may be granted to provide, in com- bination 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 duration may be extended by a further six months if the product is the subject of an agreed and success- fully completed pediatric investigation plan. The post-grant phase of patents, including the SPC system, is currently administered on a country-by-country basis under national laws that, while differing, are intended to (but do not always) have the same effect. RDP and market exclusivity Separate from patent exclusivities, the EU provides a system of regulatory data protection for authorized human medicines that runs in parallel to any patent pro- tection. The system for new drugs being approved today is usually referred to as “8+2+1” because it provides an initial period of eight  years of data protection, 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 marketing authorization but a competitive product can- not be launched; and a possible one-year extension of the market exclusivity period if, during the initial eight-year data exclusivity period, the sponsor registered a new therapeutic indication with “significant clinical benefit.” This system generally applies both to national and cen- tralized authorizations in the EU plus other non-EU coun- tries such as the UK. The EU also has an orphan drug exclusivity system for medicines. 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 medicine for the same indication will not generally be accepted or granted. Under certain cir- cumstances, this exclusivity can be extended with a two-year pediatric extension. Third-party patents and challenges to intellectual property Third parties can challenge our IP, including patents, pat- ent term extensions, RDP and marketing exclusivities (such as pediatric extensions and orphan drug exclusiv- ity), through various proceedings. For example, patents in the US can be challenged in the United States Patent and Trademark Office (USPTO) through various pro- ceedings, including Inter Partes Review (IPR) and Post- Grant Review (PGR) proceedings. They may also be chal- lenged through patent infringement litigation under the Abbreviated New Drug Application (ANDA) provisions of the Hatch-Waxman Act or under the Biologics Price Competition and Innovation Act (BPCIA). In the EU, pat- ents may be challenged through oppositions in the EPO, or national patents may be challenged in national courts or national patent offices. The outcomes of such chal- lenges can be difficult to predict. In addition to directly challenging our IP rights, in some circumstances a competitor may be able to mar- ket a generic version of one of our products by, for exam- ple, designing around our patents or marketing the generic product for non-patent-protected indications, or filing a separate New Drug Application (NDA) under the Hatch-Waxman Act (typically referred to as a 505(b)(2) application). Despite RDP, a competitor could opt to incur the costs of conducting its own clinical trials and prepar- ing its own regulatory application, and avoid our RDP altogether. There is a risk that some countries may seek to impose limitations on or seek not to recognize the availability of IP rights for pharmaceutical products, or limit the extent to which such rights may be enforced. Also, even though we may own, co-own or in-license pat- ents protecting our products, and conduct free- dom-to-operate analyses, a third party may nevertheless assert that one of our products infringes a third-party patent for which we do not have a license, seeking rem- edies such as monetary damages or an injunction against our continued marketing of the product. As a result, there can be no assurance that our IP rights will protect our products or that we will be able to avoid adverse effects from the loss of IP protection or from third-party patents in the future. Intellectual property protection for certain key marketed products and compounds in development We present additional details below regarding certain IP protection for the listed Innovative Medicines Division products. For each, we identify issued, unexpired 37 Item 4. Information on the Company patents by their general subject matter and, in parenthe- ses, years of expiry, if relevant, in the US and the EU. The identified patents are owned, co-owned or exclusively in-licensed by Novartis and relate to at least one dosage strength of the product or to the method of treatment or its use as it is currently approved and marketed or, in the case of a compound in development, as it is currently submitted to the FDA and/or the EMA for approval. Iden- tification 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, co-own, control or have rights to additional patents, for example, relating to compound forms, methods of treatment or use, formulations, devices, processes, prod- uct-by-process, synthesis, purification and detection. We identify unexpired RDP periods and, in parenthe- ses, years of expiry if the relevant marketing authoriza- tions have been authorized or granted. We identify cer- tain 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 exclusivity (PE), patent term extension (PTE) and supplementary protection certificate (SPC). We des- ignate these as “pending” if they have been applied for but not granted and include years of expiry if estimable. Such pending applications ultimately may or may not be granted. In the case of the EU, identification of a patent, sup- plementary protection certificate, marketing exclusivity or regulatory data protection means grant, authorization and maintenance in at least one EU country or the UK. However, it could be pending, not granted, expired 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 either the US or one or more EU countries, if IP is otherwise disclosed. We identify certain enforcement actions, or ongoing challenges to the disclosed IP, includ- ing IPRs or PGRs if instituted by the USPTO, that have not been finally resolved (including appeals) unless noted. 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 IP, which in the EU may involve IP in one or more EU countries, may include set- tlement agreements under which Novartis permits or does not permit future launch of generic versions of our products before expiration of that IP. We identify certain material terms of such settlement agreements where they could have a material adverse effect on our busi- ness. In other cases, such settlement agreements may contain confidentiality obligations restricting what may be disclosed. In the event that a product listed below does not have identified patents as described above, we provide infor- mation only on generic competition. For additional information regarding commercial arrange- ments with respect to these products, see “—Key mar- keted products.” Cardiovascular • Entresto. US: Four patents on combination (2023 (4)), PTE (2025), four PEs (2023, 2023, 2024, 2025); two patents on complex (2026, 2027), two PEs (2027, 2027); three patents on methods of treatment (2033 (3)); patent on dosage regimen (2036); RDP for new pediatric patient population (2022), PE (2023); RDP for labeling changes related to new clinical investigation (2024). EU: Patent on combination (2023), SPC (2028); two patents on complex (2026, 2026), two SPCs (2030, 2030); patent on formulation (2028); patent on method of use (2034); RDP (2025). There is no generic competition in the US or the EU. In the US, two combi- nation patents, the two complex patents, and the dos- age regimen patent are being challenged in ANDA pro- ceedings against generic manufacturers. In the EU, one complex patent and the use patent are being opposed in the EPO. In some EU countries, the combination pat- ent or its associated SPC is being challenged by generic manufacturers. • Leqvio. US: Two patents on composition of matter (2027, 2034), PTE pending (2035); two patents on method of treatment and dosing regimen (2027, 2036); RDP (2026). EU: One patent on composition of matter (2033), SPC (2035); RDP (2030). There is no generic competition in the US or the EU. Immunology • Cosentyx. US: Five patents on composition of matter (2025 (4), 2026), PTE (2029); patent on psoriatic arthri- tis use (2031); patent on psoriasis use (2032); two pat- ents on ankylosing spondylitis use (2032, 2033); RDP (2027). EU: Four patents on composition of matter (2025 (4)), SPC (2030), PE (2030); patent on psoriasis use (2031); patent on ankylosing spondylitis use (2031); RDP (2026). There is no generic competition in the US or the EU. In the EU, the patent on ankylosing spondy- litis use is being opposed in the EPO. • Xolair. US: Two patents on syringe formulation (2024, 2025). EU: Three patents on syringe formulation (2024, 2024, 2025). There is no generic competition in the US or the EU. • Ilaris. US: Patent on composition of matter (2024); pat- ent on cryopyrin-associated periodic syndromes use (2026); patent on familial Mediterranean fever (FMF) use (2026); patent on systemic onset juvenile idiopathic arthritis (SJIA) use (2028); patent on hyperimmuno- globulin D syndrome and tumor necrosis factor recep- tor-associated periodic syndrome use (2029); patent on formulation (2029). EU: Patent on composition of matter (2021), SPC (2024), PE (2025); patent on SJIA use (2026); patent on FMF use (2026); two patents on formulation (2029, 2029). There is no generic compe- tition in the US or the EU. 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). EU: Pat- ent on formulation (2024), SPC (2026); patent on 38 Item 4. Information on the Company 0.25 mg formulation (2032); patent on dosing regimen (2027). There is generic competition in the US and in most EU countries. In the US, the dosage regimen pat- ent was challenged in ANDA proceedings against a generic manufacturer and was found invalid by the US Court of Appeals for the Federal Circuit in June 2022. Novartis has filed a petition seeking further review with the US Supreme Court. Novartis is also enforcing the method of treatment patent against a generic manu- facturer. In the EU, Novartis is enforcing the dosing reg- imen patent against generic manufacturers. The dos- ing regimen patent is being opposed in the EPO. • Zolgensma. US: Four patents on composition of mat- ter (2024, 2024, 2026, 2033), PTE pending (2029); three patents on methods of treatment (2028, 2028, 2029); ODE for spinal muscular atrophy (SMA) in patients less than 2 years old with biallelic mutations in the SMN1 gene (2026); RDP (2031). EU: Three pat- ents on composition of matter (2024, 2024, 2028), SPC (2029); two patents on methods of use (2028, 2028), SPC (2033), SPC pending (2033); ODE for SMA in patients with a biallelic mutation in the SMN1 gene and a clinical diagnosis of SMA type 1, or patients with a biallelic mutation in the SMN1 gene and up to three cop- ies of the SMN2 gene (2030); RDP (2030). There is no generic competition in the US or the EU. • Kesimpta. US: Patent on compound (2031); patent on dosing regimen (2037). EU: Patent on compound (2023); patent on use (2023), SPC (2028); patent on formulation (2028), patent on formulation and use (2028), SPC (2033); patent on dosing regimen (2037). There is no generic competition in the US or the EU. Solid Tumor • Tafinlar and Mekinist. Tafinlar. US: Two patents on compound (2030, 2030); patent on method of treatment (2029). EU: Patent on compound (2029); RDP (2024). There is no generic competition in the US or the EU. Mekinist. US: Patent on compound (2025), PTE (2027); patent on method of treatment (2025); four patents on formulation (2032 (4)). EU: Patent on compound (2025), SPC (2029); patent on formulation (2031); RDP (2025). There is no generic competition in the US or the EU. In the EU, the formulation patent is being opposed in the EPO. Use of Mekinist with Tafinlar or Tafinlar with Mekinist. US: Patent on combination (2030); four patents on method of use of combination (2025, 2030, 2030, 2033); ODE on non-small cell lung cancer (2024); ODE on adjuvant treatment of melanoma (2025); ODE on anaplastic thyroid cancer (2025); ODE on metastatic solid tumors (2025). EU: Patent on combination (2030); patent on adjuvant for melanoma use (2033). There is no generic competition in the US or the EU. In the EU, the adjuvant use patent is being opposed in the EPO. • Kisqali. US: Three patents on compound (2028, 2030, 2031), PTE (2031); three patents on methods of treat- ment (2029, 2029, 2031); patent on salt form (2031); patent for tablet formulation (2036). EU: Patent on com- pound (2027); patent on compound (2029), SPC (2032); patent on salt form (2031); patent on methods of use with letrozole (2034); patent on formulation (2036); RDP (2027). There is no generic competition in the US or the EU. In the US, the three compound pat- ents, the three method of treatment patents, the salt patent and the formulation patent are being challenged in ANDA proceedings against generic manufacturers. In the EU, the method of use patent is being opposed in the EPO. • Piqray. US: Patent on compound (2029); patent on com- pound and use (2029), PTE pending (2033); RDP (2024). EU: Patent on compound and use (2029), SPC (2034); RDP (2030). There is no generic competition in the US or the EU. • Pluvicto. US: Three patents on composition of matter (2028, 2028, 2034); RDP (2027). PTE pending. EU: RDP (2032). There is no generic competition in the US or the EU. Hematology • Promacta/Revolade. US: Patent on compound (2021), PTE (2022), PE (2023); patent on method of enhanc- ing platelet production using salt (2023), PE (2023); patent on salt form and thrombocytopenia use (2025), PE (2026); five patents on tablet formulations of differ- ent dose strengths (2027 (5)), five PEs (2028 (5)); ODE on severe aplastic anemia patients in combination with standard immunosuppressive therapy (2025). EU: Pat- ent on compound (2021), SPC (2025), PE (2025); pat- ent on salt form (2023); patent on severe aplastic ane- mia use (2028). There is no generic competition in the US or the EU. In the US, generic manufacturers have filed ANDAs challenging certain patents other than the compound patent. In the EU, the severe aplastic ane- mia use patent is being opposed in the EPO. • Tasigna. US: Patent on compound (2023), PE (2024); two patents on salt forms (2026, 2028), two PEs (2027, 2029); patent on polymorph compound 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 com- pound form (2026); patent on capsule form (2027); pat- ent on method of treatment (2030). There is no generic competition in the US or the EU. In the US, generic man- ufacturers have filed ANDAs challenging certain pat- ents other than the compound patent. • Jakavi. EU: Patent on compound (2026), SPC (2027); two patents on salt form (2028, 2028); patent on com- pound for polycythemia vera (PV) use (2026); patent on salt form for graft-versus-host disease (GvHD) use (2028). There is no generic competition in the EU. 39 Item 4. Information on the Company • Scemblix. US: Patent on compound (2033), PTE pend- ing (2035); Patent on polymorph compound form (2040); RDP (2026); ODE (2028). EU: Patent on com- pound (2033), SPC pending (2037); RDP (2032); ODE (2032). There is no generic competition in the US or the EU. Other Promoted Brands • Lucentis. EU: There is generic competition in some EU markets. • Xiidra. US: Four patents on compound (2024, 2024, 2025, 2026); two patents on formulation (2024, 2033); five patents on method of treatment (2024, 2024, 2026, 2029, 2029); one patent on polymorph compound form (2029). PTE pending. There is no generic competition in the US. Xiidra is not marketed in the EU. In the US, the compound, compound and use, formulation, method of treatment, and polymorph compound form patents are being challenged in ANDA proceedings against generic manufacturers. Established Brands • Sandostatin SC and Sandostatin LAR: Sandostatin SC: There is generic competition in the US and the EU. Sandostatin LAR: There is generic competition in most EU countries but no generic competition in the US. Compounds in development We provide certain patent information for non-marketed compounds in development that have been submitted to the FDA and/or the EMA for registration but have not yet been approved by either agency. For these products, Novartis will seek all appropriate RDP, will continue to seek additional intellectual property protection for sig- nificant product developments, and will apply for PTEs and SPCs in keeping with the great importance we attach to intellectual property. • VDT482 (tislelizumab). US: Patent on composition of matter (2033). EU: Patent on composition of matter (2033). Sandoz Our Sandoz Division is a global leader in generic pharmaceuticals and biosimilars, and sells products in well over 100 countries. In 2022, the Sandoz Division achieved consolidated net sales of USD 9.2 billion, rep- resenting 18.3% 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 finished dosage forms of small-molecule pharmaceuticals for sale to third parties across a broad range of therapeutic areas, including finished dosage form anti-infectives sold to third parties. In Anti-Infec- tives, Sandoz manufactures and supplies active pharma- ceutical ingredients and intermediates – mainly antibiot- ics – for internal use by Retail Generics and for sale to third-party customers. In Biopharmaceuticals, Sandoz develops, manufactures and markets protein- and other biotechnology-based products, including biosimilars. The Sandoz strategic ambition is to be the world’s leading and most valued generics and biosimilars com- pany . Our divisional strategy focuses on three areas: developing a broad and consistent pipeline of generic and biosimilar launches across key geographies and across a broad range of therapeutic areas; positioning Sandoz to be “first in” by having a strong pipeline with a focus on being first to market and “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. Sandoz is a global market leader in biosimilars, with a total of eight approved and marketed products, and a pipeline of over 15 molecules. In addition to internally developed projects, our biosimilar portfolio comprises publicly announced commercialization agreements with BioCon, Gan & Lee, EirGenix, Polpharma Biologics and Bio-Thera Solutions Ltd. Availability of our biosimilars varies by country. Sandoz is also the global market leader in generic antibiotics. Its Kundl, Austria, manufacturing site is the hub of the last fully vertically integrated penicillin pro- duction chain in Europe, which offers certain competi- tive advantages including added supply chain resilience. In January 2020, we closed the previously announced acquisition of the Japanese business of Aspen Global Incorporated, consisting of off-patent branded medicines with a focus on anesthetics and specialty brands. In July 2020, Sandoz and the Austrian government announced a planned combined investment of more than EUR 150 million to enhance the long-term competitive- ness and supply resilience of European production for key antibiotics. In May 2021, Sandoz confirmed details of a previously announced investment of EUR 100 million in antibiotic manufacturing technology for its Kundl, Austria, manu- facturing site, and announced an additional EUR 50 mil- lion investment in a new sterile production line in Pala- folls, Spain. In November 2022, Sandoz announced an additional EUR 50 million investment to support increased manufacturing capacity for finished dosage form peni- cillin at its Kundl, Austria, manufacturing site. In October 2021, Sandoz announced that its planned acquisition of GSK’s global cephalosporin antibiotics business, first announced in February 2021, had been successfully closed. On October 1, 2021, Sandoz Inc., the US subsidiary of Sandoz, entered into a settlement agreement with the Civil Division of the US Department of Justice (DOJ) con- cerning the department’s years-long pricing investiga- tion into the US generic drug industry. This settlement 40 Item 4. Information on the Company was an expected outcome of the resolution the company reached in March 2020 with the DOJ Antitrust Division regarding the same investigation and underlying con- duct. As part of the settlement, Sandoz agreed to cer- tain corporate integrity obligations as part of a corporate integrity agreement with the Office of Inspector General of the US Department of Health and Human Services, which have now been implemented. The settlement con- tains no new factual allegations against Sandoz and, in 2020, the Group fully provisioned for this settlement and disclosed the agreement in principle as part of the March 2020 resolution. For more information, see “Item 18. Financial Statements—Note 20. Provisions and other non-current liabilities.” In August 2022, Novartis announced its intention to separate the Sandoz business to create a standalone company by way of a 100% spin-off, concluding the Strategic Review announced in October 2021. The Stra- tegic Review determined that a 100% spin-off would be in the best interests of shareholders as it would create two standalone companies focused on their respective growth strategies. The new company is planned to be incorporated in Switzerland and to be listed on the SIX Swiss Exchange, with an American Depositary Receipt (ADR) program in the US. Completion of the transaction is subject to certain conditions, including consultation with works councils and employee representatives (as required), general market conditions, tax rulings and opinions, final Board of Directors endorsement and shareholder approval in line with Swiss corporate law. The transaction is expected to be generally tax neutral to Novartis, with completion expected in the second half of 2023. 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 Acetylcysteine Tacrolimus 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 Immunosuppressive agent Clavulanic acid and mixtures with clavulanic acid Beta-lactam inhibitors Classical and semisynthetic macrolides Anti-infectives Intermediates Various cephalosporin intermediates Macrolide base intermediates Description Anti-infectives Anti-infectives Various crude compounds produced by fermentation Cyclosporine, ascomycin, rapamycin, mycophenolic acid, etc. 41 Item 4. Information on the Company Biopharmaceuticals Product Omnitrope Originator drug Genotropin ® Binocrit and Epoetin alfa Hexal Eprex®/Erypo ® Zarzio, Zarxio and Filgrastim Hexal Neupogen ® Glatopa Erelzi 1 Rixathon Hyrimoz Zessly Ziextenzo Copaxone ® Enbrel ® MabThera ® Humira ® Remicade ® Neulasta ® Description Recombinant human growth hormone to treat growth disorders and growth hormone deficiency Recombinant protein (erythropoiesis-stimulating) agent to treat anemia Recombinant protein (granulocyte colony-stimulating factor, short-acting) used in oncology Treatment for relapsing forms of multiple sclerosis Fusion protein (TNF-alpha receptor) to treat multiple immune-mediated inflammatory diseases Chimeric monoclonal antibody (directed against CD20 protein on B-cells) to treat blood cancers and immunological diseases Monoclonal antibody (TNF-alpha antibody) to treat multiple immune-mediated inflammatory diseases Monoclonal antibody (TNF-alpha antibody) to treat multiple immune-mediated inflammatory diseases PEGylated form of a recombinant human granulocyte colony-stimulating factor (long-acting) to reduce duration of chemotherapy-induced neutropenia and incidence of chemotherapy-induced febrile neutropenia 1 Approved in the US in 2016. In patent litigation with Amgen, which markets Enbrel®, the US District Court of New Jersey ruled against Sandoz in August 2019, which was upheld on appeal. The decision is final and Sandoz cannot launch its Erelzi product in the US until 2029. Selected development projects – biosimilars in Phase III development and registration The following table describes Sandoz biosimilar projects that are in registration trial or in registration with a regu- latory agency (including filing preparation): Project/ product Common name (INN) GP2411 denosumab Mechanism of action Potential indication/indications Therapeutic areas Anti-RANKL monoclonal antibody Osteoporosis (same as originator) Endocrinology, Neurology Route of administration Current phase Subcutaneous Phase III SOK583 aflibercept Recombinant fusion protein Ophthalmology indication (same as originator) that blocks VEGF-A Ophthalmology Intravitreal Phase III HER2+ cancer tumors Oncology Intravenous Registration EGI014A11 trastuzumab DST356A12 natalizumab Anti-HER2 recombinant IgG1, humanized monoclonal antibody Anti-alpha4 integrin monoclonal antibody insulin glargine, Long-acting (HFT896)/ lispro, aspart rapid-acting insulin Diabetes HFT896, SMQ969, PYB1063 VVF3794 Multiple sclerosis and Crohn’s disease Neurology, Immunology (US only) Intravenous Registration Endocrinology, Diabetology Subcutaneous Phase III/ Phase I bevacizumab Recombinant humanized monoclonal antibody that blocks VEGF Solid tumors Oncology Intravenous Registration 1 Development in collaboration with EirGenix, Inc. 2 Development in collaboration with Polpharma Biologics 3 Development in collaboration with Gan & Lee 4 Development in collaboration with Bio-Thera Solutions 42 Item 4. Information on the Company 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 2022 net sales of Sandoz by region: Sandoz Europe United States Asia, Africa, Australasia Canada and Latin America Total Of which in Established Markets 1 Of which in Emerging Growth Markets 1 2022 net sales to third parties USD millions 4 913 1 754 1 613 969 9 249 6 460 2 789 % 53 19 17 11 100 70 30 1 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 material changes in seasonal demand, while sales of the vast majority of our other products are not. The COVID-19 pandemic has substantially impacted seasonal variation in recent years. Production For information on the production of our products, see “—Item 4.B Business overview—Innovative Medicines— Production.” In September 2020, as part of a broader reorganiza- tion of Novartis Technical Operations (NTO), we estab- lished the Sandoz Technical Operations (STO) platform within NTO. STO focuses on producing generic medicines for Sandoz, as well as related external supply operations and supply chain. In October 2021, Sandoz created a new position, Global Head, Sandoz Operations. This new, broader role, includes full operational and financial accountability for manufacturing and supply as of Jan- uary 1, 2023, and was established in anticipation of the intended Sandoz 100% spin-off. Due to impurities found in the active ingredient batches sourced from third-party manufacturers, we recalled Sandoz valsartan, losartan and irbesartan prod- ucts in the second half of 2018 and the first quarter of 2019, and ranitidine film-coated tablets in the second half of 2019, from several markets, in line with our qual- ity standards for all of our marketed products. The dis- covery of nitrosamines in some types of drug products led several health regulators (e.g., EMA, FDA and others) to conduct a detailed analysis of these impurities in affected medicinal products. Novartis works with health authorities around the world to continuously review all chemical and biological human medicines for the possi- ble presence of nitrosamines. The EMA, FDA and other health authorities have provided guidance to the phar- maceutical industry to prevent unacceptable levels of nitrosamines in medicines. The EMA review concluded in March 2021 for chemical human medicines and in July 2021 for biological human medicines. Based on guidance from health authorities, any chemical and/or biological human medicines products identified with a potential risk for nitrosamines will undergo further testing. For these products, we have provided initial testing and potential control strategy updates to the EMA and other health authorities. Due to constant and rapidly evolving health authority requirements, the risk assessment and related testing that we may be required to perform may increase. We will submit and communicate the final outcome of any risk assessment and related testing to the relevant health authorities within their expected time frame, and make changes to the control strategy update, if neces- sary. Beginning in September 2021, we initiated a volun- tary recall of all finished product batches of losartan and losartan HCT products exceeding or potentially exceed- ing acceptable regulatory limits of the losartan azide impurity in the losartan drug substance. This impurity, which is viewed as an industrywide issue, was initially considered a mutagen that may increase the risk of can- cer over time if allowed to rise above certain levels. This recall was unrelated to the nitrosamine-related recalls described above, and supply was re-established in March 2022. Since the voluntary recall, further informa- tion has been provided to the EMA by Novartis and other companies in the industry, and the EMA has concluded that the losartan azide impurity is to be classified as a non-mutagenic impurity. Marketing and sales Sandoz sells a broad portfolio of products, including the products of our Retail Generics franchise and biosimi- lars, to wholesalers, pharmacies, hospitals and other healthcare outlets. Sandoz adapts its marketing and sales approach to local decision-making processes, depending on the structure of the market in each coun- try. In response to rising healthcare costs, many govern- ments and private medical care providers, such as health 43 Item 4. Information on the Company maintenance organizations, have instituted reimburse- ment schemes that favor the substitution of bioequiva- lent generic versions of originator pharmaceutical prod- ucts, such as those sold by our Retail Generics franchise. In the US, statutes have been enacted by all states that permit or require pharmacists to substitute a less expen- sive generic product for the brand-name version of a drug that has been prescribed to a patient. Generic use is growing in Europe, but penetration rates in many EU countries (as a percentage of volume) remain well below those in the US. Recent trends have been toward continued consoli- dation among distributors and retailers of Sandoz prod- ucts, both in the US and internationally, which has increased our customers’ purchasing leverage. Legislative or regulatory changes can have a signifi- cant impact on our business in a country. For more infor- mation on such changes, see “—Item 4.B Business over- view—Innovative Medicines—Price controls.” 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 already mature market framework in Europe and some other markets, while the business environment is rapidly evolving in the US and many international markets. Reg- ulatory pathways for approving biosimilar products are at various stages of maturity by market, but in some cases are still relatively new or still in development. Pol- icies have not yet been fully defined or implemented regarding the substitution and reimbursement of biosim- ilars in many markets, including the US. 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 expenditure 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 industrywide US sales that began in 2017 and continued through 2022. Development and registration Development of Sandoz Biopharmaceuticals is jointly overseen by Sandoz and GDD, and is governed by the IMB. Development and registration activities for Retail Generics products, and registration activities for Bio- pharmaceuticals products, are also overseen 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 reference product. Nevertheless, research and develop- ment costs associated with generic pharmaceuticals are generally much lower than those of the originator pharmaceuticals, as no original drug discovery, preclin- ical studies or clinical trials on dose finding, safety and efficacy are typically performed by the generics com- pany. As a result, the different focus and lower costs of the generic pharmaceutical model ultimately allow generic pharmaceutical products to be offered at lower prices, which support and contribute to the cost contain- ment goals of healthcare systems. 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 still require such targeted studies for biosimilar products. Interna- tional regulators are nonetheless increasingly discuss- ing the potential for “tailored development” (which refers to proposals that seek to implement a more efficient and expedited biosimilar development process that elimi- nates the current need for comparative clinical efficacy and safety studies of biosimilars, without any resulting compromise on quality, safety or efficacy) for certain molecules. Biosimilars are engineered to match the ref- erence medicine in quality, safety and efficacy. This is achieved by systematically defining the target range of the reference medicine and then comparing the biosim- ilar to the reference medicine at various development stages to confirm biosimilarity and to establish that there are no clinically meaningful differences between the pro- posed biosimilar and the reference biologic. Because the purpose of a biosimilar clinical 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 reference biologic. Therefore, the cost of development for a biosimilar is usually less than that of a reference biologic. The development and registration staff employed by affiliates of the Sandoz Division are based worldwide, including at facilities in Holzkirchen, Germany; Hyder- abad, India; Kundl, Austria; Ljubljana, Slovenia; and Rudolstadt, Germany. In November 2020, Sandoz com- pleted (i) the previously announced closure of the Holz- kirchen, Germany, development and registration site, with the exception of patch development and the proj- ect management group, and (ii) the closure of the prod- uct development and registration site as well as the main- tenance and development regulatory centers in Unterach, Austria. We conduct an ongoing review of our global development and regulatory network to consolidate and streamline operations and optimize our network struc- ture to enable Sandoz to compete sustainably in an increasingly challenging generics environment. In 2021, Sandoz completed the previously announced closures of its maintenance regulatory center in Barleben, Ger- many, its Fougera development center located in 44 Item 4. Information on the Company Melville, New York, as well as its product development center in Boucherville, Canada. 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. An ANDA is generally permitted to be filed four years after the initial approval of the refer- ence product and generally cannot be fully approved by the FDA until any regulatory exclusivity of the reference product has expired. 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 generics company. In the event of such a lawsuit, the Hatch-Waxman Act imposes an automatic 30-month stay 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, enabling such generic applicants to exclusively market their product alongside the reference product at a cer- tain point in time, which is generally after any intellectual property issues have been resolved. However, after such point in time, the generic applicants must launch their products within certain time frames 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 generics company is able to submit its abridged appli- cation based on the data submitted by the innovator company for the reference product, without the need to conduct 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 submitted throughout the EU. However, the data submit- ted by the innovator company in support of its applica- tion for a marketing authorization for the reference prod- uct is generally protected for 10 years after the first grant of marketing authorization in all member states, and can be extended for an additional year if, during the initial eight-year data exclusivity period, the innovator company registers a new therapeutic indication with “significant clinical benefit.” In the case of orphan drugs, it may be extended with a two-year pediatric extension. See “— Item 4.B Business overview—Innovative Medicines— Intellectual property.” 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 process similar to that followed for small molecules. However, biosimilars usually have to be approved through the cen- tralized procedure because they are manufactured using recombinant DNA technology. As part of the approval process in the EU, biosimilars have to demonstrate com- parability to the reference medicine in terms of safety, efficacy and quality through an extensive comparability exercise, based on strict guidelines set by the authori- ties. Regulators will only approve a biosimilar based on data that allows the regulators to conclude that there are no clinically meaningful differences between the refer- ence medicine and the biosimilar. In the US, under the BPCIA, a biosimilar must be highly similar with no clinically meaningful differences compared to the reference medicine. Approval of a bio- similar in the US requires the submission of a BLA to the FDA, including an assessment of immunogenicity and pharmacokinetics; an efficacy study; and possibly a phar- macodynamics study. The BLA for a biosimilar can be submitted as soon as four years after the initial approval of the reference biologic, but can only be approved 12 years after the initial approval of the reference bio- logic. Intellectual property We take all reasonable steps to ensure that our products do not infringe valid intellectual property rights held by others, including taking steps to proactively challenge intellectual property rights that we believe should not have been granted. Nevertheless, competing companies 45 Item 4. Information on the Company 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 defending these suits, we could be subject to injunc- tions preventing us from selling our products and to potentially substantial damages. Wherever possible, our products are protected by our own patents. Among other things, patents may cover the products themselves, including the product’s formu- lation, or the processes for manufacturing a product. However, there can be no assurance that our intellectual property will protect our products or that we will be able to avoid adverse effects from the loss of intellectual prop- erty protection in the future. 4.C Organizational structure Organizational structure See “Item 4. Information on the Company—Item 4.A History and development of Novartis” and “Item 4. Information on the Company—Item 4.B Business overview—Overview.” Significant subsidiaries See “Item 18. Financial Statements—Note 31. Principal Group subsidiaries and associated companies.” 4.D Property, plants and equipment Our principal executive offices are located in Basel, Swit- zerland. Our divisions operate through a number of affil- iates that have offices, research and development facil- ities, and production sites throughout the world. We generally own our facilities or have entered into long-term lease arrangements for them. Some of our principal facilities are subject to mortgages and other security interests granted to secure certain debts. Novartis Operations manages the production, supply chains and quality of our Innovative Medicines and Sandoz Division products through a network of 55 manufacturing sites, as well as through external suppli- ers, and warehouse and distribution centers. In addition, Novartis Operations also manages non-production real estate owned or leased by Novartis around the world. 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. Major facilities Location (in square meters) Major activity Size of site Basel, Switzerland – St. Johann 589 000 Global Group headquarters; global Innovative Medicines Division headquarters; global Sandoz Division headquarters; research and development; production of drug substances and drug intermediates Kundl and Schaftenau, Austria 480 000 Production of biotechnological products, drug products and finished products, anti-infectives, active drug substances and nucleic acids; 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 201 800 Research and development Menges, Slovenia Shanghai, China Stein, Switzerland 133 763 Production of drug substances and drug intermediates 106 500 Research and development 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 Sandoz Division production of transdermal delivery systems and certain international and global service functions. Huningue, France 35 000 Production of drug substances for clinical and commercial supply Durham, North Carolina 15 794 Manufacture, package and release commercial Zolgensma product and certain clinical development activities Princeton, New Jersey 14 300 Sandoz Division US headquarters Schweizerhalle, Switzerland 8 880 Manufacture of small-interfering RNA (siRNA) drug substance for Leqvio 46 Item 4. Information on the Company As our product portfolio evolves, Novartis Operations is adapting our manufacturing capacity and capabilities to meet our changing needs, shifting from high-volume products toward lower-volume, customized and person- alized medicines. As of December 31, 2022, we have closed, exited or sold 19 manufacturing sites since 2019 and have announced the closure, exit or sale of seven additional manufacturing sites. We have continued to invest in new technologies implemented at our sites, such as the new targeted radioligand therapy production facil- ity in Indianapolis, Indiana, which is currently under con- struction (with an expected size of approximately 67 thousand square meters), the FDA-approved Zolgensma production site in Durham, North Carolina, and the small-interfering RNA (siRNA) oligonucleotide manufac- turing facility in Schweizerhalle, Switzerland. We are leveraging innovation to increase the reliability and pro- ductivity of our manufacturing network, including using data and digital technologies. We continue to seek opportunities to manage our production facilities as efficiently as possible, optimize external spend, and sim- plify and standardize across our manufacturing network to help us increase our cost competitiveness and opti- mize the value of our products. At the same time, we are working to improve our environmental sustainability, for example by reducing energy, waste disposal and water consumption at our sites by making our manufacturing processes more efficient, introducing new technologies, and switching to clean and renewable energy solutions. For a description of the impact of environmental mat- ters, see “Item 3. Key Information—Item 3.D Risk fac- tors—Environmental, social and governance matters— Failure to meet increasingly challenging environmental, social and governance expectations,” “Item 3. Key Infor- mation—Item 3.D Risk factors—Environmental matters— Impact of environmental liabilities,” and “Item 3. Key Infor- mation—Item 3.D Risk factors—Climate change—Climate change and increased risk of major natural disasters.” See also “Item 18. Financial Statements—Note 20. Pro- visions and other non-current liabilities.” 47 Item 4A. Unresolved Staff Comments Item 4A. Unresolved Staff Comments Not applicable. 48 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 selected development projects of our divisions (see “Item 4. Infor- mation on the Company—Item 4.B Business overview”) constitute the Operating and Financial Review (Lage- bericht), as defined by the Swiss Code of Obligations. The discussion and analysis of the financial condition and results of operations of certain items from fiscal year ended December 31, 2020, and year-to-year compari- son between fiscal year ended December 31, 2021, and December 31, 2020, that are not included in this Form 20-F can be found in “Item 5. Operating and Financial Review and Prospects” of our Form 20-F for the fiscal year ended December 31, 2021, which is incorporated by reference herein. 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 become the most valued and trusted medicines com- pany in the world. 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. In April 2022, we announced a new, integrated orga- nizational structure and operating model designed to sup- port our innovation, growth, and productivity ambitions as a focused medicines company. For information about this new organizational structure, see “Item 4. Information on the Company—Item 4.B Overview.” Under this new orga- nizational structure, our divisions are supported by the following organizational units: the Novartis Institutes for BioMedical Research, Global Drug Development, and Novartis Operations. The financial results of these orga- nizational units are included in the results of the divisions for which their work is performed. Significant transactions are discussed in “Item 18. Financial Statements—Note 2. Significant transactions,” and “Item 18. Financial Statements—Note 3. Segmenta- tion of key figures 2022, 2021 and 2020.” Our business environment Medical technology continues to accelerate, with new advanced treatments emerging to meet the growing need for high-quality healthcare. At the same time, aging populations are putting pressure on healthcare resources, while access to healthcare remains a chal- lenge around the world. As a result, we see challenges and opportunities in our business environment: the need for continuous innovation in healthcare, increasing access to medicines, the adoption of new working prac- tices and the growing use of data science and technol- ogy. The following are some major trends currently shap- ing our business environment. • Spending on healthcare continues to grow. The need for high-quality healthcare is more critical than ever. Over the next five years, global spending on medicines is forecast to rise faster than GDP in many developed countries. The price of medicines remains a key issue as increased healthcare spending and a more uncer- tain economic outlook weigh on government budgets. • Aging populations are fueling a rise in chronic illness. Aging and lifestyle changes are triggering an increase in noncommunicable diseases, such as cancer, heart disease and diabetes, causing millions of preventable deaths and putting further pressure on healthcare resources. • Medical science continues to accelerate. Scientific innovation is advancing at an unprecedented pace. In recent years, new types of treatments have been approved, including RNA therapies, gene and cell ther- apies, and radioligand therapies, which offer targeted approaches to treating serious diseases. Because these medicines are complex, they require focused investment and expertise to bring them to reality for patients. • Access to healthcare remains a formidable challenge. Worldwide, millions of patients struggle to access the medicines they need. This may be because of cost, inequity, or structural issues in healthcare systems. While access to medicines remains an acute issue in lower-income countries, it is a problem in developed 49 Item 5. Operating and Financial Review and Prospects countries too, where the COVID-19 pandemic high- lighted that deep health inequities remain entrenched. • Patients are moving to the center of healthcare. Patients are demanding more say over their treatment through patient representative groups and other means. In response, healthcare systems and pharmaceutical companies are adapting, moving toward a more inte- grated, end-to-end approach, with an increased focus on patient engagement in drug development and other areas. At the same time, patients are becoming more important as data owners – as personal data allows more targeted treatments and supports development of new medicines. • Economic uncertainty is growing, post-COVID-19 pan- demic. The global economy is facing considerable uncertainty, driven by concerns over rising energy prices and geopolitical instability. Forecasts suggest the current economic slowdown is likely to continue in 2023. In our own industry, the COVID-19 pandemic put strain on supply chains and highlighted the importance of resilient supplies of active pharmaceutical ingredi- ents – the raw materials used to make finished medicines. See “Item 3. Key Information—Item 3.D Risk factors—Pricing, reimbursement and access—Pricing and reimbursement pressure, including pricing trans- parency and access to healthcare,” and “Item 3. Key Information—Item 3.D Risk factors—Macroeconomic developments—Impact of macroeconomic develop- ments.” • Biopharma searches for more efficiency. At a time of growing economic uncertainty, investors are looking for sustainable growth in margins and earnings. To remain competitive, pharmaceutical companies are moving to more agile, cost-efficient business models, particularly as they invest to build specialized capabil- ities in research and development (R&D) and manufac- turing. Meanwhile, rates of return on R&D are increas- ing for the first time in several years, largely because of emergency approvals during the COVID-19 pan- demic and faster innovation cycles. • New technologies are reshaping our industry. The use of data science and technology is increasing across the industry in everything from R&D to manufacturing and marketing. This has brought greater efficiency, but it also requires new investment and skills. Importantly, new technologies are helping close gaps between companies, healthcare systems and patients – for example, by providing insights into the social determi- nants of heart health enabling the development of new prevention measures. • Working practices are changing. Working practices are changing in many countries. Demand for new skills is increasing, especially in areas such as data science. Workforces are becoming more flexible and more diverse, allowing companies to tap into new talent pools – important at a time of skills shortages in many parts of the economy. • Climate change is increasingly affecting human health. Climate change could undermine decades of progress in improving human health at a time when antimicrobial resistance is also rising. At the same time, more gov- ernments are looking to decarbonize their economies over the long-term, while companies also face increased scrutiny over the sustainability of their operations and supply chains. See “Item 3. Key Information—Item 3.D Risk factors—Climate change—Impact of climate change and increased risk of major natural disasters.” Our strategy Our strategy as a focused medicines company is to deliver high-value medicines that alleviate society’s greatest disease burdens through technology leadership in R&D and novel access approaches. We have made significant progress in transforming Novartis from a diversified healthcare conglomerate into a focused medicines company. In doing so, we have divested or spun off non-core businesses and made tar- geted acquisitions to focus on our core business: dis- covering and developing new medicines and finding new ways to deliver them to as many people as possible. In 2022, we continued to execute on our strategy by putting in place a new organizational structure to sup- port innovation, growth and productivity. We also updated our strategic priorities and announced our intention to spin-off our Sandoz business, which paves the way for Novartis to advance as a company focused fully on innovative medicines. See “Item 4. Information on the Company—Item 4.B Overview” and “Item 4. Information on the Company—Item 4.B Sandoz.” Our strategy has clear focus areas and priorities to meet the challenges and opportunities we see in our business environment, and ensure we continue to cre- ate value for our stakeholders and society. Our focus areas determine where we invest most of our time, energy and resources and include: • Core therapeutic areas with high unmet patient needs: cardiovascular; immunology; neuroscience; solid tumors; and hematology. • Technology platforms where we have the depth and scale to discover, develop and commercialize new ther- apies: Chemistry; biotherapeutics; xRNA; radioligand therapy; and gene and cell therapy. • Priority geographies which, taken together, account for the majority of the forecast growth in global health- care spending: US, China, Germany and Japan. While these are our priority countries, we will continue to invest in other markets worldwide. Our focus areas are supported by three strategic prior- ities, which determine how we implement our strategy. These three strategic priorities are: • Deliver high-value medicines to accelerate growth. Delivering new medicines for major diseases is at the core of our purpose and value creation as a company. We focus on high-value innovative medicines with the potential to transform the treatment of diseases across our five core therapeutic areas. To do this, we seek to maximize the potential of our key in-market and launch medicines, while finding new ways to deliver them to as many people as possible and investing in R&D to deliver the next generation of high-value therapies for patients over the longer term. As part of our efforts, we continue our longstanding commitment to reduce the burden of infectious and tropical diseases that pre- dominantly affect underserved populations in low- and middle-income countries. 50 Item 5. Operating and Financial Review and Prospects • Embed operational excellence to deliver returns. We aim to drive efficiency and free up resources to invest in innovation for patients. This also underpins our finan- cial performance and makes us more agile; better able to take quick decisions and scale the use of new tech- nologies, with effective cooperation across our busi- ness. In everything we do, we maintain high standards of product quality and patient safety, while also work- ing to reduce our environmental footprint. • Strengthen our foundations by: Unleashing the power of our people. We continue to focus on culture as a key enabler of our strategy to drive innovation and long-term performance. For us, this is about building an agile, diverse workforce and making sure we attract and retain the right talent for the future. Scaling data science and technology. We are investing in data science and technology to increase efficiency, support innovation, better respond to the needs of patients and healthcare professionals, and ultimately improve the way we develop and deliver our medicines. Building trust with society. We aim to increase access to our medicines for underserved populations around the world and follow high standards of ethical behav- ior wherever we operate. 51 Item 5. Operating and Financial Review and Prospects Results of operations Financial year 2022 compared with 2021 Key figures1 (USD millions unless indicated otherwise) Net sales to third parties Other revenues Cost of goods sold Gross profit Selling, general and administration Research and development Other income Other expense Operating income % of net sales to third parties (Loss)/income from associated companies Interest expense Other financial income and expense Income before taxes Income taxes Net income Attributable to: Shareholders of Novartis AG    Non-controlling interests Basic earnings per share (USD) Net cash flows from operating activities Free cash flow 1 Year ended Year ended Dec 31, 2022 Dec 31, 2021 Change in USD % Change in constant currencies % 1 50 545 51 626 1 283 1 251 – 15 486 – 15 867 36 342 37 010 – 14 253 – 14 886 – 9 996 – 9 540 805 1 852 – 3 701 – 2 747 9 197 11 689 18.2 22.6 – 9 15 339 – 837 20 – 811 – 80 8 371 26 137 – 1 416 – 2 119 6 955 24 018 6 955 24 021 0 – 3 3.19 10.71 14 236 15 071 11 945 13 282 – 2 3 2 – 2 4 – 5 – 57 – 35 – 21 nm – 3 nm – 68 33 – 71 – 71 nm – 70 – 6 – 10 4 4 – 4 4 – 1 – 9 – 54 – 43 – 13 nm – 5 nm – 64 25 – 67 – 67 nm – 66 1 For an explanation of non-IFRS measures and reconciliation tables, see “—Non-IFRS measures as defined by Novartis.” nm = not meaningful 52 Item 5. Operating and Financial Review and Prospects Group overview Net sales to third parties for Novartis were USD 50.5 bil- lion, down 2% in USD reported terms and up 4% mea- sured in constant currencies (cc) to remove the impact of exchange rate movements. Sales growth was driven by volume growth of 11 percentage points, mainly driven by continued strong growth from Entresto, Kesimpta, Kisqali, Pluvicto and Cosentyx. Generic competition had a negative impact of 3 percentage points, mainly due to Gilenya, Afinitor/Votubia, and Gleevec/Glivec. Pricing had a negative impact of 4 percentage points. Sales in the US were USD 17.7 billion (+5%) and in the rest of the world USD 32.8 billion (–6%, +4% cc). By division, Innovative Medicines delivered net sales of USD 41.3 billion (–2%, +4% cc) and Sandoz net sales were USD 9.2 billion (–4%, +4% cc). In Emerging Growth Markets, which comprise all mar- kets excluding the US, Canada, Western Europe, Japan, Australia and New Zealand, sales to third parties were USD 13.5 billion (+2%, +9% cc) driven by China (USD 3.1 billion) growing 2% (+6% cc). Operating income was USD 9.2 billion (–21%, –13% cc), mainly due to higher restructuring costs (USD 1.2 bil- lion) primarily related to the implementation of the pre- viously announced streamlined organizational model, higher impairments (USD 1.0 billion), and lower divest- ment gains (USD 0.6 billion). Operating income margin was 18.2% of net sales, decreasing by 4.4 percentage points (-3.8 percentage points cc). Net income was USD 7.0 billion compared with USD 24.0 billion in the prior year, impacted by Roche income in the prior year. Excluding the impact of Roche income, net income declined –9% (cc). Earnings per share were USD 3.19 compared with USD 10.71 in the prior year. Excluding the impact of Roche income, EPS declined –7% (cc). Net cash flows from operating activities amounted to USD 14.2 billion, compared with USD 15.1 billion in 2021. This decrease was mainly due to unfavorable changes in working capital and lower dividends from associated companies (2021 included the USD 0.5 billion dividends received from our investment in Roche, which was divested in the fourth quarter of 2021), partly offset by lower income taxes paid and favorable hedging results. Free cash flow amounted to USD 11.9 billion (–10% USD), compared with USD 13.3 billion in 2021, mainly due to a decrease in net cash flows from operating activities and lower divestment proceeds, partly offset by lower purchases of property, plant and equipment. We also present our core results1, which exclude the impact of amortization, impairments, disposals, acquisi- tions, restructurings and other significant items, to help investors understand our underlying performance. Core operating income was USD 16.7 billion (0%, +8% cc), benefiting from higher sales, partly offset by higher research and development (R&D) investments. Core operating income margin was 33.0% of net sales, increasing by 0.9 percentage points (+1.3 percentage points cc). Core net income was USD 13.4 billion (–5%, +3% cc) as growth in core operating income was partly offset by the loss of Roche core income. Excluding the impact of Roche core income, core net income grew +11% (cc). 1 For an explanation of non-IFRS measures and reconciliation tables, see “—Non-IFRS measures as defined by Novartis.” 53 Item 5. Operating and Financial Review and Prospects Net sales to third parties 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 Innovative Medicines Year ended Year ended Dec 31, 2022 Dec 31, 2021 41 296 41 995 9 249 9 631 50 545 51 626 Change in USD % – 2 – 4 – 2 Change in constant currencies % 4 4 4 The Innovative Medicines Division delivered net sales of USD 41.3 billion (–2%, +4% cc) with volume contributing 12 percentage points to growth. Generic competition had a negative impact of 4 percentage points. Pricing had a negative impact of 4 percentage points. Sales in the US were USD 15.9 billion (+6%) and in the rest of the world USD 25.4 billion (–6%, +3% cc). Sales growth was mainly driven by continued strong growth from Entresto (USD 4.6 billion, +31%, +37% cc), Kesimpta (USD 1.1 billion, +194%, +200% cc), Kisqali (USD 1.2 billion, +31%, +38% cc), Pluvicto (USD 271 million) and Cosentyx (USD 4.8 billion, +1%, +5% cc), partly offset by generic competition mainly for Gilenya, Afinitor/Votubia and Gleevec/Glivec. In the US (USD 15.9 billion +6%), sales growth was mainly driven by Entresto, Kesimpta and Pluvicto, partly offset by the impact of generic competition on Afinitor/ Votubia and Gilenya. In Europe (USD 13.6 billion, –9%, +1% cc) sales growth was driven by Entresto, Kisqali and Kesimpta, partly offset by increased generic competition for Gilenya. Emerging Growth Markets grew +2% (+9% cc), with China sales USD 2.9 billion (+3%, +7% cc) driven by Cosentyx. The following table provides an overview of net sales to third parties by core therapeutic area; other promoted brands; and established brands in the Innovative Medicines Division: (USD millions)    Cardiovascular    Immunology    Neuroscience    Solid Tumors    Hematology    Other Promoted Brands Total Promoted Brands    Established Brands Total Innovative Medicines 1 Reclassified to reflect the new Innovative Medicines divisional structures announced on April 4, 2022 Year ended Year ended Dec 31, 2022 Dec 31, 2021 1 4 756 7 287 5 051 4 723 6 452 3 127 3 560 7 205 5 007 4 101 6 430 3 451 31 396 29 754 9 900 12 241 41 296 41 995 Change in USD % Change in constant currencies % 34 1 1 15 0 – 9 6 – 19 – 2 40 7 5 21 7 – 1 12 – 13 4 54 Item 5. Operating and Financial Review and Prospects The following table provides the top 20 Innovative Medicines Division product net sales to third parties in 2022 as well as the change compared with 2021: US Rest of world Total Brands Cosentyx Brand classification by therapeutic area, other promoted brands or established brands Immunology Entresto Cardiovascular Promacta/Revolade Hematology Gilenya Neuroscience Tasigna Hematology Lucentis Other Promoted Brands Tafinlar + Mekinist Solid Tumors Jakavi Hematology Zolgensma Neuroscience Xolair 1 Immunology Sandostatin Established Brands Kisqali Ilaris Solid Tumors Immunology Kesimpta Neuroscience Key indications Psoriasis (PsO), ankylosing spondylitis (AS), psoriatic arthritis (PsA), non-radiographic axial spondyloarthritis (nr-axSPA) Chronic heart failure, hypertension Immune thrombocytopenia (ITP), severe aplastic anemia (SAA) Relapsing multiple sclerosis (RMS) Chronic myeloid leukemia (CML) % change USD m USD/cc 2 % % change change cc 2 USD USD m % % change change cc 2 USD USD m 2 770 – 4 2 018 10 20 4 788 1 5 2 354 38 2 290 25 37 4 644 31 37 1 083 14 1 005 – 6 5 2 088 4 9 1 153 – 19 860 – 37 – 29 2 013 – 28 – 24 877 – 1 1 046 – 11 – 2 1 923 – 7 – 1 Age-related macular degeneration (AMD), diabetic macular edema (DME), retinal vein occlusion (RVO) BRAF V600+ metastatic adjuvant melanoma, advanced non-small cell lung cancer (NSCLC), tumor agnostic with BRAF mutation indication Myelofibrosis (MF), polycytomia vera (PV), graft-versus-host disease (GvHD) Spinal muscular atrophy (SMA) Severe allergic asthma (SAA), chronic spontaneous urticaria (CSU), nasal polyps Carcinoid tumors, acromegaly HR+/HER2- metastatic breast cancer Auto-inflammatory (CAPS, TRAPS, HIDS/MKD, FMF, SJIA, AOSD, gout) Relapsing-remitting multiple sclerosis (RRMS) 1 874 – 13 – 4 1 874 – 13 – 4 678 12 1 092 0 10 1 770 5 11 1 561 – 2 9 1 561 – 2 9 434 – 7 936 6 12 1 370 1 1 365 – 4 6 1 365 – 4 5 6 800 – 5 438 – 23 – 16 1 238 – 12 – 10 472 39 759 27 38 1 231 31 38 570 14 563 1 16 1 133 7 15 921 165 171 nm nm 1 092 194 200 Galvus Group Established Brands Type 2 diabetes 859 – 21 – 12 859 – 21 – 12 Gleevec/Glivec Established Brands Chronic myeloid leukemia (CML), gastrointestinal stromal tumors (GIST) 205 – 22 540 – 29 – 23 745 – 27 – 22 Exforge Group Established Brands Hypertension Diovan Group Established Brands Hypertension 14 55 0 8 729 – 18 – 12 743 – 18 – 12 597 – 17 – 10 652 – 16 196 – 15 340 – 5 7 536 – 9 – 9 – 2 Kymriah Hematology Afinitor/Votubia Established Brands r/r pediatric and young adults acute lymphoblastic leukemia (ALL), diffuse large B-cell lymphoma (DLBCL), follicular lymphoma (FL) Breast cancer/ tuberous sclerosis complex (TSC) Top 20 brands total Rest of portfolio Total division net sales to third parties 171 – 67 341 – 18 – 8 512 – 45 – 41 12 753 6 19 384 – 5 5 32 137 – 1 3 146 6 6 013 – 9 0 9 159 – 4 15 899 6 25 397 – 6 3 41 296 – 2 5 2 4 1 Net sales to third parties reflect Xolair sales for all indications. 2 For an explanation of non-IFRS measures and reconciliation tables, see “—Non-IFRS measures as defined by Novartis.” nm = not meaningful 55 Item 5. Operating and Financial Review and Prospects For the table providing the top 20 Innovative Medicines Division product net sales to third parties in 2021, see “Item 18. Financial statements—Note 3. Segmentation of key figures 2022, 2021 and 2020.” For information about the approved indications for certain products described, see “Item 4. Information on the Company—Item 4.B Business overview—Innovative Medicines— Innovative Medicines Division products.” CARDIOVASCULAR Sales in the Cardiovascular therapeutic area were USD 4.8 billion (+34%, +40% cc), sales growth mainly driven by Entresto. Entresto (USD 4.6 billion, +31%, +37% cc) sustained robust demand-led growth, with increased patient share across all geographies. Guidelines position Entresto as the first choice RASi versus ACEi/ARB in patients with HFrEF. Entresto benefits from the adoption of guideline directed medical therapy for these patients in all geog- raphies. In the US, Entresto benefits from being added to guidelines for patients with HFpEF (with LVEF below normal). In China, Entresto has been listed in the National Reimbursement Drug List (NRDL) for both HFrEF and hypertension, effective January 2022. In China and Japan, Entresto volume growth is fueled by increased penetration in hypertension in addition to growth in heart failure. It is estimated that around 10 million patients are on treatment with Entresto. Leqvio (USD 0.1 billion) launch in the US and other markets is ongoing, with focus on patient on-boarding, removing access hurdles and enhancing medical edu- cation. Leqvio is the first and only small interfering RNA (siRNA) therapy to lower low-density lipoprotein choles- terol approved in the US and was launched in January 2022. In the US, Leqvio is covered at or near label for 76% of patients eleven months after launch. Leqvio in the US has been assigned a unique Healthcare Common Procedure Coding System code (J-code) and average sales price. Leqvio is now approved in 70 countries. Novartis obtained global rights to develop, manufacture and commercialize Leqvio under a license and collabo- ration agreement with Alnylam Pharmaceuticals. IMMUNOLOGY Sales in the Immunology therapeutic area reached USD 7.3 billion (+1%, +7% cc), sales growth was mainly driven by Cosentyx and Ilaris. Cosentyx (USD 4.8 billion, +1%, +5% cc) sales grew in Emerging Growth Markets, Europe and Japan, partly offset by decline in the US due to higher revenue deduc- tions. In China, Cosentyx growth was fueled by increased biologic uptake and inclusion in approximately 1,900 hos- pital listings. Since initial approval in 2015, Cosentyx has proven its sustained efficacy and consistent safety pro- file across five systemic inflammatory conditions and has treated more than 960,000 patients worldwide. Xolair (USD 1.4 billion, –4%, +6% cc) sales grew (cc) in Emerging Growth Markets, Europe and Japan. Novartis co-promotes Xolair with Genentech in the US and shares a portion of revenue as operating income but does not record any US sales. Ilaris (USD 1.1 billion, +7%, +15% cc) showed contin- ued growth across all geographies. Contributors to growth include the adult-onset Still’s disease indication, together with the other adult rheumatology indications in the US and Europe, as well as strong performance for the Periodic Fevers Syndrome indications in Japan. NEUROSCIENCE Sales in the Neuroscience therapeutic area were USD 5.1 billion (+1%, +5% cc), sales growth (cc) mainly driven by Kesimpta, which was partly offset by sales decline of Gilenya. Gilenya (USD 2.0 billion, –28%, –24% cc) sales declined mainly in Europe and in the US due to generic pressure. Zolgensma (USD 1.4 billion, +1%, +5% cc) has been approved in 47 countries to date. As this represents most major markets, sales growth is now mainly driven by the Incident patient population where we’ve seen double digit growth in 2022. Access pathways are now in place in 35 countries with negotiations ongoing in additional markets. Kesimpta (USD 1.1 billion, +194%, +200% cc) showed strong sales growth driven by launch momentum across all geographies. Kesimpta is a targeted B-cell therapy that can deliver powerful and sustained high efficacy, with a favorable safety and tolerability profile and the flexibility of an at home self-administration for a broad population of RMS patients. Kesimpta is now approved in 80 countries with more than 36,000 patients treated. Mayzent (USD 0.4 billion, +27%, +32% cc) sales grew across all geographies in MS patients showing signs of progression despite being on other treatments. Mayzent is the first and only oral disease-modifying therapy stud- ied and proven to delay disease progression in a broad SPMS patient population. Aimovig (USD 0.2 billion, +1%, +11% cc) sales grew in Europe and Emerging Growth Markets. Aimovig is reim- bursed in 32 markets and has been prescribed to over 759,000 patients worldwide. Earlier this year, Aimovig was submitted for approval in China. In October 2022, Novartis reached an agreement in Germany by which Aimovig is reimbursed as a 1st line prophylactic migraine treatment based on the HER-MES trial. SOLID TUMORS Sales in the Solid Tumors therapeutic area were USD 4.7 billion (+15%, +21% cc), sales growth mainly driven by Kisqali, Pluvicto and Tafinlar + Mekinist. Tafinlar + Mekinist (USD 1.8 billion, +5%, +11% cc) sales grew across all geographies, driven by demand in BRAF+ adjuvant melanoma and NSCLC indications, while maintaining demand in the highly competitive BRAF+ metastatic melanoma market. Tafinlar + Mekinist remains the worldwide targeted therapy leader in BRAF+ melanoma. Following FDA approval in late June, Tafinlar + Mekinist is the first and only therapy with a tumor-ag- nostic indication for adult and pediatric patients with solid tumors that have a BRAF V600E mutation, which drives tumor growth in more than 20 different tumor types. Kisqali (USD 1.2 billion, +31%, +38% cc) sales grew strongly across all geographies, based on increasing rec- ognition of its overall survival and quality of life benefits in HR+/HER2- advanced breast cancer. It is a CDK4/6 56 Item 5. Operating and Financial Review and Prospects inhibitor with proven overall survival benefit across all three Phase III trials of the MONALEESA program regardless of menopausal status, line of therapy, site and number of metastases, endocrine resistance, or endo- crine partner. Votrient (USD 0.5 billion, –18%, –13% cc) declined due to increased competition, especially from immuno-on- cology agents in metastatic renal cell carcinoma. Lutathera (USD 0.5 billion, –1%, +3% cc) sales grew (cc) in Europe and Japan, partly offset by decline in the US. There are approximately 500 centers actively treat- ing patients globally. In the second quarter of 2022, there was a temporary suspension in manufacturing during the quarter; production and deliveries of patient doses resumed in early June. Piqray (USD 0.4 billion, +13%, +14% cc) sales grew mainly in the US, benefiting from indication expansion into PIK3CA-related overgrowth spectrum (PROS). Piqray is the first and only therapy specifically developed for the approximately 40% of HR+/HER2- advanced breast cancer patients who have a PIK3CA mutation, which is associated with a worse prognosis. Pluvicto (USD 0.3 billion) launch is progressing well, with more than 160 active centers ordering. Pluvicto is the first and only radioligand therapy approved by the FDA for the treatment of progressive, PSMA-positive metastatic castration-resistant prostate cancer, who have already been treated with other anticancer treat- ments (ARPI and taxane-based chemotherapy). Tabrecta (USD 0.1 billion, +48%, +48% cc) sales grew across all geographies, as the first therapy approved by the FDA to specifically target metastatic NSCLC with a mutation that leads to MET exon 14 skipping (METex14). with relapsed or refractory (r/r) follicular lymphoma (FL) after two or more lines of systemic therapy. Adakveo (USD 0.2 billion, +18%, +19% cc) continued to grow worldwide, reaching more than 11,800 patients with vaso-occlusive crises caused by sickle cell disease to date. Scemblix (USD 0.1 billion) continued its strong launch uptake in the US, with launches underway in EU and Japan, demonstrating the high unmet need in CML, par- ticularly patients previously treated with 2 or more tyro- sine kinase inhibitors, or with the T315I mutation. In Octo- ber 2022, US FDA converted the accelerated approval of Scemblix to a full approval, confirming the clinical ben- efit after longer exposure. OTHER PROMOTED BRANDS Sales for Other Promoted Brands were USD 3.1 billion (–9%, –1% cc). Lucentis (USD 1.9 billion, –13%, –4% cc) sales declined in Japan and Europe mainly due to competition, which was partly offset by growth in Emerging Growth Markets. Xiidra (USD 0.5 billion, +4%, +4% cc) sales grew mainly in the US. Ultibro Group (USD 0.5 billion, –18%, –9% cc) sales declined in Europe and Emerging Growth Markets due to competition and was partly offset by growth in Japan. Ultibro Group consists of Ultibro Breezhaler, Seebri Bree- zhaler and Onbrez Breezhaler. Beovu (USD 0.2 billion, +9%, +18% cc) sales grew in Europe, Emerging Growth Markets and Japan, partly off- set by decline in the US. Beovu received approval for dia- betic macular edema (DME) in the EU in the first quarter of 2022, and in the US in the second quarter of 2022. HEMATOLOGY Sales in the Hematology therapeutic area were USD 6.5 billion (0%, +7% cc), sales growth (cc) mainly driven by Promacta/Revolade, Jakavi and Scemblix. Promacta/Revolade (USD 2.1 billion, +4%, +9% cc) growth was driven by the US, Europe and Emerging Growth Markets, partly offset by decline in Japan. Sales growth was driven by increased use in second-line per- sistent and chronic immune thrombocytopenia and as first-line and/or second-line treatment for severe aplas- tic anemia. Tasigna (USD 1.9 billion, –7%, –1% cc) sales declined in Europe, Japan and the US, partly offset by growth in Emerging Growth Markets. Jakavi (USD 1.6 billion, –2%, +9% cc) sales grew (cc) in Europe, Emerging Growth Markets, Japan, driven by strong demand in both the myelofibrosis and polycythe- mia vera indications. In May, EC approved Jakavi for the treatment of patients aged 12 years and older with acute or chronic GvHD who have inadequate response to cor- ticosteroids or other systemic therapies. Kymriah (USD 0.5 billion, –9%, –2% cc) sales declined in the US and Europe due to lower DLBCL demand in both geographies and was partly offset by growth in Emerging Growth Markets and Japan. In May, EC and FDA approved Kymriah for the treatment of adult patients ESTABLISHED BRANDS The Established Brands had sales of USD 9.9 billion (–19%, –13% cc). Sandostatin (USD 1.2 billion, –12%, –10% cc) declined across all geographies due to ongoing competitive pres- sure, including generic competition ex-US. Galvus Group (USD 0.9 billion, –21%, –12% cc) declined in Japan, Europe and Emerging Growth Mar- kets. Gleevec/Glivec (USD 0.7 billion, –27%, –22% cc) declined due to increased generic competition. Exforge Group (USD 0.7 billion, –18%, –12% cc) declined across all geographies. Diovan Group (USD 0.7 billion, –16%, –9% cc) declined in Emerging Growth Markets, Japan and Europe. Afinitor/Votubia (USD 0.5 billion, –45%, –41% cc) declined in the US and Europe driven by generic com- petition. Voltaren/Cataflam (USD 0.3 billion, –10%, 0% cc) sales were stable (cc). Zortress/Certican (USD 0.3 billion, –24%, –14% cc) declined in the US and Japan. Exjade/Jadenu (USD 0.3 billion, –43%, –38% cc) declined due to pressure from generic competition. Neoral/Sandimmun(e) (USD 0.3 billion, –16%, –8% cc) declined across all geographies. 57 Item 5. Operating and Financial Review and Prospects Sandoz Sandoz net sales were USD 9.2 billion (–4%, +4% cc) with volume contributing 10 percentage points to growth. Pricing had a negative impact of 6 percentage points. Sales in Europe were USD 4.9 billion (–7%, +4% cc), in the US USD 1.8 billion (–4%) in Asia/Africa/Australasia USD 1.6 billion (–3%, +6% cc) and in Canada and Latin America USD 969 million (+11%, +15% cc) driven by vol- ume increases and tender wins. The following table provides an overview of net sales to third parties by business franchise in the Sandoz Divi- sion: (USD millions) Year ended Year ended Dec 31, 2022 Dec 31, 2021 Retail Generics1 6 776 Biopharmaceuticals 2 093 7 092 2 116 Anti-Infectives (partner label/API)1 380 423 Total Sandoz 9 249 9 631 Change in USD % – 4 – 1 – 10 – 4 Change in constant currencies % 4 9 – 5 4 1 Sandoz total anti-infectives net sales to third parties amounted to USD 1.2 billion (2021: USD 1.1 billion; 2020: USD 1.2 billion), of which USD 777 million (2021: USD 707 million; 2020: USD 694 million) is sold through the Retail Generics business franchise and USD 380 million (2021: USD 423 million; 2020: USD 474 million) is sold to other third-party companies through the Anti-Infectives business franchise. Retail Generics In Retail Generics, Sandoz develops, manufactures and markets finished dosage forms of small molecule pharmaceuticals for sale to third parties across a broad range of therapeutic areas, including finished dosage form of anti-infectives sold to third parties. Retail sales were USD 6.8 billion (–4%, +4% cc), grow- ing across all regions ex-US. Biopharmaceuticals In Biopharmaceuticals, Sandoz develops, manufactures and markets protein- and 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 (biosimilars, bio- pharmaceutical contract manufacturing and Glatopa) grew to USD 2.1 billion (–1%, +9% cc), growing across all regions. 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. Total Anti-Infectives sales were USD 1.2 billion (+2%, +10% cc) of which USD 777 million were sold through the Retail Generics business franchise and USD 380 million were sold to other third-party companies through the Anti-Infectives business franchise. The sales of the Anti-Infectives business franchise declined mainly due to product discontinuations and supply challenges. 58 Item 5. Operating and Financial Review and Prospects Operating income The following table provides an overview of operating income by segment: (USD millions) Innovative Medicines Sandoz Corporate Operating income Year ended Dec 31, 2022 8 786 1 448 – 1 037 % of net sales to third Year ended parties Dec 31, 2021 21.3 15.7 10 688 1 600 – 599 % of net sales to third parties 25.5 16.6 9 197 18.2 11 689 22.6 Change in USD % – 18 – 10 – 73 – 21 Change in constant currencies % – 9 – 2 – 84 – 13 Operating income was USD 9.2 billion (–21%, –13% cc), mainly due to higher restructuring (USD 1.2 billion) primar- ily related to the implementation of the previously announced streamlined organizational model, higher impairments (USD 1.0 billion) and lower divestment gains (USD 0.6 billion). Operating income margin was 18.2% of net sales, decreasing by 4.4 percentage points (-3.8 percentage points cc). Core operating income key figures1 (USD millions unless indicated otherwise) Core gross profit Selling, general and administration Research and development Other income Other expense Core operating income As % of net sales to third parties Year ended Year ended Dec 31, 2022 Dec 31, 2021 40 392 41 097 – 14 190 – 14 815 – 9 088 – 9 041 384 421 – 833 – 1 074 16 665 16 588 33.0 32.1 Change in USD % Change in constant currencies % – 2 4 – 1 – 9 22 0 4 – 1 – 5 – 2 17 8 1 For an explanation of non-IFRS measures and reconciliation tables, see “—Non-IFRS measures as defined by Novartis.” The adjustments made to operating income to arrive at core operating income amounted to USD 7.5 billion (com- pared with USD 4.9 billion in the prior year). For details, please see “—Non-IFRS measures as defined by Novartis—2022 and 2021 reconciliation from IFRS results to core results.” Core operating income was USD 16.7 billion (0%, +8% cc) benefiting from higher sales, partly offset by higher R&D investments. Core operating income margin was 33.0% of net sales, increasing by 0.9 percentage points (+1.3 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, 2022 15 237 1 903 – 475 % of net sales to third Year ended parties Dec 31, 2021 36.9 20.6 15 215 2 064 – 691 % of net sales to third parties 36.2 21.4 Core operating income 16 665 33.0 16 588 32.1 Change in USD % Change in constant currencies % 0 – 8 31 0 8 – 1 28 8 Innovative Medicines Operating income was USD 8.8 billion (–18%, –9% cc), driven by higher impairments, restructuring, lower divest- ment gains and higher R&D expenses, partly offset by higher gross margin. Operating income margin was 21.3% of net sales, decreasing 4.2 percentage points (-3.4 percentage points in cc). Core adjustments were USD 6.5 billion, mainly due to amortization, impairments and restructuring, com- pared to USD 4.5 billion in prior year. Core adjustments increased compared to prior year, mainly due to higher impairments and restructuring. Core operating income was USD 15.2 billion (0%, +8% cc), mainly driven by higher gross margin, partly offset 59 Item 5. Operating and Financial Review and Prospects by higher R&D investments. Core operating income mar- gin was 36.9% of net sales, increasing 0.7 percentage points (+1.3 percentage points cc). Revenues as a per- centage of sales increased by 0.1 percentage points (cc). Core cost of goods sold as a percentage of sales was in line with the prior year. Core R&D expenses as a per- centage of net sales increased by 0.2 percentage points (cc). Core selling, general and administration (SG&A) expenses as a percentage of net sales decreased by 1.4 percentage points (cc). Core other income and expense as a percentage of net sales was in line with the prior year. Core operating income was USD 1.9 billion (–8%, –1% cc), with the decline mainly due to higher SG&A, partly offset by higher sales. Core operating margin was 20.6% of net sales, decreasing by 0.8 percentage points (-1.1 percentage points cc). Core gross margin as a percent- age of sales decreased by 0.3 percentage points (cc), due to higher inflation and input costs. Core R&D expenses as a percentage of net sales decreased by 0.5 percentage points (cc). Core SG&A expenses increased by 0.9 percentage points (cc). Core other income and expense decreased the margin by 0.4 percentage points (cc). Sandoz Operating income was USD 1.4 billion (–10%, –2% cc), with the decline mainly due to higher SG&A investments to drive higher sales and inflationary pressures on input costs, which were partly offset by higher sales. Operat- ing income margin was 15.7% of net sales, decreasing by 0.9 percentage points (-1.0 percentage points in cc). Core adjustments were USD 455 million, including USD 221 million of amortization. Prior year core adjust- ments were USD 464 million, including USD 236 million of amortization. Corporate income and expense, net Corporate income and expense, which includes the cost of Group headquarter and coordination functions, amounted to an expense of USD 1.0 billion, compared to an expense of USD 599 million in 2021, mainly driven by higher restructuring costs, lower contributions from the Novartis Venture Fund and prior year income from a fair value adjustment on contingent receivables related to intellectual property rights, partly offset by prior year adjustments to provisions on M&A transactions. 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, 2022 Dec 31, 2021 – 2 938 – 3 209 – 6 234 – 5 432 – 9 172 – 8 641 22.2 20.6 – 2 784 – 2 809 – 5 483 – 5 341 – 8 267 – 8 150 20.0 19.4 Change in USD % 8 – 15 – 6 1 – 3 – 1 Change in constant currencies % 6 – 20 – 10 – 1 – 7 – 5 1 Core results exclude impairments, amortization and certain other items. For an explanation of non-IFRS measures and reconciliation tables, see “—Non-IFRS measures as defined by Novartis.”         Innovative Medicine Division research and exploratory development expense decreased by 8% (+6% cc) to USD 2.9 billion. Confirmatory development expense amounted to USD 6.2 billion, increasing by 15% (–20% cc) versus prior year mainly due to higher impairment charges and higher investments in development to support recently acquired assets. Total core research and development expense in the Innovative Medicine Division as a percentage of sales increased by 0.6 percentage points (+0.2 percentage points cc) to 20.0% of net sales, mainly driven by higher investments in recently acquired assets. 60 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: (USD millions unless indicated otherwise) Operating income (Loss)/income from associated companies Interest expense Other financial income and expense Income before taxes Income taxes Net income Attributable to:    Shareholders of Novartis AG    Non-controlling interests Basic earnings per share (USD) nm = not meaningful Year ended Year ended Dec 31, 2022 Dec 31, 2021 9 197 11 689 – 9 15 339 – 837 20 – 811 – 80 8 371 26 137 – 1 416 – 2 119 6 955 24 018 6 955 24 021 0 – 3 3.19 10.71 Change in USD % – 21 nm – 3 nm – 68 33 – 71 – 71 nm – 70 Change in constant currencies % – 13 nm – 5 nm – 64 25 – 67 – 67 nm – 66 Income from associated companies Income from associated companies was a loss of USD 9 million compared to an income of USD 15.3 billion in prior year. This decrease was due to the divestment of our investment in Roche that closed in the fourth quar- ter of 2021 where a gain of USD 14.6 billion was recog- nized. Interest expense and other financial income and expense Interest expense amounted to USD 837 million, broadly in line with prior year. Other financial income and expense amounted to an income of USD 20 million compared to an expense of USD 80 million in the prior year, as higher interest income was partly offset by financial expenses and currency losses. Income taxes The tax rate was 16.9% compared to 8.1% in the prior year period. In the prior year, the tax rate was impacted by the Roche income from associated companies (includ- ing the divestment gain recognized on the sale of our investment in Roche in December 2021), the impact of increases in uncertain tax positions and prior-year items. For comparability, excluding these impacts, the prior year tax rate would have been 16.8%, broadly in line with 16.9% in the current year. Net income Net income was USD 7.0 billion (–71%, –67% cc), impacted by Roche income in the prior year. Excluding the impact of Roche income, net income declined –9% (cc). Earnings per share Basic earnings per share were USD 3.19 compared with USD 10.71 in the prior year, mainly due to prior year Roche income. Excluding the impact of Roche income, EPS declined –7% (cc). 61 Item 5. Operating and Financial Review and Prospects Core non-operating income and expense1 The following table provides an overview of core non-operating income and expense: (USD millions unless indicated otherwise) Core operating income Core (loss)/income from associated companies Core interest expense Core other financial income and expense Core income before taxes Core income taxes Core net income Core basic earnings per share (USD) nm = not meaningful Core income from associated companies Core income from associated companies was a loss of USD 9 million compared with an income of USD 993 mil- lion in prior year. This decrease was due to the divest- ment of our investment in Roche that closed in the fourth quarter of 2021. Core interest expense and other financial income and expense Core interest expense amounted to USD 837 million, broadly in line with prior year. Core other financial income and expense amounted to an income of USD 141 million compared to an expense of USD 41 million in the prior year as higher interest income was only partly offset by currency losses. Year ended Year ended Dec 31, 2022 Dec 31, 2021 16 665 16 588 – 9 – 837 141 993 – 811 – 41 15 960 16 729 – 2 608 – 2 635 13 352 14 094 6.12 6.29 Change in USD % Change in constant currencies % 0 nm – 3 nm – 5 1 – 5 – 3 8 nm – 5 nm 3 – 7 3 6 Core income taxes The core tax rate (core taxes as a percentage of core income before tax) was 16.3% compared to 15.8% in the prior year. For comparability, excluding Roche Income from associated companies (divested in December 2021), the prior year core tax rate would have been 16.7% compared to 16.3% in the current year, decreasing mainly as a result of a change in core profit mix. Core net income Core net income was USD 13.4 billion (–5%, +3% cc) as growth in core operating income was partly offset by the loss of Roche core income. Excluding the impact of Roche core income, core net income grew +11% (cc). Core earnings per share Core EPS was USD 6.12 (–3%, +6% cc), benefiting from lower weighted average number of shares outstanding. Excluding the impact of Roche core income, core EPS grew +14% (cc). 1 For an explanation of non-IFRS measures and reconciliation tables, see “—Non-IFRS measures as defined by Novartis.” 62 Item 5. Operating and Financial Review and Prospects Results of operations excluding Roche investment impacts To enhance investors’ understanding of the Group’s performance in comparison with the prior year, the following table provides a comparison of our 2022 published IFRS results and non-IFRS measures core results and free cash flow with the 2021 results, excluding the impacts related to our Roche investment, due to its divestment. Operating income Loss from associated companies Interest expense Other financial income and expense Income taxes Net income Basic earnings per share (USD) Net cash flows from operating activities Free cash flow 1 Core 1 Core operating income Core net income Core basic earnings per share (USD) Excluding Roche investment impacts2 Year ended Year ended Dec 31, 2022 Dec 31, 2021 % change USD % change cc 1 9 197 11 689 – 21 – 13 – 9 – 837 20 – 2 – 811 – 96 – 1 416 – 2 119 6 955 8 661 3.19 3.86 14 236 14 549 11 945 12 760 16 665 16 588 13 352 13 099 6.12 5.84 nm – 3 nm 33 – 20 – 17 – 2 – 6 0 2 5 nm – 5 nm 25 – 9 – 7 8 11 14 1 For an explanation of non-IFRS measures and reconciliation tables, see “—Non-IFRS measures as defined by Novartis.” 2 For a reconciliation of 2021 IFRS results and non-IFRS measures core results and free cash flow to exclude the impacts of the 2021 divestment of our Roche investment, see “— Non-IFRS measures as defined by Novartis.” nm = not meaningful 63 Item 5. Operating and Financial Review and Prospects  Factors affecting comparability of year-on-year results of operations Significant transactions in 2022 and 2021 long-term strategy to focus Novartis as a leading medicines company, we announced and/or completed several acquisitions and divestments during 2022 and 2021. 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 A detailed description of significant transactions in 2022 and 2021, can be found in “Item 18. Financial State- ments—Note 2. Significant transactions.” 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, 2022. For more details, see “Item 15. Controls and Procedures.” Approach to risk management See “Item 6. Directors, Senior Management and Employ- ees—Item 6.C Board practices—Corporate gover- nance—Information and control systems—Risk management” and “Item 18. Financial Statements—Note 29. Financial instruments – additional disclosures.” Non-IFRS measures as defined by Novartis Novartis uses certain non-IFRS metrics when measur- ing performance, especially when measuring cur- rent-year results against prior periods, including core results, constant currencies and free cash flow. 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, and should be viewed in conjunction with IFRS financials. 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. 64 Item 5. Operating and Financial Review and Prospects 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, software, 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, since core measures exclude items that can vary significantly from year to year, they enable better comparison of business performance across years. For this same reason, Novartis uses these core measures in addition to IFRS and other measures as important factors in assessing the Group’s perfor- mance. 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. As an internal measure of Group performance, the core results measures have limitations, and the Group’s per- formance management process is not solely restricted to these metrics. A limitation of the core results mea- sures is that they provide a view of the Group’s opera- tions without including all events during a period, such as the effects of an acquisition, divestment, or amortiza- tion/impairments of purchased intangible assets, impair- ments to property, plant and equipment and restructur- ings and related items. 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 consolidated entities from their non-USD functional currencies to USD • The impact of exchange rate movements on the major transactions of consolidated entities performed in cur- rencies other than their functional currency. We calculate constant currency measures by translating the current year’s foreign currency values for sales and other income statement items into USD (excluding the IAS 29 “Financial Reporting in Hyperinflationary Econo- mies” adjustments to the local currency income state- ments of subsidiaries operating in hyperinflationary economies), using the average 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 with the prior year is shown as a positive growth. Free cash flow Novartis defines free cash flow as net cash flows from operating activities and cash flows from investing activ- ities associated with purchases and sales of property, plant and equipment, of intangible assets, of financial assets and of other non-current assets. Excluded from free cash flow are cash flows from investing activities associated with acquisitions and divestments of busi- nesses and of interests in associated companies, pur- chases and sales of marketable securities, commodities, time deposits and net cash flows from financing activi- ties. Free cash flow is a non-IFRS measure and is not intended to be a substitute measure for net cash flows from operating activities as determined under IFRS. Free cash flow is presented as additional information because management believes it is a useful supplemental indica- tor 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 avail- able for investment in strategic 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 determined under IFRS. 65 Item 5. Operating and Financial Review and Prospects Additional information 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 is presented as additional information because it sets forth how management monitors net debt or liquidity and management believes it is a useful sup- plemental indicator of the Group’s ability to pay divi- dends, to meet financial commitments, and to invest in new strategic opportunities, including strengthening its balance sheet. For the table that shows the Group’s net debt, see “— Item 5.B Liquidity and capital resources — Group liquidity, financial debts and net debt.” EBITDA Novartis defines earnings before interest, tax, depreci- ation and amortization (EBITDA) as operating income, excluding depreciation of property, plant and equipment, depreciation of right-of-use assets, amortization of intan- gible assets, and impairments of property, plant and equipment, right-of-use assets and of intangible assets. (USD millions) Operating income Depreciation of property, plant and equipment Depreciation of right-of-use assets Amortization of intangible assets 2022 2021 9 197 11 689 1 163 1 208 300 318 3 982 3 903 Impairments of property, plant and equipment, right-of-use assets and intangible assets 1 EBITDA 1 736 684 16 378 17 802 1 There were no impairments of right-of-use assets in 2021. 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) Market capitalization Non-controlling interests Non-current financial debts Current financial debts and derivative financial instruments Marketable securities, commodities, time deposits and derivative financial instruments Cash and cash equivalents Enterprise value Dec 31, 2022 Dec 31, 2021 191 530 196 107 81 167 20 244 22 902 5 931 6 295 – 11 413 – 15 922 – 7 517 – 12 407 198 856 197 142 66 Item 5. Operating and Financial Review and Prospects Reconciliation from IFRS results to core results The following tables provide an overview of the reconciliation from IFRS results to core results: 2022 and 2021 reconciliation from IFRS results to core results (USD millions unless indicated otherwise) 2022 2021 2022 2021 2022 2021 2022 2021 IFRS operating income 8 786 10 688 1 448 1 600 – 1 037 – 599 9 197 11 689 Amortization of intangible assets 3 585 3 528 221 236 3 806 3 764 Innovative Medicines Sandoz Corporate Group Impairments    Intangible assets 1 291 360 25 27 2 1 318 387    Property, plant and equipment related to the Group-wide    rationalization of manufacturing sites 286 219 – 2 7    Other property, plant and equipment 85 40 Total impairment charges 1 662 619 23 34 2 284 85 1 687 226 40 653 Acquisition or divestment of businesses and related items    - Income    - Expense Total acquisition or divestment of businesses and related items, net Other items    Divestment gains    Financial assets – fair value adjustments    Restructuring and related items    - Income    - Expense    Legal-related items    - Income    - Expense    Additional income    Additional expense Total other items Total adjustments Core operating income as % of net sales – 2 1 – 1 8 8 – 4 – 64 106 – 4 8 – 66 107 – 4 42 4 41 – 161 – 649 134 – 43 – 4 – 5 – 75 – 166 – 728 126 5 260 – 38 – 33 1 572 – 32 833 – 14 167 – 36 193 – 1 449 – 6 – 48 – 74 32 2 188 1 058 – 51 364 170 – 692 – 139 63 1 196 241 381 6 451 4 527 – 11 53 – 1 194 464 56 – 6 8 211 455 – 51 420 – 11 223 – 6 – 138 – 704 – 278 1 48 72 564 – 134 1 971 289 441 562 – 92 7 468 4 899 15 237 15 215 1 903 2 064 – 475 – 691 16 665 16 588 36.9% 36.2% 20.6% 21.4% 33.0% 32.1% (Loss)/income from associated companies – 2 5 2 2 – 9 15 332 – 9 15 339 Core adjustments to income from associated companies, net of tax – 14 346 – 14 346 Interest expense Other financial income and expense Core adjustments to other financial income and expense Income taxes, adjusted for above items (core income taxes) Core net income Core net income attributable to shareholders of Novartis AG Core basic EPS (USD) 1 1 Earnings per share (EPS) is calculated on the amount of net income attributable to shareholders of Novartis AG. – 837 – 811 20 – 80 121 39 – 2 608 – 2 635 13 352 14 094 13 352 14 097 6.12 6.29 67 Item 5. Operating and Financial Review and Prospects 2022 and 2021 reconciliation from IFRS results to core results – Group Amortization of intangible assets 1 IFRS results Acquisition or divestment of businesses and related items 3 Impairments 2 2022 (USD millions unless indicated otherwise) Gross profit Operating income Income before taxes Income taxes 5 Net income Basic EPS (USD) 6 The following are adjustments to arrive at core gross profit Other revenues Cost of goods sold 3 648 3 806 3 806 338 1 687 1 687 36 342 9 197 8 371 – 1 416 6 955 3.19 1 283 – 15 486 3 648 338 Other items 4 Core results 64 40 392 4 4 1 971 16 665 2 092 15 960 – 2 608 13 352 6.12 – 86 1 197 150 – 11 350 The following are adjustments to arrive at core operating income Selling, general and administration – 14 253 Research and development – 9 996 158 Other income Other expense 805 – 3 701 954 – 3 398 63 – 14 190 – 204 – 9 088 – 4 8 – 414 2 462 384 – 833 The following are adjustments to arrive at core income before taxes Other financial income and expense 20 121 141 1 Amortization of intangible assets: cost of goods sold includes the amortization of acquired rights to currently marketed products and other production-related intangible assets; research and development includes the amortization of acquired rights for technologies 2 Impairments: cost of goods sold, research and development and other expense include 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: other income and other expense include transitional service fee income and charges related to divestments; other income also includes adjustments to provisions; other expense includes stamp duties related to an acquisition 4 Other items: other revenues includes a net income from an outlicensing agreement; cost of goods sold, selling, general and administration, research and development, other income and other expense include restructuring income and charges related to the restructuring initiative to implement a new streamlined organizational model, the Sandoz strategic review, the Group-wide rationalization of manufacturing sites and other net restructuring charges and related items; cost of goods sold, selling, general and administration, research and development and other expense include adjustments to provisions and related items; cost of goods sold and research and development also include contingent consideration adjustments; other income and other expense include fair value adjustments and divestment gains and losses on financial assets and legal-related items; other income also includes gains from the divestment of products and property, curtailment gains and an adjustment to an environmental provision; other expense includes a reversal of an accrual and other costs and items; other financial income and expense includes the monetary loss on the restatement of non-monetary items for subsidiaries in hyperinflationary economies and 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 of USD 7.6 billion to arrive at the core results before tax amounts to USD 1.2 billion. The average tax rate on the adjustments is 15.7% since the full year core tax charge of 16.3% has been applied to the pre-tax income of the period. 6 Earnings per share (EPS) is calculated on the amount of net income attributable to shareholders of Novartis AG. 68 Item 5. Operating and Financial Review and Prospects 2021 (USD millions unless indicated otherwise) Gross profit Operating income Income before taxes Income taxes 5 Net income Basic EPS (USD) 6 Amortization of intangible assets 1 IFRS results Acquisition or divestment of businesses and related items 3 Impairments 2 Other items 4 Core results 37 010 11 689 26 137 – 2 119 24 018 10.71 3 655 3 764 3 974 18 653 41 653 – 14 531 414 441 496 41 097 16 588 16 729 – 2 635 14 094 6.29 The following are adjustments to arrive at core gross profit Cost of goods sold – 15 867 3 655 18 414 – 11 780 The following are adjustments to arrive at core operating income Selling, general and administration Research and development Other income Other expense – 14 886 – 9 540 1 852 – 2 747 109 369 – 100 366 71 21 – 14 815 – 9 041 – 66 107 – 1 265 421 1 200 – 1 074 The following are adjustments to arrive at core income before taxes Income from associated companies Other financial income and expense 15 339 210 – 14 556 – 80 – 16 55 993 – 41 1 Amortization of intangible assets: cost of goods sold includes the amortization of acquired rights to currently marketed products and other production-related intangible assets; research and development includes the amortization of acquired rights for technologies; income from associated companies includes USD 210 million for the Novartis share of the estimated Roche core items 2 Impairments: cost of goods sold and research and development include impairment charges related to intangible assets; other income and other expense include reversals of impairment charges and impairment charges related to property, plant and equipment 3 Acquisition or divestment of businesses and related items, including restructuring and integration charges: other income includes adjustments to portfolio transformation and Alcon spin-off accruals; other income and other expense include transitional service-fee income and expenses related to the Alcon distribution; other expense also includes adjustments to provisions; income from associated companies includes the gain related to the divestment of our investment in Roche; other financial income and expense includes other financial gains related to the divestment of our investment in Roche 4 Other items: cost of goods sold, research and development, 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, other income and other expense include other restructuring income and charges and related items; cost of goods sold, research and development, other income and other expense also include adjustments to contingent consideration; selling, general and administration, research and development, other income and other expense include adjustments to provisions; other income and other expense also include gains and losses from the divestment of products and financial assets and fair value adjustments on financial assets, adjustments to environmental provisions and legal-related items; other financial income and expense includes a charge related to the monetary loss due to hyperinflation in Argentina and Venezuela and 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 of USD 9.4 billion to arrive at the core results before tax amounts to USD 516 million. Excluding the gain on the divestment of our investment in Roche, the tax on the total adjustments of USD 5.2 billion to arrive at the core results before tax amounts to USD 516 million and the average tax rate on the adjustments was 10.0%. 6 Earnings per share (EPS) is calculated on the amount of net income attributable to shareholders of Novartis AG. 69 Item 5. Operating and Financial Review and Prospects 2022 and 2021 reconciliation from IFRS results to core results – Innovative Medicines 2022 (USD millions) Gross profit Operating income Amortization of intangible assets 1 IFRS results Acquisition or divestment of businesses and related items 3 Impairments 2 31 801 8 786 3 427 3 585 314 1 662 Other items 4 Core results – 29 35 513 8 1 196 15 237 The following are adjustments to arrive at core gross profit Other revenues Cost of goods sold 1 249 – 11 569 3 427 314 – 86 1 163 57 – 7 771 The following are adjustments to arrive at core operating income Selling, general and administration – 11 679 Research and development – 9 172 158 Other income Other expense 531 – 2 695 953 – 1 396 50 – 11 629 – 206 – 8 267 – 311 1 692 219 – 599 8 1 Amortization of intangible assets: cost of goods sold includes the amortization of acquired rights to currently marketed products and other production-related intangible assets; research and development includes the amortization of acquired rights for technologies 2 Impairments: cost of goods sold, research and development and other expense include 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: other expense includes stamp duties related to an acquisition and transitional service fee charges related to divestments 4 Other items: other revenues includes a net income from an outlicensing agreement; cost of goods sold, selling, general and administration, research and development, other income and other expense include restructuring income and charges related to the initiative to implement a new streamlined organizational model, the Group-wide rationalization of manufacturing sites and other net restructuring charges and related items; cost of goods sold and research and development also include contingent consideration adjustments and adjustments to provisions and related items; other income and other expense include fair value adjustments and divestment gains and losses on financial assets and legal-related items; other income also includes gains from the divestment of products and property, curtailment gains and an adjustment to an environmental provision; other expense includes a reversal of an accrual and other costs and items 2021 (USD millions) Gross profit Operating income Amortization of intangible assets 1 IFRS results 32 218 10 688 3 419 3 528 Acquisition or divestment of businesses and related items 3 Impairments 2 619 – 1 Other items 4 Core results 344 381 35 981 15 215 The following are adjustments to arrive at core gross profit Cost of goods sold – 11 751 3 419 344 – 7 988 The following are adjustments to arrive at core operating income Selling, general and administration Research and development Other income Other expense – 12 306 – 8 641 1 149 – 1 732 109 360 – 45 304 71 22 – 12 235 – 8 150 – 2 1 – 837 781 265 – 646 1 Amortization of intangible assets: cost of goods sold includes the amortization of acquired rights to currently marketed 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 related to intangible assets; other income and other expense include reversals of impairment charges and impairment charges related to property, plant and equipment 3 Acquisition or divestment of businesses and related items, including restructuring and integration charges: other income and other expense include transitional service fee income and expenses related to the Alcon distribution 4 Other items: cost of goods sold, research and development, 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, other income and other expense include other restructuring income and charges and related items; cost of goods sold, research and development and other expense include adjustments to contingent consideration; selling, general and administration, research and development and other expense include adjustments to provisions; other income and other expense include gains and losses from the divestment of products and financial assets and fair value adjustments on financial assets; other expense also includes legal-related items and adjustments to environmental provisions 70 Item 5. Operating and Financial Review and Prospects 2022 and 2021 reconciliation from IFRS to core results – Sandoz 2022 (USD millions) Gross profit Operating income Amortization of intangible assets 1 IFRS results Acquisition or divestment of businesses and related items Impairments 2 4 504 1 448 221 221 24 23 Other items 3 Core results 93 211 4 842 1 903 The following are adjustments to arrive at core gross profit Cost of goods sold – 4 978 221 24 93 – 4 640 The following are adjustments to arrive at core operating income Selling, general and administration Research and development Other income Other expense – 2 062 – 824 103 – 273 1 – 2 9 2 – 14 121 – 2 053 – 821 87 – 152 1 Amortization of intangible assets: cost of goods sold includes the amortization of acquired rights to currently marketed products and other production-related intangible assets 2 Impairments: cost of goods sold and research and development include impairment charges related to intangible assets; other income includes a reversal of an impairment charge related to property, plant and equipment 3 Other items: cost of goods sold, selling, general and administration, research and development, other income and other expense include charges related to the Sandoz strategic review, the Group-wide rationalization of manufacturing sites and other net restructuring charges and related items; other expense also includes legal-related items; cost of goods sold and selling, general and administration include adjustments to provisions and related items 2021 (USD millions) Gross profit Operating income Amortization of intangible assets 1 IFRS results Acquisition or divestment of businesses and related items Impairments 2 4 725 1 600 236 236 18 34 Other items 3 Core results 70 194 5 049 2 064 The following are adjustments to arrive at core gross profit Cost of goods sold – 5 147 236 18 70 – 4 823 The following are adjustments to arrive at core operating income Research and development Other income Other expense – 899 233 – 397 9 – 55 62 – 1 – 51 176 – 891 127 – 159 1 Amortization of intangible assets: cost of goods sold includes the amortization of acquired rights to currently marketed products and other production-related intangible assets 2 Impairments: cost of goods sold and research and development include impairment charges related to intangible assets; other income and other expense include reversals of impairment charges and 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; research and development includes adjustments to provisions; other income includes net gains from the divestment of a product; other income and other expense include legal-related items 71 Item 5. Operating and Financial Review and Prospects 2022 and 2021 reconciliation from IFRS results to core results – Corporate Amortization of intangible assets IFRS results Acquisition or divestment of businesses and related items 2 Impairments 1 2022 (USD millions) Gross profit Operating loss The following are adjustments to arrive at core operating loss Selling, general and administration Other income Other expense 37 – 1 037 – 512 171 – 733 Other items 3 Core results 37 2 – 4 564 – 475 – 4 2 4 – 508 – 89 649 78 – 82 1 Impairments: other expense includes impairment charges related to intangible assets 2 Acquisition or divestment of businesses and related items, including restructuring and integration charges: other income includes adjustments to provisions and transitional service fee income related to divestments 3 Other items: selling, general and administration, other income and other expense include restructuring income and charges related to the initiative to implement a new streamlined organizational model, the Sandoz strategic review and other net restructuring charges and related items; other income and other expense also include fair value adjustments and divestment gains and losses on financial assets; other income also includes a curtailment gain Amortization of intangible assets IFRS results Acquisition or divestment of businesses and related items 1 Impairments 2021 (USD millions) Gross profit Operating loss The following are adjustments to arrive at core operating loss Other income Other expense 67 – 599 470 – 618 Other items 2 Core results 67 42 – 134 – 691 – 64 106 – 377 29 243 – 269 1 Acquisition or divestment of businesses and related items, including restructuring and integration charges: other income includes adjustments to portfolio transformation and Alcon spin-off accruals; other income and other expense include transitional service fee income and expenses related to the Alcon distribution; other expense also includes adjustments to provisions 2 Other items: other income includes an adjustment to a contingent consideration receivable; other income and other expense include fair value adjustments and divestment gains and losses on financial assets, adjustments to environmental provisions and restructuring income and charges and related items 72 Item 5. Operating and Financial Review and Prospects Reconciliation of 2021 IFRS results and non-IFRS measures core results and free cash flow to exclude the impacts of the 2021 divestment of our Roche investment To enhance investor understanding of the Group’s performance in comparison with the prior year, we presented the 2021 IFRS results and non-IFRS measures core results and free cash flow excluding the impacts related to our Roche investment, due to its divestment in the fourth quarter of 2021. The following tables provide a reconciliation of our 2021 published IFRS results and non-IFRS measures core results and free cash flow to the 2021 results, excluding the impacts related to our Roche investment, due to its divest- ment. (USD millions unless indicated otherwise) Operating income Income from associated companies Interest expense and other financial income and expense Income before tax Income taxes Net income Basic earnings per share (USD) Effective tax rate 1 Core operating income Core income from associated companies Core interest expense and core other financial income and expense Core income before tax Core income taxes Core net income Core basic earnings per share (USD) Core effective tax rate 2 2021 Our Roche investment impacts excluding Results as the divestment gain published Gain on divestment of our Results excluding impacts from the divestment investment of our Roche investment in Roche 11 689 15 339 – 891 – 785 – 14 556 – 2 11 689 – 16 – 907 26 137 – 785 – 14 572 10 780 – 2 119 24 018 – 785 – 14 572 10.71 – 0.35 – 6.50 8.1% 16 588 993 – 995 – 852 16 729 – 995 – 2 635 14 094 – 995 6.29 – 0.45 15.8% – 2 119 8 661 3.86 19.7% 16 588 – 2 – 852 15 734 – 2 635 13 099 5.84 16.7% Free cash flow 3 13 282 – 522 12 760 1 Effective tax rate is calculated as Income taxes divided by Income before tax. 2 Core effective tax rate is calculated as Core income taxes divided by Core income before tax. 3 The free cash flow impact represents the dividend received in Q1 2021 from Roche in relation to the distribution of its 2020 net income. 73 Item 5. Operating and Financial Review and Prospects 2021 (USD millions) Operating income Adjustments for non-cash items Operating income adjusted for non-cash items Dividends received from associated companies and others Interest and other financial payments, net Income taxes paid Other operating cash flow items, net Net cash flows from operating activities Net purchases of property, plant and equipment, intangible assets, financial assets and other non-current assets Free cash flow 1 In 2021, the dividend received from Roche in relation to the distribution of its 2020 net income was received in Q1 2021. Dividends received from Roche in Free cash relation to flow excluding dividends received from Roche the distribution of its 2020 net income 1 Free cash flow as published 11 689 7 030 18 719 11 689 7 030 18 719 525 – 522 3 – 953 – 2 342 – 878 – 953 – 2 342 – 878 15 071 – 522 14 549 – 1 789 – 1 789 13 282 – 522 12 760 The following table provides a summary of the percentage point impact from excluding the effect of the divestment of our investment in Roche (in the fourth quarter of 2021) on the USD and constant currencies % change on key Group figures. In USD % change excluding impacts from the In constant currencies % change excluding impacts from the % change of our Roche investment 2022 as published 2022 divestment Percentage point % change of our Roche investment 2022 divestment Percentage point impact 2022 impact as published 2022 2022 Net income Basic earnings per share (USD) Free cash flow Core net income Core basic earnings per share (USD) – 71 – 70 – 10 – 5 – 3 – 20 – 17 – 6 2 5 – 51 – 53 – 4 – 7 – 8 – 67 – 66 3 6 – 9 – 7 11 14 – 58 – 59 – 8 – 8 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 Net cash flows from investing activities Net cash flows used in financing activities Effect of exchange rate changes on cash and cash equivalents Net change in cash and cash equivalents Change in marketable securities, commodities, time deposits and derivative financial instruments Change in current and non-current financial debts and derivative financial instruments Change in net debt Net debt at January 1 Net debt at December 31 2022 2021 14 236 15 071 1 468 4 208 – 20 562 – 16 264 – 32 – 4 890 – 266 2 749 – 4 509 14 017 3 022 6 847 – 6 377 23 613 – 868 – 24 481 – 7 245 – 868 74 Item 5. Operating and Financial Review and Prospects Cash flow Financial year 2022 compared with 2021 Net cash flows from operating activities amounted to USD 14.2 billion, compared with USD 15.1 billion in 2021. This decrease was mainly due to unfavorable changes in working capital and lower dividends from associated companies (2021 included the USD 0.5 billion dividends received from our investment in Roche, which was divested in the fourth quarter of 2021), partly offset by lower income taxes paid and favorable hedging results. Net cash inflows from investing activities amounted to USD 1.5 billion, compared with USD 4.2 billion in 2021. The current year cash inflows were driven by net pro- ceeds of USD 4.7 billion from the sale of marketable securities, commodities and time deposits; USD 0.5 bil- lion from the sale of intangible assets, financial assets and property, plant and equipment. These cash inflows were partly offset by cash outflows of USD 1.5 billion for purchases of intangible assets; USD 1.2 billion for pur- chases of property, plant and equipment; USD 0.1 billion for purchases of financial assets; and USD 0.9 billion for acquisitions and divestments of businesses, net (primar- ily the acquisition of Gyroscope Therapeutics Holdings plc for USD 0.8 billion). In 2021, net cash inflows from investing activities of USD 4.2 billion were driven by proceeds of USD 20.7 bil- lion from the divestment of our investment in Roche; USD 2.3 billion from the sale of marketable securities, com- modities and time deposits; and USD 1.4 billion from the sale of intangible assets, financial assets and property, plant and equipment. These cash inflows were partly off- set by USD 16.4 billion cash outflows for purchases of marketable securities and time deposits, mainly due to the investment of a portion of the proceeds from the divestment of our investment in Roche; USD 1.6 billion for purchases of intangible assets (including the upfront payment to in-license tislelizumab from an affiliate of Bei- Gene, Ltd); USD 1.4 billion for purchases of property, plant and equipment; USD 0.6 billion for acquisitions and divestments of businesses, net (including the acquisition of GSK’s cephalosporin antibiotics business for USD 351 million); and USD 0.2 billion for purchases of financial assets. Net cash outflows used in financing activities amounted to USD 20.6 billion, compared with USD 16.3 billion in 2021. The current year cash outflows were mainly driven by USD 10.6 billion for net treasury share transactions; USD 7.5 billion for the dividend payment; USD 2.5 billion in aggregate for the repayment of two US dollar bonds; and USD 0.3 billion payments of lease liabilities. These cash outflows were partly offset by cash inflows of USD 0.3 billion from the net increase in current financial debts. In 2021, net cash outflows used in financing activities of USD 16.3 billion were driven by USD 7.4 billion for the dividend payment; USD 3.0 billion for net treasury share transactions; USD 3.5 billion net decrease in current financial debts; and USD 2.2 billion for the repayment of two bonds denominated in euro (notional amount of EUR 1.25 billion and of EUR 0.6 billion) at maturity. Payments of lease liabilities and other financing cash flows resulted in a net cash outflow of USD 0.2 billion. Free cash flow Free cash flow is a non-IFRS measure, see “—Item 5.A Operating results—Non-IFRS measures as defined by Novartis—Free cash flow” for further information. The following table is a reconciliation of the three major categories of the IFRS consolidated statements of cash flows to free cash flow: (USD millions) 2022 2021 IFRS cash flow Adjustments Free cash flow IFRS cash flow Adjustments Net cash flows from operating activities 14 236 14 236 15 071 Free cash flow 15 071 Net cash flows from/(used in) investing activities 1 1 468 – 3 759 – 2 291 4 208 – 5 997 – 1 789 Net cash flows used in financing activities 2 – 20 562 20 562 0 – 16 264 16 264 0 Free cash flow 11 945 13 282 1 Excluded from the free cash flow are cash flows from investing activities associated with acquisitions and divestments of businesses and of interest in associated companies, purchases and sales of marketable securities, commodities and time deposits. 2 Net cash flows used in financing activities are excluded from the free cash flow. 75 Item 5. Operating and Financial Review and Prospects The following table is a summary of the free cash flow: (USD millions) Operating income Adjustments for non-cash items    Depreciation, amortization and impairments    Change in provisions and other non-current liabilities    Other Operating income adjusted for non-cash items Dividends received from associated companies and others Interest and other financial receipts Interest and other financial payments Income taxes paid Payments out of provisions and other net cash movements in non-current liabilities Change in inventories and trade receivables less trade payables Change in other net current assets and other operating cash flow items Net cash flows from operating activities Purchases of property, plant and equipment Proceeds from sale of property, plant and equipment Purchases of intangible assets Proceeds from sale of intangible assets Purchases of financial assets Proceeds from sale of financial assets Purchases of other non-current assets Proceeds from sale of other non-current assets Free cash flow 2022 2021 9 197 11 689 7 441 1 403 460 6 075 896 59 18 501 18 719 1 325 525 13 – 728 – 966 – 1 975 – 2 342 – 885 – 1 119 – 1 467 464 – 329 570 14 236 15 071 – 1 198 – 1 378 167 240 – 1 473 – 1 593 202 – 121 133 – 1 748 – 191 442 – 61 4 11 945 13 282 Financial year 2022 compared with 2021 Free cash flow amounted to USD 11.9 billion (–10% USD), compared with USD 13.3 billion in 2021, mainly due to a decrease in net cash flows from operating activities and lower divestment proceeds, partly offset by lower pur- chases of property, plant and equipment. 76 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 Investments in associated companies Deferred tax assets Financial assets and other non-current assets Total non-current assets Inventories Trade receivables Other current assets and income tax receivables Marketable securities, commodities, time deposits and derivative financial instruments Cash and cash equivalents Total current assets Total assets Equity and liabilities Total equity Liabilities 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 liabilities Total current liabilities Total liabilities Total equity and liabilities Dec 31, 2022 Dec 31, 2021 10 764 11 545 1 431 1 561 29 301 29 595 31 644 34 182 143 3 739 3 521 205 3 743 5 246 80 543 86 077 7 175 8 066 2 739 6 666 8 005 2 718 11 413 15 922 7 517 12 407 36 910 45 718 117 453 131 795 59 423 67 822 20 244 22 902 1 538 2 686 4 906 1 621 3 070 6 172 29 374 33 765 5 146 5 931 251 5 553 6 295 275 17 328 18 085 28 656 30 208 58 030 63 973 117 453 131 795 Assets Total non-current assets of USD 80.5 billion at Decem- ber 31, 2022, decreased by USD 5.5 billion compared to December 31, 2021. Intangible assets other than goodwill decreased by USD 2.5 billion as additions (including the acquisition of Gyroscope Therapeutics Holdings plc) were more than offset by amortization, impairments and unfavorable cur- rency translation adjustments. Goodwill decreased by USD 0.3 billion, mainly due to unfavorable currency translation adjustments. Property, plant and equipment decreased by USD 0.8 billion, as net additions were more than offset by depre- ciation, unfavorable currency translation adjustments and impairments. Financial and other non-current assets decreased by USD 1.7 billion, driven by the decrease of the prepaid post-employment benefit plans of USD 0.9 billion, result- ing mainly from the pension accounting effects from increases in actuarial discount rates and of USD 0.6 bil- lion from fair value losses on listed equity and fund invest- ments. Right-of-use assets, investments in associated com- panies and deferred tax assets were broadly in line with December 31, 2021. Total current assets of USD 36.9 billion at December 31, 2022, decreased by USD 8.8 billion compared to December 31, 2021. Cash and cash equivalents decreased by USD 4.9 billion, mainly due to the dividend payment, the purchase of treasury shares and net repayments of financial debt, partly offset by the cash generated from operating activ- ities and from investing activities, which includes the net proceeds from the sales of marketable securities, com- modities and time deposits. Marketable securities, commodities, time deposits and derivative financial instruments decreased by USD 4.5 billion mainly driven by the net sales of marketable securities, commodities and time deposits. Inventories increased by USD 0.5 billion and trade receivables and other current assets and income tax receivables were broadly in line with December 31, 2021. We consider our provisions for doubtful trade receiv- ables to be adequate. We particularly monitor the level of trade receivables in countries deemed to have an 77 Item 5. Operating and Financial Review and Prospects elevated credit risk. We consider macroeconomic envi- ronment, historical experience, country and political risk, in addition to other relevant information when assessing risk. These risk factors are monitored regularly to deter- mine any adjustments in risk classification. The majority of the past due trade receivables from elevated credit risk countries are due from local governments or from government-funded entities. Deteriorating credit and economic conditions as well as other factors in these elevated credit risk 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 expected credit loss amount of these trade receivables in future periods. At December 31, 2022, amounts past due for more than one year were not significant in elevated credit risk countries. For a table showing an overview of the aging analy- sis of total trade receivables and the total amount of the provision for doubtful trade receivables as of December 31, 2022, and 2021, see “Item 18. Financial Statements— Note 15. Trade receivables.” There is also a risk that certain countries could devalue their currency. Currency exposures are described in more detail in “—Effects of currency fluctu- ations.” Liabilities Total non-current liabilities of USD 29.4 billion decreased by USD 4.4 billion compared to December 31, 2021. Non-current financial debts decreased by USD 2.7 billion, mainly due to the reclassification of USD 2.3 bil- lion from non-current to current financial debts of two EUR denominated bonds with notional amounts of EUR 750 million and EUR 1.25 billion maturing in 2023 and favorable currency translation adjustments of USD 0.4 billion. Provisions and other non-current liabilities decreased by USD 1.3 billion, mainly driven by decreases in accrued liabilities for employee benefits of USD 1.2 billion (primar- ily due to a decrease in accrued liabilities for defined benefit pension plans of USD 0.9 billion, resulting from the pension accounting effects from increases in actu- arial discount rates), and in contingent consideration of USD 0.3 billion, a reclassification of non-current legal matters provisions to current portion of USD 0.2 billion, partly offset by the increase in other non-current liabili- ties of USD 0.4 billion. Deferred tax liabilities decreased by USD 0.4 billion and non-current lease liabilities were broadly in line with December 31, 2021. Total current liabilities of USD 28.7 billion decreased by USD 1.6 billion compared to December 31, 2021. Provisions and other current liabilities and current income tax liabilities decreased by USD 0.8 billion, mainly driven by the decrease in the commitment for repurchase of own shares liability of USD 2.8 billion, partly offset by increases in restructuring provisions of USD 0.8 billion (primarily due to the initiative announced in April 2022, to implement a new streamlined organizational model), in provisions for legal matters of USD 0.5 billion, includ- ing a USD 0.2 billion reclassification from non-current provisions for legal matters, and in provisions for reve- nue deductions of USD 0.3 billion. Current financial debts and derivative financial instru- ments decreased by USD 0.4 billion, mainly due to the repayment of two US dollar bonds of USD 1.0 billion and USD 1.5 billion, the closure during the third quarter of 2022 of the interest-bearing accounts of employees pay- able on demand, which amounted to USD 1.8 billion at December 31, 2021, and favorable currency translation adjustments, partly offset by the reclassification from non-current to current financial debts of USD 2.3 billion and an increase of USD 1.9 billion in commercial paper. Trade payables decreased by USD 0.4 billion and cur- rent lease liabilities were broadly in line with December 31, 2021. In our key countries, Switzerland and the United States, assessments have been agreed by the tax author- ities up to 2017 in Switzerland and up to 2014 in the United States, with the exception of one open United States position related to the 2007 tax filing. Uncertainties also exist on the application of a taxing right based on a Ger- man non-resident tax regulation for specific revenues derived from German registered intellectual property rights. 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. Equity The Group`s equity decreased by USD 8.4 billion to USD 59.4 billion at December 31, 2022, compared to Decem- ber 31, 2021. This decrease was mainly due to the cash-dividend payment of USD 7.5 billion, purchase of treasury shares of USD 10.9 billion, unfavorable currency translation dif- ferences of USD 0.5 billion and fair value adjustments on equity securities of USD 0.4 billion. This was partially off- set by the net income of USD 7.0 billion, decrease of the treasury share repurchase obligation of USD 2.8 billion, and equity-based compensation of USD 0.9 billion. 78 Item 5. Operating and Financial Review and Prospects Summary of equity movements attributable to Novartis AG shareholders Balance at beginning of year Shares acquired to be canceled Other share purchases Exercise of options and employee transactions Equity-based compensation Shares delivered to Alcon employees as a result of the Alcon spin-off Taxes on treasury share transactions Decrease/(increase) of treasury share repurchase obligation under a share buyback trading plan Transaction costs, net of taxes Dividends Net income of the year attributable to shareholders of Novartis AG Other comprehensive income attributable to shareholders of Novartis AG Impact of change in ownership of consolidated entities Other movements 1 Balance at end of year Number of outstanding shares (in millions) Equity attributable to Novartis AG shareholders 2022 2021 2022 2021 USD millions USD millions 2 234.9 2 256.8 67 655 56 598 – 126.2 – 30.7 – 10 787 – 2 775 – 1.4 1.9 10.4 0.0 – 1.5 – 123 – 145 0.6 9.6 0.1 88 854 5 14 39 745 17 1 2 809 – 1 040 12 – 7 506 – 7 368 6 955 24 021 – 839 – 2 493 217 – 5 48 2 119.6 2 234.9 59 342 67 655 1 Impact of hyperinflationary economies (see “Item 18. Financial Statements—Note 1. Significant accounting policies”). In 2022, Novartis repurchased a total of 126.2 million shares for USD 10.8 billion on the SIX Swiss Exchange second trading line, including 115.3 million shares (USD 9.9 billion) under the up-to USD 15 billion share buyback announced in December 2021 and 10.9 million shares (USD 0.9 billion) to mitigate dilution related to participa- tion plans of associates. In addition, 1.4 million shares (USD 0.1 billion) were repurchased from associates. In the same period, 12.3 million shares (for an equity value of USD 0.9 billion) were delivered as a result of option exercises and share deliveries related to participation plans of associates. Consequently, the total number of shares outstanding decreased by 115.3 million versus December 31, 2021. These treasury share transactions resulted in a decrease in equity of USD 10.0 billion and a net cash outflow of USD 10.6 billion. In 2021, Novartis repurchased a total of 30.7 million shares for USD 2.8 billion on the SIX Swiss Exchange second trading line, including 19.6 million shares (USD 1.8 billion) under the up-to USD 2.5 billion share buyback announced in November 2020, 8.6 million shares (USD 0.8 billion) to mitigate dilution related to participation plans of associates and 2.5 million shares (USD 0.2 billion) under the up-to USD 15 billion share buyback announced in December 2021. In addition, 1.5 million shares (USD 0.1 billion) were repurchased from associ- ates. In the same period, 10.3 million shares (for an equity value of USD 0.8 billion) were delivered as a result of options exercised and share deliveries related to partic- ipation plans of associates. Consequently, the total num- ber of shares outstanding decreased by 21.9 million ver- sus December 31, 2020. These treasury share transactions resulted in a decrease in equity of USD 2.1 billion and a net cash outflow of USD 3.0 billion. Treasury shares At December 31, 2022, our holding of treasury shares amounted to 284.1 million shares, or approximately 12% of the total number of issued shares. Approximately 99.0 million treasury shares were held in entities that restrict their availability for use. At December 31, 2021, our holding of treasury shares amounted to 199.5 million shares, or approximately 8% of the total number of issued shares. Approximately 102.5 million treasury shares were held in entities that restrict their availability for use. 79 Item 5. Operating and Financial Review and Prospects Effects of currency fluctuations We transact our business in many currencies other than the US dollar, our reporting currency. The following table provides an overview of net sales and operating expenses based on IFRS values for 2022 and 2021, for currencies most important to the Group: Currency US dollar (USD) Euro (EUR) Swiss franc (CHF) Chinese yuan (CNY) Japanese yen (JPY) Canadian dollar (CAD) British pound (GBP) Russian ruble (RUB) Brazilian real (BRL) Australian dollar (AUD) Other currencies 2022 2021 Net sales % Operating expenses % 1 Net sales % Operating expenses % 1 37 27 2 6 4 3 2 2 2 1 14 36 24 20 4 2 1 2 1 1 1 8 35 29 2 6 5 3 3 2 1 1 13 35 26 18 3 3 2 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. 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 expenditure in Swiss francs is signifi- cantly higher than our revenue in Swiss francs, volatility in the value of the Swiss franc can have a significant impact on the reported value of our earnings, assets and liabilities, and the timing and extent of such volatility can be difficult to predict. 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. In 2022 and 2021, we entered into various contracts that change in value with movements in foreign exchange rates, to preserve 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 contingent liabilities” and “Item 18. Financial Statements—Note 29. Financial instruments – additional disclosures.” 80 Item 5. Operating and Financial Review and Prospects 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 2022 0.695 0.194 0.769 1.048 0.149 1.054 1.237 0.766 1.481 2021 Change in % 0.752 0.186 0.798 1.094 0.155 1.183 1.376 0.912 1.357 – 8 4 – 4 – 4 – 4 – 11 – 10 – 16 9 2022 0.678 0.189 0.738 1.081 0.144 1.065 1.207 0.757 1.380 2021 Change in % 0.726 0.180 0.785 1.093 0.157 1.131 1.351 0.868 1.336 – 7 5 – 6 – 1 – 8 – 6 – 11 – 13 3 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. For additional information on the constant currency calculation (“cc”), see “—Item 5.A Operating results—Non-IFRS measures as defined by Novartis—Constant currencies”. Currency impact on key figures Total Group Net sales to third parties Operating income Net income Basic earnings per share (USD) Core operating income Core net income Core basic earnings per share (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 % 2022 Change in Percentage constant point currency impact 2022 currencies % 2022 Change in Change in Percentage constant point currency impact 2021 USD % currencies % 2021 2021 – 2 – 21 – 71 – 70 0 – 5 – 3 – 2 – 18 0 – 4 – 10 – 8 4 – 13 – 67 – 66 8 3 6 4 – 9 8 4 – 2 – 1 – 73 31 – 84 28 – 6 – 8 – 4 – 4 – 8 – 8 – 9 – 6 – 9 – 8 – 8 – 8 – 7 11 3 6 15 198 202 8 7 9 8 17 12 0 53 – 12 4 13 195 200 6 5 7 6 15 10 – 2 48 – 14 2 2 3 2 2 2 2 2 2 2 2 5 2 nm – 23 nm – 20 nm – 3 For additional information on the effects of currency fluctuations, see “Item 18. Financial Statements—Note 29. Financial instruments – additional disclosures.” 81 Item 5. Operating and Financial Review and Prospects Group liquidity, financial debts and net debt The following table shows Group liquidity, financial debts and net debt: (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 1 2022 2021 – 20 244 – 22 902 – 5 931 – 6 295 – 26 175 – 29 197 7 517 12 407 11 413 15 922 18 930 28 329 – 7 245 – 868 1 For further information about the net debt measure, which is a non-IFRS measure, see “—Item 5.A Operating results—Non-IFRS measures as defined by Novartis—Net debt.” Financial year 2022 Group net debt at December 31, 2022, increased to USD 7.2 billion, compared with USD 0.9 billion at Decem- ber 31, 2021. Total financial debts amounted to USD 26.2 billion at December 31, 2022, compared with USD 29.2 billion at December 31, 2021. Non-current financial debts decreased by USD 2.7 billion, mainly due to the reclas- sification of USD 2.3 billion from non-current to current financial debts of two EUR denominated bonds with notional amounts of EUR 750 million and EUR 1.25 bil- lion maturing in 2023 and favorable foreign currency translation adjustments of USD 0.4 billion. Current financial debts and derivative financial instru- ments decreased by USD 0.4 billion, mainly due to the repayment of two US dollar bonds of USD 1.0 billion and USD 1.5 billion, the closure during the third quarter of 2022 of the interest-bearing accounts of employees pay- able on demand, which amounted to USD 1.8 billion at December 31, 2021, and favorable currency translation adjustments, partly offset by the reclassification from non-current to current financial debts of USD 2.3 billion and an increase of USD 1.9 billion in commercial paper. Novartis has two US commercial paper programs under which it can issue up to USD 9.0 billion in the aggregate of unsecured commercial paper notes. Novartis also has a Japanese commercial paper program under which it can issue up to JPY 150 billion (approxi- mately USD 1.1 billion) of unsecured commercial paper notes. Commercial paper notes totaling USD 2.8 billion under these three programs were outstanding as per December 31, 2022 (2021: USD 0.9 billion). Novartis also has a committed credit facility of USD 6.0 billion, which was extended in 2022. This credit facility is provided by a syndicate of banks and is intended to be used as a backstop for the US commercial paper programs. The extended facility matures in September 2025 and was undrawn as per December 31, 2022, and December 31, 2021. Total liquidity decreased to USD 18.9 billion com- pared with USD 28.3 billion at December 31, 2021. As of year-end 2022, 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. For the tables showing the maturity schedule of our current financial assets, current and non-current finan- cial debts and net debt at December 31, 2022 and December 31, 2021, see “Item 18. Financial Statements— Note 29. Financial instruments – Additional disclosures— Nature and extent of risks arising from financial instru- ments—Liquidity risk.” For a description of risks and restrictions on the abil- ity of subsidiaries to transfer funds to the Company via cash dividends, loan or advances, please see “—Liquid- ity/short-term funding” and “Item 18. Financial State- ments—Note 29. Financial instruments – Additional dis- closures—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 2022 and 2021 and an indication of the general purpose of such commitments and the anticipated sources of funds needed to fulfill such commitments are provided in “— Material short- and long-term cash requirements.” 82 Item 5. Operating and Financial Review and Prospects Liquidity and financial debt by currency The following table provides a breakdown of liquidity and financial debt by currency as of December 31: USD CHF EUR JPY Other Liquidity in % 2022 1 Liquidity in % 2021 1 Financial debt in % 2022 2 Financial debt in % 2021 2 85 4 7 4 100 92 4 2 2 100 62 6 29 1 2 57 12 27 1 3 100 100 1 Liquidity includes cash and cash equivalents and marketable securities, including debt securities, commodities and time deposits. 2 Financial debt includes non-current and current financial debt. Bonds In April 2022, a 5-year USD denominated bond of USD 1.0 billion with a coupon of 2.40% was repaid, in advance of its maturity date at no additional cost. In September 2022, a 10-year USD denominated bond of USD 1.5 billion with a coupon of 2.40% was repaid at maturity. In March 2021, a 4-year EUR denominated bond of EUR 1.25 billion with a coupon of 0.00% was repaid at maturity. In November 2021, a 7-year EUR denominated bond of EUR 0.6 billion with a coupon of 0.75% was repaid at maturity. Liquidity/short-term funding The Group’s liquidity amounted to USD 18.9 billion at December 31, 2022, compared with USD 28.3 billion at December 31, 2021. Total non-current and current finan- cial debts, including derivatives, amounted to USD 26.2 billion at December 31, 2022, compared with USD 29.2 billion at December 31, 2021. The debt/equity ratio increased to 0.44:1 at Decem- ber 31, 2022, compared with 0.43:1 at December 31, 2021. The net debt increased to USD 7.2 billion at December 31, 2022, compared with USD 0.9 billion at December 31, 2021. We continuously track our liquidity position and asset/liability profile. This involves modeling cash flow maturity profiles based on both historical experiences and contractual expectations to project our liquidity requirements. We seek to preserve prudent liquidity and funding capabilities. We are confident that we have suf- ficient liquidity to support our normal business activities for the foreseeable future. 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. 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 and raised funds through our commercial paper pro- grams. The maturity schedule of our net debt can be found in “Item 18. Financial Statements—Note 29. Financial instruments – Additional disclosures—Nature and extent of risks arising from financial instruments—Liquidity risk.” 83 Item 5. Operating and Financial Review and Prospects Material short- and long-term cash requirements The following table summarizes the Group’s material short- and long-term cash requirements: (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 22 485 2 241 5 428 3 547 11 269 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 Commitments for leases not yet commenced Unfunded pensions and other post-employment benefit plans Research and development potential milestone commitments Contingent consideration liabilities Property, plant and equipment purchase commitments 5 532 1 789 1 416 83 1 281 5 814 835 549 476 251 46 10 115 420 131 441 821 357 76 14 215 1 256 339 93 611 259 67 15 204 969 98 15 3 624 922 1 227 44 747 3 169 267 Total contractual cash obligations 39 784 4 131 8 599 5 785 21 269 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. For other contingent liabilities, see “Item 8. Financial Information—Item 8.A Consolidated statements and other financial information,” “Item 18. Financial State- ments—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 Statements—Note 28. Commitments and contingent lia- bilities.” 84 Item 5. Operating and Financial Review and Prospects 5.C Research and development, patents and licenses Our research and development spending totaled USD 10.0 billion and USD 9.5 billion (Core research and development USD 9.1 billion and USD 9.0 billion) for the years 2022 and 2021, respectively. Each of our divisions has its own research and devel- opment and patents. Our divisions have numerous prod- ucts in various stages of development. For further infor- mation on these policies and these products in development, see “Item 4. Information on the Company— Item 4.B Business overview.” 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 programs, 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”, “—Item 5.B Liquidity and capital resources” and “Item 4. Information on the Company—Item 4.B Business overview” for trend information. 5.E Critical accounting estimates Our consolidated financial statements are prepared in accordance with International Financial Reporting Stan- dards (IFRS) as issued by the International Accounting Standards Board (IASB). The preparation of financial statements requires management to make certain esti- mates and assumptions, either at the balance sheet date or during the year, which affect the reported amounts of revenues, expenses, assets, liabilities and contingent amounts. Our significant accounting policies that are set out in “Item 18. Financial Statements—Note 1. Significant accounting policies” include a description of the esti- mates, assumptions and judgments applied in the prepa- ration of the consolidated financial statements of the Group. 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. Management believes that the estimation uncertain- ties described below did not have or are not reasonably likely to have a material impact on the Group’s financial condition but could be material to the results of opera- tions or cash flows in a given period. Deductions from revenues As is typical in the pharmaceutical industry, the consid- eration we receive in exchange for goods and services maybe fixed or variable. The most common elements of variable consideration are primarily composed of rebates and discounts granted to wholesalers, retailers, govern- ment agencies, government supported healthcare sys- tems, private health systems, pharmacy benefit manag- ers, managed healthcare organizations and other customers. Variable consideration is recognized when it is highly probable that a significant reversal will not occur. These elements of variable consideration represent esti- mates of the related obligations, requiring the use of judg- ment when estimating the effect of these considerations for a reporting period. 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 use of estimates and interpreting relevant regulations, which are subject to challenge or change in interpretative 85 Item 5. Operating and Financial Review and Prospects guidance by government authorities. Provisions for esti- mated Medicaid rebates are calculated using a combi- nation 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. Calculating the rebates to be paid related to this program involves use of estimates and interpreting relevant regulations, which are subject to challenge or change in interpretative guid- ance by government authorities. Provisions for estimated Medicare Part D rebates are calculated based on the terms of individual plan agreements, product sales and population growth, product pricing, including inflation impacts, and the mix of contracts. We offer rebates to key managed healthcare and pri- vate plans in an effort to ensure patient access to our products and to sustain and increase the market share of our products. These programs provide a rebate after the plans have demonstrated they have met all terms and conditions set forth in their contract with us. These rebates and discounts, applied using provision rates, are estimated based on the specific terms in the individual states and plans agreements, historical expe- rience, product pricing and projected product growth rates, as appropriate to the individual rebate and dis- count arrangements, 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 between recording of revenue deductions and the final account- ing for them. Non-United States-specific healthcare plans and program rebates In certain countries other than the US, we provide rebates to governments and other entities. These rebates are often mandated by laws or government regulations. These rebates, applied using provision rates, are esti- mated based on government regulations, laws and terms of individual rebate arrangements, historical experience and other relevant factors, and are recorded as a deduc- tion from revenue at the time the related revenue is recorded. These estimates are adjusted periodically to reflect actual experience. There is often a time lag between the recording of revenue deductions and the final accounting for them. Innovative pay-for-performance arrangements We enter into innovative pay-for-performance arrange- ments (i.e. outcome based arrangements) with certain healthcare providers and governments. Under these agreements, we may be required to make refunds, defer a portion of the sales price until anticipated treatment outcomes meet predefined targets, or to provide addi- tional medicines free of charge if anticipated treatment outcomes do not meet predefined targets. The impact of potential refunds or a deferral of a por- tion of the sales price are estimated and recorded as a deduction from revenue at the time the related sales are recorded. The impact of the future delivery of additional medicines at no cost is estimated and recorded as a con- tract liability at the time the related revenues are recorded. Estimates are based on historical experience and clini- cal data available for the product, as well as specific terms of the individual agreements. In cases where his- torical experience and clinical data are not sufficient for a reliable estimation of the outcome, revenue recogni- tion is deferred until the uncertainty is resolved, until such history is available or the period of the refund right has expired. These provisions for revenue deductions are adjusted periodically based on established processes and actual experience, including the products’ actual outcomes achieved compared with the anticipated predefined tar- gets. There is often a time lag between 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 chargebacks by reducing revenue by the estimate of chargebacks attrib- utable to a sales transaction. Provisions for estimated chargebacks are calculated using a combination of fac- tors, such as historical experience, product growth rates, product pricing, level of inventory in the distribution chan- nel, and the terms of individual agreements. 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 2021, 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 86 Item 5. Operating and Financial Review and Prospects provisioned at the time of revenue recognition and are deducted from revenue. the range of economic conditions that are expected to exist over the remaining useful life of the asset. 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. Shelf stock adjustments are generally granted to customers, primarily of the Sandoz Division, to cover the inventory held by them at the time a price decline becomes effec- tive. Revenue deduction provisions for shelf stock adjust- ments are recorded when the price decline is anticipated, based on the impact of the price decline on the custom- er’s estimated inventory levels. Other sales discounts, such as consumer coupons, vouchers 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 specific terms for each program. In addition, we offer global patient assistance pro- grams. 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 reve- nue deductions provisions and related payment experi- ences for the Group see “Item 18. Financial Statements— Note 22. Provisions and other current liabilities.” 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 as indicated in “Item 18. Financial Statements—Note 1. Significant accounting policies.” Due to these factors, actual cash flows and values could vary significantly from forecasted future cash flows and related values derived using dis- counting techniques. The recoverable amount of the grouping of cash-gen- erating units to which goodwill is allocated is based on fair value less costs of disposal. The valuations are derived from applying discounted future cash flows based on key assumptions, including the terminal growth rate and discount rate. For additional information on impairment charges recognized and reversed by divi- sions, see “Item 18. Financial Statements—Note 1. Sig- nificant accounting policies—Impairment of goodwill and intangible assets” and “Item 18. Financial Statements— Note 11. Goodwill and intangible assets.” 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 based on our impairment assessment and review of reasonable pos- sible changes in key assumptions to the respective impairment assessment, future impairment evaluation could lead to material impairment charges in the future. For more information, see “Item 18. Financial State- ments—Note 11. Goodwill and intangible assets.” For net impairment charges for property, plant and equipment see “Item 18. Financial Statements—Note 9. Property, plant and equipment.” Impairment of goodwill, intangible assets and property, plant and equipment We review intangible assets and property, plant and equipment for impairment whenever events or changes in circumstance indicate that the asset’s balance sheet carrying amount may not be recoverable. Goodwill and other intangible assets that are not yet amortized, 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 present 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 techniques 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 cash generating units (CGUs), and for this purpose, management considers 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 employees. 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. Depending on events, such differences could have a material effect on our total equity. For more information on obligations under retirement and other post-employment benefit plans and underly- ing actuarial assumptions, see “Item 18. Financial 87 Item 5. Operating and Financial Review and Prospects Statements—Note 25. Post-employment benefits for employees.” For more information, see “Item 18. Financial State- ments—Note 6. Income taxes” and “Item 18. Financial Statements—Note 12. Deferred tax assets and liabilities.” Income 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. Uncertain (income) tax positions are periodically (re)assessed by the Company based on management’s best judgment given any changes in the facts, circumstances and infor- mation available and applicable tax laws. When it is prob- able that the tax authorities will not accept the position taken, the Group recognizes income tax liabilities based on the most likely amount of the liability (recovery) or weighted average of various possible outcomes to reflect the effect of the uncertainty in determining the related taxable profit (tax loss), tax bases, unused tax losses, unused tax credits or tax rates, to the extent that a reli- able estimate can be made. Provisions and contingent liabilities 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. 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. 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. For more information, see “Item 18. Financial State- ments—Note 20. Provisions and other non-current liabil- ities” and “Item 18. Financial Statements—Note 28. Com- mitments and contingent liabilities.” 88 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. Directors, Senior Management and Employees—Item 6.C Board prac- tices—Corporate governance—Board of Directors” and “Item 6. Directors, Senior Management and Employees— Item 6.C Board practices—Corporate governance— Executive Committee” is incorporated by reference. 89 Item 6. Directors, Senior Management and Employees 6.B Compensation Dear shareholder, I am pleased to share with you the Novartis Compensa- tion Report for 2022. We believe that our compensation system supports our strategy and motivates our executives to deliver sus- tainable growth, successful outcomes on our financial and strategic targets, and value creation for our share- holders. Over the course of 2022, we engaged with shareholders and proxy advisors to share how our com- pensation system is aligned with short and long-term performance, and to secure their continued support for our compensation system design. Based on the feed- back from these interactions and the positive response to our 2021 Compensation Report, which received a 90.7% vote in favor, we will retain the current design of our executive compensation system, with small enhance- ments as explained later in this letter. iptacopan, our investigational monotherapy in the treat- ment of paroxysmal nocturnal hemoglobinuria (PNH). However, we also had disappointments as some clinical trials of experimental compounds did not meet their pri- mary endpoints, including ACZ885 (canakinumab) in lung cancer, and UNR844 in presbyopia. We are proud that Novartis also continued to deliver on its commitments to broaden access to medicines and tackle major global health challenges. We pledged fur- ther investment in research into malaria and neglected tropical diseases, increased access to our innovative medicines for low- and middle-income countries and formed new collaborations with governments and other partners to strengthen healthcare systems. More details on our ESG efforts can be found in our Novartis in Soci- ety Integrated Report 2022. 2022 performance highlights 2022 was a year of solid financial performance, with growth in constant currencies (cc) across sales, core profits and core margins. Sales growth drivers were Entresto (USD 4.6 billion), Kesimpta (USD 1.1 billion), Kisqali (USD 1.2 billion), Cosentyx (USD 4.8 billion), along with the Pluvicto launch. Our six in-market growth driv- ers with multi-billion sales potential (Cosentyx, Entresto, Zolgensma, Kisqali, Kesimpta and Leqvio) grew 26% (cc) in 2022, and now represent 32% of total Innovative Medicines sales, up from 26% in 2021. Overall sales were broadly in line with target. In April 2022, we announced the introduction of a new organizational model designed to support the company’s innovation, growth, and productivity ambitions as a focused medicines company. The restructuring will sim- plify the organization and our processes, and is expected to deliver USD 1.5 billion in savings by 2024 with a pro- portion of these savings already delivered in 2022, enabling us to raise our long-term core operating income margin guidance. These savings are expected to help us progress towards our aspiration of achieving ~40%+ core margin beyond 2027 and further invest in our pipeline, as a pure-play medicines company (after the planned Sandoz spin-off which is subject to approval of the Novartis AG Board of Directors and shareholders). None- theless, there was an immediate impact on Operating Income as we incorporated related costs in the latter part of the year, that, along with higher legal settlements and unfavorable fair market value adjustments on financial assets, impacted operating income growth. In 2022, we continued to deliver high value medicines to patients. We received 23 approvals in our key focus markets US, EU, China and Japan, including US and EU approvals for Pluvicto, a novel radioligand therapy for advanced prostate cancer. We advanced our focused pipeline of investigational medicines, with several import- ant clinical data readouts paving the way for further launches in 2023 and beyond, a significant one being 2022 CEO compensation As a result of the above performance, the CEO was awarded a 2022 Annual Incentive of 100%, having over- all met the financial targets and strategic objectives set at the beginning of the cycle. When determining perfor- mance against the operating income metric, the Board of Directors approved adjustments to exclude restruc- turing costs arising from the implementation of the new organizational model and costs related to the planned Sandoz spin-off, which are investments in the future of the company in terms of both sales and margin growth. These adjustments ensured that the performance assessment was consistent with the basis on which the original targets were set. The 2020-2022 Long-Term Performance Plan (LTPP) vested at 57% of target. The LTPP outcome was heavily affected by the relative Total Shareholder Return (rTSR) performance over the period, as well as reduced sales growth during 2020 and 2021, which was substantially impacted by the COVID-19 pandemic. No adjustments were made for the COVID-19 impact, or for any other factors. (For more information, please see “—LTPP per- formance outcomes”). Despite a solid 2022 performance, as outlined above, the CEO’s 2022 total realized compensation was CHF 8 452 176, a decrease of 24.7% compared with prior year, driven mainly by the 2020-2022 LTPP outcome. Changes to Executive Committee compensation system and disclosures During the year, we reviewed our Executive Committee compensation system, with the aim of simplification and increased transparency of our performance assessment measures and strengthening our focus on key strategic priorities, while also considering developments in com- pensation best practices. Effective the 2022-2024 cycle of the LTPP, we strengthened the assessment of research and early development performance under the Innovation metrics, 90 Item 6. Directors, Senior Management and Employees to ensure that targets are focused more directly on activ- ities that create long-term value, and are measurable over a three-year performance period. For the innova- tion performance measure, the Science & Technology Committee sets targets that take into account the expected Net Present Value (eNPV) of programs transi- tioning to late-stage clinical development rather than the previous approach to set targets related to early-stage milestones. Effective from performance year 2023, we will remove “Share of Peers” as a financial performance measure for the Annual Incentive plan, to simplify the metrics and focus on targets that provide greater transparency. The weighting of the three remaining financial measures, Group Net Sales, Group Operating Income and Group Free Cash Flow, will be 40%, 30% and 30%, respectively. In addition, we will fold division specific financial targets, where applicable, into individual strategic objectives (40% weighting) of the related Executive Committee member. All Executive Committee members will be eval- uated, with a 60% weighting, against the performance of Group financial measures mentioned above. During the year, we announced our intention to sep- arate our Sandoz generics and biosimilars Division into a new publicly traded standalone company, by way of a 100% spin-off, subject to approval of the Novartis AG Board of Directors and shareholders. Based on the planned completion of the spin-off in 2023, the Compen- sation Committee made some initial decisions on the 2023 compensation elements related to the spin-off. Finally, the 2023 Compensation Report will also include additional disclosures following the reform of Swiss corporate law that came into effect on January 1, 2023. For more information, please see “—2023 Execu- tive Compensation Changes”. Inflation and cost-of-living impact on broader employee group The Board and the Executive Committee are mindful of the cost-of-living challenges that are impacting many of our associates in different markets. The Executive Committee has considered these as part of its pay deci- sions and outcomes, and where appropriate, it has initi- ated local level initiatives to support associates. In most countries, our 2023 salary budgets are higher than in previous years, reflecting the overall higher mar- ket forecasts driven by inflation. In some of our larger markets we are making a one-time payment to certain employee populations. Where legally possible, we have tried to target these one-time payments to our lower paid employees, who are most impacted. We will continue to monitor our compensation against the Living Wage, and regularly monitor and adjust wages in hyperinflation mar- kets to support our local associates. These actions reflect our commitment to pay mar- ket-competitive and sustainable salaries, rather than to fully match the current volatile inflation environment. 2023 base salary increases for ECN members, including the CEO, are made in line with policy, and no ECN member will receive any inflation related one-time payments. 2023 Annual General Meeting (AGM) At the 2023 AGM, shareholders will be asked to vote on both the maximum aggregate amount of compensation for the Board of Directors from the 2023 AGM to the 2024 AGM, and the maximum aggregate amount of compen- sation for the Executive Committee for the financial year 2024. Furthermore, we will request an advisory vote on this Compensation Report. We welcome your feedback, which is invaluable in driving improvements in our compensation system and practices. On behalf of the Compensation Committee, I would like to thank you for your continued support and trust. Simon Moroney, D.Phil. Chair of the Compensation Committee 91 Item 6. Directors, Senior Management and Employees Compensation at a glance 2022 outcomes CEO pay for performance 2022 Annual Incentive Long-Term Performance Plan (2020–2022 performance) % of target % of target 200% Maximum 200% Maximum 150% 100% 50% 0% 150% Payout: 100% of target 100% Target 50% 0% Payout: 57% of target { • Net sales CAGR (43% of target) • Core operating income CAGR (93% of target) • Innovation (92% of target) • Relative TSR (0% of target) CEO total realized compensation The 2022 total realized compensation for the CEO was CHF 8 452 176. It includes payouts of the Annual Incentive and LTPP based on actual performance assessed for the cycles concluding in 2022. More information on the assessment of the CEO by the Board of Directors can be found in “—2022 CEO balanced scorecard” and “ —LTPP performance outcomes”. Fixed pay and benefits (CHF 000s) Variable pay: Performance-related (CHF 000s) 1 787 674 2 684 3 3071 29% of total 32% of total 39% of total Total realized compensation: CHF 8 452 176 1 The amounts shown represent the underlying share value of the total number of shares vested (including dividend equivalents of CHF 317 316) to the CEO for the 2020-2022 LTPP performance cycle. Annual base salary Pension and other benefits 2022 Annual Incentive LTPP 2020–2022 cycle  Board compensation The total actual compensation earned by Board members in the 2022 financial year is shown in the table below. 2022 total compensation 1 CHF 000s Board Chair Other members of the Board Total 3 804 4 703 8 506 1 Includes an amount of CHF 29 250 for mandatory employer contributions for all Board members paid by Novartis to Swiss governmental social security systems. This amount is out of total employer contributions of CHF 453 083 and provides a right to the maximum future insured government pension benefit for the Board members. 92 Item 6. Directors, Senior Management and Employees 2023 compensation systems An overview of the 2023 compensation systems for the Executive Committee and the Board of Directors is provided below. Executive Committee compensation system Effective 2023, financial measures of the Annual Incentive plan comprise Group Net Sales (40%), Group Operat- ing Income (30%) and Group Free Cash Flow (30%) for all Executive Committee members. Additionally, “Share of Peers” will be removed from the financial measures. 2023 fixed pay and benefits Performance-related variable pay Annual base salary Pension and other benefits 2023 Annual Incentive Purpose Reflects responsibilities, experience and skill sets Provide retirement and risk insurances (tailored to local market practices/ regulations) Rewards performance against short-term financial and strategic objectives, and Values and Behaviors Long-Term Incentive awards cycle 2023-2025 LTPP1 Rewards long-term share- holder value creation and innovation in line with our strategy Form of payment Cash Country/individual- specific and aligned with other employees 50% cash 50% equity2 deferred for three years3 Equity, vesting following a three-year performance period Performance measures – – Balanced scorecard comprising: • Financial measures4 (60%) • Strategic objectives5 (40%) • Net sales CAGR (25%) • Core operating income CAGR (25%) • Innovation (25%) • Relative TSR (25%) 1 LTPP = Long-Term Performance Plan 2 Executive Committee members may elect to receive more of their Annual Incentive in equity instead of cash 3 The Annual Incentive deferred in equity is granted under the Deferred Share Bonus Plan (DSBP) 4 Financial Measures are Group Net Sales (40%), Group Operating Income (30%) and Group Free Cash Flow (30%) 5 Strategic objectives are aligned with our transformation to become a pure-play Innovative Medicines company: Strategy, Growth / Launches, Innovation, Operational excellence, Build trust with society Board compensation system There are no changes to the Board compensation system for 2023. CHF 000s Board Chair Board membership Vice-Chair Lead Independent Director Chair of the Audit and Compliance Committee Chair of the Compensation Committee Chair of the following committees: • Governance, Sustainability and Nomination Committee • Science & Technology Committee • Risk Committee Membership of the Audit and Compliance Committee Membership of the following committees: • Compensation Committee • Governance, Sustainability and Nomination Committee • Science & Technology Committee • Risk Committee 93 AGM 2023-2024 annual fee 3 800 280 50 20 130 90 70 70 40 Item 6. Directors, Senior Management and Employees Executive Committee compensation philosophy and principles Novartis compensation philosophy Approach to market benchmarking There continues to be significant competition for top executive talent with deep expertise, the requisite com- petencies and proven performance within the pharma- ceutical and biotechnology industries. As such, external peer compensation data is one of a number of key refer- ence points considered by the Board of Directors and the Compensation Committee when making decisions on executive pay, so as to help ensure that the compensa- tion system and compensation levels at Novartis remain competitive. Novartis is committed to confirming bench- marking practices, including the peer group, to sharehold- ers on an annual basis. The Compensation Committee believes in a rigorous approach to peer group construction and maintenance. Furthermore, it believes that using a consistent set of peers that is similar in size and scope enables sharehold- ers to evaluate the compensation year on year and make pay-for-performance comparisons. In 2022, the Com- pensation Committee decided to maintain the same pri- mary peer group of 14 global healthcare companies, as presented in the table below. GLOBAL HEALTHCARE PEER GROUP AbbVie Biogen Amgen AstraZeneca Bristol-Myers Squibb Eli Lilly & Co. GlaxoSmithKline Gilead Sciences Johnson & Johnson Novo Nordisk Merck & Co. Pfizer Roche Sanofi The companies in this peer group reflect our industry and are similar to Novartis in terms of both size and scope of operations. Although Novartis is headquartered in Switzerland, more than a third of its sales come from the US market, and the US remains a significant talent pool for the recruitment of executives by the Company. It is therefore critical that Novartis is able to attract and retain key talent globally, especially from the US. To ensure European and local practices were fully taken into account, in 2022 the Compensation Commit- tee also reviewed a cross-industry peer group of Europe-headquartered multinational companies, selected based on comparability to Novartis in terms of industry, size, global scope of operations, and economic influence. Based on this review, the Committee retained the same group of European peers as in 2021: Anheus- er-Busch InBev, AstraZeneca, Bayer, BMW, GlaxoSmith- Kline, L’Oréal, Merck KGaA, Nestlé, Novo Nordisk, Reck- itt Benckiser, Roche, Siemens, Sanofi, and Unilever. Our compensation philosophy aims to ensure that we attract and retain outstanding Executive Committee members and reward them according to their success in implementing the Company strategy, and their contri- bution to Company performance and long-term value creation. The main elements of our compensation phi- losophy are set out in the table below. 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 Competitive compensation • Total compensation must be sufficient to attract and retain key global talent • Overarching emphasis on pay for performance Alignment with Company strategy Executive compensation is strongly connected to busi- ness strategy. In 2022, we refocused our strategy to deliver high-value medicines that alleviate society’s greatest disease burdens through technology leadership in research and development, and novel access approaches. Our strategy focuses on five core thera- peutic areas with high unmet patient needs, two core and three emerging technology platforms, and four pri- ority geographies, which together account for the major- ity of expected growth in global healthcare spending. In line with this refocused strategy, we updated our strategic priorities to target innovation power, sales growth, delivering both margin and total shareholder returns, and sector leadership in material ESG factors. The Long-Term Incentive Plan was adapted, with greater emphasis now on the delivery of high value programs in our research and early development targets. The Annual Incentive plan has been simplified effective 2023, with three key financial metrics: Net Sales, weighted 40%; Operating Income, weighted 30%; and Free Cash Flow, weighted 30%. 94 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 increase this toward market level over a period of three to four years as an individual develops in the role. If the scope of an existing Executive Committee member’s role changes significantly during the year, the Compensation Committee may make adjustments to the individual’s base salary (and/or incentives) in consideration of the benchmark of the new role and the Executive Committee appointments compensation policy. 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 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 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 the local country pension plan 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 to compensate the commercial equivalent value or fair value of payments and awards forfeited by the individual, in such form as the Compensation Committee considers appropriate, taking into account relevant factors. Relevant factors include the expected value of the forfeited award, 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 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. 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 (e.g., relocation support, tax equalization). This includes ongoing US state income tax liabilities on behalf of US citizens locally employed outside the US who have US workdays and therefore, US state taxable compensation that generates a US state tax liability. International mobility 95 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, i.e., “good leavers” Pro-rata Annual Incentive is paid to reflect the portion of the year the individual was employed. Voluntary resignation or termination by the Company for misconduct or poor performance Annual Incentive is fully forfeited. Annual Incentive – mandatory deferral into restricted shares/ restricted share units (RSUs) Retirement, termination by the Company for reasons other than performance or conduct, and change of control Awards are released on the original blocking end date. There is no accelerated vesting. All awards are subject to forfeiture in the event that a leaver joins a competitor company as defined in the applicable plan rules, before the end of the three-year blocking date, starting from the date of grant. Annual Incentive – voluntary restricted shares/RSUs/American Depository Receipts (ADRs) (ADRs applicable for US employees only) Long-Term Incentive – mandatory performance share units (PSUs) Death or long-term disability Accelerated vesting is applied. Voluntary resignation or termination by the Company for misconduct or poor performance Unvested restricted shares and restricted share units (RSUs) are forfeited. Awards are not subject to forfeiture during the deferral period. Retirement, termination by the Company for reasons other than performance or conduct, and change of control 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. All awards are subject to forfeiture in the event that a leaver joins a competitor company as defined in the applicable plan rules, until the vesting date. Death or long-term disability Accelerated vesting at target is applied. Voluntary resignation or termination by the Company for misconduct or poor performance All of the award is forfeited. 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 vested in the past (clawback). This applies in cases where the payout has resulted from a violation of laws or conflicts with internal management standards, including Company and accounting policies. This principle applies to both the short-term Annual Incentive and Long-Term Incentive (LTI) plans. The Compensation Committee is assessing the impact of the final clawback rule in the Federal Register published by the US Securities and Exchange Commis- sion in 2022, and any required changes to the policy will be disclosed in the 2023 Compensation Report. 96 Item 6. Directors, Senior Management and Employees Executive Committee performance management process To foster a high-performance culture, the Company applies a performance management process based on quantitative and qualitative criteria. The CEO and the other Executive Committee members are subject to a formal three-step process: objective setting, perfor- mance evaluation and compensation determination. This process is explained in the chart below. Performance targets are generally set before the start of the relevant performance cycle. A rigorous framework is 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 tar- gets include: • Internal and external market expectations • Novartis strategic priorities • 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 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 and determine their individual compensation. Prior to deter- mining the final outcome, related factors such as perfor- mance relative to peers, wider market conditions, general industry trends and good practice are used to inform the overall performance assessment. Objective setting Performance evaluation Compensation determination • The CEO proposes their targets to the • The CEO’s performance against • A recommendation for the CEO’s Board Chair; 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 the Compensation Committee. the individual balanced scorecard is assessed by the Board of Directors. • For Executive Committee members, the CEO discusses each member’s performance (assessed against his or her individual balanced scorecard) with the Board Chair before making recommendations to the Board of Directors for final determination. • 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. 97 Item 6. Directors, Senior Management and Employees 2022 Executive Committee compensation 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. 2022 annual base salaries The 2022 annual base salaries were as follows: • CEO (effective March 1, 2022): CHF 1 789 500. • OTHER EXECUTIVE COMMITTEE MEMBERS (effective March 1, 2022): All other members of the Executive Committee were awarded increases in line with the average of all Novartis employees, with the exception of five individuals as disclosed in Item 6.B of the 2021 Annual Report. 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 employees 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 860 400. No supplementary pension plans or savings plans are provided. The CEO’s employer pension contributions represent 9.77% 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. 98 Item 6. Directors, Senior Management and Employees 2022 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 • An Annual Incentive balanced scorecard containing: • Financial performance measures (60% weighting) related to Group, division or business unit, where relevant • Strategic objectives (40% weighting) are aligned with our transformation to become a pure-play Innovative Medicines company: Strategy, Growth / Launches, Innovation, Operational excellence, Build trust with society • The balanced scorecard targets and achievements of the CEO are detailed on the next page. • The 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 expectations PAYOUT (% of on-target) 170% – 200% 130% – 160% 80% – 120% 40% – 70% 0% Payout formula Payout vehicle Annual base salary x Target incentive (% of base salary) x Payout factor (% of target: 0%–200%) = Realized Annual Incentive • At the end of the performance period, 50% is paid in cash, and the remaining 50% is delivered in Novartis restricted shares or RSUs, deferred for three years (see “—Executive Committee compensation system”). • 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. Dividend rights, voting rights and settlement • Novartis restricted shares and ADRs 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. 99 Item 6. Directors, Senior Management and Employees 2022 CEO BALANCED SCORECARD This section presents the balanced scorecard for the CEO. Balanced scorecard performance is measured in constant cur- rencies (cc) to reflect operational performance that can be influenced. The Board of Directors uses a stringent process to set ambitious financial targets to incentivize superior performance. In addition to the financial targets, the CEO also has ambitious strategic objectives across key priority areas, including targets related to ESG matters. CEO achievements – 2022 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 (20%) Overall assessment of Group financial targets in constant currencies Target Achievement versus target 54 360 million | 11 630 million | 24.8% 7.3% | | Met Met* Below Met Met * The Board concluded that the achievement for Group operating income versus target was “Met” after approving adjustments mainly to exclude restructuring costs arising from the implementation of the new organizational model announced to investors on April 4, 2022 (and were not available at the time of target setting in January 2022), and costs related to the planned Sandoz spin-off, to transform Novartis into a focused medicines company. Strategic objectives – 40% of total Annual Incentive, comprising: Strategy (15%) In 2022, the CEO launched a new strategy and laid the foundation to improve our growth profile via a strong focus on our five core therapeutic areas (cardiovascular, immunology, neuroscience, solid tumors, and hematology), two established (chemistry and biotherapeutics) and three emerging (gene & cell therapy, radioligand therapy, and xRNA) technology platforms, and four key geographies (China, Germany and Japan, and a particular priority in the US market). This strategy will transform Novartis into a pure-play Innovative Medicines business, with multiple in-market brands of multi-billion dollar peak sales potential, and prioritize our pipeline to focus on high-value assets that address high disease burden and have substantial growth potential. Sandoz separation analysis was completed with spin-off being the preferred separation path given potential future value upside for shareholders. Substantial progress was also made on the preparation for the planned spin-off, which is expected to take place in the second half of 2023. Growth/Launches (15%) Recent launch products Pluvicto (USD 271 million), Kesimpta (USD 1.1 billion), and Scemblix (USD 149 million) achie- ved higher than target sales. However, lower uptake for Leqvio resulted in sales behind target. In-market growth drivers (including Cosentyx, Entresto, Zolgesma, Kisqali, Kesimpta, and Leqvio) delivered com- bined sales of USD 13.2 billion, which was slightly behind target. This was largely due to the below target perfor- mance of Cosentyx (total sales of USD 4.8 billion, impacted by US payer pressures, China business and Inflation Reduction Act headwinds). This was partly offset by strong performance of Entresto (USD 4.6 billion) and Kisqali (USD 1.2 billion). Innovation (15%) In 2022, we received 23 approvals in our top four markets (US, EU, China and Japan). Major approvals included Pluvicto (US, EU), Scemblix (EU), and further indication expansions for Kymriah and Cosentyx. 24 submissions were made across the top four markets. We advanced our focused pipeline of investigational medicines, with several important clinical data readouts including Iptacopan for patients with paroxysmal nocturnal hemoglobinuria (PNH), a rare and deadly blood disorder, and Pluvicto in earlier lines of prostate cancer. Cosentyx was submitted to the US FDA for an additional indication, ahead of planned timelines. Among our early-stage development activities, we secured ten proofs of concept (POCs) / proofs of mechanisms (POMs). Additionally, we achieved First Patient First Visit in six pivotal trial-enabling studies against our Research and Development target of five. The year also experienced some disappointments, with important trials not meeting primary goals (such as cana- kinumab for lung cancer and UNR844 in presbyopia). | | | Met Met Met 100  | | Met Above Item 6. Directors, Senior Management and Employees 2022 CEO BALANCED SCORECARD − CONTINUED Operational excellence (15%) In April 2022, we introduced a new operating model to make our organization more agile and efficient in support of our strategy. This simplified and leaner organization is expected to deliver identified cost savings of approximately USD 1.5 billion by 2024, and help drive mid-term Innovative Medicines margin to the low 40s. Financial performance for 2022 improved from prior year in constant currencies on core operating income and core margin to USD 16.7 billion and 33.0% respectively. The Operations unit, comprising our legacy Technical Operations unit and the legacy Customer and Technology Solutions unit, achieved savings of USD 998 million against a combined target of USD 785 million. However, these savings were partially offset by external headwinds, driven mainly by inflation, of approximately USD 350 million. Build trust with society (40%) INNOVATION AND ACCESS In 2022, we achieved a 26% increase in patient reach with our strategic innovative therapies, reaching 1.2 million patients, compared with the previous year (0.95 million). All our product launches in 2022 included a tiered pricing strategy based on national income level and value-based pricing, in line with target. With our commitment to diversity in clinical trials, 100% of our US Phase 3 studies evaluated Diversity & Inclusion principles in feasibility planning, in line with our target. Through our Novartis Global Health flagship programs, we reached 31 million patients in 2022, beating our Sustain- ability-linked Bond target of 22.6 million patients by 2025. In 2022, we renewed our commitment to the research and development of new medicines for malaria and neglec- ted tropical diseases, pledging to invest USD 250mn over five years (2021-2025), and we advanced the clinical development of next-generation malaria medicines. PEOPLE AND CULTURE We progressed towards a “Performance Culture” mindset with the implementation of a new “high support / high challenge” approach. We remain committed in our efforts to increase workforce diversity. The percentage of women in management increased to 47%, slightly behind our target of 48%. ENVIRONMENTAL SUSTAINABILITY In 2022, we reduced our Scope 1 and 2 carbon emissions by 49%, our water consumption by 42%, and our waste sent for disposal by 59%, compared with our 2016 baseline. This was broadly in line or ahead of our 50%, 41% and 50% targets, respectively. To advance on our Scope 3 emissions target, environmental sustainability criteria have been integrated into supply contracts covering more than a third of our Scope 3 supplier emissions. ETHICAL BUSINESS PRACTICES We assessed 100% of our applicable policies & controls in the areas of Access to Medicine & Artificial Intelligence and categorized them as either “aligned with Human Right standards” or “needs update with defined scope to meet Human Rights standards”, in line with our target. Overall assessment of strategic objectives Overall assessment of CEO balanced scorecard Met Met ANNUAL INCENTIVE PAYOUT Payout The 2022 CEO performance showed solid financial results, including sales and operating income performance at target and most strategic objectives were achieved or exceeded. The launch of a new focused strategy transforming Novartis into a pure-play medicines company, performance of launch products and preparation for planned Sandoz spin-off were key highlights. However, Free Cash Flow performance was impacted by decrease in net cash flows from operating activities and lower divestment proceeds. On balance, based on the overall assessment, the Board of Directors decided on an Annual Incentive payout for the CEO amounting to CHF 2 684 321, which is 100% of target, within the range of 0–200%. 101 Item 6. Directors, Senior Management and Employees Long-Term Performance Plan, 2020-2022 cycle OVERVIEW OF LONG-TERM PERFORMANCE PLAN Award vehicle Performance share units (PSUs) are granted at the beginning of the three-year performance cycle and vest at the end of the cycle to the extent that performance conditions have been met. At the time of vesting, they are converted into Novartis shares. PSUs carry dividend equivalents that are paid in shares at the end of the cycle. Grant formula At the start of the performance cycle, PSUs are granted under the Long-Term Incentive plan, as follows: Step 1 Annual base salary Step 2 Grant value x / Target incentive % Share price = = Grant value Target number of PSUs Target opportunity • CEO: 325% of annual base salary • Other Executive Committee members: between 180% and 260% of annual base salary Performance measures • Net sales CAGR (25%) • Core operating income CAGR (25%) • Innovation (25%) • Relative TSR (25%) Target setting Payout range Financial targets: Targets for net sales CAGR and core operating income CAGR are set based on the strategic plan of the Company. Innovation: Global Drug Development (GDD) targets are based on targeted filings communicated at the start of each performance cycle, weighted 70%. The Science & Technology Committee determines the most important Novartis Institutes for BioMedical Research (NIBR) milestones, weighted 30%. Effective the 2022- 2024 LTPP cycle, NIBR targets set by the Science & Technology Committee take into account the expected Net Present Value (eNPV) of programs transitioning to late-stage clinical development. Financial targets: When assessing performance, achievements for threshold, target and maximum payout are defined for each metric, and a payout curve is applied to determine the corresponding payout between 0–200% against target. Innovation: At the end of the cycle, the Compensation Committee determines the payout factor in the range of 0–150% based on the performance assessment made by the Science & Technology Committee. A payout between 150–200% of target is only delivered for truly exceptional performance. Relative TSR: Performance on TSR is assessed relative to a global healthcare peer group, as outlined below. A three-month averaging method is used for both the start and the end of the performance cycle. Companies are then ranked in order of highest to lowest TSR in USD. Global healthcare peer group Novartis position in the peer group Payout range (% of target) Abbvie Biogen Amgen AstraZeneca Position 1 – 2 Bristol-Myers Squibb Eli Lilly & Co Position 3 – 5 GlaxoSmithKline Gilead Sciences Johnson & Johnson Position 6 – 8 Novo Nordisk Merck & Co. Pfizer Position 9 – 15 170% – 200% 130% – 160% 80% – 120% 0% Roche Sanofi The Compensation Committee may use its discretion on each metric, including deciding on the payout within the ranges where appropriate. In doing so, it takes into consideration factors such as the underlying assumptions of the targets set at the beginning of the cycle, overall economic conditions, currency fluctuations and other unforeseeable situations. Payout formula Target number of PSUs x Performance factor + Dividend equivalents = Realized PSUs 102 Item 6. Directors, Senior Management and Employees LTPP performance outcomes The charts below illustrate the performance of the 2020-2022 LTPP against target. NET SALES CAGR (25% weighting) CORE OPERATING INCOME (COI) CAGR (25% weighting) Vesting range 0–200% of target Vesting range 0–200% of target 8% 6% 4% 2% 0% Maximum (200%): 8.7% (CAGR) Target: 5.7% (CAGR) Actual: 3.8% (CAGR) Net sales growth payout 43% of target 16% 12% 8% 4% 0% Maximum (200%): 16.6% (CAGR) Target: 10.6% (CAGR) Actual: 9.9% (CAGR) COI growth payout 93% of target Notes: A minimum achievement of 3.7% CAGR was required to receive a payout under this performance measure Notes: A minimum achievement of 6.6% CAGR was required to receive a payout under this performance measure Actual performance was adjusted for mergers and acquisitions as well as business development and licensing projects not included in the target Novartis achieved a COI CAGR of 9.9% (cc) against the 10.6% target set at the beginning of the performance cycle. This was mainly due to lower than target Innovative Medicines sales over the three-year cycle, which was partly offset by lower spend in selling, general and adminis- trative expenses (SG&A). In 2022, the Company took organizational transformative measures, delivering savings reflected in COI improve- ment for the year. Following the application of the payout curve, the COI CAGR (cc) achievement generates a payout factor of 93% (maximum 200%) for this metric. RELATIVE TOTAL SHAREHOLDER RETURN (TSR) (25% weighting) Novartis position in the peer group Payout range (% of target) Position 1 – 2 Position 3 – 5 Position 6 – 8 Position 9 – 15 170% – 200% 130% – 160% 80% – 120% 0% Actual ranking 12th = 0% of target TSR for the 2020-2022 cycle was 5.5%. As a result, Novartis ranked No. 12 out of 15 healthcare companies (including Novartis). Considering that the relative TSR rank is below median, there was a zero payout for this metric. Novartis achieved a net sales CAGR of 3.8% (in constant currencies – cc) against the 5.7% target set at the beginning of the performance cycle. The lower than target performance was mainly due to the nega- tive and unexpected impact of COVID-19 in 2020 and 2021, the Beovu safety update, and the slower uptake of Zolgensma. Following the application of the payout curve, the net sales CAGR (cc) achievement generates a payout factor of 43% (maximum 200%) for this metric. INNOVATION (25% weighting) The following developments were considered in our 2020-2022 LTPP innovation performance: • US and EU approvals for Pluvicto • EU approval for Scemblix for adult patients with chronic myeloid leu- kemia • US approval for Kymriah in the treatment of adult patients with relapsed or refractory follicular lymphoma • Filing of Cosentyx for Hidradenitis suppurativa with both the US FDA and the European Medicines Agency(EMA) • Submission of Cosentyx for an additional indication ahead of planned timelines • Tislelizumab’s acceptance by the EMA for regulatory review in esoph- ageal and lung cancers • CANOPY trials, Ligelizumab PEARL studies in chronic spontaneous urticaria (CSU), and Sabatolimab STIMULUS MDS-1 where import- ant trial milestones were delayed/not submitted In NIBR, advancement of multiple development candidates including two novel radioligand therapies • Based on input from the Science & Technology Committee, the Board of Directors approved an innovation performance factor of 92% of tar- get. 2020-2022 LTPP PAYOUT Overall, the Board of Directors approved a 2020-2022 LTPP payout at 57% of target, within the range of 0–200%. No adjustments, pandemic- related or otherwise, were made in the evaluation of performance, despite the substantial shortfall in sales growth caused by Covid-19. This resulted in an LTPP payout of CHF 3 307 422 for the CEO, including dividend equivalents of CHF 317 316. Net sales CAGR 43% x 25% + COI CAGR 93% x 25% + Innovation 92% x 25% + Relative TSR 0% x 25% Final vesting 57% of target 103 Item 6. Directors, Senior Management and Employees Compensation for joining and departing Executive Committee members in 2022 2022 Executive Committee member appointments In 2022, four new appointments were made to the Executive Committee, which comprise an internal promotion and three external appointments. Victor Bulto was promoted internally as President, Innovative Medicines US, and joined the Executive Commit- tee on May 1, 2022. In line with our compensation policy, externally appointed Executive Committee members were granted buyout awards to compensate for entitlements forfeited by them as a result of joining Novartis, as described in the table below (see “—Executive Committee appointments compensation policy”). Further details on the vesting of the awards below will be provided in relevant future compensation reports. Name Date of appointment Currency Cash payments Equity awards May 16, 2022 CHF No cash buyout 5 708 RSUs, vesting over the period 2023-2026 Total value at grant 491 915 July 18, 2022 CHF 818 202 43 253 RSUs, vesting over the period 2022-2023 November 1, 2022 USD 522 000 to be paid 31 861 RSUs and 9 649 PSUs, out in March 2023 vesting over the period 2023-2026 4 353 702 3 886 801 Shreeram Aradhye, President, Global Drug Development and Chief Medical Officer Aharon Gal, Chief Strategy & Growth Officer Fiona Marshall, President, Novartis Institutes for BioMedical Research 2022 Executive Committee member departures In determining the compensation arrangements for departing Executive Committee members, the Compensation Committee ensures that contractual entitlements are respected, and 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. No new LTPP grants are made during the notice period. In line with the new regulations arising from the reform of Swiss corporate law, any compensation payments toward non-competition agreements from 2023 onwards, will not exceed the average annual compensation of the previous three financial years. Equity plan rules state that malus and clawback as well as non-compete restrictions will continue to apply. No severance payments are made to departing Executive Committee members. Further details on the policy treatment of variable compensation for departing Executive Committee members can be found in “—Treatment of variable compensation for Executive Committee leavers.” Former President of Novartis Oncology, Susanne Schaffert, stepped down from her role following the Compa- ny’s decision to integrate the Pharmaceuticals and Oncology business units and create separate US and Interna- tional commercial organizations under the Innovative Medicines (IM) Division, and started her notice period on May 1, 2022. Former Head of Customer & Technology Solutions (CTS), Robert Weltevreden, stepped down from his role fol- lowing the Company’s decision to combine Novartis Technical Operations (NTO) and CTS into a new Operations unit, and started his notice period on May 1, 2022. Former Head of Global Drug Development and Chief Medical Officer, John Tsai, stepped down from his role effective May 15, 2022, and started his notice period on the same day. Former President of the Novartis Institutes for BioMedical Research (NIBR), James Bradner, stepped down from his role effective October 31, 2022, and started his notice period on November 1, 2022. All four executives departed under good leaver conditions. Outstanding LTI grants will vest at the end of the rel- evant performance cycles on a pro-rata basis, as per their contractual agreements and in line with the said plan rules. To avoid a conflict of interest, Richard Saynor, Chief Executive Officer of Sandoz, stepped down from the Execu- tive Committee with effect from October 25, 2022, following his appointment as CEO designate of the Sandoz standalone company that is planned to be created in the second half of 2023. He will continue to report directly to the CEO and to lead the Sandoz division. 104   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 a vested LTI), compensation increases, payout of variable compensation based on actual performance, share price fluctuations of the LTI, and dividend equivalents. 2022 realized compensation for the CEO and other Executive Committee members The table below shows fixed and other compensation for the year, including the Annual Incentive for the 2022 per- formance year, the realized LTI for the 2020-2022 performance cycle, and any buyouts vesting in 2022. The por- tion of the Annual Incentive paid in shares for the year 2022 is disclosed using the underlying value of Novartis shares at the date of grant, while the realized values of any other equity awards (including dividend equivalents) are calculated using the share price on the date of vesting. To determine the appropriateness of the 2022 CEO and executive compensation payouts under the Annual Incentive and LTI plans, the Board of Directors and the Compensation Committee reviewed management’s perfor- mance and contribution, taking the following into consideration: • Operational and financial performance against targets • Progress toward strengthening our global product portfolio • Accomplishments across all strategic pillars, with careful attention given to ESG performance The incentive performance outcomes, combined with base salary and other benefits, pension, and dividend equiv- alents, resulted in 2022 total realized compensation for the CEO of CHF 8 452 176. 2022 realized compensation for the CEO and other Executive Committee members 2022 annual base salary 2022 pension benefits1 2022 Annual Incentive Currency Cash (amount) Amount Cash Equity2 Long-Term Incentives LTPP 2020 – 2022 cycle Other 2022 compensation Equity (value at vesting date)3 Total realized compensation (incl. share Amount4,5 price movement)6 CHF 1 786 500 174 488 1 342 125 1 342 196 3 307 422 499 445 8 452 176 CHF 9 122 792 CHF 10 909 292 1 978 304 2 152 792 4 211 841 5 553 966 5 918 318 10 025 047 9 716 294 40 972 595 7 260 514 13 332 469 10 215 739 49 424 771 Executive Committee members Vasant Narasimhan (CEO) Aggregate realized compensation of the other 15 Executive Committee members, including the members who stepped down during the financial year 2022 7,8 Total See 2021 realized compensation for the CEO and other Executive Committee members for 2021 comparative figures. 1 Includes mandatory employer contributions of CHF 4 560 for the CEO and CHF 67 148 for the other current Executive Committee members paid by Novartis to governmental social security systems. This amount is out of total employer contributions of CHF 3 937 537 paid in 2022 for all Executive Committee members, and provides a right to the maximum future insured government pension benefit. 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 25, 2023) of CHF 85.30 per Novartis share and USD 92.81 per ADR. 3 The amounts represent the underlying share value of the 97 361 LTPP PSUs vesting on January 25, 2023, to the CEO and other Executive Committee members for the 2020-2022 performance cycle and dividend equivalents for the three-year cycle (for details, see ‘’—LTPP performance outcomes’’). The taxable value is determined using the closing share price on the day the Novartis Board of Directors approved the final LTPP performance factor (i.e., January 25, 2023) of CHF 85.30 per Novartis share and USD 92.81 per ADR. Robert Kowalski was promoted to the Executive Committee during the course of the 2021 performance period and Victor Bulto during the course of the 2022 performance period, and as such, the information disclosed reflects their pro-rata LTPP 2020-2022 payout attributable to the period in which they were members of the Executive Committee. Shreeram Aradhye rejoined Novartis and Karen Hale, Aharon Gal and Fiona Marshall joined Novartis after the 2020 LTI awards were made and hence did not receive an LTPP award for the 2020-2022 performance period. 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). The 2022 tax payments were CHF  221 633 for Richard Saynor, as well as CHF  533 927 for Victor Bulto, CHF  127 980 for Robert Kowalski, CHF  109 966 for Aharon Gal, and CHF  417 826 for Vas Narasimhan. 5 Includes 696 vested RSUs and 2 765 PSUs (for a total value of CHF 268 158), which vested on March 13, 2022, to John Tsai in lieu of the LTI that he forfeited when leaving his previous employer. Also includes 2 348 vested RSUs and 1 586 vested PSUs (for a total value of CHF 313 815), which vested on February 13, 2022, to Richard Saynor in lieu of the LTI that he forfeited when leaving his previous employer, and 3 675 vested PSUs (CHF 287 238) on January 18, 2022, to Klaus Moosmayer in lieu of the LTI he forfeited when leaving his previous employer as well as 15 448 RSUs (CHF 1 292 225), which vested on December 1, 2022, to Aharon Gal in lieu of the LTI that he forfeited when leaving his previous employer. 6 All amounts are before deduction of the social security contribution and income tax due from the Executive Committee member. 7 Includes compensation of the following members who stepped down from the ECN: Richard Saynor, Sandoz CEO designate, James Bradner, former President NIBR, Susanne Schaffert, former CEO Oncology, John Tsai, former Global Head of Drug Development and Chiel Medical Officer and Robert Weltevreden, former Head of Customer and Technology Solutions, including the vesting of their Long-Term Incentives for 2020-2022 performance cycle, as per the plan rules. The compensation and benefits elements related to the period after the step-down dates are reported under the ‘other 2022 compensation’ column. See “—2022 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 0.9548, which is the same average exchange rate used in the Group’s 2022 consolidated financial statements (a similar rule applies to payments made in other currencies during the year). 105 Item 6. Directors, Senior Management and Employees The table and information below provide additional details on awards granted as part of the 2020-2022 LTPP per- formance cycle, including the number of shares awarded and delivered, following the application of the payout fac- tor and the addition of dividend equivalent shares. 2020-2022 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 ECN LTPP delivered at vesting (value at vesting date) delivered at vesting (value at vesting date) (CHF) (% of target) (number) Dividend (number) (CHF) 3 4 Dividend Total shares equivalent shares delivered at vesting (value at vesting date) (CHF) Executive Committee members 1 Vasant Narasimhan 61 498 5 712 549 57% 35 054 2 990 106 3 720 317 316 3 307 422 Other 15 Executive Committee members, including the members who stepped down during the financial year 2022 5 183 733 17 005 806 57% 105 530 9 058 150 11 156 966 897 10 025 047 Total 245 231 22 718 356 140 584 12 048 256 14 876 1 284 213 13 332 469 1 Robert Kowalski and Victor Bulto joined the Executive Committee during the course of the 2020-2022 performance period. As such, the information disclosed reflects their pro-rata LTPP 2020-2022 attributable to the period in which they were members of the Executive Committee. Karen Hale, Aharon Gal, Fiona Marshall and Shreeram Aradhye joined Novartis after the 2020-2022 LTPP awards were made and hence did not receive an LTPP award for this 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 2020-2022 performance period, 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 shown amounts represent the underlying share value of the number of PSUs vested for the 2020-2022 performance period, based on the closing share price on the day the Novartis Board of Directors approved the final LTPP performance payout factor (i.e., January 25, 2023) of CHF 85.30 per Novartis share and USD 92.81 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 2020-2022 performance period. At vesting, the dividend equivalents are credited in shares or ADRs. 5 Includes the LTPP vesting for Richard Saynor, Sandoz CEO Designate, James Bradner, former President NIBR, Susanne Schaffert, former CEO Oncology, John Tsai, former Global Head of Drug Development and Chiel Medical Officer and Robert Weltevreden, former Head of Customer and Technology Solutions for the 2020-2022 performance cycle, as per the plan rules. 106 Item 6. Directors, Senior Management and Employees The table and information below provide details on the 2021 realized compensation for the CEO and other Execu- tive Committee members, for comparative purposes. 2021 realized compensation for the CEO and other Executive Committee members 2021 annual base salary 2021 pension benefits1 2021 Annual Incentive Long-Term Incentives LTPP 2019-2021 cycle Other 2021 compensation Currency Cash (amount) Amount Cash Equity2 Equity (value at vesting date)3 Total realized compensation (incl. share Amount2,4,5 price movement)6 CHF 1 769 200 176 731 1 328 625 1 328 642 6 356 128 265 401 11 224 727 CHF 8 983 841 CHF 10 753 041 2 065 561 2 242 292 4 174 006 5 502 631 5 400 015 18 770 029 6 728 657 25 126 157 6 021 712 45 415 164 6 287 113 56 639 891 Executive Committee members Vasant Narasimhan (CEO) Aggregate realized compensation of the other 14 Executive Committee members, including the members who stepped down during the financial year 2021 7,8 Total 1 Includes mandatory employer contributions of CHF 5 498 for the CEO and CHF 53 693 for the other Executive Committee members paid by Novartis to governmental social security systems. This amount is out of total employer contributions of CHF 4 966 397 paid in 2021 for all Executive Committee members, and provides a right to the maximum future insured government pension benefit. 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 26, 2022) of CHF 78.16 per Novartis share and USD 84.24 per ADR. 3 The amounts represent the underlying share value of the 296 741 LTPP PSUs vested on January 22, 2022, to the CEO and other Executive Committee members for the 2019-2021 performance cycle, inclusive of earned Alcon Keep Whole awards and dividend equivalents for the three-year cycle (for details, see ‘’—LTPP performance outcomes’’). The taxable value is determined using the closing share price on the day the Novartis Board of Directors approved the final LTPP performance factor (i.e., January 26, 2022) of CHF 78.16 per Novartis share and USD 84.24 per ADR. Marie-France Tschudin and Robert Kowalski were promoted to the Executive Committee during the course of the 2019-2021 performance period, and as such, the information disclosed reflects their pro-rata LTPP 2019-2021 payout attributable to the period in which they were members of the Executive Committee. Richard Saynor and Karen Hale joined Novartis after the 2019 LTI awards were made and hence did not receive an LTPP award for the 2019-2021 performance period. 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). The 2021 tax payments were CHF 127 009 for Mr. Saynor, as well as CHF 822 808 for Susanne Schaffert, and CHF 156 788 for Vas Narasimhan. 5 Includes 6 128 vested RSUs and 3 546 PSUs (for a total value of CHF 782 649), which vested partially on March 13, 2021, and partially on July 28, 2021, to John Tsai in lieu of the LTI that he forfeited when leaving his previous employer. Also includes 2 584 vested RSUs and 2 043 vested PSUs (for a total value of CHF 379 414), which vested on February 14, 2021, to Mr. Saynor in lieu of the LTI that he forfeited when leaving his previous employer, and 4 313 vested PSUs (CHF 370 961) on January 18, 2021, to Klaus Moosmayer in lieu of the LTI he forfeited when leaving his previous employer. 6 All amounts are before deduction of the social security contribution and income tax due from the Executive Committee member. 7 Includes the first six weeks of Karen Hale’s compensation, before her appointment to the Executive Committee, under other compensation. Comprises the compensation of Bertrand Bodson, former Chief Data Officer and Steven Baert, former Chief People & Organization Officer, including the vesting of their Long-Term Incentives for 2019-2021 performance cycle, as per the plan rules. The compensation and benefits elements related to the period after the step-down dates are reported under the other compensation column. Unvested shares for Shannon Klinger were forfeited upon her departure from the Company. See “—2021 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 0.9139, which is the same average exchange rate used in the Group’s 2021 consolidated financial statements (a similar rule applies to payments made in other currencies during the year). Realized compensation for the CEO and other Executive Committee members for 2022 compared with 2021 The 2022 total realized compensation for the CEO was CHF 8 452 176. This is a reduction of 24.7% compared with the prior year, mainly due to the lower performance payout of the 2020-2022 LTPP (57% compared with the 107% payout for the 2019-2021 LTPP). At the end of the 2020-2022 LTPP performance cycle, the rTSR ranking for Novartis, which is weighted 25% of the overall LTPP opportunity, was below median, which resulted in zero payout for this measure. Payout for Net Sales CAGR performance, also weighted 25%, was significantly lower (43% com- pared with 119% in 2019-2021), mainly driven by the impact of Covid-19 on Sales growth during 2020 and 2021. Furthermore, the Alcon “keep-whole” awards, granted at the time of Alcon spin-off in 2019, ended with the 2019- 2021 LTPP payout. The 2022 total realized compensation for the Executive Committee members, including the CEO, was CHF 49 424 771. This decrease of 12.7% compared with the prior year can be attributed to the same reasons mentioned above. For more detail, please refer to “—LTPP performance outcomes”. 107 Item 6. Directors, Senior Management and Employees Compensation at grant value In accordance with the Swiss Ordinance against Excessive Compensation in Listed Companies, Novartis contin- ues to disclose total compensation at grant value for the CEO and other Executive Committee members. The tables below disclose the following information for the CEO and other Executive Committee members: • Fixed 2022 compensation (base salary and benefits) • Actual cash portion and the deferred portion granted in equity of the 2022 Annual Incentive • 2022-2024 LTPP performance cycle awards, which are reported at target grant date value, based on the assump- tion that the awards will vest at 100% achievement, excluding any share price movement and dividend equivalents that may be accrued over the performance cycle. The future payout will be determined only after the performance cycle concludes in three years (i.e., at the end of 2024), with a payout range of 0% to 200% of the target value • Other compensation for 2022, which includes other benefits, either paid in cash or granted in equity during the year The compensation paid, promised or granted to the members of the Executive Committee during financial year 2022 was within the amount approved by shareholders at the 2021 AGM. To assess CEO actual pay for performance in 2022, including the Annual Incentive payout for the 2022 performance year and the LTI payouts for the 2020-2022 performance cycle, shareholders should refer to the 2022 realized compensation table in “—2022 realized compensation for the CEO and other Executive Committee members.” 2022 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 2022 Long-Term Incentive 2022-2024 cycle grants at target 2022 annual base salary 2022 pension benefits 2022 Annual Incentive (performance achieved) LTPP 2022-2024 cycle Other 2022 compensation Total compensation paid, promised or granted 2022 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, 2022 Vasant Narasimhan Shreeram Aradhye (from May 16, 2022) 6 Victor Bulto (from May 1, 2022) 7, 8 Aharon Gal (from July 18, 2022) 9 Karen Hale Harry Kirsch Robert Kowalski Steffen Lang Fiona Marshall (from November 1, 2022) 8, 9 Klaus Moosmayer Marie-France Tschudin Total CHF CHF USD CHF CHF CHF CHF CHF USD CHF CHF 1 786 500 538 656 622 596 363 441 845 834 1 082 250 705 833 840 833 186 154 580 000 951 250 8 466 817 Executive Committee members who stepped down during 2022 James Bradner (until October 31, 2022) 8, 10 Richard Saynor (until October 25, 2022) 11 Susanne Schaffert (until April 4, 2022) 12 John Tsai (until May 15, 2022) 13 Robert Weltevreden (until April 4, 2022) 14 Subtotal Total 1 006 294 641 721 292 466 321 967 225 479 2 442 475 10 909 292 USD CHF CHF CHF CHF 174 488 110 041 49 434 78 083 215 842 177 526 207 628 180 675 16 222 181 112 164 480 1 552 567 1 342 125 270 959 310 445 150 000 – 655 820 349 965 165 136 101 085 313 740 527 209 4 167 896 1 342 196 270 998 310 449 150 043 935 059 655 872 349 986 935 826 101 163 313 819 527 239 499 445 10 960 639 3 401 215 581 328 2 948 867 782 443 5 318 285 4 576 719 3 842 946 146 154 5 426 373 36 456 3 193 982 307 969 3 858 923 14 431 4 365 688 3 961 064 2 466 555 32 026 4 399 040 8 804 5 874 057 19 058 209 10 732 583 49 852 130 5 815 886 1 629 233 873 500 – 1 700 058 2 818 450 1 272 601 1 722 021 – 1 045 859 2 220 057 280 763 150 920 59 180 67 322 54 721 600 225 2 152 792 605 668 383 977 161 112 161 031 101 638 1 386 070 5 553 966 605 771 384 021 161 217 161 132 101 678 6 180 024 651 499 3 030 029 3 760 436 706 394 1 493 403 4 118 690 1 306 257 2 138 458 4 300 403 1 396 407 2 192 544 1 029 246 2 886 815 1 374 053 1 386 456 10 091 626 5 060 376 20 967 229 7 260 514 29 149 836 15 792 959 70 819 358            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 2025  See next page for 2021 comparative figures. 1 Includes mandatory employer contributions of CHF 4 560 for the CEO and CHF 67 148 for the other current Executive Committee members paid by Novartis to governmental social security systems. This amount is out of total employer contributions of CHF 3 937 537 paid in 2022 for all Executive Committee members, and provides a right to the maximum future insured government pension benefit. 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 25, 2023) of CHF 85.30 per Novartis share and USD 92.81 per ADR. 3 The amounts represent the underlying share value of the target number of PSUs granted to Executive Committee members for the 2022-2024 performance cycle, based on the closing share price on the grant date (January 26, 2022) of CHF 78.16 per Novartis share and USD 84.24 per ADR for all members. 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). The compensation and benefits elements related to the period after the step-down dates are also reported under ‘other 2022 compensation’. 5 All amounts are before deduction of the social security contribution and income tax due by the Executive Committee member. 6 Shreeram Aradhye received a pro-rata LTPP award of 18 905 PSUs on June 1, 2022 (at CHF 86.18 closing share price on grant date) upon joining the organization, as per contractual entitlement. 7 Victor Bulto received his 2022 LTPP grant before his appointment to Executive Committee, therefore the reported LTPP amount is pro-rated to reflect his time as Executive Committee member over the full performance cycle. 8 Amounts in USD for Victor Bulto, Fiona Marshall and James Bradner were converted at a rate of CHF 1.00 = USD 1.0473, which is the average rate used in the Group’s 2022 consolidated financial statements. 9 Aharon Gal and Fiona Marshall did not receive a pro-rata LTPP award upon joining the organization, as they received buyout grants for their forfeited awards upon joining. 10 James Bradner stepped down from the Executive Committee on October 31, 2022 and will end his notice period on October 31, 2023, in line with his contractual notice period (for more details, see “—2022 Executive Committee member departures”). The LTPP grant for the 2022-2024 performance cycle, included in the table above, will vest at the end of the performance cycle on a pro-rata basis subject to the plan rules. 11 Richard Saynor left the Executive Committee on October 25, 2022. The LTPP grant for the 2022-2024 performance cycle, included in the table above, will vest at the end of the performance cycle, subject to the plan rules. 12 Susanne Schaffert stepped down from the Executive Committee on April 4, 2022 and will end her notice period on April 30, 2023, in line with her contractual notice period (for more details, see “—2022 Executive Committee member departures”). The LTPP grant for the 2022-2024 performance cycle, included in the table above, will vest at the end of the performance cycle on a pro-rata basis subject to the plan rules. 13 John Tsai stepped down from the Executive Committee on May 15, 2022 and will end his notice period on May 15, 2023, in line with his contractual notice period (for more details, see “—2022 Executive Committee member departures”). The LTPP grant for the 2022-2024 performance cycle, included in the table above, will vest at the end of the performance cycle on a pro-rata basis subject to the plan rules. 14 Robert Weltevreden stepped down from the Executive Committee on April 4, 2022 and will end his notice period on April 30, 2023, in line with his contractual notice period (for more details, see “—2022 Executive Committee member departures”). The LTPP grant for the 2022-2024 performance cycle, included in the table above, will vest at the end of the performance cycle on a pro-rata basis subject to the plan rules. 108                 Item 6. Directors, Senior Management and Employees 2021 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 2021. Executive Committee member compensation at grant for financial year 2021 Fixed compensation and pension benefits Variable compensation Actual compensation paid or granted for 2021 Long-Term Incentive 2021-2023 cycle grants at target 2021 annual base salary 2021 pension benefits 2021 Annual Incentive (performance achieved) LTPP 2021-2023 cycle Other 2021 compensation Total compensation paid, promised or granted 2021 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, 2021 Vasant Narasimhan James Bradner 6 Karen Hale (from May 15, 2021) 7 Harry Kirsch Robert Kowalski (from September 1, 2021) 8 Steffen Lang Klaus Moosmayer Richard Saynor Susanne Schaffert John Tsai Marie-France Tschudin Robert Weltevreden Total 1 769 200 1 184 462 519 750 1 072 084 233 333 780 833 566 667 785 000 881 333 875 834 881 333 673 333 10 121 211 CHF USD CHF CHF CHF CHF CHF CHF CHF CHF CHF CHF 176 731 367 246 85 987 177 174 49 692 180 413 198 992 190 263 180 837 186 807 164 980 171 352 2 098 866 1 328 625 712 802 261 062 354 255 105 288 508 680 253 000 196 500 88 250 306 950 706 000 299 200 5 059 259 1 328 642 712 839 261 133 1 062 820 105 360 763 076 253 004 196 572 794 262 307 012 706 019 299 275 5 757 423 2 970 016 1 442 371 2 791 111 448 824 1 570 027 1 035 044 1 493 478 2 118 082 2 192 567 2 029 750 1 292 042 6 728 657 24 885 096 265 401 10 626 023 6 039 652 3 112 992 5 501 060 1 122 925 3 817 459 2 356 557 3 278 506 4 919 415 4 070 477 4 488 083 2 735 202 2 655 408 51 548 498 92 286 542 689 43 617 180 428 14 430 49 850 416 693 856 650 201 307 – – Executive Committee members who stepped down during 2021 CHF Steven Baert (until June 30, 2021) 9 Bertrand Bodson (until January 31, 2021) 10 CHF Shannon Thyme Klinger (until March 15, 2021) 11 CHF 400 277 54 451 177 102 87 753 15 240 40 434 399 887 43 485 – – – – 422 223 – 279 791 1 831 302 1 339 471 2 018 161 3 141 442 1 452 647 2 515 487 Subtotal Total 631 830 10 753 041 143 427 2 242 292 443 372 5 502 631 702 014 6 728 657 25 587 110 0 7 109 576 5 188 934 7 844 343 58 658 074            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 2024  1 Includes mandatory employer contributions of CHF 5 498 for the CEO and CHF 53 693 for the other Executive Committee members paid by Novartis to governmental social security systems. This amount is out of total employer contributions of CHF 4 966 397 paid in 2021 for all Executive Committee members, and provides a right to the maximum future insured government pension benefit. 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 26, 2022) of CHF 78.16 per Novartis share and USD 84.24 per ADR. 3 The amounts represent the underlying share value of the target number of PSUs granted to Executive Committee members for the 2021-2023 performance cycle, based on the closing share price on the grant date (January 20, 2021) of CHF 86.01 per Novartis share and USD 96.92 per ADR for all members. 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). The compensation and benefits elements related to the period after the step-down dates are also reported under ‘other 2021 compensation’. 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 1.0942, which is the average rate used in the Group’s 2021 consolidated financial statements. 7 Karen Hale received a pro-rata LTPP award of 18 639 PSUs on Apr-2, 2021 (at CHF 81.15 share price at grant) upon joining the organization, as per contractual entitlement. The other compensation amount includes the first six weeks of compensation before her appointment to the Executive Committee. 8 Robert Kowalski received his 2021 LTPP grant before his appointment to Executive Committee, therefore the reported LTPP amount is pro-rated to reflect his time as Executive Committee member over the full performance cycle. 9 Steven Baert left the Executive Committee on June 30, 2021 and ended his notice period on September 30, 2021, in line with his reduced contractual notice period (for more details, see “—2021 Executive Committee member departures”). He received his 2021 Annual Incentive 100% in cash on a pro-rata basis, and the LTPP grant for the 2021-2023 performance cycle, included in the table above, will vest at the end of the performance cycle on a pro-rata basis subject to the plan rules. 10 Bertrand Bodson left the Executive Committee on January 31, 2021 and ended his notice period on November 30, 2021, in line with his reduced contractual notice period (for more details, see “—2021 Executive Committee member departures”). He received his 2021 Annual Incentive 100% in cash on a pro-rata basis, and no LTPP was granted for the 2021-2023 performance cycle. 11 Shannon Klinger resigned as Chief Legal Officer as of March 15, 2021, and left the Company on May 31, 2021, in line with her reduced contractual notice period (for more details, see “—2021 Executive Committee member departures”). The 2021 Annual Incentive and LTPP 2021-2023 cycle grant (23 586 PSUs), displayed at pro-rata value for the time she was in her role in 2021, were forfeited in full upon her departure. Compensation at grant value for the CEO and other Executive Committee members for 2022 compared with 2021 Compensation at grant delivered in 2022 to the CEO and the other Executive Committee members, including those who stepped down, was CHF 70 819 358, which was an increase of 20.7% compared with the prior year. This increase was driven mainly by the change in composition of the Executive Committee during 2022. Compensation at grant for the active Executive Committee members on December 31, 2022 (11 active members versus 12 in prior year) was CHF 49 852 130, which is a reduction of 3.3% from December 31, 2021. 109                 Item 6. Directors, Senior Management and Employees Additional disclosures for the CEO and other Executive Committee members This section provides additional disclosures, including information about the shareholdings of the CEO and the other Executive Committee members. Malus and clawback Consistent with our “—Executive Committee compensation philosophy and principles,” in 2022 there was no legal or factual basis on which to exercise malus or clawback for current or former Executive Committee members. Number of equity instruments granted to the CEO and other Executive Committee members for the financial year 2022 Executive Committee members active on December 31, 2022 Vasant Narasimhan Shreeram Aradhye (from May 16, 2022) Victor Bulto (from May 1, 2022) Aharon Gal (from July 18, 2022) Karen Hale Harry Kirsch Robert Kowalski Steffen Lang Fiona Marshall (from November 1, 2022) Klaus Moosmayer Marie-France Tschudin Total Executive Committee members who stepped down during 2022 James Bradner (until October 31, 2022) 4 Richard Saynor (until October 25, 2022) 5 Susanne Schaffert (until April 4, 2022) 6 John Tsai (until May 15, 2022) 7 Robert Weltevreden (until April 4, 2022) 8 Subtotal Total Variable compensation1 2022 Annual Incentive (performance achieved) LTPP 2022-2024 cycle Other Equity (number) 2 PSUs (target number) 3 Equity/PSUs (number) 15 735 3 177 3 345 1 759 10 962 7 689 4 103 10 971 1 090 3 679 6 181 74 410 18 905 10 671 0 21 751 36 060 16 282 22 032 0 5 708 0 43 253 0 0 0 0 0 41 510 13 381 28 404 0 0 68 691 241 896 90 471 6 527 4 502 1 890 1 889 1 192 16 000 84 691 35 969 19 107 27 360 28 052 17 580 128 068 369 964 0 0 0 0 0 0 90 471 See next page for 2021 comparative figures. 1 The values of the awards are reported in the table “2022 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 the 2022 performance period. 3 Target number of PSUs granted under the LTPP as applicable for the 2022-2024 performance cycle. 4 James Bradner stepped down from the Executive Committee on October 31, 2022 and will end his notice period on October 31, 2023, in line with his contractual notice period (for more details, see “—2022 Executive Committee member departures”). The LTPP grant for the 2022-2024 performance cycle, included in the table above, will vest at the end of the performance cycle on a pro-rata basis subject to the plan rules. 5 Richard Saynor left the Executive Committee on October 25, 2022. The LTPP grant for the 2022-2024 performance cycle, included in the table above, will vest at the end of the performance cycle, subject to the plan rules. 6 Susanne Schaffert stepped down from the Executive Committee on April 4, 2022 and will end her notice period on April 30, 2023, in line with her contractual notice period (for more details, see “—2022 Executive Committee member departures”). The LTPP grant for the 2022-2024 performance cycle, included in the table above, will vest at the end of the performance cycle on a pro-rata basis subject to the plan rules. 7 John Tsai stepped down from the Executive Committee on May 15, 2022 and will end his notice period on May 15, 2023, in line with his contractual notice period (for more details, see “—2022 Executive Committee member departures”). The LTPP grant for the 2022-2024 performance cycle, included in the table above, will vest at the end of the performance cycle on a pro-rata basis subject to the plan rules. 8 Robert Weltevreden stepped down from the Executive Committee on April 4, 2022 and will end his notice period on April 30, 2023, in line with his contractual notice period (for more details, see “—2022 Executive Committee member departures”). The LTPP grant for the 2022-2024 performance cycle, included in the table above, will vest at the end of the performance cycle on a pro-rata basis subject to the plan rules. 110 Item 6. Directors, Senior Management and Employees Number of equity instruments granted to the CEO and other Executive Committee members for the financial year 2021 (comparative information) Executive Committee members active on December 31, 2021 Vasant Narasimhan James Bradner Karen Hale (from May 15, 2021) Harry Kirsch Robert Kowalski (from September 1, 2021) Steffen Lang Klaus Moosmayer Richard Saynor Susanne Schaffert John Tsai Marie-France Tschudin Robert Weltevreden Total Executive Committee members who stepped down during 2021 Steven Baert (until June 30, 2021) 4 Bertrand Bodson (until January 31, 2021) 5 Shannon Thyme Klinger (until March 15, 2021) 6 Subtotal Total Variable compensation1 2021 Annual Incentive (performance achieved) LTPP 2021-2023 cycle Other Equity (number) 2 PSUs (target number) 3 Equity/PSUs (number) 16 999 8 462 3 341 13 598 1 348 9 763 3 237 2 515 10 162 3 928 9 033 3 829 66 939 30 644 17 823 32 451 5 067 18 254 12 034 17 364 24 626 25 492 23 599 15 022 86 215 289 315 0 0 0 0 4 909 0 3 253 8 162 86 215 297 477 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 The values of the awards are reported in the table “2021 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 the 2021 performance period. 3 Target number of PSUs granted under the LTPP as applicable for the 2021-2023 performance cycle. 4 Steven Baert left the Executive Committee on June 30, 2021 and ended his notice period on September 30, 2021, in line with his reduced contractual notice period (for more details, see “—2021 Executive Committee member departures”). The LTPP grant for the 2021-2023 performance cycle, included in the table above, will vest at the end of the performance cycle on a pro-rata basis subject to the plan rules. 5 Bertrand Bodson left the Executive Committee on January 31, 2021 and ended his notice period on November 30, 2021, in line with his reduced contractual notice period (for more details, see “—2021 Executive Committee member departures”). No LTPP was granted for the 2021-2023 performance cycle. 6 Shannon Klinger resigned as Chief Legal Officer as of March 15, 2021, and left the Company on May 31, 2021, in line with her reduced contractual notice period (for more details, see “—2021 Executive Committee member departures”). The LTPP 2021-2023 cycle grant (23 586 PSUs), displayed at pro-rata value for the time she was in her role in 2021, was forfeited in full upon her departure. 111 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 here. In addition, the CEO and CFO are required to hold the equity vesting under the LTPP plan (granted since 2022) for a minimum of two years after the vesting date. 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 accord- ingly. 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), together with RSUs acquired under the Company’s compensation plans. Unvested PSUs are, however, 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 compliance with the share ownership guideline on an annual basis. Shares, ADRs and other equity rights owned by Executive Committee members as at December 31, 20221 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 at December 31, 2022. As at December 31, 2022, 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 at December 31, 2022, 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) 4 annual base salary 3 Equity ownership level Total as at December 31, 2022 Vasant Narasimhan Shreeram Aradhye (from May 16, 2022) Victor Bulto (from May 1, 2022) Aharon Gal (from July 18, 2022) Karen Hale Harry Kirsch Robert Kowalski Steffen Lang Fiona Marshall (from November 1, 2022) Klaus Moosmayer Marie-France Tschudin Subtotal 228 614 1 241 0 17 948 0 312 682 0 118 057 0 16 713 52 818 69 687 8 885 21 292 45 012 9 458 34 816 17 398 27 383 32 951 12 524 28 447 748 073 307 853 Executive Committee members who stepped down during 2022 James Bradner (until October 31, 2022) 0 Richard Saynor (until October 25, 2022) Susanne Schaffert (until April 4, 2022) John Tsai (until May 15, 2022) Robert Weltevreden (until April 4, 2022) Subtotal Total 0 142 844 13 550 28 755 185 149 933 222 34 231 16 843 26 245 21 812 14 436 113 567 421 420 13x 108 201 406 502 0x 2x 6x 0x 26x 2x 14x 2x 4x 6x 2x 1x 15x 3x 5x 4 268 15 094 0 19 110 52 450 15 097 28 797 2 029 18 184 46 699 14 394 36 386 62 960 28 568 399 948 32 495 174 237 34 980 47 421 127 964 309 929 1 365 855 70 171 48 117 44 981 49 826 27 317 240 412 550 341 104 402 64 960 214 070 85 188 70 508 539 128 1 904 983 1 Includes holdings of “persons closely linked” to Executive Committee members (see the ‘persons closely linked’ definition). 2 Includes unvested shares and ADRs as well as other equity rights applicable for the determination of equity amounts for the share ownership requirements, as per the definition above. 3 The multiple is calculated based on the full-year annual base salary and the closing share price as at the end of the 2022 financial year. The share price on the final trading day of 2022 was CHF 83.59 / USD 90.72 as at December 31, 2022. 4 The target number of PSUs is disclosed pro-rata to December 31, 2022, unless the award qualified for full vesting under the relevant plan rules. 112   Item 6. Directors, Senior Management and Employees Fixed and variable compensation The following table summarizes the annual base salary and variable compensation mix at grant value for the financial year 2022 for the CEO and other Executive Committee members. Vasant Narasimhan Shreeram Aradhye (from May 16, 2022) Victor Bulto (from May 1, 2022) Aharon Gal (from July 18, 2022) Karen Hale Harry Kirsch Robert Kowalski Steffen Lang Fiona Marshall (from November 1, 2022) Klaus Moosmayer Marie-France Tschudin Total 3 Annual Variable base salary 1 compensation 2 16.6% 16.4% 21.5% 6.9% 23.3% 20.6% 23.6% 22.9% 4.3% 25.4% 22.5% 17.5% 83.4% 83.6% 78.5% 93.1% 76.7% 79.4% 76.4% 77.1% 95.7% 74.6% 77.5% 82.5% 1 Excludes pension and other benefits and is pro-rated for ECN time. 2 See the table “2022 compensation at grant value for the CEO and other Executive Committee members” with regard to the disclosure principles of variable compensation. 3 Excludes members, who stepped down during the year. Other payments to Executive Committee members During 2022, no other payments or waivers of claims other than those set out in the tables (including the 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’ contracts and in line with the Company’s LTI plan rules, payments were made to 8 former members. Of this, CHF 993 574 relates to the vesting of LTI awards. In addi- tion, contractual amounts totaling CHF  167 106 were made (comprising the base salary, the Annual Incentive and other benefits), and tax equalization on variable com- pensation granted during international assignments amounted to a total of CHF 296 627. No other payments (or waivers of claims) were made to former Executive Committee members or to “persons closely linked” to them during 2022. Persons closely linked “Persons closely linked” are (i) their spouse, (ii) their chil- dren (under 18 years of age), (iii) any legal entities that they own or otherwise control, and (iv) any legal or nat- ural 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 employees During 2022, 12.7 million unvested restricted shares (or ADRs), RSUs and target PSUs were granted, and 10.4 million Novartis vested shares (or ADRs) were delivered to Novartis employees under various equity-based par- ticipation plans. Current unvested equity instruments (restricted shares, RSUs and target PSUs) and outstand- ing equity options held by employees represent 1.05% of issued shares. Novartis delivers treasury shares to employees to fulfill these obligations and aims to offset the dilutive impact from its equity-based participation plans. 113 Item 6. Directors, Senior Management and Employees Interim update regarding ongoing LTI performance cycles Below we report how performance is tracking against our stretch targets for our ongoing LTI performance cycles. 2021-2023 LTPP After the first two years of the three-year LTPP perfor- mance cycle, both net sales CAGR and core operating income CAGR are tracking behind target, driven mainly by the impact of the safety update on Beovu. Innovation is on track. At the end of 2022, the relative TSR for Novartis was below median among our global healthcare peer group. 2022-2024 LTPP After the first year of the three-year LTPP performance cycle, net sales CAGR is on target and core operating income CAGR is ahead of target, while innovation perfor- mance is on target. At the end of 2022, the relative TSR for Novartis was below the median among our global healthcare peer group. PERFORMANCE MEASURES TRACKING PERFORMANCE MEASURES Net sales CAGR (25%) Core operating income CAGR (25%) Innovation (25%) Relative TSR (25%) CAGR = compound annual growth rate TRACKING Net sales CAGR (25%) M M T M Core operating income CAGR (25%) Innovation (25%) Relative TSR (25%) CAGR = compound annual growth rate T On or ahead of target M Slightly behind or behind target T T T M 114 Item 6. Directors, Senior Management and Employees 2023 Executive Committee compensation 2023 Executive Committee compensation changes The Compensation Committee believes that the compensation system supports the company’s strategy and ensures a strong link between pay and performance. Following a positive vote of 90.6% in favor of our 2021 Compensation Report at the 2022 AGM, the Board and Compensation Committee decided to make evolutionary changes to the compensation system. The aim of these changes is to simplify and increase the transparency of our performance assessment measures, in addition to strength- ening our focus on key strategic priorities, while also considering developments in compensation best practices. There are also changes as a result of the Swiss Corporate Law reform, which came into effect on January 1, 2023. Assuming that the Sandoz spin-off will occur in 2023, some impact is expected on 2023 Executive Compensation. Annual Incentive Following a review, the Compensation Committee decided to adapt the financial performance in the Annual Incentive Plan effective as of performance year 2023 as below: • Remove “Share of Peers” from the financial perfor- mance measures in the Annual Incentive plan. As a result, the Annual Incentive financial performance mea- sures are Group Net Sales (40%), Group Operating Income (30%) and Group Free Cash Flow1 (30%), thereby retaining a strong link to our key priorities • Group financial measures will be weighted at 60% for all Executive Committee members. Financial targets that relate to a division or business unit, where appli- cable, will be part of the individual strategic objectives (40% weight) Sandoz spin-off In August 2022, we announced our intention to separate Sandoz, our generics and biosimilars division, into a new publicly traded standalone company, by way of a 100% spin-off, subject to approval of the Novartis AG Board of Directors and shareholders. In view of the planned spin- off, the Compensation Committee made the following decisions. Sandoz CEO 2023 Annual Incentive Based on the assumption that the spin-off will be imple- mented in the second half of 2023, the 2023 Balanced Scorecard for Richard Saynor, CEO designate of Sandoz, will be adapted so that his 2023 Annual Incentive will be based exclusively on the financial and strategic perfor- mance of Sandoz. Swiss Corporate Law reform Following the reform of Swiss corporate law, which came into effect on January 1, 2023, the following changes will be made to compensation design and disclosure in the 2023 Compensation Report: • Contracts of Executive Committee members will be adapted so that any non-compete compensation will not exceed the average annual compensation of the previous three financial years • In previous years, the Swiss regulations permitted com- panies to award compensation of up to 40% above the shareholder approved budget for newly appointed members of the Executive Committee, whether that be through internal promotions or external hires. From 2023, this additional budget of 40% will only be made available for external appointments of Executive Com- mittee members These changes will require adjustments to the Articles of Incorporation of Novartis, which will be submitted to Novartis shareholders for their approval at the 2023 AGM. Equity Restoration principles If and when the planned spin-off occurs, holders of vested and unvested awards in the form of Novartis shares or ADRs will receive a dividend in kind resulting from the spin-off in the same way as other Novartis shareholders. Holders of unvested RSUs and PSUs will not receive the dividend in kind resulting from the spin- off. To compensate for the expected reduction in share- holder value after the issue of dividend in kind, Novartis will grant equity awards (called “Keep Whole awards”) to its employees, including the Executive Committee members, following the spin-off. This will be undertaken in accordance with the Sandoz equity restoration plan, as follows: • The Keep Whole awards will have a value similar to the value of the dividend in kind resulting from the spin-off that each RSU or PSU would have received had it been a Novartis share or ADR • The aim of the Keep Whole awards is to ensure that Novartis employees who have been granted RSUs or PSUs, including Executive Committee members, are not disadvantaged by the spin-off relative to Novartis shareholders More details will be shared at the time of the spin-off. 1 For the purposes of the 2023 annual incentives, free cash flow is defined as net cash flows from operating activities less purchases of property, plant and equipment. 115 Item 6. Directors, Senior Management and Employees 2023 Executive Committee member compensation increases Each year, we collaborate with our external advisors to benchmark the compensation levels of the members of the Executive Committee and assess the competitiveness of their total target compensation. 2023 salary increases have been made in line with their demonstrated performance and ability in their respective roles, and commensu- rate to changes in responsibilities, if any, as outlined in our “—Executive Committee appointments compensation policy”. In general, Executive Committee members (including the CEO) will receive compensation changes applicable to associates in Switzerland or where applicable, the US. The members who will receive an additional increase based on the principles outlined above are mentioned below. Karen Hale, Chief Legal Officer Ms. Hale, who has joined the Executive Committee in May 2021, delivered many highlights in 2022, including effec- tively managing ongoing cases with the SEC/DOJ, creating a new, focused and efficient global legal function, pre- paring for the Sandoz spin-off effectively, and continuing to improve the governance of the company. Effective March 1, 2023, Ms. Hale will receive a 6% increase in annual base salary increase and a 10% increase LTI target, as a percentage of annual base salary. Klaus Moosmayer, Chief Ethics, Risk & Compliance Officer Following the implementation of the new organization structure in 2022, Mr. Moosmayer took over additional man- agement responsibilities in the areas of HSE governance, Data Privacy, and Digital & Artificial Intelligence Compli- ance. He demonstrated strong leadership across all responsibilities of compliance, risk, ethics, and managing emerging issues including the company’s continuing response to the global pandemic, the lockdown in China and crisis management related to the war in Ukraine. Effective March 1, 2023, Mr. Moosmayer will receive a 12% increase in annual base salary increase and a 10% increase LTI target, as a percentage of annual base salary, to recognize these additional responsibilities. Marie-France Tschudin, President, Innovative Medicines International & Chief Commercial Officer Following her appointment in April 2022 as the President, Innovative Medicines International & Chief Commercial Officer, Ms. Tschudin effectively executed the creation of our new Innovative Medicines International organization and Chief Commercial Office. During the year, she designed the new organization structure, implementing a large restructuring program and creating new therapeutic areas with clear portfolio focus, while delivering strong com- mercial performance in Region International and ensuring growth above target for many key brands. Effective March 1, 2022, Ms. Tschudin will receive a 5% increase in annual base salary, and a 10% increase in both her Annual Incen- tive target and LTI target, as a percentage of annual base salary, to recognize her increased responsibilities as the Chief Commercial Officer. Following an assessment of their compensation competitiveness and performance, recently appointed Executive Committee members Victor Bulto, Aharon (Ronny) Gal, and Robert Kowalski will receive a 10–20% increase in their Annual Incentive target and/or LTI target, in line with the “—Executive Committee appointments compensation pol- icy”. Steffen Lang will also receive a 10% increase in LTI target as a result of his enhanced responsibilities in Oper- ations. 116 Item 6. Directors, Senior Management and Employees 2022 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. Given their focus on corporate strategy, supervision and governance, Board members do not receive variable compensation. Each year at the AGM, shareholders are requested to approve, in a binding vote, the total com- pensation of the Board of Directors until the following AGM. The Board of Directors sets the level of compensa- tion for its Chair and the other members to be in line with relevant benchmark companies, including other large Switzerland-based multinational companies such as ABB, Credit Suisse, 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 criminal liability under Swiss rules regarding board and executive committee compensation related to the Ordinance against Excessive Compensation in Listed Companies), and under US law (due to the Company’s secondary listing on the New York Stock Exchange). The Board of Directors reviews the compensation of its mem- bers, including the Board Chair, each year based on a proposal by the Compensation Committee and advice from its independent advisor, including relevant bench- marking information. To ensure independence of deci- sion-making, the peer group used for the Board of Direc- tors is different to that used for the Executive Committee. The Board Chair’s contract and the Board of Direc- tors compensation policy do not provide for any termi- nation-related payments. Board Chair As Board Chair, Joerg Reinhardt receives total annual compensation valued at CHF 3.8 million. The total com- pensation is comprised equally of cash and shares, as follows: • Cash compensation: CHF 1.9 million per year • Share compensation: annual value equal to CHF 1.9 million of unrestricted Novartis shares For 2022, the Board Chair voluntarily waived the increase in compensation to which he is contractually entitled. 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 2022 AGM. Aggregate Board compensation is aligned with other large Swiss companies. CHF 000s Board Chair Board membership Vice-Chair Lead Independent Director Chair of the Audit and Compliance Committee Chair of the Compensation Committee Chair of the following committees: • Governance, Nomination and Corporate Responsibilities Committee • Science & Technology Committee • Risk Committee Membership of the Audit and Compliance Committee Membership of the following committees: • Compensation Committee • Governance, Nomination and Corporate Responsibilities Committee • Science & Technology Committee • Risk Committee 2022-2023 AGM annual fee 3 800 280 50 20 130 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. 2023 Board compensation In 2022, the Compensation Committee reviewed, together with its independent advisor, the Board of Direc- tors’ compensation system against the Swiss Market Index. They found that the Board Chair fees and retainer fees of the other Board members are well positioned and competitive among the benchmarked companies in rela- tion to the Company’s size, operational complexity and corporate headquarter’s location. Additional information on our Board benchmarking practices is provided in “—2022 Board compensation.” The compensation sys- tem and fee levels for the Board of Directors will there- fore remain unchanged in 2023. 117 Item 6. Directors, Senior Management and Employees Board member total compensation earned for the financial year 2022 Board membership Committee Audit and Science & Compliance Compensation and Nomination Technology Committee Committee Committee Risk Committee Shares 1 (number) Cash (CHF) (A) Shares (CHF) (B) Other (CHF) 2 (C) Total (CHF) 3 (A)+(B)+(C) Governance, Sustainability Board members active on December 31, 2022 Joerg Reinhardt 4 Simon Moroney Patrice Bula Nancy C. Andrews Ton Buechner Elizabeth Doherty Bridgette Heller Daniel Hochstrasser Frans van Houten Ana de Pro Gonzalo Andreas von Planta Charles L. Sawyers William T. Winters Subtotal Board Chair Vice-Chair 6 Lead Independent Director 6 • Chair • • • • • • • • 6 • • 6 • • • Chair • • • Chair 6 • 6 • • • Chair 23 574 1 900 000 1 900 000 3 670 3 803 670 • • • • 2 695 225 834 225 834 4 560 456 228 2 259 197 500 197 500 3 670 398 670 • 2 233 180 000 180 000 – 360 000 Chair 2 605 210 000 210 000 4 560 424 560 • • • 2 791 225 000 225 000 – 450 000 2 541 211 667 211 667 – 423 334 856 116 667 116 667 4 560 237 894 4 838 – 390 000 – 390 000 1 192 162 500 162 500 4 560 329 560 2 327 182 500 182 500 3 670 368 670 2 233 180 000 180 000 – 360 000 4 466 – 360 000 – 360 000 54 610 3 791 668 4 541 668 29 250 8 362 586 Board members who stepped down at the 2022 AGM Ann Fudge 5 Enrico Vanni 5 Subtotal Total 1 132 30 000 30 000 – 60 000 1 509 40 000 40 000 3 670 83 670 2 641 70 000 70 000 3 670 143 670 57 251 3 861 668 4 611 668 32 919 8 506 255 See next page for 2021 comparative figures. 1 The shown amounts represent the gross number of shares delivered to each Board member in 2022 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 2022 for the services from the 2021 AGM to the 2022 AGM, and (ii) the first of two equity installments delivered in August 2022 for the services from the 2022 AGM to the 2023 AGM. The second and final equity installment for the services from the 2022 AGM to the 2023 AGM will take place in February 2023. 2 Includes an amount of CHF 29 250 for mandatory employer contributions for all Board members paid by Novartis to Swiss governmental social security systems. This amount is out of total employer contributions of CHF 453 083 and provides a right to the maximum future insured government pension benefit for the Board members. 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 Science & Technology Committee were delivered to Joerg Reinhardt. 5 Until March 4, 2022. 6 From March 4, 2022. 118 Item 6. Directors, Senior Management and Employees Board member total compensation earned for the financial year 2021 Board membership Committee Audit and Science & Compliance Compensation and Nomination Technology Committee Committee Committee Risk Committee Shares 1 (number) Cash (CHF) (A) Shares (CHF) (B) Other (CHF) 2 (C) Total (CHF) 3 (A)+(B)+(C) Governance, Sustainability Board members active on December 31, 2021 Joerg Reinhardt 4 Chairman Chair 22 830 1 900 000 1 900 000 4 560 3 804 560 Enrico Vanni Nancy C. Andrews Ton Buechner Patrice Bula Elizabeth Doherty Ann Fudge Bridgette Heller Frans van Houten Simon Moroney Andreas von Planta Charles L. Sawyers William T. Winters Subtotal Vice Chairman / Lead Independent Director7 • • Chair • 6 • 6 • • • • • • • • • • • • • • • • Chair 6 • Chair • • Board members who stepped down at the 2021 AGM Srikant Datar 5 Subtotal Total • • • • • 3 035 244 167 244 167 3 670 492 004 • 2 162 180 000 180 000 – 360 000 Chair 6 3 625 175 000 240 000 4 560 419 560 1 922 160 000 160 000 4 560 324 560 • 3 391 206 250 243 750 – 450 000 2 162 180 000 180 000 – 360 000 2 128 189 167 189 167 – 378 334 4 257 – 378 333 – 378 333 2 187 197 500 197 500 4 560 399 560 • 2 556 200 833 200 833 3 670 405 336 2 162 180 000 180 000 – 360 000 4 325 – 360 000 – 360 000 56 742 3 812 917 4 653 750 25 580 8 492 247 1 970 23 000 53 667 – – – – – 76 667 – 58 712 3 835 917 4 707 417 25 580 8 568 914 1 The shown amounts represent the gross number of shares delivered to each Board member in 2021 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 2021 for the services from the 2020 AGM to the 2021 AGM, and (ii) the first of two equity installments delivered in August 2021 for the services from the 2021 AGM to the 2022 AGM. The second and final equity installment for the services from the 2021 AGM to the 2022 AGM will take place in February 2022. 2 Includes an amount of CHF 25 580 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 435 204 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 Science & Technology Committee were delivered to Joerg Reinhardt. 5 Until March 2, 2021. 6 From March 2, 2021. 7 No additonal compensation was paid for the Lead Independent Director role. 119 Item 6. Directors, Senior Management and Employees Other payments to Board members During 2022, no payments (or waivers of claims) other than those set out in the Board member compensation table titled “—Board member total compensation earned for the financial year 2022” (including in the table foot- notes) were made to current members of the Board or to “persons closely linked” to them. Payments to former Board members During 2022, no payments (or waivers of claims) were made to former Board members or to “persons closely linked” to them. Board member compensation approved by shareholders The total compensation earned by Board members from the 2021 AGM to the 2022 AGM was within the amount approved by shareholders at the 2021 AGM. Additional disclosures Share ownership requirements for Board members The Board Chair 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, 2022, all current and former members of the Board of Directors who were required to meet the mini- mum share ownership requirements did so. Shares, ADRs and share options owned by Board members The total number of vested Novartis shares and ADRs owned by members of the Board of Directors and “per- sons closely linked” to them as at December 31, 2022, is shown in the table below. As at December 31, 2022, 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, 2022 1,2 Joerg Reinhardt Simon Moroney Patrice Bula Nancy C. Andrews Ton Buechner Elizabeth Doherty Bridgette Heller Daniel Hochstrasser Frans van Houten Ana de Pro Gonzalo Andreas von Planta Charles L. Sawyers William T. Winters Sub-Total Board members who stepped down at the 2022 AGM Enrico Vanni Ann Fudge Sub-Total Total 632 730 4 102 8 802 8 931 20 461 12 836 4 296 804 14 442 823 168 717 15 888 27 659 920 491 32 078 12 751 44 829 965 320 1 Includes holdings of “persons closely linked” to Board members (see definition “Persons closely linked”). 2 Each share provides entitlement to one vote. 120 Item 6. Directors, Senior Management and Employees Compensation governance Legal framework The Swiss Code of Obligations and the corporate gov- ernance guidelines of the SIX Swiss Exchange require listed companies to disclose certain information about the compensation of board and executive committee members, their equity participation, and loans made to them. This Annual Report fulfills that requirement in addi- tion to being in line with the principles of the Swiss Code of Best Practice for Corporate Governance of the Swiss Business Federation (economiesuisse). For more details, please refer to “—Corporate Governance” in Section 6C of this Report. 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 man- agement 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 is limited to a maximum of 12 months from the end of employment. Resulting com- pensation, if applicable, will not exceed the average annual compensation (annual base salary plus Annual Incentive) of the previous three financial years • 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 • No loans granted to current or former members of the Execu- tive Committee and the Board of Directors or to “persons closely linked” to them Compensation decision-making authorities Authority for decisions related to compensation is gov- erned by the Articles of Incorporation, Board Regulations and the Compensation Committee Charter, which are all published on the Company website: www.novartis.com/ investors/company-overview/corporate-governance. The Compensation Committee serves as the supervi- sory and governing body for compensation policies and plans within Novartis, and has overall responsibility for determining, reviewing and proposing compensation pol- icies and plans for approval by the Board of Directors in line with the Compensation Committee Charter. The dis- cussions and conclusions of each committee meeting are delivered to the full Board of Directors. A summary of the compensation decision-making authorities is set out below. Compensation authorization levels within the parameters set by the shareholders’ meeting DECISION ON DECISION-MAKING AUTHORITY Compensation of Board Chair 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 2022 AGM, the Compensation Committee consisted of the following four members: Simon Moroney (as Chair), Patrice Bula, Bridgette Heller, and William Winters. Role of the Compensation Committee’s independent advisor The independent external compensation advisor sup- ports the committee in determining the design and imple- mentation of compensation and benefits. The Compensation Committee retained Mercer Limited, which was appointed in July 2017, as its inde- pendent external advisor until June 2022. As part of its normal governance practices, and with a view to ensur- ing the independence of the advisor, the Compensation Committee considered a change in the Committee advi- sor. To inform this decision, it conducted a market review of compensation advisors, with a focus on companies with extensive experience in European and US markets. Following a tendering process and an analysis to ensure that there were no conflicts of interest, the Compensa- tion Committee appointed Mitul Shah of Deloitte AG as its independent compensation advisor with effect from July 2022. The independent advisors from Mercer Limited and Deloitte AG and their respective teams that advised and supported the committee are not responsi- ble or rewarded for work beyond support provided to the Compensation Committee and the People & Organiza- tion function on senior compensation. Meetings held in 2022 and self-evaluation In 2022, the Compensation Committee held seven for- mal meetings. In line with prior years, it collaborated with the Science & Technology Committee to review and endorse, for approval by the Board of Directors, the inno- vation targets and achievements of the Annual Incentive and LTPP. The Compensation Committee conducted a self-evaluation in 2022. 121 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 Opinion We have audited the Compensation Report of Novartis AG (the Company) for the year ended December 31, 2022. The audit was limited to the information on compensation, loans and advances pursuant to Art. 14-16 of the Ordinance against Excessive Compensation in Listed Companies Limited by Shares (Verordnung gegen übermässige Vergütungen bei börsenkotierten Aktiengesellschaften, VegüV) namely the tables “2022 realized compensation for the CEO and other Executive Committee members” on pages 105-106, “2022 com- pensation at grant value for the CEO and other Executive Com- mittee members” on pages 108-109, “Additional disclosures for the CEO and other Executive Committee members” on pages 110-113, as well as the “2022 Board compensation” on page 117- 118 and the “Additional disclosures” on page 120 of the Com- pensation Report of Novartis AG for the year ended December 31, 2022, hereinafter referred to as “disclosures made on the pages defined as subject to audit”. In our opinion, the information on compensation, loans and advances in the enclosed Compensation Report defined as sub- ject to audit complies with Swiss law and Art. 14-16 VegüV. Basis for Opinion We conducted our audit in accordance with Swiss law and Swiss Standards on Auditing (SA-CH). Our responsibilities under those provisions and standards are further described in the “Auditor’s Responsibilities for the Audit of the Compensa- tion Report” section of our report. We are independent of the Company in accordance with the provisions of Swiss law and the requirements of the Swiss audit profession, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is suffi- cient and appropriate to provide a basis for our opinion. Other Matter The Compensation Report of the Company for the year ended December 31, 2021 was audited by another auditor who expressed an unmodified opinion on this Report on February 1, 2022. Other Information The Board of Directors is responsible for the other information. The other information comprises the information included in the annual report, but does not include the tables and disclo- sures in the Compensation Report mentioned in the “Opinion” paragraph of this report, the consolidated financial statements, the financial statements and our auditor’s reports thereon. Our opinion on the Compensation Report does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the Compensation Report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsis- tent with the audited financial information in the Compensation Report 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 misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Board of Directors’ Responsibilities for the Compensation Report The Board of Directors is responsible for the preparation of a Compensation Report 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 a Compensation Report that is free from material misstatement, whether due to fraud or error. The Board of Directors is also responsible for design- ing the compensation system and defining individual compen- sation packages. Auditor’s Responsibilities for the Audit of the Compensation Report Our objectives are to obtain reasonable assurance about whether the information on compensation, loans and advances pursuant to Art. 14-16 VegüV is 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 SA-CH will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influ- ence the economic decisions of users taken on the basis of the Compensation Report. As part of an audit in accordance with Swiss law and SA-CH, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement in the Compensation Report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forg- ery, 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 appropri- ate in the circumstances, but not for the purpose of express- ing an opinion on the effectiveness of the Company’s inter- nal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made. We communicate with the Board of Directors or its relevant committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the Board of Directors or its relevant com- mittee with a statement that we have complied with relevant ethical requirements regarding independence, and to commu- nicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. KPMG AG Richard Broadbelt Licensed Audit Expert Auditor in charge Basel, January 31, 2023 Norman Dittes Licensed Audit Expert 122 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 further described in key governance documents, in particular 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, Sustainability and Nomination Com- mittee 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 maintaining the highest standards. To better reflect its evolving role and responsibilities in sustainability and environmental, social and gover- nance (ESG) matters, the Board of Directors (“Board”) amended, effective as of March 1, 2022, the Board Reg- ulations and renamed the Governance, Nomination and Corporate Responsibilities Committee to the Governance, Sustainability and Nomination Committee (GSNC). 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, Board Chair, 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, adopts and modifies Board Regulations 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 limited assurance on selected performance indicators in the Novartis in Society Integrated Report 123 AUDIT AND COMPLIANCE COMMITTEECOMPENSATION COMMITTEERISK COMMITTEESCIENCE & TECHNOLOGY COMMITTEEGOVERNANCE, SUSTAINABILITY AND NOMINATION COMMITTEE Item 6. Directors, Senior Management and Employees Group structure and shareholders Group structure Shareholdings 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 31. Principal Group subsidiaries and associated companies.” Divisions and business units Novartis has two operating divisions: Innovative Medicines (IM), which specializes in patent-protected medicines, and Sandoz1, which sells generics and biosimilars. In 2022, Novartis integrated the Pharmaceuticals and Oncology business units under the IM Division and created two separate commercial organizations with a stronger geo- graphic focus – Innovative Medicines International and Innovative Medicines US. IM is supported by the Novartis Institutes for BioMedical Research (NIBR) and Global Drug Development (GDD). Both operating divisions are supported by Novartis Operations (which combines the former Novartis Technical Operations (NTO) and Cus- tomer & Technology Solutions (CTS) units), and corporate functions. The latter includes the newly created Strat- egy & Growth function, which combines corporate strat- egy, R&D portfolio strategy and business development. A detailed review of 2022 business results can be found in “Item 18. Financial Statements—Note 3. Segmentation of key figures 2022, 2021 and 2020.” n o v a t i ve Medicines O p erations I n Research & Development C orporate f u n c ti o n s Sando z Majority holdings in publicly traded Group companies The Novartis Group owns 70.68% of Novartis India Ltd., with registered office in Mumbai, India, and a listing on the BSE (formerly known as the Bombay Stock Exchange) (ISIN INE234A01025, symbol: HCBA). The total market value of the 29.32% free float of Novartis India Ltd. was USD 59.0 million on December 31, 2022, using the quoted market share price at year-end. Applying this share price to all the shares of the company, the market capitalization of the whole company was USD 201.2 million, and that of the shares owned by Novartis was USD 142.2 million. Shareholders Significant shareholders According to the Share Register, as of December 31, 2022, the following registered shareholders, including nominees and the American Depositary Share (ADS) depositary, held more than 2% of the total share capital, with the right to vote all their shares based on exemp- tions granted by the Board (see “—Item 6.C Board prac- tices—Shareholder participation—Voting rights, restric- tions and representation—Registration restrictions”):2 Shareholders registered for their own account: Emasan AG, Basel UBS Fund Management (Switzerland) AG, Basel Credit Suisse Funds AG, Zurich Shareholders registered as nominees: Chase Nominees Ltd., London Nortrust 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 % holding of share capital Dec 31, 2022 3.7 2.3 2.1 % holding of share capital Dec 31, 2022 8.4 3.8 2.9 1.6 0.9 0.4 Shareholder acting as American Depositary Share (ADS) depositary: JPMorgan Chase Bank, N.A., New York 9.4 1 On August 25, 2022, Novartis announced its intention to separate the Sandoz business to create a standalone company by way of a 100% spin-off, with completion expected in the second half of 2023. 2 Excluding 7.7% of the share capital held as treasury shares by Novartis AG or its fully owned subsidiaries. As of the entry into force of the revised Swiss Code of Obligations on January 1, 2023, Novartis ordinary shares held by certain Swiss foundations controlled by Novartis also no longer carry the right to vote and therefore will be treated for this calculation as treasury shares going forward. 124 Item 6. Directors, Senior Management and Employees According to a disclosure notification filed with Novartis AG, Norges Bank (Central Bank of Norway), Oslo, held 2.3% of the share capital but was not regis- tered in the Share Register as of December 31, 2022. According to a disclosure notification filed with Novartis AG and the SIX Swiss Exchange Regulation AG, BlackRock, Inc., New York, held between 5% and 10% but was registered with less than 2% of the share capital as of December 31, 2022. Disclosure notifications pertaining to shareholdings filed with Novartis AG and the SIX Swiss Exchange are published on the latter’s electronic publication platform: www.ser-ag.com/en/resources/notifications-market-par- ticipants/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. Number of registered shareholders/shares As of December 31, 2022 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 share capital 34 085 110 467 37 732 3 212 475 68 29 0.08 1.86 4.32 3.39 5.85 5.39 46.14 67.03 32.97 100.00 Total registered shareholders/shares 186 068 Unregistered shares Total 1 At the record date of the 2022 Annual General Meeting of Shareholders (AGM), unregistered shares amounted to 17.0%. 2 Including significant registered shareholders as listed above Registered shareholders by type As of December 31, 2022 Shareholders in % Shares in % Individual shareholders Legal entities 1 Nominees, fiduciaries and ADS depositary Total 96.71 3.25 0.04 100.00 15.61 37.69 46.70 100.00 1 Excluding 7.7% of the share capital held as treasury shares by Novartis AG or its fully owned subsidiaries. As of the entry into force of the revised Swiss Code of Obligations on January 1, 2023, Novartis ordinary shares held by certain Swiss foundations controlled by Novartis also no longer carry the right to vote and therefore will be treated for this calculation as treasury shares going forward. Registered shareholders by country1 As of December 31, 2022, Novartis AG had approxi- As of December 31, 2022 Shareholders in % Shares in % mately 186 000 registered shareholders. Belgium France Germany Japan Luxembourg Switzerland 2 United Kingdom United States Other countries Total 0.11 1.97 5.72 0.17 0.06 87.14 0.63 0.25 3.95 0.77 0.36 1.82 0.45 0.79 48.39 23.68 21.29 2.45 100.00 100.00 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 7.7% of the share capital held as treasury shares by Novartis AG or its fully owned subsidiaries. As of the entry into force of the revised Swiss Code of Obligations on January 1, 2023, Novartis ordinary shares held by certain Swiss foundations controlled by Novartis also no longer carry the right to vote and therefore will be treated for this calculation as treasury shares going forward. 125 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 employees. 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, 2022, the share capital amounted to CHF 1 201 860 626 fully paid-in and divided into 2 403 721 252 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 Depositary Receipts (ADRs) representing American Depositary Shares (ADSs) (ISIN US66987V1098, symbol: NVS). No authorized and conditional capital exists as of December 31, 2022. 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 (Genussscheine) or profit-sharing certificates have been issued. Changes to share capital AGM Shareholder decision 2020 • Capital reduction by CHF 30.16 million (from CHF 1 263 687 410 to CHF 1 233 530 460) 2021 2022 • Capital reduction by CHF 16.32 million (from CHF 1 233 530 460 to CHF 1 217 210 460) • Authorization of the Board to repurchase shares up to a maximum of CHF 10 billion between the 2021 AGM and the 2024 AGM • Capital reduction by CHF 15.35 million (from CHF 1 217 210 460 to CHF 1 201 860 626) • Authorization of the Board to repurchase shares up to a maximum of CHF 10 billion between the 2022 AGM and the 2025 AGM2 Shares canceled 60 313 900 32 640 000 30 699 668 Average repurchase share price (CHF) 1 88.18 80.57 81.82 AGM Proposal to the shareholders 2023 • Capital reduction by CHF 63.12 million (from CHF 1 201 860 626 to CHF 1 138 738 876) • Authorization of the Board to repurchase shares up to a maximum of CHF 10 billion between the 2023 AGM and the 2026 AGM3 1 All shares were repurchased on the SIX Swiss Exchange second trading line. 2 In addition to the remaining authorization from the 2021 AGM 3 In addition to the remaining authorization from the 2022 AGM Shares to be canceled 126 243 500 Average repurchase share price (CHF) 1 81.56 Key Novartis share data Issued shares Treasury shares 1 Outstanding shares at December 31 2022 2021 2020 2 403 721 252 2 434 420 920 2 467 060 920 284 112 195 199 480 972 210 238 872 2 119 609 057 2 234 939 948 2 256 822 048 Weighted average number of shares outstanding 2 181 180 341 2 242 601 173 2 277 041 940 1 Approximately 99 million treasury shares (2021: 102 million, 2020: 103 million) are held in Novartis entities that restrict their availability for use. 126 Item 6. Directors, Senior Management and Employees Per-share information1 Basic earnings per share from continuing operations (USD) Diluted earnings per share from continuing operations (USD) Net cash flows from operating activities from continuing operations (USD) Year-end equity for Novartis AG shareholders (USD) Dividend (CHF) 2 Dividend (USD) 3 2022 3.19 3.17 6.53 2021 10.71 10.63 6.72 2020 3.55 3.52 5.99 28.00 30.31 25.07 3.20 3.46 3.10 3.33 3.00 3.20 1 Calculated on the weighted average number of shares outstanding, except year-end equity 2 2022: proposal to shareholders for approval at the AGM on March 7, 2023. 3 Translated into US dollars at the December 31, 2022, rate of USD 1.081 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. 2021 and 2020, dividends are translated into US dollars at the Bloomberg Market System Rate on the payment date. Key ratios – December 31 Share price (CHF) Price/earnings ratio 1 Dividend yield (%) 1 2022 28.3 3.8 2021 8.2 3.9 1 Based on the Novartis share price at December 31 of each year Key data on ADRs issued in the US 2020 26.7 Year-end share price 3.6 High 1 Low 1 2022 83.59 87.82 73.98 2021 80.28 86.75 73.44 2020 83.65 95.82 69.96 Year-end market capitalization (USD billions) 2 Year-end market capitalization (CHF billions) 2 191.5 196.1 214.3 177.2 179.4 188.8 Year-end ADR price (USD) High 1 Low 1 Number of ADRs outstanding 2 2022 90.72 93.75 74.61 2021 87.47 98.47 79.70 2020 94.43 99.01 70.67 225 435 680 269 891 321 288 755 853 1 Based on daily closing prices 2 The depositary, JPMorgan Chase Bank, N.A., holds one Novartis AG share for every ADR issued. 1 Based on daily closing prices 2 Market capitalization is calculated based on the number of shares outstanding (excluding treasury shares). Market capitalization in USD is based on the market capitalization in CHF converted at the year-end CHF/USD exchange rate. 127 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 ESG analysts – who rep- resent 60% of our ownership. While the Board Chair, CEO and CFO, together with Investor Relations, are accountable for ensuring effective shareholder engage- ment, other senior managers from within and outside the Executive Committee also participate in the meetings. We conduct regular outreach to investors throughout the year. TYPES OF ENGAGEMENTS (SELECT EXAMPLES): • AGM and quarterly results teleconferences (TCs) • Bank conferences and management roadshows • “Meet Novartis Management” capital markets event • Governance roadshow and TCs • Board Chair’s TCs for US and UK investors • ESG roadshows • Investor Update on Access & Sustainability (formerly known as ESG Investor Day) • Update on the new organizational model • Update on the Sandoz business TOPICS DISCUSSED WITH SHAREHOLDERS DURING 2022: GROWTH: • Replacement power • Growth drivers (Cosentyx, Entresto, Zolgensma, Kisqali, Kesimpta, Leqvio) • Policy and pricing environment • Life cycle management INNOVATION: • Progress and milestones • Data of pipeline projects • Return on R&D investments PRODUCTIVITY: • Progress on financial, strategic and operational performance • Long-term sustainability of financial performance • Capital allocation strategy • New organization model • Intention to separate Sandoz business BUILDING TRUST WITH SOCIETY AND CULTURE: • Board accountability on ESG, and integration of ESG and compensation • Strong governance, enhanced process and focus on material ESG factors, leading to improved rating agency scores • Patient access to innovative medicines • Learning from Novartis Access programs implemented over the decades, including integrated sustainable business models and access principles to help address access and inequities • ESG targets: full carbon neutrality, patient access targets for strategic innovative therapies, and global health flagship programs • Progress on culture and other human capital metrics COMPENSATION AND GOVERNANCE: • Diversity of the Board, the Executive Committee and the Company • Board renewal, succession planning and evaluation • Link of compensation system to key strategic priorities • Risk oversight • Stakeholder expectations from the Board on ESG matters We appreciate the value that shareholders attach to ESG matters. We will continue to integrate ESG into our strat- egy and to promote transparency through our compre- hensive ESG engagement program. We have more than doubled the number of investor engagements on ESG mat- ters in recent years, and in 2022, our CEO led our Inves- tor Update on Access & Sustainability (formerly known as ESG Investor Day) for the fourth time (marking our ninth dedicated ESG event for investors since 2014). We also held virtual roadshows in 2022 as part of our engage- ment with North American, European and Asian investors. 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 Articles of Incorporation (see, in particular, articles 17 and 18 of the Articles of Incorporation). 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. Article 5, paragraph 2 of the Articles of Incorporation provides that to be registered with voting rights, a shareholder must declare that he or she acquired the shares in his or her own name and for his or her own account. According to article 5, paragraph 3 of the Articles of Incorporation, 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. The Articles of Incorporation are available at www. novartis.com/investors/company-overview/corpo- rate-governance. REGISTRATION RESTRICTIONS Article 5, paragraph 2 of the Articles of Incorporation provides that no shareholder shall be registered with the right to vote for more than 2% of the share capital. Given that shareholder representation at General Meetings has traditionally been com- paratively low in Switzerland, Novartis AG considers registra- tion restrictions necessary to prevent a minority shareholder from dominating a General Meeting. The Board may, upon request, grant an exemption. Considerations include whether the shareholder supports our goal of creating sustainable value and has a long-term investment horizon. Exemptions are in force for the registered shareholders listed in “—Item 6.C Board practices—Group structure and shareholders— Shareholders—Significant shareholders.” Exemptions also apply to the Novartis Foundation for Employee Participa- tion, Basel, which as of December 31, 2022, was registered in the Share Register with less than 2% of the share capital, and to Norges Bank (Central Bank of Norway), Oslo, which as of December 31, 2022, was not registered but held 2.3% according to a disclosure notification filed with Novartis AG. No further exemptions were requested in 2022. The same restrictions indirectly apply to ADR holders. Article 5, paragraph 3 of the Articles of Incorporation provides that no nominee shall be registered with the right to vote for more than 0.5% of the registered share capital. The Board may, upon request, grant an exemption from this restriction if the nominee discloses the names, addresses 128 Item 6. Directors, Senior Management and Employees and number of shares of the persons 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—Sharehold- ers—Significant shareholders,” and for the nominee Citibank, London, which in 2015 requested an exemption, but as of December 31, 2022, was not registered in the Share Regis- ter. The same restrictions indirectly apply to ADR holders. According to article 5, paragraph 4 of the Articles of Incorporation, 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. The registration restrictions may be changed by res- olution of the General Meeting, with approval of at least two-thirds of the votes represented at the meeting. The Articles of Incorporation are available at www. novartis.com/investors/company-overview/corpo- rate-governance. ATTENDANCE, REPRESENTATION AND ONLINE PLATFORM Registered shareholders will receive personal invita- tions to the General Meetings along with a registration/ proxy form as well as a personal one-time password and a QR code to log in to our online platform. By returning the registration/proxy form or using the online platform, shareholders are able to order an admission card for the General Meeting or appoint another shareholder or the Independent Proxy to vote their shares on their behalf. If the Independent Proxy is appointed, shareholders can also give voting instructions on alternative or addi- tional motions related to the agenda items either (i) fol- lowing the recommendations of the Board for such alter- native or additional motions, or (ii) opposing such alternative or additional motions. They can also abstain from voting. Shareholders choosing not to receive the compre- hensive invitation materials will be informed of upcoming General Meetings through a letter containing the login credentials to access the online platform as well as a ref- erence to www.novartis.com/investors/shareholder-in- formation/general-meetings, where all relevant informa- tion is available. In accordance with Swiss legislation passed in response to the COVID-19 pandemic, and as in the pre- vious year, physical attendance at the 2022 Annual Gen- eral Meeting (AGM) was not possible, and shareholders could exercise their voting rights exclusively through the Independent Proxy. ADR HOLDERS ADR holders have the rights enumerated in the deposit agreement (such as the right to give voting instruc- tions 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 shareholder 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 exer- cise their voting rights. The ADS depositary exercises the voting rights for registered shares underlying ADRs for which no voting instructions have been given by pro- viding a discretionary proxy to an uninstructed indepen- dent designee. Such designee has to be a shareholder. General Meeting CONVENING The AGM must be held within six months after the end of our financial year (December 31), and normally takes place in late February/early March. Extraordinary General Meet- ings may be requested by the Board, the external 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 According to article 17 of the Articles of Incorporation (www.novartis.com/investors/company-overview/corpo- rate-governance), the following powers are vested exclu- sively in the General Meeting: • Adoption and amendment of the Articles of Incorporation • Election and removal of the Board Chair, the Board and Compensation Committee members, the Independent Proxy and the external auditor • Approval of the management report and the consoli- dated financial statements • Approval of the financial statements of Novartis AG, and the decision on the appropriation of available earnings shown on the balance sheet, including dividends • Approval of the maximum aggregate compensation of the Board (from an AGM until the next AGM) and of the Executive Committee (for the financial year following the AGM). If the maximum aggregate amount of com- pensation already approved by the AGM is not sufficient to cover the compensation of newly appointed or pro- moted 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 Incorpora- tion (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 cancellation of subscription rights • Change 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. 129 Item 6. Directors, Senior Management and Employees Board of Directors Composition (as per December 31, 2022)1 BOARD CHAIR: J. Reinhardt VICE-CHAIR: S. Moroney LEAD INDEPENDENT DIRECTOR: P. Bula N. Andrews T. Buechner E. Doherty B. Heller D. Hochstrasser1 F. van Houten A. von Planta2 A. de Pro Gonzalo C. Sawyers W. Winters AUDIT AND COMPLIANCE COMMITTEE E. Doherty (Chair) T. Buechner B. Heller F. van Houten A. de Pro Gonzalo COMPENSATION COMMITTEE S. Moroney (Chair) P. Bula B. Heller W. Winters GOVERNANCE, SUSTAINABILITY AND NOMINATION COMMITTEE P. Bula (Chair) B. Heller A. von Planta C. Sawyers W. Winters RISK COMMITTEE SCIENCE & TECHNOLOGY COMMITTEE T. Buechner (Chair) N. Andrews E. Doherty A. von Planta A. de Pro Gonzalo J. Reinhardt (Chair) N. Andrews F. van Houten S. Moroney C. Sawyers 1 Effective January 1, 2023, Mr. Hochstrasser became a member of the Audit and Compliance Committee and of the Governance, Sustainability and Nomination Committee. 2 Mr. von Planta will not stand for re-election at the 2023 AGM. Changes to the Board of Directors Succession planning The Board Chair, supported by the GSNC, ensures effective succession plans for the Board, the CEO and the Executive Committee. These plans are discussed by the Board in private meetings. A search for a new Board member is launched – normally with the support of a professional executive search company – with indi- vidual selection criteria defined based on the evolving needs of the Company and a continuing focus on diver- sity. The set of competencies (further explained in “— Item 6.C Board practices—Board of Directors—Board skills”) and a balance between continuity of experience and fresh perspectives are also important criteria for the GSNC when evaluating new candidates. Candidates are interviewed by the Board Chair, members of the GSNC, other Board members, and members of the Executive Committee. The GSNC then makes a recommendation to the full Board, and the Board ultimately decides who should be proposed for election at the upcoming AGM. The Board will propose to the shareholders a new candidate for election at the 2023 AGM. Andreas von Planta already announced in 2021 that he will not stand for re-election at the 2023 AGM. Ana de Pro Gonzalo and Daniel Hochstrasser were elected as new Board members at the 2022 AGM. Ann Fudge, Board member since 2008, and Enrico Vanni, Board member and Vice-Chair since 2011 and Lead Indepen- dent Director since 2021, did not stand for re-election at the 2022 AGM. The biographies of Ms. Fudge and Mr. Vanni can be found in the 2021 Annual Report (pages 130 and 133), available at www.novartis.com/news/media-li- brary/novartis-annual-report-2021. Election and term of office Board members (including the Board Chair) and Com- pensation Committee members are elected individually by shareholders at the General Meeting for a one-year term of office. The term of office expires at the end of the next AGM. According to article 20, paragraph 3 of the Articles of Incorporation, a member shall not serve on the Board for more than 12 years. Under special circumstances and if deemed to be in the best interest of the Company, the Board may recommend exceptions to the shareholders (www.novartis.com/investors/company-overview/cor- porate-governance). The term limit supports our commitment to renew the Board on an ongoing basis and also follows international best practice. We believe age is still a relevant factor in Board composition, and the GSNC will consider this and other factors – including gender, nationality and ethnic- ity – when evaluating candidates and exploring ways to increase Board diversity. 130 Item 6. Directors, Senior Management and Employees GENDER GENDER Diversity EXECUTIVE/NON-EXECUTIVE EXECUTIVE/NON-EXECUTIVE INDEPENDENCE INDEPENDENCE Independence NATIONALITY NATIONALITY All Board members – including the Board Chair – are non-executive and independent, pursuant to applica- ble corporate governance rules and Novartis indepen- dence criteria, which are outlined in Appendix II to the Board Regulations (www.novartis.com/investors/com- pany-overview/corporate-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, 2022, or has or had, except for Daniel Hochstrasser, a signifi- cant business relationship with Novartis AG or with any other Novartis Group company. Mr. Hochstrasser fulfilled the independence criteria following his resignation from Bär & Karrer, a Swiss law firm that has a business rela- tionship with Novartis, as of December 31, 2022. During 2022, Mr. Hochstrasser did not belong to any Board committee. No separate meetings of independent Board members were held in 2022. dence questionnaire that is subject to review by the GSNC. The GSNC then submits a proposal to the full Board, and the Board determines the independence sta- tus of each Board member. Diversity of gender, age, nationality, ethnicity, viewpoints, professional backgrounds and expertise is a key factor to success and Board effectiveness in a constantly evolving environment. A diverse Board ensures that the appropri- ate balance of skills, expertise, experience and cultural background is represented to discharge its responsibil- ities and to support long-term value creation for share- holders, patients, employees and other stakeholders. Diversity remains a critical area of focus for the Board, and the GSNC is continuously looking for opportunities to further increase the Board’s diversity when identify- ing new Board member candidates. The independence of Board members is assessed annually. Each Board member completes an indepen- Diversity profile 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 31% p American 23% p Dutch 11% p German 11% p British 8% p Spanish 8% p Irish 4% p New Zealander 4% p Male p Female 69% 31% p 55–60 p 61–65 p >65 15% 62% 23% p <3 y p 3–6 y p 7–9 y p >9 y 31% 31% 31% 7% 1 Please note that five Board members have dual nationalities. Each of these nationalities is counted as a half in the above chart. BACKGROUND/EXPERIENCE BACKGROUND/EXPERIENCE AGE AGE TENURE TENURE Board skills Upon proposal by the GSNC, the Board has determined a diverse set of competencies for its members that aligns with our status as a listed company, as well as our busi- ness portfolio, geographic reach and culture. Based on this set of competencies, our Board members were asked to identify their most relevant skills highlighted by their educational background, professional experience and personal achievements. The GSNC assesses the set of competencies as well as the individual skills annually to ensure that an appro- priate balance of skills, expertise, experience and diver- sity is represented on the Board. To learn more about our Board members and their individual skills, see “—Item 6.C Board practices—Board of Directors—Members of the Board of Directors.” Board skill distribution Medicine/healthcare/R&D 46% 6/13 Leadership/management 92% 12/13 Finance/accounting 46% 6/13 Law/regulatory/risk management 69% 9/13 Data/digital Environmental, social and governance (ESG) 23% 3/13 38% 5/13 131 Item 6. Directors, Senior Management and Employees Members of the Board of Directors Joerg Reinhardt, Ph.D. Chair since 2013 | Nationality: German | Year of birth: 1956 Joerg Reinhardt is a healthcare industry veteran whose career spans nearly 40 years. After receiving his doctorate in pharmaceutical sciences, Mr. Reinhardt joined Sandoz Pharma Ltd., a predecessor to Novartis, in 1982. He held a number of senior leadership positions at Novartis, including Chief Operating Officer and Head of the Vaccines and Diagnostics Division. Additionally, he led Bayer HealthCare AG as chair of the board of management and the executive committee from 2010 to 2013. Professional experience • Chair 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 • Senate member, Helmholtz Association of German Research Centres, Germany • Chair of the board of trustees, Institute of Molecular and Clinical Ophthalmology Basel (IOB), Switzerland • Chair 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) • Chair, 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 l Law/regulatory/risk management Simon Moroney, D.Phil. Board member since 2020 | Vice-Chair since March 4, 2022 | Nationality: German/New Zealander | Year of birth: 1959 As co-founder and CEO of MorphoSys AG, Simon Moroney played a central role in establishing the company as a force in the field of therapeutic antibodies, with one of the broadest pipelines of drug candidates in the industry. Mr. Moroney holds both a doctorate and a Master of Science in chemistry. Professional experience • Co-founder and CEO, MorphoSys AG, Germany (1992–2019) • Research associate, Department of Pharmacology, University of Cambridge, UK (1991–1992) • Assistant professor, Department of Chemistry, University of British Columbia, Canada (1989–1990) Mandates • Chair of the board of directors and the Remuneration and Nomination Committee, Biotalys NV, Belgium Education • Doctorate in chemistry, University of Oxford, UK • Master of Science in chemistry, University of Waikato, New Zealand Key skills g Leadership/management x Medicine/healthcare/R&D l Law/regulatory/risk management 132 Item 6. Directors, Senior Management and Employees Nancy C. Andrews, M.D., Ph.D. Board member since 2015 | Nationality: American/Swiss | Year of birth: 1958 Nancy C. Andrews has extensive experience as a physician, scientist, professor and senior administrator at leading academic institutions and hospitals. Her distinguished career spans more than 30 years, with leadership roles at both Harvard Medical School and the Duke University School of Medicine. Dr. Andrews currently chairs the board of the American Academy of Arts and Sciences, and is credited with conducting research that led to advances in understanding iron biology and iron diseases. Professional experience • Executive vice president and chief scientific officer, Boston Children’s Hospital, US (2021–present) • Dean emerita, Duke University School of Medicine, and vice chancellor emerita for academic affairs, Duke University, US (2017–2021) • Dean, Duke University School of Medicine, and vice chancellor for academic affairs, Duke University, US (2007–2017) • Professor of pediatrics, pharmacology and cancer biology, Duke University, US (2007–2021) • Dean for 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 • Board member, Maze Therapeutics Inc., US • Board member and chair of the Science and Technology Committee, Charles River Laboratories International Inc., US • Council member, National Academy of Sciences, US • Former council member (2013–2019) and member, National Academy of Medicine, US • Chair of the board, American Academy of Arts and Sciences, US • Member of the Scientific Advisory Board, Dyne Therapeutics Inc., US • Member of the executive committee of the Corporation, Massachusetts Institute of Technology, US (2019-2022) • Member of the Scientific Management Review Board, National Institutes of Health, US (2014–2019) • Board member and former chair, Burroughs Wellcome Fund, US (2011–2019) Education • Doctor of medicine, Harvard Medical School, US • Doctorate in biology, Massachusetts Institute of Technology, US • Master of Science and Bachelor of Science in molecular biophysics and biochemistry, Yale University, US Key skills x Medicine/healthcare/R&D g Leadership/management Ton Buechner Board member since 2016 | Nationality: Dutch/Swiss | Year of birth: 1965 Ton Buechner is an engineer by training who started his career in the oil and gas construction industry. Before becoming the CEO of Sulzer AG, he held several divisional leadership roles at the company and worked in markets including Asia. Mr. Buechner most recently served as CEO and chair of the executive board of AkzoNobel NV, where he introduced industry-leading ESG policies. Professional experience • CEO and chair of the executive board, AkzoNobel NV, Netherlands (2012–2017) • CEO, Sulzer AG, Switzerland (2007–2011) • President, Sulzer Pumps, Switzerland (2003–2006) • President, Sulzer Turbomachinery Services, Switzerland (2000–2002) • Various managerial positions at Sulzer AG, China and Switzerland (1994–2000) Mandates • Chair of the board of directors and the sustainability board, Swiss Prime Site AG, Switzerland • Chair of the board of directors and the Strategy and Sustainability Committee, Burckhardt Compression AG, Switzerland • Advisor, Ammega, Switzerland • Member of the presidential and shareholder committees, Voith GmbH & Co. KGaA, Germany (2014–2020) • 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 m Finance/accounting g Leadership/management l Law/regulatory/risk management z Environmental, social and governance (ESG) 133 Item 6. Directors, Senior Management and Employees Patrice Bula Board member since 2019 | Lead Independent Director since March 4, 2022 | Nationality: Swiss | Year of birth: 1956 Patrice Bula has 40 years of global management experience and is a leader in the consumer goods industry across established and emerging markets. He has served in various senior roles at Nestlé SA, including as general manager of its businesses in China, Germany and South Africa. Most recently, he successfully led the Nestlé Group’s brand strategies, digital marketing transformation and Nespresso business. Professional experience • Executive vice president and head of strategic business units, marketing, sales and Nespresso, Nestlé SA, Switzerland (2011–2021) • 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 • Chair, Froneri Lux Topco Sarl, Luxembourg • Board member, Schindler AG, Switzerland • Board member and chair of the ESG Committee, New Tiger LLC, US • Co-chair (2020–2021) and board member (2015–2021), Cereal Partners Worldwide SA, Switzerland (Nestlé representative) • Board member, Froneri Lux Topco Sarl, Luxembourg (Nestlé representative) (2016–2020) • Board member, Bobst Group SA, Switzerland (2017–2019) • Chair, Blue Bottle Coffee Inc., US (Nestlé representative) (2017–2019) • Chair, 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 m Finance/accounting g Leadership/management y Data/digital Elizabeth (Liz) Doherty Board member since 2016 | Nationality: British/Irish | Year of birth: 1957 | Audit Committee Financial Expert Elizabeth (Liz) Doherty is an expert in finance and accounting who has broad operational experience in inter- national consumer and retail businesses. She began her career in internal audit at Unilever PLC and has held senior finance and accounting roles there and at other companies including Tesco PLC and Reckitt Benckiser Group PLC. 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 and chair of the Audit Committee, Corbion NV, Netherlands • Member of the supervisory board and chair of the Audit Committee, Royal Philips NV, Netherlands • Advisor, Affinity Petcare SA and GB Foods SA, 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) 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 m Finance/accounting l Law/regulatory/risk management 134 Item 6. Directors, Senior Management and Employees Bridgette Heller Board member since 2020 | Nationality: American | Year of birth: 1961 Bridgette Heller has proven experience in the standalone divisions of companies such as Johnson & Johnson, Merck & Co. Inc. and Danone SA, and has served on the audit committees of ADT Corp. and Tech Data Corp. During her career, she has overseen the performance of CFOs and made decisions on strategic R&D prior- ities. Ms. Heller is an advocate for diversity, equity and inclusion, and traveled globally to reinforce Danone’s commitment to infant and maternal health, inclusive diversity, an equitable workforce for women, and sustainable communities. She is co-founder and CEO of the Shirley Proctor Puller Foundation, an education and youth empowerment nonprofit, and devotes much of her time to strengthening education and sustain- ability in an underserved community in the US. Professional experience • Co-founder and CEO, Shirley Proctor Puller Foundation, US (2019–present) • EVP and president of specialized nutrition, Danone SA, Netherlands (2017–2019) • EVP of early life nutrition, Danone SA, Netherlands (2016–2019) • EVP and president of consumer care, Merck & Co. Inc., US (2010–2015) • Global president of the baby global business unit, Johnson & Johnson, US (2007–2009) • President of the US baby, kids and wound care business and of global innovation development, Johnson & Johnson, US (2005–2007) • Managing partner, Heller Associates: Ideas for Growth Inc., US (2004–2005) • CEO, Chung’s Gourmet Foods, US (2003–2004) • Various managerial positions at Kraft Foods Inc., US (1985–2003) Mandates • Board member, Integral Ad Science Inc., US • Board member, Aramark, US • Board member, Dexcom Inc., US • Board member, Newman’s Own Inc., US • Member of the board of trustees, Northwestern University, US • Member of the advisory board, Kellogg School of Management at Northwestern University, US • Board member, Shirley Proctor Puller Foundation, US • Board member, Newman’s Own Foundation, US • Board member, Tech Data Corp., US (2016–2020) • Board member, ADT Corp., US (2012–2016) • Board member, Girls Inc., US (2002–2014) Education • Master’s degree in marketing and management policy, Kellogg School of Management at Northwestern University, US • Bachelor’s degree in economics and computer studies, Northwestern University, US Key skills z Environmental, social and governance (ESG) g Leadership/management x Medicine/healthcare/R&D m Finance/accounting Daniel Hochstrasser Board member since March 4, 2022 | Nationality: Swiss | Year of birth: 1960 Daniel Hochstrasser is an independent dispute resolution specialist practicing in Zurich, Switzerland. Until the end of 2022, he has been leading Bär & Karrer’s arbitration practice for 15 years. He frequently repre- sented parties in complex disputes arising from matters such as M&A transactions, industrial and infrastructure projects, and license, distribution and development agreements, particularly in the pharmaceutical industry. In addition, he led the firm as senior partner from 2011 until 2021. He has published extensively on arbitration and litigation, and lectures at the University of Zurich and the University of St. Gallen in Switzerland. Professional experience • Attorney-at-law, Daniel Hochstrasser AG, Switzerland (since January 2023) • Attorney-at-law and partner, Bär & Karrer AG, Switzerland (1993–December 2022) • Senior partner and chair of the board of directors, Bär & Karrer AG, Switzerland (2011-2021) • Lawyer, District Court of Affoltern, Court of Appeals/Court of Cassation of Zurich, Switzerland (1987–1992) • In-house lawyer, Staubli SA, France (1986–1987) Mandates • Member (2015–2021) and Vice President (since 2021), ICC Court of Arbitration, France • Member of the Ethics Court, Zurich Bar Association, Switzerland (since 2004) • Board member, Finland Arbitration Institute, Finland (since 2020) • Chair of the board of directors, Bär & Karrer AG, Switzerland (2011-2021) • Member of the Court, Swiss Arbitration Chambers, Switzerland (2004–2014) Education • Master of Laws (LL.M.), Cornell Law School, US • Bar examination, Switzerland • Licentiatus iuris, University of Zurich, Switzerland Key skills g Leadership/management l Law/regulatory/risk management 135 Item 6. Directors, Senior Management and Employees Frans van Houten Board member since 2017 | Nationality: Dutch | Year of birth: 1960 Frans van Houten is passionate about purpose-driven innovation, entrepreneurship and business transfor- mation to drive customer value and competitiveness. Under his leadership as CEO of Royal Philips, the company transformed into a leading health technology solutions company, leveraging data and informatics to improve healthcare provider results, and became a forerunner across ESG dimensions, having become carbon neutral in its operations since 2020 and recycling over 90% of its waste. Mr. van Houten was an initiator of the World Economic Forum Compact for Responsive and Responsible Leadership as well as founder and co-chair of the Platform to Accelerate the Circular Economy. Professional experience • Advisor, Royal Philips NV, Netherlands (October 2022–April 2023) • CEO and chair of the executive committee and the board of management, Royal Philips NV, Netherlands (2011–October 2022) • Interim management, ING Group NV, Netherlands (2009–2010) • CEO and chair 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 • Chair of the supervisory board, Erasmus Trust Foundation, Netherlands (2014–February 2023) • Founder and co-chair of the WEF Platform to Accelerate the Circular Economy (PACE), Netherlands (2016-December 2022) • Member of the steering committee, European Round Table for Industry (ERT), Belgium (2014-November 2022) • Chair, Graduate Entrepreneur Foundation, Netherlands • Chair, NL2025 Foundation, Netherlands • Vice chair 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 z Environmental, social and governance (ESG) g Leadership/management x Medicine/healthcare/R&D y Data/digital l Law/regulatory/risk management Andreas von Planta, Ph.D. Board member since 2006 | Nationality: Swiss | Year of birth: 1955 Andreas von Planta is a leading expert in corporate governance, corporate law and stock exchange regulation. He advises boards of public companies on corporate governance matters and is a sought-after speaker and writer on these topics. He has co-authored the Switzerland chapter of the International Comparative Legal Guide to Corporate Governance for many years. Professional experience • Senior counsel, Lenz & Staehelin, Switzerland (2017–present) • Partner, Lenz & Staehelin, Switzerland (1988–2017) Mandates • Board member, Helvetia Holding AG, Switzerland • Member of the board of trustees, Novartis Foundation, Switzerland • Board member, Helvetia Schweizerische Lebensversicherungsgesellschaft AG, Switzerland • Board member, Helvetia Schweizerische Versicherungsgesellschaft AG, Switzerland • Chair, HSBC Private Bank (Suisse) SA, Switzerland • Chair, HSBC Private Banking Holdings (Suisse) SA, Switzerland • Board member, Socotab Frana SA, Switzerland • Chair of the regulatory board, SIX Swiss Exchange AG, Switzerland • Chair of the Audit Committee, International Road Transport Union, Switzerland • Board member, Société Immobilière Quai Gustave Ador 50 SA, Switzerland • Board member, Burberry (Suisse) SA, Switzerland (2001-2022) • Vice chair of the board of directors, A.P. Moller Finance SA, Switzerland (1997-2022) • Board member, Raymond Weil SA, Switzerland (2007–2018) • Board member and former chair, Clinique Générale-Beaulieu SA, Switzerland (2008–2016) • Board member and former chair, 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 z Environmental, social and governance (ESG) l Law/regulatory/risk management 136 Item 6. Directors, Senior Management and Employees Ana de Pro Gonzalo Board member since March 4, 2022 | Nationality: Spanish | Year of birth: 1967 | Audit Committee Financial Expert Since starting her career at Arthur Andersen, Ana de Pro Gonzalo has worked across a variety of industries, ranging from construction and real estate to engineering and telecommunications. With deep expertise in finance, capital markets and technology, she has held executive positions at several multinational companies. Most recently, she spent 10 years as chief financial officer of Amadeus IT Group, a leading software provider for the global travel and tourism industry. Professional experience • Chief financial officer, Amadeus IT Group SA, Spain (2010–2020) • Corporate general manager, Sacyr Vallehermoso SA, Spain (2002–2010) • Deputy general manager and finance director, Metrovacesa SA, Spain (1994–2002) • Senior auditor, Arthur Andersen SA, Spain (1990–1994) Mandates • Member of the supervisory board and chair of the Audit Committee, STMicroelectronics NV, Netherlands • Board member, National Express Group PLC, UK • Board member, Indra Sistemas SA, Spain (2020-2022) • Board member, Merlin Properties Socimi SA, Spain (2015–2017) Education • General Management Program (PDG), IESE Business School, Spain • Bachelor of Science in business studies, Complutense University of Madrid, Spain Key skills g Leadership/management m Finance/accounting l Law/regulatory/risk management Charles L. Sawyers, M.D. Board member since 2013 | Nationality: American | Year of birth: 1959 Charles L. Sawyers is a highly accomplished expert and leader in cancer research. As a physician and prominent scientist, he has a deep understanding of the benefits of drugs for patients and society at large, and the importance of access to medicines. Dr.  Sawyers co-developed the Novartis cancer drug Gleevec/ Glivec and has received numerous honors and awards, including the Lasker-DeBakey Clinical Medical Research Award. 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 Academy of Medicine, US • Member, National Academy of Sciences, US • Investigator, Howard Hughes Medical Institute, US • Science advisor for the following US companies: Arsenal Capital Partners; 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 • Member, National Cancer Advisory Board, US (2012–2020) • 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) 137 Item 6. Directors, Senior Management and Employees William T. Winters Board member since 2013 | Nationality: British/American | Year of birth: 1961 William T. Winters has extensive leadership experience in the financial sector. He began his career at JPMorgan Chase & Co. in 1983 and has held management roles across several market areas and in corporate finance. Mr. Winters founded Renshaw Bay LLP, an alternative asset management firm, and now serves as CEO of Standard Chartered PLC, where he is leading a digital transformation of the global bank. Professional experience • CEO, Standard Chartered PLC, UK (2015–present) • Chair 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 • Member of the board of overseers, International Rescue Committee, UK • Chair of the board of trustees, 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 y Data/digital g Leadership/management l Law/regulatory/risk management m Finance/accounting Corporate Secretary Charlotte Pamer-Wieser, Ph.D. Self-assessment The Board and its committees conduct a self-assessment once a year, covering topics including Board composition, purpose, scope and responsibilities; succession planning; Board processes and governance; interaction between the Board and the Executive Committee; Board meetings and pre-reading material; team effectiveness; and Board Chair and peer evaluation. Every third year, this process is con- ducted by an independent external consultant. This last occurred in 2020 with the consulting firm Egon Zehnder. Anonymous survey Qualitative review Outcome • Each Board member fills out an anonymous survey. • A report identifying key strengths and challenges is produced for the Board and its committees. • Based on the results, the Board Chair and the committee chairs each lead a qualitative review with their colleagues and then with the entire Board. • The last self-assessment of October 2022 determined that the Board and its committees are functioning effectively and efficiently. • In addition, the Vice-Chair leads a qualitative review of the Board Chair’s performance, without the Chair being present, and then provides the Board Chair with the Board’s feedback. • The feedback confirmed that the Board has an open culture, fostering a broad range of viewpoints. • The results also identified key areas on which to focus, such as further development of Novartis strategy, oversight of a range of challenging technology and reorganizational projects, and the impact of the current geopolitical situation in Europe, the US and China, including pricing. 138 Item 6. Directors, Senior Management and Employees Trainings Role of the Board and its committees Our Board receives regular briefings and trainings on ethics, risks and compliance, ESG and other relevant topics. In 2022, each Board member completed the fol- lowing trainings: • Health, Safety and Environment Policy • ‘Fit to Commit’, which focused on anti-bribery, insider trading and procurement • An ESG educational session conducted by an external expert on holistic value creation • Third Party Risk Management Our Chief Legal Officer also provides regular updates to our Board members on developments related to insider trading laws and regulations and briefs the members of the Board and the Executive Committee on an annual basis on their respective duties. In addition, the Com- pany offers a broad range of external trainings to its Board members. 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 committee chair, as set out in the Board Regulations (www. novartis.com/investors/company-overview/corporate-gov- ernance). In some cases, these responsibilities are of an advisory or preparatory nature. In other cases, the com- mittee has decision-making power that is subject to final Board approval, or the responsibilities have been fully del- egated to the committee. All committees have the author- ity to retain external consultants. Any Board member may request a Board or committee meeting and the inclusion of an agenda item. Before meetings, Board members receive materials to help them prepare for the discussions and to inform decision-mak- ing. Attendance at Board and Board Committee Meetings in 2022 Audit and Compliance Committee Compensation Committee Governance, Sustainability and Nomination Committee Risk Committee Science & Technology Committee 7/7 7/7 3/3 7/7 3/3 3/3 3/3 3/3 6/7 5/5 5/5 5/5 5/5 5/5 4/4 4/4 4/4 3/4 4/4 Name Position J. Reinhardt Board Chair S. Moroney Vice-Chair Board 10/10 10/10 P. Bula Lead Independent Director 10/10 N. Andrews T. Buechner E. Doherty B. Heller F. van Houten Member Member Member Member Member D. Hochstrasser 1 Member A. von Planta Member A. de Pro Gonzalo 1 Member C. Sawyers W. Winters Member Member 9/10 10/10 10/10 10/10 10/10 8/8 10/10 8/8 10/10 9/10 7/7 7/7 7/7 7/7 5/5 1 Ms. de Pro Gonzalo and Mr. Hochstrasser were elected at the 2022 AGM. Further details can be found on pages 140 – 145. 139 Item 6. Directors, Senior Management and Employees Board of Directors Primary responsibilities • Strategy: decides on the ultimate direction of the Group’s business (including portfolio, markets, acquisitions and divestments), considering also key ESG aspects • Structure and organization: determines major changes in the Group’s structure and organization • Culture: oversees the strategy and implementation of the corporate culture • Ethics and compliance: oversees the Group’s ethics and compliance framework, including the approval of fundamental corporate policies such as the Novartis Code of Ethics • Risk management: oversees the Group’s risk management system, the most significant risks, and how these risks are managed • Finance: determines the Group’s accounting system, financial controls and financial planning; reviews and approves the Annual Report (including the Compensation Report) • Non-financial reporting: reviews and approves the Group’s annual reporting on non-financial matters • People and organization: nominates or appoints, removes, and determines responsibilities of key executives, and succession planning Key activities in 2022 • Oversaw the Company’s strategy to become a fully focused medicines company with leading technology in key therapeutic and geographic areas • Reviewed the set-up and functioning of the Executive Committee in the context of the Company’s new organizational structure • Reviewed the geopolitical situation in Europe, with a special focus on the impact on the Russian and Ukrainian markets • Discussed and closely monitored the Transformation for Growth project to ensure a smooth transition and the successful implementation of its objectives • Received an update on the US market and our priorities to accelerate growth in Innovative Medicines and become a top player in the market • Received an update on the German market and the Company’s strategic ambition to become the market leader in Germany • Received updates from Global Drug Development and Operations • Reviewed and discussed strategic considerations around mergers and acquisitions, and the Company’s larger strategic moves to drive sustainable growth • Conducted detailed discussions about the strategic review of Sandoz, deciding that a separation through a 100% spin-off would offer the best value proposition to investors (subject to shareholders approval) • Discussed the Company’s ESG strategy, plans and developments, and attended an ESG education session on holistic value creation • Discussed the upcoming non-financial disclosure regulations and Novartis non-financial reporting governance • Discussed longer-term Board succession planning and required profiles, proposing a new Board member candidate to be elected at the 2023 AGM • Discussed the amendment of the Articles of Incorporation of Novartis AG as part of the reform of Swiss corporate law • Discussed and reviewed the annual Board self-evaluation Meetings Number of meetings held Number of members Approximate average duration (hours) Meeting attendance 10 13 6:30 98.5% The Board met ten times in 2022. This includes regular meet- ings in January, April, June, August, October and December, and additional special meetings to deal with ad hoc matters. Board committees typically meet the day before the meetings of the full Board. The Board held virtual, hybrid and physical meetings, with participants joining in person when possible. Documents • Articles of Incorporation of Novartis AG • Board Regulations J. Reinhardt (Board Chair) S. Moroney (Vice-Chair) P. Bula (Lead Independent Director) N. Andrews T. Buechner E. Doherty B. Heller D. Hochstrasser1 F. van Houten A. von Planta A. de Pro Gonzalo1 C. Sawyers W. Winters 10 10 10 9 10 10 10 8 10 10 8 10 9 www.novartis.com/investors/company-overview/corporate-governance 1 Ms. de Pro Gonzalo and Mr. Hochstrasser were elected at the 2022 AGM and have attended all Board meetings since their election. 140 Item 6. Directors, Senior Management and Employees Audit and Compliance Committee Primary responsibilities • Supervises the external auditor, and selects and nominates the external auditor for election by the shareholders (FD)** • Oversees Internal Audit (FD)** • Oversees accounting policies, financial controls, and compliance with accounting and internal control standards (FD)** • Approves financial statements for the first three quarters of each calendar year and the corresponding financial results releases (FD)**, and reviews the annual financial statements and the corresponding financial results releases (FBA)*** • Reviews the non-financial data contained in the Group’s annual reporting (FBA)*** • Oversees compliance with laws, regulations and internal policies related to its subject matter expertise (FD)** • Reviews updates with regards to Quality Assurance and patient safety twice a year and Health Safety & Environment once a year (FD)** • Reviews updates from the SpeakUp Office twice a year (FD)** • Reviews the Group’s tax policy every two years (FD)** • Reviews updates in closed sessions with the Chief Financial Officer, Chief Audit Officer, and external auditor Key activities in 2022 • Evaluated the performance of the external auditor KPMG during 2022 • Reviewed the accounting and financial reporting, focusing on those areas involving significant risk or judgment • Monitored the geopolitical situation and reviewed the treasury aspects and cash collection in Russia • Reviewed and discussed the Company’s approach to non-financial reporting and assurance • Reviewed the timelines and milestones of the intended Sandoz spin-off • Received an update on data privacy and its mechanisms of classifications and control • Received a presentation on foreign exchange risk management at Novartis • Liaised with the Risk Committee to ensure adequate oversight of the Company’s key transformation projects (Enterprise Data Governance and Management and Lean Digital Core (LDC) program) • Received reports and updates from Internal Audit; Quality; Ethics, Risk & Compliance; the SpeakUp Office; Health, Safety & Environment; and Legal, and discussed progress on identifying and remedying the root causes of issues Meetings Number of meetings held Number of members Approximate average duration (hours) Meeting attendance Documents 7 5 2:35 100% E. Doherty (Chair, Audit Committee Financial Expert) T. Buechner B. Heller 7 7 7 F. van Houten 7 A. de Pro Gonzalo1 (Audit Committee Financial Expert) 5 • Board Committees Charter, Appendix I to the Board Regulations www.novartis.com/investors/company-overview/corporate-governance * A/P = advisory or preparatory task ** FD = fully delegated task *** FBA = task subject to final Board approval 1 Ms. de Pro Gonzalo became a member of the Audit and Compliance Committee after the 2022 AGM and has attended all Audit and Compliance Committee meetings since that time. 141 Item 6. Directors, Senior Management and Employees Compensation Committee Primary responsibilities • Designs, reviews and recommends to the Board the compensation policies and programs (FBA)*** • Advises the Board on the compensation of Board members and the CEO (A/P)* • Decides on the compensation of Executive Committee members (FD)** • Prepares the Compensation Report and the Say-on-Pay brochure, and submits them to the Board for approval (FBA)*** Key activities in 2022 • Made decisions relating to Executive Committee and wider employee compensation during the year • Established compensation to be paid for the future Sandoz board and executive committee members • Determined the critical performance measures (including financial, strategic, operational, innovation and ESG) to be considered in the 2022 and 2023 incentive plan targets • Reviewed the achievement of incentive plan targets for the Executive Committee members • Reviewed shareholder and proxy advisor feedback related to Novartis compensation practices and disclosures and to those of peer companies • Reviewed disclosures in the Novartis Compensation Report • Proposed appropriate peer companies for comparisons of board and executive committee compensation, and assessed the Company’s level of compensation against the peer group • Reviewed incentive plan rules to secure pay-for-performance alignment while preserving market competitiveness • Appointed a new independent advisor to the Compensation Committee • Reflected on effectiveness of the Company’s compensation programs in view of its strategy to become a fully focused medicines company, following announcements of the introduction of a new organizational structure and the intention to separate the Sandoz business by way of a 100% spin-off • Reviewed the Compensation Committee charter Meetings Number of meetings held Number of members Approximate average duration (hours) Meeting attendance Documents 7 4 1:40 96.5% S. Moroney (Chair) P. Bula B. Heller W. Winters 7 7 7 6 • Board Committees Charter, Appendix I to the Board Regulations www.novartis.com/investors/company-overview/corporate-governance * A/P = advisory or preparatory task ** FD = fully delegated task *** FBA = task subject to final Board approval 142 Item 6. Directors, Senior Management and Employees Governance, Sustainability and Nomination Committee Primary responsibilities • Oversees the Company’s strategy, governance and progress on sustainability, including access to medicine and healthcare, global health, environmental sustainability, human capital management and other material ESG aspects (FBA)*** • Recommends corporate governance best practices to the Board (FBA)*** • Reviews the Articles of Incorporation and Board Regulations on a periodic basis (FD)** • Reviews the composition and size of the Board and its committees as well as the skills matrix on a regular basis (FBA)*** • Identifies new Board member candidates and recommends to the Board whether existing Board members should stand for re-election (FBA)*** • Prepares and reviews succession plans for the Board Chair, the Vice-Chair, the Lead Independent Director, Board members, committee members and chairs, and the CEO (FBA)*** • Reviews the independence of each Board member on an annual basis (FBA)*** • Reviews directorships and agreements of Board members for conflicts of interest, and deals with conflicts of interest (FBA)*** Key activities in 2022 • Evaluated progress on sustainability at Novartis, focusing on material ESG factors, together with targets and metrics • Received updates on ESG and Global Health covering the Company’s ESG priorities and 5-year roadmap • Received an update on environmental sustainability covering governance, strategy and progress against near- and longer- term targets for carbon emissions, waste reduction and water consumption • Received an update on human capital management covering the Company’s People & Organization strategy, key people metrics and progress in its culture journey • Evaluated the results of the 2022 AGM as well as investor and analyst feedback from ESG / Governance roadshows held in 2022 • Discussed and recommended to the Board amendments to the Articles of Incorporation of Novartis AG in connection with the reform of Swiss corporate law • Discussed candidates for the Sandoz board chair elect and the nomination process for the entire Sandoz board • Discussed the composition of, and the succession for, the (Novartis) Board and its committees on a regular basis Meetings Number of meetings held Number of members Approximate average duration (hours) Meeting attendance Documents 3 5 2:00 100% P. Bula (Chair) B. Heller A. von Planta C. Sawyers W. Winters • Board Committees Charter, Appendix I to the Board Regulations www.novartis.com/investors/company-overview/corporate-governance * A/P = advisory or preparatory task ** FD = fully delegated task *** FBA = task subject to final Board approval 3 3 3 3 3 143 Item 6. Directors, Senior Management and Employees Risk Committee Primary responsibilities • Oversees the risk management system and processes (FBA)*** • Reviews, together with management, the prioritization and handling of risks, the risk portfolio, and actions implemented by management (FBA)*** • Performs deep dives into key risk areas and fosters a culture of smart risk-taking (FBA)*** • Reviews updates on cyber security on an annual basis (FD)** Key activities in 2022 • Received updates on Enterprise Risk Management mitigation measures and results • Evaluated the emerging risks associated with the current geopolitical crisis in Russia and Ukraine, and mitigation actions • Received a presentation on launch excellence in Japan, evaluating opportunities and risks for Innovative Medicines • Reviewed and discussed the current opportunities and risks at Global Drug Development • Discussed the performance, risk management and transformation of Novartis Technical Operations associated supply chain • Received updates and closely monitored the Enterprise Data Governance and Management and the risk assessment and mitigation of the Lean Digital Core (LDC) program • Received a presentation on falsified medicines covering the various types of falsification and indirect import • Evaluated the enterprise risks for Innovative Medicines in the US for 2022 related to the Transforming for Growth program, pipeline portfolio growth and diversity in clinical trials • Reviewed the Third-Party Risk Management (TPRM) program • Discussed the key risks associated with Intellectual Property (IP protection, IP enforcement, third-party assertion and trade secrets) • Analyzed the opportunities and risks around talent management in key areas and geographies • Received a deep-dive update on cyber security, including on data loss protection, from the Chief Security Officer Meetings Number of meetings held Number of members Approximate average duration (hours) Meeting attendance Documents 5 5 1:50 100% T. Buechner (Chair) N. Andrews E. Doherty A. von Planta A. de Pro Gonzalo 5 5 5 5 5 • Board Committees Charter, Appendix I to the Board Regulations www.novartis.com/investors/company-overview/corporate-governance * A/P = advisory or preparatory task ** FD = fully delegated task *** FBA = task subject to final Board approval 144 Item 6. Directors, Senior Management and Employees Science & Technology Committee Primary responsibilities • Monitors emerging scientific, data-related, technological and research trends and issues, and brings recommendations to the Board (FBA)*** • Informs the Board on a periodic basis about critical developments for the success of the portfolio and for scientific, technological and research activities as well as benchmarking (A/P)* • Assists the Board with setting the Company’s strategy for science, data, technology and research (A/P)* • Assists the Board with oversight and evaluation of the performance of the Company’s scientific, technological and R&D activities (FBA)*** • Reviews performance and proposed targets in the area of science, technology and research (FD)** • Reviews other matters in relation to science, data, technology and research that the committee may, in its own discretion, deem desirable in connection with its responsibilities (A/P)* Key activities in 2022 • Reviewed and provided guidance on the technology strategy for the Novartis Institutes of BioMedical Research (NIBR) • Reviewed the Company’s early clinical pipeline • Discussed the performance of Global Drug Development and its future strategy • Provided guidance on the build-up of the Strategy & Growth function, and discussed the Company’s innovation strategy with the Strategy & Growth leadership Meetings Number of meetings held Number of members Approximate average duration (hours) Meeting attendance 4 5 6:00 95% J. Reinhardt (Chair) N. Andrews F. van Houten S. Moroney C. Sawyers 4 4 3 4 4 Documents • Board Committees Charter, Appendix I to the Board Regulations www.novartis.com/investors/company-overview/corporate-governance * A/P = advisory or preparatory task ** FD = fully delegated task *** FBA = task subject to final Board approval 145 Item 6. Directors, Senior Management and Employees Board Chair The Board Chair leads the Board to represent the interests of all stakeholders and ensures an appropriate balance of power between the Board and the Executive Committee. In this role, the Board Chair: • 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 for and specialization of all Board members • Ensures the Board’s annual performance evaluation • Promotes effective relationships and communication between Board and Executive Committee members • Ensures effective communication with the Company’s shareholders, other stakeholders and the public Vice-Chair and Lead Independent Director Vice-Chair The Vice-Chair has the following responsibilities: • Leads the Board in case and as long as the Board Chair is incapacitated • Leads the yearly session of the Board members to eval- uate the performance of the Board Chair, during which the Board Chair is not present The Vice-Chair also provides advice and support to the Board Chair. Lead Independent Director To support adequate control mechanisms, the Board Regulations outline the role of the Lead Independent Director. The Lead Independent Director has the follow- ing responsibilities: • Chairs the sessions of the independent Board members • Leads the independent Board members in the event of a crisis or matter requiring their separate consider- ation or decision The roles of the Vice-Chair and the Lead Independent Director can be held by two Board members or by one Board member (combined role). The Board appointed Simon Moroney as Vice-Chair and Patrice Bula as Lead Independent Director, both roles effective as of March 4, 2022. Honorary Chairmen Alex Krauer and Daniel Vasella were appointed Honor- ary Chairmen in recognition of their significant achieve- ments on behalf of Novartis. In December 2021, Mr. Krauer passed away at the age of 90. Mr. Vasella is not provided with Board documents and does not attend Board meetings. Mandates outside the Novartis Group According to article 34, paragraph 1 of the Articles of (www.novartis.com/investors/company- Incorporation overview/corporate-governance), the following limitations on mandates apply: Mandates Other listed companies 1 Maximum number of mandates 10 4 1 Holding a chair position 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 to be one mandate. 146 Item 6. Directors, Senior Management and Employees Executive Committee Composition (as per December 31, 2022) Vasant (Vas) Narasimhan Chief Executive Officer Shreeram Aradhye President, Global Drug Development & Chief Medical Officer Victor Bulto President, Innovative Medicines US Aharon (Ronny) Gal Chief Strategy & Growth Officer Karen L. Hale Chief Legal Officer Harry Kirsch Chief Financial Officer Klaus Moosmayer Chief Ethics, Risk & Compliance Officer Robert (Rob) Kowalski Chief People & Organization Officer Steffen Lang President, Operations Fiona H. Marshall President, Novartis Institutes for BioMedical Research (NIBR) Marie-France Tschudin President, Innovative Medicines International & Chief Commercial Officer Changes to the Executive Committee Susanne Schaffert, President of Novartis Oncology since 2019, stepped down from her role following the Com- pany’s decision to integrate the Pharmaceuticals and Oncology business units and create separate US and Inter- national commercial organizations under the Innovative Medicines (IM) Division, effective April 4, 2022. Marie- France Tschudin, President of Novartis Pharmaceuticals since 2019, was appointed President, Innovative Medicines International & Chief Commercial Officer, effective April 4, 2022. Victor Bulto, President, Novartis Pharmaceuticals Corporation, US, since 2019, was appointed President, Innovative Medicines US, effective April 4, 2022. He has been a member of the Executive Committee since May 1, 2022. Robert Weltevreden, Head of Customer & Tech- nology Solutions (CTS) since February 1, 2021, stepped down from his role following the Company’s decision to combine Novartis Technical Operations (NTO) and CTS into a new Operations unit, effective April 4, 2022. Stef- fen Lang, Global Head of Novartis Technical Operations since 2017, was appointed President, Operations, effec- tive April 4, 2022. John Tsai, Head of Global Drug Devel- opment and Chief Medical Officer, stepped down from his role effective May 15, 2022. Shreeram Aradhye was appointed President, Global Drug Development & Chief Medical Officer, effective May 16, 2022. Aharon (Ronny) Gal was appointed Chief Strategy & Growth Officer, effec- tive July 18, 2022. From April 4, 2022, until July 17, 2022, Lutz Hegemann, President Global Health & Sustainabil- ity, served as ad interim Chief Strategy & Growth Offi- cer but was not a member of the Executive Committee. Richard Saynor, Chief Executive Officer, Sandoz, stepped down from the Executive Committee effective October 25, 2022, following his appointment as CEO designate of the Sandoz standalone company expected to be created in the second half of 2023. James (Jay) Bradner, Presi- dent of the Novartis Institutes for BioMedical Research (NIBR), stepped down from his role effective October 31, 2022. Fiona H. Marshall was appointed President of the Novartis Institutes for BioMedical Research (NIBR), effective November 1, 2022. The biographies of the for- mer members of the Executive Committee can be found in the 2021 Annual Report (pages 147 – 149), available at www.novartis.com/news/media-library/novartis-an- nual-report-2021. Role of the Executive Committee The Board has appointed the Executive Committee mem- bers and delegated the overall responsibility for and oversight of the operational management of Novartis to them, including: • Recruiting, appointing and promoting senior management • Ensuring the efficient operation of the Group and the achievement of optimal results • Promoting an active internal and external communi cations policy • Developing policies and strategic plans for Board approval, and implementing those approved • Submitting the following to the Board for approval: invest- ments, divestments, transactions, contracts and litigations with a value exceeding USD 500 million, and capital market and other important financing transactions, as well as all other matters of fundamental significance to the Novartis Group • Preparing and submitting quarterly and annual reports to the Board and its committees • Informing the Board of all matters of fundamental sig- nificance to the businesses • Dealing with any other matters delegated by the Board There are no contracts between Novartis and third parties whereby Novartis would delegate any business management tasks to such third parties. 147 Item 6. Directors, Senior Management and Employees CEO • Ensuring Novartis has the capabilities to achieve its long-term strategic objectives NATIONALITY NATIONALITY 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, and is responsible for building and maintaining an effective executive team. With the support of the Executive Committee, the CEO is responsible for: Diversity GENDER GENDER • Developing robust management succession and development plans for presentation to the Board • Promoting effective communication with shareholders EXECUTIVE/NON-EXECUTIVE EXECUTIVE/NON-EXECUTIVE INDEPENDENCE INDEPENDENCE and other stakeholders • Ensuring Novartis conducts its business in a legal and ethical manner • Developing an effective risk control framework for all business activities • Ensuring the flow of information to the Board is accurate, timely and clear The composition as of December 31, 2022, in terms of nationality, gender, age and length of tenure, is shown in the following charts: Diversity profile 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 British p Spanish p Israeli 41% 18% 18% 9% 9% 5% p Male p Female 73% 27% p <45 p 45–50 p >50 9% 9% 82% p <2 y p 2–4 y p >4 y 55% 27% 18% 1 Please note that three Executive Committee members have dual nationalities. Each of these nationalities is counted as a half in the above chart. BACKGROUND/EXPERIENCE BACKGROUND/EXPERIENCE AGE AGE Mandates outside the Novartis Group According to article 34, paragraph 2 of the Articles of Incorporation (www.novartis.com/investors/company- overview/corporate-governance), the following limitations on mandates apply: TENURE TENURE 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 Other listed companies 1 Maximum number of mandates 6 2 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 1 Holding a chair position of the board of directors in other listed companies is not allowed. “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 to be one mandate. 148 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 • Member, National Academy of Medicine, US • Chair (since December 2022) and board member (2020–2022), African Parks Network, South Africa • 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 and treasurer, 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 Shreeram Aradhye, M.D. President, Global Drug Development & Chief Medical Officer since May 16, 2022 | Nationality: American | Year of birth: 1962 Professional experience • Executive Vice President & Chief Medical Officer, Dicerna Pharmaceuticals, US (2020–March 2022) • Executive Vice President & Chief Development Officer, Axcella Health, US (2019–2020) • Global Head, Medical Affairs and Chief Medical Officer, Pharmaceuticals, Novartis, US & Switzerland (2017–2019) • Global Head, Development Franchise, Neuroscience, and US Head, Development, Novartis, US & Switzerland (2013–2017) • Executive Global Program Head, Multiple Sclerosis, Novartis, Switzerland (2012–2013) • Head, Global Development India, Novartis, India (2011–2012) • Head, Global Clinical Development & Medical Affairs, Biosimilars, Sandoz, Germany (2009–2011) • Joined Novartis in 1999 holding positions of increasing responsibility Education • Chief Resident and Teaching Fellow in Internal Medicine, Newton Wellesley Hospital, US • Resident in Internal Medicine, Newton Wellesley Hospital, US • Fellow in Nephrology, St Luke’s Roosevelt Medical Center, US • Resident in Internal Medicine (M.D.), All India Institute of Medical Sciences, India • Bachelor of Medicine and Bachelor of Surgery, All India Institute of Medical Sciences, India Victor Bulto President, Innovative Medicines US since April 4, 2022 | Member of the Executive Committee as of May 1, 2022 | Nationality: Spanish | Year of birth: 1978 Professional experience • President, Novartis Pharmaceuticals Corporation, US (2019–April 2022) • Vice President & Head US Immunology & Dermatology Franchise, US (2017–2019) • Vice President & Head US Alcon Pharmaceuticals, US (2016–2017) • Head Neuroscience Franchise, Region Europe, Novartis, Switzerland (2013–2016) • Business Franchise Head Neuroscience, Novartis, Spain (2012–2013) • Business Franchise Head Neuroscience/MS, Respiratory, Osteoarticular, Spain, Novartis (2010–2012) • Marketing Head Respiratory, Osteoarticular, Novartis, Spain (2009–2010) Mandates • Board member, Biotechnology Innovation Organization (BIO), US Education • Master of business administration, ESADE Business School, Spain • Master’s degree in health economics and pharmacoeconomics, Pompeu Fabra University Spain • Master’s degree in chemical engineering, Ramon Llull University, Spain • Bachelor’s of science degree in chemistry, Ramon Llull University, Spain 149 Item 6. Directors, Senior Management and Employees Aharon (Ronny) Gal, Ph.D. Chief Strategy & Growth Officer since July 18, 2022 | Nationality: Israeli/American | Year of birth: 1966 Professional experience • Senior analyst, US biopharmaceutical, Sanford Bernstein, US (2020–June 2022) • Senior analyst, US specialty pharmaceuticals and Biotech, Sanford Bernstein, US (2016–2020) • Senior analyst, US specialty pharmaceuticals and EU mid-cap pharmaceuticals, Sanford Bernstein, US, UK (2013–2016) • Senior analyst, US specialty pharmaceuticals, Sanford Bernstein, US (2004–2013) • Vice president, Canon US Life Sciences, US (2003–2004) • Consultant, team leader, manager, The Boston Consulting Group, Inc., US, Singapore, China (1996–2002) Mandates • Scientific advisor, Pure Honey Technologies, US Education • Ph.D. in Biochemistry, Massachusetts Institute of Technology, US • B.Sc. in Chemistry, Emory University, US Karen L. Hale Chief Legal Officer of Novartis since May 15, 2021 | Nationality: American | Year of birth: 1968 Professional experience • Vice president, deputy general counsel, AbbVie Inc., US (2019–2021) • Vice president, chief ethics and compliance officer, AbbVie Inc., US (2013–2019) • Vice president, litigation and legal specialty operations, AbbVie Inc., US (2013) • Divisional vice president, commercial litigation, Abbott Laboratories, US (2006–2012) • Began practicing law in 1994 and joined Abbott in 1997 Education • Bar memberships: Illinois and Virginia, US • Juris doctor, William & Mary Law School, US • Bachelor’s degree in economics, Duke University, US 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 Robert (Rob) Kowalski Chief People & Organization Officer of Novartis since September 1, 2021 | Nationality: American | Year of birth: 1968 Professional experience • Executive Vice President and Global Head of Regulatory Affairs (2018–2021), and US Head of Global Drug Development (2009–2015 and 2017–2021), Novartis Pharmaceuticals Corporation, US • Ad interim President, Novartis Corporation, US (2021) • Ad interim Head of Global Drug Development and Chief Medical Officer, Novartis AG, Switzerland (2018) • Senior Vice President and Head of Regulatory Affairs, Novartis Pharmaceuticals Corporation, US (2009–2015 and 2017–2018) • Senior Vice President and Head of Regulatory Affairs, Novartis Pharma AG, Switzerland (2015–2017) • Global Head of Country Medical Development, Novartis Pharmaceuticals Corporation, US (2010–2011) • Previously held regulatory leadership roles at Schering-Plough Corporation (now Merck) and Pharmacia Corporation (now Pfizer) Mandates • Member of the advisory board, Industry Pharmacists Organization, US Education • Doctor of pharmacy, University of Wisconsin-Madison, US • Bachelor of Science in pharmaceutical sciences, University of Wisconsin-Madison, US 150 Item 6. Directors, Senior Management and Employees Steffen Lang, Ph.D. President, Operations since April 4, 2022 | Nationality: German/Swiss | Year of birth: 1967 Professional experience • Global Head of Novartis Technical Operations (NTO), Switzerland (2017–April 2022) • 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 Mandates • Board member, Bachem Holding AG, Switzerland Education • Doctorate in pharmaceutical technology, Swiss Federal Institute of Technology, Switzerland • Master’s degree in pharmaceutical sciences, University of Heidelberg, Germany Fiona H. Marshall, Ph.D. President, Novartis Institutes for BioMedical Research (NIBR) since November 1, 2022 | Nationality: British | Year of birth: 1964 Professional experience • Senior vice president, head of discovery, preclinical and translational medicine, Merck & Co., US, (2021–September 2022) • Vice president, global head of neuroscience, Merck & Co., US (2019–2021) • Vice president, head of UK discovery research, Merck & Co., UK (2018–2019) • Executive vice president and chief scientific officer, Sosei Heptares, UK (2015–2018) • Chief scientific officer and founder, Heptares Therapeutics, UK (2006–2018) Mandates • Member of the Scientific Advisory Board, SciLifeLab, Sweden • Fellow, Royal Society, UK • Honorary Fellow, Royal Society of Chemistry, UK • Honorary Fellow, British Pharmacological Society, UK • Fellow, UK Academy of Medical Sciences, UK • Fellow, Royal Society of Biology, UK Education • PhD in Neuroscience, University of Cambridge, UK • BSc in Biochemistry, University of Bath, UK 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 • Board member, SwissHoldings, the Swiss federation representing Swiss-based multinational companies, Switzerland • Member of the executive board, Business at OECD (BIAC), Paris • Co-chair, B20 Integrity & Compliance Task Force under the G20 presidencies of Indonesia (2022), Italy (2021), Saudi Arabia (2020), Argentina (2018), and Chair of the Task Force under the G20 presidency of Germany (2017) • Member of the advisory panel, Pharmaceutical Supply Chain Initiative, US • Co-founder and board member, European Chief Compliance and Integrity Officers’ Forum • Chair of the Anti-Corruption Committee of the Business and Industry Advisory Committee (BIAC), Organization for Economic Co-operation and Development (OECD), Paris (2013–2020) Education • First and second state examination in law, Germany • Doctor of jurisprudence, University of Freiburg, Germany Marie-France Tschudin President, Innovative Medicines International & Chief Commercial Officer since April 4, 2022 | Nationality: Swiss | Year of birth: 1971 Professional experience • President, Novartis Pharmaceuticals, Switzerland (2019–April 2022) • President, Advanced Accelerator Applications, France (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) Mandates • Board member, IMD Foundation, Switzerland • Board member, AXA, France • Board member, European Federation of Pharmaceutical Industries and Associations (EFPIA), Belgium Education • Master of Business Administration, IMD business school, Switzerland • Bachelor of Science, Georgetown University, US 151 Item 6. Directors, Senior Management and Employees Information and control systems The Board’s information and control systems vis-à-vis management include a steady flow of information from senior management; monthly financial reports; a compre- hensive and integrated risk management framework; and the independent evaluation of our risk management and internal control framework by the Internal Audit function (see “Item 15. Controls and Procedures”). 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), frequent communications from the CEO on current developments, and a yearly presentation • Executive Committee meeting minutes • Regular meetings and teleconferences by the Board and/or Board committees with the CEO and/or other members of the Executive Committee (e.g., the CFO, the Chief Legal Officer, the Chief Ethics, Risk & Com- pliance Officer), and regular meetings and teleconfer- ences with senior management (e.g., the Chief Audit Officer) • Information from Executive Committee members or other Novartis employees, and visits to Novartis sites To get an outside view, the Board and/or Board commit- tees occasionally invite external advisors (e.g., the inde- pendent advisor of the Compensation Committee, the external auditor) to attend a meeting and/or share their observations about a specific topic. Monthly financial reports 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 with 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, which includes 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. 152 Item 6. Directors, Senior Management and Employees Risk management Overview At Novartis, our continued success depends on our abil- ity to manage risk. Our Board has ultimate oversight of the Enterprise Risk Management (ERM) system and reg- ularly reviews the most significant risks and how these risks are managed. As explained further below, the Board is supported by its committees. Furthermore, our Internal Audit function provides an independent evaluation of risk management (see “—Item 6.C Board practices—Informa- tion and control systems—Internal Audit”). BOARD COMMITTEES RISK COMMITTEE • Oversees the risk management system and processes • Reviews, together with management, the prioritization and handling 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 • Receives updates on cyber security on an annual basis • Receives regular updates from designated risk owners as well as the Chief Ethics, Risk & Compliance Officer and/or the Head of Risk & Resilience AUDIT AND COMPLIANCE COMMITTEE • Ensures that Internal Audit plans are aligned with key risks, and that the function provides independent assurance and insights around these risks • Works closely with the Risk Committee to minimize gaps in risk coverage • Receives a semiannual presentation from the Chief Ethics, Risk & Compliance Officer • Receives a quarterly presentation from the Chief Audit Officer on progress achieved in implementing the risk-based audit plan, and key insights about audit and advisory activities • Pays particular attention to financial risk • Has closed sessions with the Chief Audit Officer and, upon request, with the Chief Ethics, Risk & Compliance Officer COMPENSATION COMMITTEE • Works closely with the Risk Committee to ensure that the compensation system does not lead to excessive risk-taking (see “—Item 6.B Compensation—Compensation governance— Risk management principles”) EXECUTIVE COMMITTEE OF NOVARTIS • Regularly assesses risks and fosters a culture of risk awareness, in line with the Novartis Values and Behaviors and the Novartis Code of Ethics ETHICS, RISK & COMPLIANCE • Governs the Novartis Code of Ethics • Provides an integrated ERM framework (further described in the following section) • Governs the global compliance program within Novartis • Administers the Enterprise Policy Management and global Internal Controls framework 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, including tracking progress and providing resources for possible actions • Assess emerging risks, trends and overall exposure as part of the ERM process Enterprise Risk Management framework The Ethics, Risk & Compliance (ERC) function provides an integrated ERM framework to obtain a holistic view of Company risks and drive a culture of smart risk-taking. Under the leadership of the Chief Ethics, Risk & Compli- ance Officer, the Risk & Resilience team is responsible for the overall ERM process. This process covers, but is not limited to, risks associated with: • The 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 eco- nomic environment The ERM process continued to evolve in 2022. The Risk & Resilience team conducted risk workshops and collab- orated with all risk assurance and monitoring functions to identify key risks across the Company. Each Novartis unit organized a focused risk workshop at the leadership team level. In parallel, risk workshops were held in the top 11 countries (by revenue) and in certain focus mar- kets. Once key risks were identified, mitigation action plans were created to address them in an effective way. The findings from these workshops were consolidated into the Novartis Risk Compass, which enables senior management, the Executive Committee and the Board to focus discussions on key risks and more closely align our corporate strategy with our risk exposure and ways of working. In 2022, we further matured our ERM framework within the Novartis Risk & Resilience organization, devel- oped additional risk management trainings, and inte- grated other critical risk management functions (like Third-Party Risk Management and Health, Safety and Environment) into the Risk & Resilience department. Fur- thermore, the Enterprise Policy & Internal Control team is progressing as planned to create a holistic framework, and the Central Monitoring Coordination team is expand- ing its scope to ensure a harmonized and coordinated monitoring process across the Company. SpeakUp Office Our SpeakUp Office provides a safe place for employ- ees to report potential misconduct, including the option to do so anonymously. Global Security Global Security proactively collects and shares threat intelligence to protect Novartis from situations that may compromise the safety of people, products and assets, and/or the reputation of our organization. Global Security protects patients from counterfeit products and, as part of the SpeakUp process, performs fair and timely inves- tigations into high-risk cases of alleged internal miscon- duct. It also provides personal security advice and sup- port for Novartis executives and other employees with the utmost discretion. 153 Item 6. Directors, Senior Management and Employees Internal Audit 2022 INTERNAL AUDIT ACTIVITIES The purpose of Internal Audit is to assist the Board and the Executive Committee in discharging their governance responsibilities by providing independent assurance and advice on the effectiveness, efficiency and adequacy of processes and controls that support Novartis in achiev- ing its objectives, managing its major risks, and ensuring compliance with applicable policies, laws and regulations. The Chief Audit Officer reports administratively to the CEO, and functionally to the chair of the Audit and Compliance Committee (ACC). The Chief Audit Officer meets with the ACC at least once a quarter and confirms the organizational independence of the Internal Audit function to the ACC on an annual basis. In 2022, our Internal Audit function executed a risk- based audit plan and reported the results to the audited units, the Executive Committee and the ACC. Audit find- ings and action plans are stored and monitored in a sin- gle location to enable efficient and effective follow-up. The following outlines the number of audits, internal reviews and advisories performed in 2022, and key meth- odology steps when managing the Internal Audit cycle. AUDITS 41 INTERNAL REVIEWS 14 ADVISORIES 8 Internal Audit cycle methodology includes: 3 Planning: Monitoring and information gathering via continuous risk assess- ment based on data analytics, busi- ness interviews and quarterly calibra- tion of the audit plan 3 Execution and Reporting: 63 engage- ments delivered in 2022, all linked to group risks, emerging topics and com- pany-wide initiatives 3 Follow Up: Management is responsible for resolving issues, supported by Internal Audit to ensure timely closure of observations Internal Audit performed 85% of planned activities (equating to 63 of 74 engagements) in 2022, conducted under a hybrid model of engagement delivery, choos- ing between remote and in-person auditing based on the engagement scope and COVID-19 situation within the audited entity. 154 Item 6. Directors, Senior Management and Employees Auditors Duration of the mandate and terms of office On behalf of the Board, the ACC selects and nominates an independent auditor for election at the AGM. KPMG commenced its auditing mandate for Novartis in 2022. Richard Broadbelt, Auditor in charge, and Sara Burke, Global Audit Partner, began serving in their roles in 2022. The ACC together with KPMG will ensure that these part- ners 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-related and non-audit services, including tax services and other ser- vices 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. KPMG fees for professional services related to the 12-month period ended December 31, 2022, and PwC fees for professional services related to the 12-month period ended December 31, 2021, are as fol- lows: Audit services Audit-related services Tax services Other services Total 2022 USD million 2021 USD million 22.5 0.7 1.2 0.0 24.4 22.2 1.5 0.1 1.4 25.2 Audit services include work performed to issue opinions on consolidated financial statements and parent company financial statements of Novartis AG, to issue opinions 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 policies, audits of infor- mation systems and the related control environment, as well as reviews of quarterly financial results. Audit-related services include other assurance services provided by the independent auditor but not restricted to those that can only be provided by the statutory auditor. They include services such as: audits of pension and other employee benefit plans; audits in connection with non-recurring transactions; contract audits of third-party arrangements; corporate responsibility assurance; and other audit-related services. Tax services include tax compliance, assistance with historical tax matters, and other tax-related services. Other services in 2021 included procedures related to corporate integrity agreements, benchmarking stud- ies, and license fees for use of accounting 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 the external auditor. In 2022, this committee held seven meetings. KPMG was invited to all of these meetings to attend the discussions on audit- ing matters and any other matters relevant to its audit. The ACC recommended to the Board to approve the audited consolidated financial statements and the separate parent company financial statements of Novartis AG for the year ended December 31, 2022. 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 the external auditor and, based on this, once a year deter- mines whether the external auditor should be proposed to the shareholders for re-election. To assess the per- formance of the external auditor, the ACC requests input from management and holds private meetings with the CFO and the Chief Audit Officer and, if necessary, obtains an independent external assessment. Criteria applied for the performance assessment of the external auditor 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 Audit Partner report to the Board on the external audi- tor’s activities during the current year, and on the audit plan for the coming year. On an annual basis, the external auditor provides the ACC with written disclosures required by the US Public Company Accounting Oversight Board, and the commit- tee and the external auditor discuss the external audi- tor’s independence from Novartis. 155 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 publishes press releases related to financial results and material events to the US Securities and Exchange Commission (SEC) via Form 6-K. An archive containing annual reports, US SEC Form 20-F, quarterly results releases and all related materials – including pre- sentations and conference call webcasts – is available at www.novartis.com/investors. Novartis also publishes a Novartis in Society Inte- grated Report, available at www.reporting.novartis.com, which highlights progress on the Company’s strategic priorities and describes how Novartis creates value for diverse stakeholders. The Novartis in Society Integrated Report has been prepared in alignment with the Inte- grated Reporting Framework (part of the IFRS Founda- tion), the Task Force on Climate-related Financial Dis- closures (TCFD), the Sustainability Accounting Standards Board (SASB) and the latest non-financial standards issued by the Global Reporting Initiative (GRI). It also contains our main disclosures against the Company’s reporting requirement as a signatory of the United Nations Global Compact. Website information Topic Share capital Shareholder rights Annual General Meeting of Shareholders Board Regulations Novartis code for senior financial officers Novartis in Society Integrated Report Novartis financial data Press releases The information on Board and Executive Committee compensation is outlined in the Compensation Report (see “—Item 6.B Compensation” in general, and for certain com- pensation information with respect to our Board that is responsive to Item 6.C.2 of Form 20-F, see “—Item 6.B Com- pensation—2022 Board compensation—Philosophy and benchmarking”). Please also refer to articles 29-35 of the Articles of Incorporation (www.novartis.com/investors/ company- overview/corporate-governance). There are no change-of-control or ‘golden parachute’ clauses benefit- ing Board members, Executive Committee members, or other members of senior management. Employment con- tracts 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 enter- prises 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. Information Articles of Incorporation of Novartis AG www.novartis.com/investors/company-overview/corporate-governance Novartis key share data www.novartis.com/investors/share-data-analysis 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 Integrated Report www.reporting.novartis.com Novartis financial data www.novartis.com/investors/financial-data Press releases www.novartis.com/news/news-archive?type=media_release Email service www.novartis.com/news/stay-up-to-date Additional information (including Novartis investor event calendar, registered office, contact and email addresses, phone numbers, etc.) Novartis Investor Relations www.novartis.com/investors 156 Item 6. Directors, Senior Management and Employees Quiet periods According to our Global Insider Policy, employees who have access to material non-public information on a reg- ular basis are designated as Continuing Insiders and are banned from trading in Novartis securities during quiet periods. Limited exemptions for the expiry of options or warrants within a quiet period apply. Until June 14, 2022, our quarterly quiet periods commenced at the begin- ning of the last trading day of each calendar quarter and ended at the beginning of the first trading day after the subsequent release of the quarterly and/or annual results. Effective June 15, 2022, our quarterly quiet peri- ods commence on the first trading day of each calen- dar quarter and end at the beginning of the first trading day after the subsequent release of the quarterly and/ or annual results. In 2022, the following quiet periods applied: • December 30, 2021, until (and including) February 2, 2022 • March 31, 2022, until (and including) April 26, 2022 • July 1, 2022, until (and including) July 19, 2022 • October 1, 2022, until (and including) October 25, 2022 157 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, 2022 (full-time equivalents) USA Canada and Latin America Europe Asia/Africa/Australasia Total For the year ended December 31, 2021 (full-time equivalents) USA Canada and Latin America Europe Asia/Africa/Australasia Total For the year ended December 31, 2020 (full-time equivalents) USA Canada and Latin America Europe Asia/Africa/Australasia Total Marketing and Production and Research and General and supply development Operations 1 administration sales 6 003 2 678 1 740 5 358 809 514 14 078 18 781 10 483 15 856 3 841 4 841 38 615 25 171 21 196 12 437 4 284 101 703 825 1 071 5 028 5 513 879 1 116 5 108 5 696 636 928 4 506 4 991 Total 14 525 5 342 599 270 2 483 50 853 932 30 983 Total 14 869 6 538 654 370 2 613 50 821 1 090 32 095 Total 15 942 6 524 820 401 2 852 52 095 1 119 31 233 Marketing and Production and Research and General and supply development Operations 1 administration sales 6 074 3 116 1 938 1 426 5 324 510 15 163 17 630 10 307 16 927 3 570 4 812 41 280 24 564 20 953 12 799 4 727 104 323 Marketing and Production and Research and General and supply development Operations 1 administration sales 5 978 3 405 2 954 1 286 5 554 504 16 066 18 628 10 043 17 240 3 346 4 537 42 689 26 214 20 638 11 061 5 192 105 794 1 relates to full time equivalent employees (FTEs) from our Operations unit, excluding the Operations units’ production and supply FTEs As of December 31, 2022, the total number of our full- time equivalent employees decreased by 2 620 com- pared with December 31, 2021, mainly driven by the ini- tiative announced in April 2022 to implement a new, streamlined organizational model. For more information about this new organizational structure, see “Item 4. Information on the Company—Item 4.B Overview.” A significant number of our employees are repre- sented by unions or works councils. We have not expe- rienced any material work stoppages in recent years, and we consider our employee relations to be good. 6.E Share ownership The information set forth under “Item 6. Directors, Senior Management and Employees—Item 6.B Compensa- tion—2021 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, 2021” and under “Item 6. Directors, Senior Man- agement and Employees—Item 6.B Compensation—2021 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 employees,” which is incorporated by reference. 158 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, 2022, Novartis had approximately 186 000 sharehold- ers listed in the Share Register of Novartis, representing approximately 67.0% of issued shares. Based on the Novartis Share Register and excluding treasury shares, approximately 48.4% of the shares registered by name were held in Switzerland, and approximately 21.3% were held in the US. Approximately 15.6% of the shares reg- istered in the Share Register were held by individual investors, while approximately 37.7% were held by legal entities (excluding 7.7% of our share capital held as trea- sury shares by Novartis AG or its fully owned subsidiar- ies), and 46.7% were held by nominees, fiduciaries and the ADS depositary. Due to a change in Swiss corporate law, as of January 1, 2023, Novartis ordinary shares held by certain Swiss foundations controlled by Novartis (Foundation Shares) no longer carry the right to vote. As a result, in the future these Foundation Shares will be excluded from the calculation of the shares registered in the Share Register in the same way, as described above, that our treasury shares are excluded. This will impact some of the percentage holdings reported in this Item 7.A in future Form 20-F filings by Novartis. Based on the 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 the Share Reg- ister as of December 31, 2022, excluding 7.7% of our share capital held as treasury shares by Novartis AG or its fully owned subsidiaries. The following registered shareholders (including nominees and the ADS deposi- tary) 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 Direc- tors: Shareholders registered for their own account: Emasan AG, Basel, Switzerland UBS Fund Management (Switzerland) AG, Basel, Switzerland Credit Suisse Funds AG, Zurich, Switzerland Shareholders registered as nominees: Chase Nominees Ltd., London, England Nortrust 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 Shareholder acting as American Depositary Share (ADS) depositary: % of respective share capital beneficially owned as of: Ordinary shares beneficially owned as of Dec 31, 2022 Dec 31, 2022 Dec 31, 2021 Dec 31, 2020 89 135 960 55 906 821 49 335 879 3.7 2.3 2.1 3.7 2.3 2.1 3.6 2.3 2.0 % of respective share capital held as of: Ordinary shares held as of Dec 31, 2022 Dec 31, 2022 Dec 31, 2021 Dec 31, 2020 201 853 725 90 962 072 68 638 910 37 227 478 22 583 699 8 827 733 8.4 3.8 2.9 1.6 0.9 0.4 8.8 4.2 3.0 1.6 1.1 0.3 9.6 4.2 3.4 1.7 1.2 0.5 JPMorgan Chase Bank, N.A., New York, NY 225 529 101 9.4 11.1 11.7 According to a disclosure notification filed with Novartis AG, Norges Bank (Central Bank of Norway), Oslo, Nor- way, held 2.3% of the share capital of Novartis AG, or 54 667 792 shares, as of December 31, 2022, but was not registered in the Share Register as of December  31, 2022. Provided that these shares are registered in the Share Register on the record date of the Annual General Meeting, Norges Bank will have full voting rights for all of these shares. According to a disclosure notification filed with Novartis AG and the SIX Swiss Exchange, Black- Rock, Inc., New York, NY, held between 5% and 10%, but was registered with less than 2% of the share capital of 159 Item 7. Major Shareholders and Related Party Transactions Novartis AG in the Share Register as of December 31, 2022. As of December 31, 2022, no other shareholder was registered as owner of more than 2% of the registered share capital. The Articles of Incorporation provide that no share- holder shall be registered with the right to vote shares comprising more than 2% of the registered share capital. The Board of Directors may, upon request, grant an exemption from this restriction. Considerations include whether the shareholder supports the Novartis goal of creating sustainable value and has a long-term investment horizon. Exemptions are in force for the reg- istered 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. 160 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 per share. This policy is subject to our financial conditions and outlook at the time, the results of our operations, and other factors. The Board will propose a dividend of CHF 3.20 per share to the shareholders for approval at the Annual General Meeting to be held on March 7, 2023. Because we pay dividends in Swiss francs, exchange rate fluctu- ations will affect the US dollar amounts received by hold- ers of ADRs. For the amount of dividends we paid in the past three years, see “Item 18. Financial Statements— Note 18—Equity.” Disclosure pursuant to Section 219 of the Iran Threat Reduction and 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 2022, 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 2022, 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. These trans- actions are conducted for the purpose of facilitating the provision of medicine to Iran, in line with the humanitar- ian exceptions contained in Section 11 of Executive Order 13902 and other applicable sanctions legal authorities. No transactions are made with an Iranian financial insti- tution designated on the SDN List in connection with Iran’s support for international terrorism or proliferation of weapons of mass destruction. 161 Item 8. Financial Information 8.B Significant changes None. 162 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 25, 2023, there were 220 million ADRs outstanding, each representing one Novartis share (approximately 9% of total Novartis shares issued). On January 25, 2023, the closing price was CHF 85.30 per share on the SIX, and USD 92.81 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. 163 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 non-exhaustive summary of certain provisions of our Articles of Incorporation (“Articles”); our Regulations of the Board, the Board Committees and the Executive Committee (“Board Regulations”); and Swiss law, particularly 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 (including the Board Chair) are elected individually by the General Meeting of Shareholders (“General Meeting”) for a one- year term of office lasting until completion of the next Annual General Meeting of Shareholders (“AGM”). (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 decisions and 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. (c) The Articles prohibit the granting of loans or credits to Directors. (d) The Articles provide that a Director shall not serve on the Board for more than 12 years. The Board may, under certain circumstances and if deemed in the best interests of the Company, recommend excep- tions to this rule to the General Meeting. (e) Our Directors are not required to be shareholders at the time of the election by the General Meeting. How- ever, according to our share ownership guidelines, the Board Chair is required to own a minimum of 30 000 Novartis AG shares, and other Directors are required to own at least 5 000 Novartis AG shares within five years after joining the Board, to ensure their interests are aligned with those of our share- holders. 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. Furthermore, the Swiss CO requires us to accrue general legal reserves under certain cir- cumstances 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 expects to recommend the payment of a divi- dend in respect of each financial year. See “Item 6. Directors, Senior Management and Employees—Item 6.C Board Practices—Capital Structure—Limitation on transferability—Per-share information” and “Item  8.  Financial Information—Item  8.A. Consoli- dated statements and other financial information— Dividend policy.” Dividends are usually due and payable shortly after the shareholders have passed a resolution approving the payment. Dividends that have not been claimed within five years after the due date revert to us and are allocated to our general reserves. For information about deduction of the withholding tax or other duties from dividend payments, see “—Item 10.E Taxation.” 164 Item 10. Additional Information (b) Each share is entitled to one vote at a General Meet- ing. Voting rights may only be exercised for shares registered with the right to vote on the record date for the applicable General Meeting. 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 reg- istered office). If the shareholder has not timely reg- istered its shares, then the shareholder may not vote at, or participate in, a General Meeting. 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 0.5% or more of the registered share capital. The same restrictions indi- rectly apply to ADR holders. We have in the past granted exemptions from the 2% rule for sharehold- ers and the 0.5% rule for nominees. 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. Except as noted below, shareholders’ resolutions require the approval of an absolute majority of the votes present at a General Meeting. As a result, abstentions have the effect of votes against such res- olutions. Some examples of shareholders’ resolutions requiring a vote by such “absolute majority of the votes” are: • Adoption and amendment of the Articles • Election and removal of the Board Chair, the Board and Compensation Committee members, the Inde- pendent Proxy and the external auditor • Approval of the management report and of the con- solidated 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 divi- dends, if any • Approval of the maximum aggregate compensation of the Board (from an AGM until the next AGM) and of the Executive Committee (for the financial year following the AGM) • Discharge of Board and Executive Committee members from liability for matters disclosed to the General Meeting • Decision on other matters that are reserved by law or by the Articles (e.g., advisory vote on the Com- pensation Report) to the General Meeting 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: • 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 restric- tions • Authorized or conditional increase of the share cap- ital • Increase of the share capital out of equity, by con- tribution in kind, for the purpose of an acquisition of property or the grant of special rights • Restriction or cancellation of subscription rights • Change of the registered office of Novartis AG • Dissolution of Novartis AG In addition, the law provides for a qualified major- ity for other resolutions, such as a merger or demerger. Our shareholders are required to annually elect all Directors (including the Board Chair), the Compen- sation Committee members, the external auditor and the Independent Proxy. The Articles do not provide for cumulative voting of shares. At a General Meeting, shareholders can be repre- sented by a proxy, which must either be the sharehold- er’s legal representative, another shareholder with the right to vote, or the Independent Proxy. Votes are taken either by a show of hands or by electronic voting, unless the General Meeting resolves to have a ballot or where a ballot is ordered by the chair of the meet- ing. ADSs, each representing one Novartis AG share and evidenced by 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 enu- merated 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 165 Item 10. Additional Information ADRs). The enumeration of rights, including any lim- itations on those rights in the Deposit Agreement, is final. There are no other rights given to the ADR hold- ers. 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 a General Meeting in person. ADR holders exercise their voting rights by instructing JPMorgan Chase Bank, N.A., our depositary, to exercise the vot- ing rights attached to the registered shares underly- ing the ADRs. Each ADR represents one Novartis AG share. JPMorgan Chase Bank, N.A., exercises the vot- ing rights for registered shares underlying ADRs for which no voting instructions have been given by pro- viding a discretionary proxy to an uninstructed inde- pendent designee. Such designee has to be a share- holder 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 otherwise granted an exemption by the Board – and the disclo- sure 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, 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, but are entitled to the economic benefits generally con- nected with the shares. The definition of subsidiaries, and therefore, treasury shares, for purposes of the above-described reserves requirement and voting restrictions, differs from the definition of subsidiaries for purposes of consolidation in our consolidated financial statements. The definition in the consoli- dated financial statements requires consolidation for financial reporting purposes of special purpose enti- ties 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 require- ments and voting restrictions of the Swiss CO because we do not hold a majority participation in these spe- cial purpose entities. Accordingly, no reserve require- ments apply to shares held by such special purpose entities, and such entities are not restricted from inde- pendently 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 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 General Meeting by a super- majority of votes. In addition, see “—Item 10.B.3(b) Share- holder 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 AGM within six months after the end of our financial year. A General Meeting may be convened by the Board or, if necessary, by the external auditor. The Board is further required to convene an extraordinary General Meeting if so resolved by a General Meeting, or if so requested by shareholders representing at least 10% of the share capital, specifying the items for the agenda and their proposals. Shareholders representing shares with an aggregate nominal value of at least CHF 1 000 000 may request that an item be included in a General Meeting agenda. A General Meeting is convened by publishing a notice in the Swiss Official Gazette of Commerce (Schweizerisches Handelsamtsblatt) at least 20  days prior to such meeting. Shareholders may also be informed by mail. Neither the Swiss CO nor the Articles require a quorum for a General Meeting. In addition, see “— Item 10.B.3(b) Shareholder rights” regarding conditions for exercising a shareholder’s right to vote at a General Meeting. 166 Item 10. Additional Information parties acquire or dispose of our shares or purchase or sale rights relating to our shares are required to notify us and the SIX of the level of their holdings whenever such holdings reach, exceed or fall below certain thresh- olds – 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 publishing the information via the electronic publication platform operated by the 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.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 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. 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 10.C Material contracts 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 9.6 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 indirect wholly owned subsidiary of Novartis. This merger broadens our cardiovascular portfolio by adding incli- siran, an investigational cholesterol-lowering therapy. Divestment of Roche shares On November 3, 2021, we entered into a Share Repur- chase Agreement with Roche under which we agreed to sell 53.3 million (approximately 33%) of Roche bearer shares in a bilateral transaction to Roche for a total con- sideration of USD 20.7 billion. The transaction was approved by the shareholders of Roche on Novem- ber 26, 2021, and closed on December 6, 2021. 167 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- income tax return. However, holder’s personal distributions 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 rep- resent 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 time frame 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. 168 Item 10. Additional Information As of January 1, 2023, 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 Brazil 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 Malaysia Malta Mexico Moldova Mongolia Montenegro Morocco Netherlands New Zealand North Macedonia Norway Oman Pakistan Peru Philippines Poland Portugal Qatar Romania Russia Saudi Arabia 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 Tax treaty negotiations are underway, or have been conducted, with Angola, Bosnia and Herzegovina, Cameroon, Costa Rica, Ethiopia, Jordan, Kenya, Libya, Nigeria, Rwanda, 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) is not a company (or, if it is a company, such company directly holds less than 10% of our voting stock), and (iii) does not conduct business through a permanent establishment or fixed base in Swit- zerland 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, pro- vided that such holder (i) is a company, (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 establishment 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 Withholding Tax in excess of the 5% Treaty rate. Claims for refunds must be filed on Swiss Tax Form 82 (82C for corporations; 82I for indi- viduals; 82E for other entities), which may be obtained from any Swiss Consulate General 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 Adminis- tration 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 December 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 depositary, will comply with these Swiss 169 Item 10. Additional Information procedures on behalf of the holders, and will remit the net amount to the holders. 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 that (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. the control of one or more US persons, or (ii) that has a valid election in place to be treated as a US person. If a partnership (or other entity treated as a partnership for US federal income tax purposes) holds shares or ADRs, the tax treatment of a partner generally will depend upon the status of the partner and the activities of the part- nership. Partners in a partnership that holds shares or ADRs are urged to consult their own tax advisor regard- ing the specific tax consequences of the owning and disposing of such shares or ADRs by the partnership. For US federal income tax purposes, a US Holder of ADRs generally will be treated as the beneficial owner of our shares represented by the ADRs. However, see the discussion below under “—Dividends” regarding cer- tain statements made by the US Treasury concerning depositary arrangements. This discussion assumes that each obligation in the Deposit Agreement and any related agreement will be performed in accordance with its terms. US federal income taxation The following is a general discussion of the material US federal income tax consequences of the ownership and disposition of our shares or ADRs that may be relevant to you if you are a US Holder (as defined below). Because this discussion does not consider any specific circum- stances of any particular holder of our shares or ADRs, persons who are subject to US taxation are strongly urged to consult their own tax advisors as to the overall US federal, state and local tax consequences, as well as to the overall Swiss and other foreign tax consequences, of the ownership and disposition of our shares or ADRs. In particular, additional or different rules may apply to US expatriates; banks and other financial institutions; regu- lated investment companies; traders in securities who elect to apply a mark-to-market method of accounting; dealers in securities or currencies; tax-exempt entities; insurance companies; broker-dealers; investors liable for alternative minimum tax; investors that hold shares or ADRs as part of a straddle, hedging or conversion trans- action; holders whose functional currency is not the US dollar; partnerships or other pass-through entities; per- sons who acquired our shares pursuant to the exercise of employee stock options or otherwise as compensa- tion; and persons who hold, directly, indirectly or by attri- bution, 10% or more of our outstanding shares. This dis- cussion generally applies only to US Holders who hold the shares or ADRs as a capital asset (generally, for investment purposes), and whose functional currency is the US dollar. Investors are urged to consult their own tax advisors concerning whether they are eligible for benefits under the Treaty. For purposes of this discussion, a US Holder is a ben- eficial owner of our shares or ADRs who is (i) an individ- ual who is a citizen or resident of the US for US federal income tax purposes; (ii) a corporation (or other entity taxable as a corporation for US federal income tax pur- poses) created or organized in or under the laws of the US or a state thereof or the District of Columbia; (iii) an estate the income of which is subject to US federal income taxation regardless of its source; or (iv) a trust (i) subject to the primary supervision of a US court and Dividends. US Holders will be required to include in gross income, as an item of ordinary income, the full amount (without reduction for any Withholding Tax) of the 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 170 Item 10. Additional Information inconsistent with the claiming of foreign tax credits for US Holders of ADRs. Accordingly, the summary above of the creditability of the Withholding Tax could be affected by future actions that may be taken by the US Treasury. In general, a US Holder will be required to determine the amount of any dividend paid in Swiss francs, includ- ing the amount of any Withholding Tax imposed thereon, by translating the Swiss francs into US dollars at the spot rate on the date the dividend is actually or constructively received by a US Holder, in the case of shares, or by the depositary, in the case of ADRs, regardless of whether the Swiss francs are in fact converted into US dollars. If a US Holder converts the Swiss francs so received into US dollars on the date of receipt, the US Holder gener- ally should not recognize foreign currency gain or loss on such conversion. If a US Holder does not convert the Swiss francs so received into US dollars on the date of receipt, the US Holder will have a tax basis in the Swiss francs equal to the US dollar value on such date. Any for- eign currency gain or loss that a US Holder recognizes on a subsequent conversion or other disposition of the Swiss francs generally will be treated as US source ordi- nary income or loss. For a non-corporate US Holder, the US dollar amount of any dividends paid that constitute qualified dividend income generally will be taxable at a maximum rate of 15% (or 20% in the case of taxpayers with annual income that exceeds certain thresholds), provided that the US Holder meets certain holding period and other require- ments. In addition, the dividends could be subject to a 3.8% net investment income tax. This tax is applied against the lesser of the US Holder’s net investment income or the amount by which modified adjusted gross income exceeds a statutory threshold amount based on filing status. We currently believe that dividends paid with respect to our shares and ADRs will constitute qualified dividend income for US federal income tax purposes, provided that the US Holder meets certain holding period and other requirements. 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 situation and the computations of their foreign tax credit limitation with respect to any qual- ified dividends paid to them, as applicable. Sale or other taxable disposition. Upon a sale or other taxable disposition of shares or ADRs, US Holders generally will recognize capital gain or loss in an amount equal to the difference between the US dollar value of the amount realized on the disposition and the US Hold- er’s tax basis (determined in US dollars) in the shares or ADRs. This capital gain or loss generally will be US source gain or loss and will be treated as long-term cap- ital gain or loss if the holding period in the shares or ADRs exceeds one year. In the case of a non-corporate US Holder, any long-term capital gain generally will be sub- ject to US federal income tax at preferential rates, with a maximum rate of 15% (or 20% in the case of taxpayers with annual income that exceeds certain thresholds). In addition, the gains could be subject to a 3.8% investment income tax. This tax is applied against the lesser of the US Holder’s net investment income or the amount by which modified adjusted gross income exceeds a stat- utory threshold amount based on filing status. The deductibility of capital losses is subject to significant lim- itations under the Code. Deposits or withdrawals of our shares by US Holders in exchanges for ADRs will not result in the realization of gain or loss for US federal income tax purposes. US information reporting and backup withholding. Divi- dend payments with respect to shares or ADRs and pro- ceeds from the sale, exchange or other disposition of shares or ADRs received in the United States or through US-related financial intermediaries may be subject to information reporting to the US Internal Revenue Service (IRS) and possible US backup withholding. Certain exempt recipients (such as corporations) are not subject to these information reporting and backup withholding requirements. Backup withholding will not apply to a US Holder who furnishes a correct taxpayer identification number and makes any other required certification or who is otherwise exempt from backup withholding. Any US Holders required to establish their exempt status generally must provide a properly executed IRS Form W-9 (Request for Taxpayer Identification Number and Certi- fication). Backup withholding is not an additional tax. Amounts withheld as backup withholding may be cred- ited against a US Holder’s US federal income tax liabil- ity, and a US Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by timely filing the appropriate claim for refund with the IRS and furnishing any required information. 10.F Dividends and paying agents Not applicable. 10.G Statement by experts Not applicable. 171 Item 10. Additional Information 10.H Documents on display Any statement in this Form 20-F about any of our con- tracts or other documents is not necessarily complete. If the contract or document is filed as an exhibit to the Form 20-F, the contract or document is deemed to mod- ify the description contained in this Form 20-F. You must review the exhibits themselves for a complete descrip- tion of the contract or document. The SEC maintains an internet site at http://www.sec. gov that contains reports and other information regard- ing issuers that file electronically with the SEC. These SEC filings are also available to the public from commer- cial document retrieval services. We are required to file or furnish reports and other information with the SEC under the 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. 172 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, which has established pro- cesses and procedures to identify, aggregate and man- age our financial risk exposure. The Group 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. 173 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 174 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. 175 Item 13. Defaults, Dividend Arrearages and Delinquencies PART II Item 13. Defaults, Dividend Arrearages and Delinquencies None. 176 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. 177 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, 2022. 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, 2022, the Group’s internal control over financial reporting is effective based on those cri‑ teria. KPMG AG, Switzerland, an independent registered public accounting firm, has issued an unqualified opin‑ ion on the effectiveness of the Group’s internal control over financial reporting, which is included in this Annual Report under “Item 18. Financial Statements—Report of independent registered public accounting firm.” See the report of KPMG, 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 31, 2023 178 Item 16A. Audit Committee Financial Expert Item 16A. Audit Committee Financial Expert Our Audit and Compliance Committee has determined that Elizabeth Doherty and Ana de Pro Gonzalo possess specific accounting and financial management exper‑ tise, and that they are Audit Committee Financial Experts as defined by the SEC. The Board of Directors has also determined that Elizabeth Doherty and Ana de Pro Gonzalo are “independent” in accordance with the appli‑ cable requirements of Rule 10A‑3 of the Exchange Act, and that other members of the Audit and Compliance Committee have sufficient experience and ability in finance and compliance matters to enable them to ade‑ quately discharge their responsibilities. 179 Item 16B. Code of Ethics Item 16B. Code of Ethics In addition to our Code of Ethics and Professional Prac‑ tices Policy, which are applicable to all of our employees, we have adopted Ethical Conduct Requirements that impose additional obligations on our principal executive officer, principal financial officer, principal accounting 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 180 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. 181 Item 16D. Exemptions from the Listing Standards for Audit Committees Item 16D. Exemptions from the Listing Standards for Audit Committees Not applicable. 182 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 10 746 816 87.76 9 773 500 10 160 538 86.73 10 000 000 11 494 338 85.43 11 470 000 9 534 769 90.61 9 500 000 10 521 350 88.04 10 500 000 10 524 101 84.79 10 500 000 10 525 453 85.10 10 500 000 11 045 776 84.91 11 000 000 11 035 057 79.65 11 000 000 10 524 526 77.45 10 500 000 11 021 724 84.64 11 000 000 10 520 012 91.17 10 500 000 127 654 460 85.45 126 243 500 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 7 831 7 030 16 119 15 305 14 399 13 535 12 670 11 775 10 922 10 113 9 216 8 324 8 405 7 594 17 451 15 756 14 996 14 164 13 329 12 098 11 172 10 118 9 675 8 999 2022 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 employees.” 2 Column (c) shows shares repurchased on the SIX Swiss Exchange second trading line under the CHF 10 billion share buyback authority approved at the 2021 AGM and under the additional CHF 10 billion share buyback authority approved at the 2022 AGM for transactions in 2022. 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 183 Item 16F. Change in Registrant’s Certifying Accountant Item 16F. Change in Registrant’s Certifying Accountant Not applicable. 184 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. • 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. • 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. • The full Board is responsible for setting objectives rel‑ evant to the CEO’s compensation and for evaluating his performance. 185 Item 16H. Mine Safety Disclosure Item 16H. Mine Safety Disclosure Not applicable. 186 Item 16I. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Item 16I. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable. 187 Item 17. Financial Statements PART III Item 17. Financial Statements See response to “Item 18. Financial Statements.” 188 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 2022, 2021 and 2020 4. Associated companies 5. Interest expense and other financial income and expense 6. Income 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 employees 26. Equity‑based participation plans for employees 27. Transactions with related parties 28. Commitments and contingent liabilities 29. Financial instruments – additional disclosures 30. Events subsequent to the December 31, 2022, consolidated balance sheet date 31. Principal Group subsidiaries and associated companies Statutory Auditor’s Report 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 Statutory Auditor’s Report on the financial statements of Novartis AG Page F‑1 F‑2 F‑3 F‑4 F‑5 F‑6 F‑6 F‑15 F‑17 F‑26 F‑27 F‑27 F‑28 F‑29 F‑30 F‑32 F‑33 F‑36 F‑37 F‑38 F‑38 F‑39 F‑40 F‑40 F‑42 F‑44 F‑48 F‑48 F‑50 F‑53 F‑53 F‑58 F‑61 F‑62 F‑64 F‑74 F‑75 F‑77 A‑1 A‑3 A‑11 A‑12 189 Item 19. Exhibits Item 19. Exhibits The SEC maintains an internet site at http://www.sec.gov that contains reports and other information regarding issuers that file electronically with the SEC. These SEC filings are also available to the public from commercial doc‑ ument retrieval services. 1.1 Articles of Incorporation of Novartis AG, as amended March 2, 2021 (English translation) (incorporated by reference to Exhibit 4.1 to Novartis AG’s registration statement on Form S‑8 (File No. 333‑258081) as filed with the SEC on July 22, 2021). 1.2 Regulations of the Board of Directors, the Board Committees and the Executive Committee of Novartis AG, effective January 1, 2021 (incorporated by reference to Exhibit 1.2 to Novartis AG’s Annual Report on Form 20‑F (File No. 001‑15024) as filed with the SEC on January 26, 2021). 2.1 Form of Second Amended and Restated Deposit Agreement among Novartis AG, JPMorgan Chase Bank, N.A., as depositary, and all Holders and Beneficial Owners from time to time of American Depositary Receipts issued thereunder (incorporated by reference to Exhibit 99.A to the Registration Statement on Form F‑6 (File No. 333‑198623) as filed with the SEC on December 16, 2022). 2.2 Form of American Depositary Receipt (incorporated by reference to Exhibit 99.A to the Registration Statement on Form F‑6 (File No. 333‑198623) as filed with the SEC on December 16, 2022). 2.3 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. 2.4 Description of Securities registered under Section 12 of the Exchange Act. 8.1 For a list of all of our principal Group subsidiaries and associated companies, see “Item 18. Financial Statements—Note 31. Principal Group subsidiaries and associated companies.” 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 KPMG AG. 15.2 Consent of PricewaterhouseCoopers AG. 190 Item 19. Exhibits 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 104 Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101). 191   (This page has been left blank intentionally.) 192 Novartis Group consolidated financial statements Novartis Group consolidated financial statements Consolidated income statements (For the years ended December 31, 2022, 2021 and 2020) (USD millions unless indicated otherwise) Net sales to third parties Other revenues Cost of goods sold Gross profit Selling, general and administration Research and development Other income Other expense Operating income (Loss)/income from associated companies Interest expense Other financial income and expense Income before taxes Income taxes Net income Attributable to:    Shareholders of Novartis AG    Non-controlling interests Basic earnings per share (USD) Diluted earnings per share (USD) The accompanying Notes form an integral part of the consolidated financial statements. Note 2022 2021 2020 3 3 50 545 51 626 48 659 1 283 1 251 1 239 – 15 486 – 15 867 – 15 121 36 342 37 010 34 777 – 14 253 – 14 886 – 14 197 – 9 996 – 9 540 – 8 980 805 1 852 1 742 – 3 701 – 2 747 – 3 190 9 197 11 689 10 152 4 5 5 – 9 15 339 – 837 20 – 811 – 80 8 371 26 137 673 – 869 – 78 9 878 6 – 1 416 – 2 119 – 1 807 6 955 24 018 8 071 6 955 24 021 8 072 0 – 3 – 1 7 7 3.19 10.71 3.55 3.17 10.63 3.52 F-1 Novartis Group consolidated financial statements  Consolidated statements of comprehensive income (For the years ended December 31, 2022, 2021 and 2020) (USD millions) Net income Other comprehensive income Items that are or may be recycled into the consolidated income statement    Novartis share of other comprehensive income    recognized by associated companies, net of taxes    Net investment hedge, net of taxes    Currency translation effects, net of taxes Total of items that are or may be recycled Items that will never 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 that will never be recycled Total comprehensive income Attributable to:    Shareholders of Novartis AG    Non-controlling interests The accompanying Notes form an integral part of the consolidated financial statements. Note 2022 2021 6 955 24 018 2020 8 071 4 8 8 8 8 91 46 216 – 450 – 4 762 – 359 – 4 500 – 103 – 382 – 485 1 809 194 2 003 – 56 – 201 3 194 2 937 143 250 393 6 111 21 521 11 401 6 116 21 528 11 403 – 5 – 7 – 2 F-2 Novartis Group consolidated financial statements Consolidated balance sheets (At December 31, 2022 and 2021) (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 Total assets Equity and liabilities Equity Share capital Treasury shares Reserves Equity 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 Total liabilities Total equity and liabilities The accompanying Notes form an integral part of the consolidated financial statements. F-3 Note 2022 2021 9 10 11 11 4 12 13 13 14 15 16 16 17 10 764 11 545 1 431 1 561 29 301 29 595 31 644 34 182 143 3 739 2 411 1 110 205 3 743 3 036 2 210 80 543 86 077 7 175 8 066 268 6 666 8 005 278 11 413 15 922 7 517 12 407 2 471 2 440 36 910 45 718 117 453 131 795 18 18 890 – 92 901 – 48 58 544 66 802 59 342 67 655 81 167 59 423 67 822 19 10 12 20 21 10 20 244 22 902 1 538 2 686 4 906 1 621 3 070 6 172 29 374 33 765 5 146 5 931 251 5 553 6 295 275 2 533 2 415 22 14 795 15 670 28 656 30 208 58 030 63 973 117 453 131 795 Novartis Group consolidated financial statements Consolidated statements of changes in equity (For the years ended December 31, 2022, 2021 and 2020) Note 8 8 18.2 18.1 18.2 18 18.2 18.2 18.1 18.2 18 18.2 18.4 18.2 (USD millions) Total equity at January 1, 2020 Net income Other comprehensive income Total comprehensive income Dividends Purchase of treasury shares Reduction of share capital Exercise of options and employee transactions Repurchase of options Equity-based compensation Shares delivered to Alcon employees as a result of the Alcon spin-off Taxes on treasury share transactions Increase of treasury share repurchase 18.3 obligation under a share buyback trading plan 8 Fair value adjustments on financial assets sold 8 Value adjustments related to divestments Impact of change in ownership of consolidated entities 18.5 18.7 Other movements Total of other equity movements Total equity at December 31, 2020 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 Shares delivered to Alcon employees as a result of the Alcon spin-off Taxes on treasury share transactions Increase of treasury share repurchase 18.3 obligation under a share buyback trading plan 18.8 Transaction costs, net of taxes 18.6 Changes in non-controlling interests 8 Fair value adjustments on financial assets sold 8 Value adjustments related to divestments Impact of change in ownership of consolidated entities 18.5 18.7 Other movements Total of other equity movements Total equity at December 31, 2021 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 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 Changes in non-controlling interests Fair value adjustments on financial assets sold Value adjustments related to divestments Other movements Total of other equity movements Total equity at December 31, 2022 18.1 18.2 18 18.2 18.2 18.3 18.6 8 8 18.7 18.2 18.2 8 Share capital 936 Treasury shares – 80 Reserves Equity attributable Retained Total value to Novartis earnings adjustments shareholders 55 474 59 275 – 4 657 8 072 8 072 3 331 – 56 11 403 8 016 – 6 987 – 6 987 – 3 038 – 3 056 – 8 798 – 89 724 806 – 89 730 3 387 3 387 30 32 30 32 Non- controlling interests 77 – 1 – 1 – 2 Total equity 55 551 8 071 3 330 11 401 – 6 987 – 3 056 806 – 89 730 30 32 – 18 31 8 6 0 – 53 – 1 769 150 – 2 7 18 27 – 10 134 57 157 24 021 46 24 067 – 7 368 – 2 902 – 6 39 740 – 18 18 0 5 0 17 1 – 1 040 12 164 65 – 5 48 5 – 10 235 70 989 6 955 – 48 6 955 – 7 506 – 66 – 10 844 – 4 87 848 15 1 6 0 5 14 – 1 769 – 1 769 – 150 2 – 1 – 1 419 6 18 – 149 – 10 279 56 598 24 021 – 2 493 21 528 – 7 368 – 2 920 – 2 539 – 2 539 39 745 17 1 – 1 040 12 – 164 – 65 0 – 4 187 – 5 48 – 229 – 10 471 67 655 6 955 – 839 6 116 – 7 506 – 10 910 – 839 – 839 88 854 5 14 – 7 – 1 18 – 7 – 10 286 56 666 68 24 018 – 3 – 2 497 – 4 21 521 – 7 – 7 368 – 2 920 39 745 17 1 – 1 040 12 – 1 – 1 107 102 48 106 – 10 365 67 822 167 6 955 0 – 844 – 5 6 111 – 5 – 7 506 – 10 910 88 854 5 14 – 23 – 23 913 – 12 – 12 901 – 11 2 809 2 809 – 81 2 809 – 81 4 – 34 217 – 44 – 14 404 63 540 – 92 – 11 890 – 4 34 217 30 – 14 429 59 342 – 4 996 217 – 81 – 14 510 59 423 81 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, 2022, 2021 and 2020) (USD millions) Net income Note 2022 2021 6 955 24 018 2020 8 071 Adjustments to reconcile net income to net cash flows from operating activities Reversal of non-cash items and other adjustments 23.1 11 546 – 5 299 9 881 Dividends received from associated companies and others Interest received Interest paid Other financial receipts Other financial payments Income taxes paid Net cash flows from operating activities before working capital and provision changes Payments out of provisions and other net cash movements in non-current liabilities 1 254 525 13 490 47 – 696 – 664 – 703 71 – 32 – 302 464 – 39 23.2 – 1 975 – 2 342 – 1 833 16 124 15 949 16 378 – 885 – 1 119 – 2 437 Change in net current assets and other operating cash flow items 23.3 – 1 003 241 – 291 Net cash flows from operating activities Purchases of property, plant and equipment Proceeds from sale of property, plant and equipment Purchases of intangible assets Proceeds from sale of intangible assets Purchases of financial assets Proceeds from sale of financial assets Purchases of other non-current assets Proceeds from sale of other non-current assets Acquisitions and divestments of interests in associated companies, net Acquisitions and divestments of businesses, net Purchases of marketable securities, commodities and time deposits Proceeds from sale of marketable securities, commodities and time deposits Net cash flows from/(used in) investing activities from continuing operations 14 236 15 071 13 650 – 1 198 – 1 378 – 1 275 167 240 88 – 1 473 – 1 593 – 1 310 202 748 – 121 – 191 133 – 1 442 – 61 4 – 24 20 669 380 – 230 723 – 61 2 – 7 – 879 – 567 – 9 957 – 34 695 – 16 403 – 1 900 39 357 2 298 492 1 468 4 208 – 13 055 23.4 23.5 Net cash flows used in investing activities from discontinued operations 23.7 – 127 Net cash flows from/(used in) investing activities Dividends paid to shareholders of Novartis AG Acquisitions of treasury shares Proceeds from exercised options and other treasury share transactions, net Increase in non-current financial debts Repayments of the current portion of non-current financial debts Change in current financial debts Payments of lease liabilities Impact of change in ownership of consolidated entities Other financing cash flows, net 1 468 4 208 – 13 182 – 7 506 – 7 368 – 6 987 – 10 652 – 3 057 – 2 842 100 16 53 16 748 7 126 – 2 575 – 2 162 – 2 003 295 – 3 524 – 295 – 316 55 – 3 97 2 261 – 312 – 2 – 147 23.6 23.6 23.6 23.6 Net cash flows used in financing activities from continuing operations – 20 562 – 16 264 – 2 158 Net cash flows used in financing activities from discontinued operations 23.7 – 50 Net cash flows used in financing activities – 20 562 – 16 264 – 2 208 Net change in cash and cash equivalents before effect of exchange rate changes Effect of exchange rate changes on cash and cash equivalents Net change in cash and cash equivalents Cash and cash equivalents at January 1 Cash and cash equivalents at December 31 The accompanying Notes form an integral part of the consolidated financial statements. – 4 858 3 015 – 1 740 – 32 – 266 286 – 4 890 2 749 – 1 454 12 407 9 658 11 112 7 517 12 407 9 658 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, devel- opment, manufacturing and marketing of a broad range of innovative pharmaceuticals and cost-saving generic medicines. The Group is headquartered in Basel, Swit- zerland. 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 revenues, expenses, assets, liabilities and contingent amounts. Estimates are based on historical experience and other assumptions that are considered reasonable under the given circumstances and are regularly monitored. Actual outcomes and results could differ from those esti- mates and assumptions. Revisions to estimates are rec- ognized in the period in which the estimate is revised. 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. 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 a subsidiary is generally the local currency of that 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 this currency. 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 for each month using the average exchange rate, with the US dollar values for each month being aggregated during the year • Balance sheet 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 accounted for as assets held for sale or as related to discontinued operations when their carrying amount is to be recovered principally through a sale transaction or distribution to owners and a sale or distribution to owners is considered highly probable. They are stated at the lower of carrying amount and fair value less costs to sell and any resulting impairment is recognized. Assets related to discontinued operations and assets of a disposal group held for sale are not depreciated or amortized. The prior year consolidated balance sheet is not restated. If in a subsequent period, the criteria for classifica- tion as held for sale are no longer met, the recoverable amount of assets and liabilities are reclassified out of assets held for sale into the respective balance sheet lines and the prior year consolidated balance sheet is not restated. The cumulative amount of depreciation and amortization not recorded since the date of their classi- fication as assets held for sale, and any required F-6 Notes to the Novartis Group consolidated financial statements adjustments to the recoverable amounts of assets are recognized in the consolidated income statement. The following table shows the estimated useful life by major categories for property, plant and equipment: Acquisition of assets and businesses Buildings Assets separately acquired are recorded at cost, which 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 and restore the site when it is no longer used are included in their cost. Acquired businesses are accounted for by applying the acquisition method, unless the optional concentra- tion test is applied. The optional concentration test allows for an election on a transaction-by-transaction basis to account for the acquired business as an asset separately acquired when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. The acquisition method requires that the assets acquired and liabilities assumed be recorded at their respective fair values on the date the Group obtains con- trol. The excess of the fair value of the total purchase consideration transferred over the fair value of the acquired assets and assumed liabilities is recognized as goodwill. The valuations are based on information avail- able at the acquisition date. Acquisition related costs are expensed as incurred. The application of the acquisition method requires certain estimates and assumptions to be made, espe- cially concerning the fair values of the acquired intangi- ble assets, inventories, property, plant and equipment and the liabilities assumed at the acquisition date, and the useful lives of the intangible assets and property, plant and equipment. Estimates of fair value require the use of valuation techniques. These valuations require the use of management assumptions and estimates, includ- ing the value of comparable assets in the market, amount and timing of future cash flows, outcomes and costs of research and development activities, probability of obtaining regulatory approval, long-term sales forecasts, actions of competitors, discount rates and terminal growth rates. The section “—Impairment of goodwill and intangible assets” in this Note 1 provides additional infor- mation on key assumptions that are highly sensitive in the estimation of fair values using valuation techniques. Property, plant and equipment Property, plant and equipment is depreciated on a straight-line basis in the consolidated income statement over the estimated useful life of the individual asset. Free- hold land is not depreciated. The related depreciation expense is included in the costs of the functions using the asset. Property, plant and equipment is assessed for impair- ment whenever there is an indication that the balance sheet carrying amount may not be recoverable using cash flow projections over the useful life. 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 As lessee, at inception and upon the modification of a contract, the Group assesses whether the contract con- tains a lease. The Group elected to allocate the consid- eration in the contract to the lease and non-lease com- ponents on the basis of the relative standalone price of each component. 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- mencement date of the lease to the end of the lease term. The lease term includes the period of any lease exten- sion that management assess as reasonably certain to be exercised by the Group. The lease payments are dis- counted using the interest rate implicit in the lease or, if not readily determinable, the Novartis incremental bor- rowing rate for the asset subject to the lease in the rel- evant market. 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 F-7 Notes to the Novartis Group consolidated financial statements the shorter of the useful life of the right-of-use asset or the end of the lease term. in which the amortization and any potential impairment charge is recognized: 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. Operating lease payments received are recog- nized on a straight-line basis over the lease term in the consolidated income statement in “Other income.” Goodwill and intangible assets Goodwill Goodwill arises on applying the acquisition method on the acquisition of a business and is the excess of the fair value of the consideration transferred to acquire the business over the underlying fair value of the net identi- fied assets acquired. It is allocated to groups of cash-gen- erating units (CGUs), that are expected to benefit from the synergies of the combination, and 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 and other intangible assets (including software). Currently marketed products represent the compos- ite value of acquired intellectual property (IP), patents, distribution rights and product trade names. 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. Intangible assets available for use with a definite use- ful life are amortized over their estimated useful lives on a straight-line basis and are evaluated for potential impairment whenever facts and circumstances indicate that their carrying value may not be recoverable. The following table shows the estimated useful life by major categories for intangible assets available for use and the line in the consolidated income statement Useful life Income statement line for amortization and impairment charges Currently marketed products 5 to 20 years “Cost of goods sold” Technologies 10 to 20 years Other (including software) 3 to 12 years “Cost of goods sold” or “Research and development” In the relevant functional expense Intangible assets not yet available for use Acquired research and development intangible assets that have not yet obtained marketing approval are rec- ognized 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 received marketing approval from a regulatory authority, it is transferred to the “Currently marketed products” cat- egory. Impairment of goodwill and intangible assets An asset, a CGU or a grouping of CGUs 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 dis- posal and its value in use. Usually, Novartis applies the fair value less costs of disposal method for its impair- ment 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 indi- rectly and is based on net present value techniques uti- lizing post-tax cash flows and discount rates. In the lim- ited cases where the value-in-use method would be applied, net present value techniques 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 CGU, 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. These valuations are classified as “Level 3” in the fair value hierarchy. 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: F-8 Notes to the Novartis Group consolidated financial statements • Amount and timing of projected future cash flows • 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 Generally, for intangible assets with a definite useful life, Novartis uses cash flow projections for the whole useful life of these assets. For goodwill, Novartis generally uti- lizes cash flow projections for a three-year period based on management forecasts, with a terminal value based on cash flow projections usually in line with inflation rates for later periods. Probability-weighted scenarios are typically used. Discount rates used consider the Group’s estimated weighted average cost of capital, adjusted for specific asset, country and currency risks associated with cash flow projections, to approximate the discount rate that market 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. 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 presented within current financial debts on the consolidated balance sheet. 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 held for short-term purposes which are principally traded in liq- uid markets and are classified 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. Non-current financial assets held for long-term strategic purposes are classified within non-current 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 and non-current financial assets are initially recorded at fair value on their trade date, which is different from the settlement 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 market for a financial asset is not active or no market is available, fair values are established using valuation techniques. The major- ity of non-quoted investments are initially valued at fair value through the purchase price established between a willing buyer and seller. Non-quoted investments are subsequently adjusted based on values derived from dis- counted cash flow analysis or other pricing models. These investment values are classified as “Level 3” in the fair value hierarchy. The Group classifies and accounts for its marketable securities and non-current financial assets in the follow- ing 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 in “Other financial income and expense.” • Fund investments and equity securities of the Novartis Venture Fund are valued at fair value through profit and loss (FVPL). Unrealized gains and losses, including exchange gains and losses, are recognized in the con- solidated income statement in “Other income” for gains and “Other expense” for losses. • Equity securities held as strategic investments, typi- cally held outside of the Novartis Venture Fund, are generally designated at the date of acquisition as finan- cial assets valued at fair value through other compre- hensive 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 the date of acquisition as financial assets valued at fair value through other comprehensive 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 F-9 Notes to the Novartis Group consolidated financial statements income. Impairments on debt securities are recorded in “Other financial income and expense.” For other financial assets valued at amortized cost, 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. 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 rate curves and forward rates at the reporting date as observable inputs. Options are valued based on a modified Black- Scholes model using volatility and exercise prices as major observable inputs. The Group enters into certain 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. The risk mitigation 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 mitigate 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 or are not designated in a hedge relationship. Changes in the fair value of these derivative instruments are recog- nized 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. Unsaleable inventory is fully written off in the consolidated income statement under “Cost of goods sold.” Trade receivables Trade receivables are initially recognized at their invoiced amounts, including any related sales taxes less adjust- ments for estimated revenue deductions such as rebates, chargebacks and cash discounts. Provisions for doubtful trade receivables are estab- lished using a forward-looking expected credit loss model (ECL), which includes possible default events on the trade receivables over the entire holding period of the trade receivable. These provisions represent the dif- ference 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. Legal and environmental liabilities Novartis and its subsidiaries are subject to contingen- cies arising in the ordinary course of business, such as patent litigation, environmental remediation liabilities and other product-related and commercial litigation, and gov- ernmental investigations and proceedings. A provision is recorded when there is a probable outflow of resources for which a reliable estimate can be made of the outcome of the legal or other disputes against the subsidiary. Contingent consideration In the acquisition or divestment of a business, it is nec- essary to recognize contingent future amounts due to previous owners, representing contractually defined potential amounts as a liability or an 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 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 their nature. F-10 Notes to the Novartis Group consolidated financial statements The effect of unwinding the discount over time is rec- ognized for contingent consideration liabilities in “Inter- est expense” and for contingent consideration 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 employees 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 employees as part of share-based compensa- tion arrangements, are recorded in “Retained earnings” in the consolidated statement of changes in equity. Revenue recognition Revenue on the sale of Novartis Group products and ser- vices, which is recorded as “Net sales to third parties” in the consolidated income statement, is recognized when a contractual promise to a customer (performance obli- gation) has been fulfilled by transferring control over the promised goods and services to the customer, substan- tially all of which is at the point in time of shipment to or receipt of the products by the customer or when the ser- vices are performed. If contracts contain customer acceptance provisions, revenue is recognized upon the satisfaction of the acceptance criteria. If a contract con- tains more than one performance obligation, the consid- eration is allocated based on the standalone selling price of each performance obligation. The amount of revenue recognized is based on the consideration Novartis expects to receive in exchange for its goods and ser- vices, when it is highly probable that a significant rever- sal will not occur. The consideration Novartis receives in exchange for its goods or services may be fixed or variable. Variable consideration is recognized when it is highly probable that a significant reversal will not occur. The most com- mon elements of variable consideration are listed below. • Rebates and discounts granted to wholesalers, retail- ers, government agencies (including US Medicaid and US Federal Medicare programs), government supported healthcare systems, private health systems, pharmacy benefit managers, managed healthcare organizations, purchasing organizations and other direct and indirect customers, as well as chargebacks are provisioned and recorded as revenue deductions at the time the related revenues are recorded, or when the incentives are offered. These rebates and dis- counts, applied using provision rates, are estimated based on the terms and conditions in the individual states, plans and customer agreements, historical experience, product sales and growth rate, population growth, product pricing including inflation impacts, the mix of contracts and products, the level of inventory in the distribution channel, regulations, contracts, chan- nels and payers, as appropriate to the individual rebate and discount arrangements. • 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 specific terms of the individual agreements. In cases where historical experience and clinical data are not sufficient for a reliable estimation of the outcome, revenue recognition is deferred until the uncertainty is resolved, until such history is avail- able or the period when the refund right has expired. The provisions for revenue deductions under the innovative pay-for-performance agreements are adjusted periodically based on established processes and actual experience, including the products actual outcomes achieved compared with the anticipated pre- defined targets. • Cash discounts are offered to customers 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. Net sales to third parties and provisions for revenue deductions are adjusted periodically to reflect experi- ence and to reflect actual amounts as rebates, refunds, F-11 Notes to the Novartis Group consolidated financial statements discounts and returns are processed. There is often a time lag between recording of revenue deductions and the final accounting for them. The provision represents estimates of the related obligations, requiring the use of judgment when estimating the effect of these revenue 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 intellectual property through a license. Royalty income earned from a license is recognized when the underly- ing sales have occurred. Milestone income is recognized at the point in time when it is highly probable that the rel- evant milestone event criteria are met, and the risk of reversal of revenue recognition is remote. “Other reve- nue” also includes revenue from activities such as man- ufacturing or other services rendered, to the extent such revenue is not recorded under net sales to third parties, and is recognized when control transfers to the third party and our performance obligations are satisfied. 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 received from a regulatory authority in a major mar- ket. Payments made to third parties to in-license or acquire intellectual property rights, compounds and products, including initial upfront and subsequent mile- stone payments, are capitalized, as are payments for other assets, such as technologies to be used in R&D activities. If additional payments are made to the origi- nator company to continue performing 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 in a major market 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 sub- sequently be 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 employees 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 employees 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. PSUs are subject to the achievement of certain per- formance criteria during the vesting period and require plan participants to provide services during this period. The following paragraphs provide an overview of the accounting policies for the share-based compensation plan that grant PSUs. For PSUs that are subject to performance criteria based on Novartis internal performance metrics and that are conditional on the provision of service by plan par- ticipants during the vesting period, the expense is rec- ognized on a straight-line basis over the vesting period, and is determined based on assumptions concerning the expected performance against the internal performance metrics throughout the vesting period. The assumptions are based on the Group’s targets for those performance metrics, and the expected forfeitures due to plan partic- ipants not meeting their service conditions. The F-12 Notes to the Novartis Group consolidated financial statements assumptions are periodically adjusted over the vesting period. Any change in estimates for past services is recorded immediately as an expense or income in the consolidated income statement, 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 vesting period represents the amount that will finally vest. The number of equity instru- ments that finally vest is determined at the vesting date. For PSUs that are subject to performance 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 specific peer group of compa- nies 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 deter- mined 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 ser- vice 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 reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Government grants received to compensate costs are deferred and recognized in the consolidated income statement over the period necessary to match them against the related costs that they are intended to com- pensate. 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 expenditure 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. Healthcare contributions Healthcare cost contribution levies and fees under gov- ernmental programs that require the Group to contrib- ute to a country’s healthcare costs, other than programs described in “Revenue recognition” in this Note 1, are recognized in “Other expense” in the consolidated income statement. Provisions for healthcare cost con- tributions are adjusted to the actual amounts levied. The provision represents estimates of the related obligations, requiring the use of judgment when estimating the effect of these healthcare cost contributions. Income taxes Income taxes comprise current income taxes and deferred income taxes and are recognized in the same periods as the revenues and expenses to which they relate. Income taxes include interest and penalties incurred during the period, insofar as they are consid- ered an income tax. Income taxes related to items rec- ognized directly to other comprehensive income or to equity are recognized together with the corresponding item, to which the income tax is attributable, directly in other comprehensive income or in equity. Deferred income taxes are determined using the comprehensive liability method and are calculated on the temporary differences that arise between the tax base of an asset or liability and its carrying value for financial reporting purposes, except for those temporary differences related to investments in subsidiaries and associated companies, where the timing of their rever- sal can be controlled and it is probable that the differ- ence 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 recognized when a dividend is declared or has been planned. Furthermore, deferred income taxes are recognized for the net tax effects of net oper- ating loss carryforwards and tax credits. The carrying amount of deferred tax assets is reduced to the extent that it is not probable that suffi- cient taxable profits will be available to enable all or part of the asset to be recovered. In evaluating our ability to recover our deferred tax assets in the jurisdiction from F-13 Notes to the Novartis Group consolidated financial statements which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. The estimated amounts for current and deferred tax assets or liabilities, including amounts related to any uncertain tax positions, are based on applicable tax law and regulations in the various tax jurisdictions, in which the Group operates, which are subject to interpretations 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 sub- ject to examination by the competent taxing authorities, which may result in an assessment being made requir- ing payments of additional tax, interest or penalties. The calculation of income tax assets and liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of juris- dictions across our global operations. As a result, inher- ent uncertainties exist in the estimates of the tax posi- tions. Tax liabilities for uncertain tax provisions are recognized on the consolidated balance sheets within current income tax liabilities. Impact of new IFRS standards, amendments and interpretations in 2022 There were no new IFRS standards adopted by the Group in 2022. In addition, new IFRS amendments or interpretations that became effective in 2022 did not have a material impact to the Group’s consolidated finan- cial statements. Based on the Group’s assessment, there are no IFRS standards, amendments or interpretations not yet effec- tive in 2022 that would be expected to have a material impact on the Group’s consolidated financial statements. Impact of adopting significant new IFRS standard in 2021 The following new IFRS standard has been adopted by Novartis from January 1, 2021: Interest Rate Benchmark Reform – Phase 2, Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 (Interest Benchmark Reform Amendments) Interest Benchmark Reform Amendments became effec- tive from January 1, 2021. These amendments address issues that might affect financial reporting when an exist- ing interest rate benchmark (i.e. Interbank offered rate – IBOR) is replaced with an alternative benchmark inter- est rate. The effects of interest rate benchmark reform on the Group’s financial instruments and risk manage- ment strategies did not have a material impact on the Group’s consolidated financial statements. Impact of adopting significant new IFRS standard in 2020 The following new IFRS standard has been adopted by Novartis from January 1, 2020: IFRS 3 Business Combinations amendments The IASB issued amendments to IFRS 3 Business Com- binations that revised the definition of a business, which assist entities with the evaluation of when an asset or group of assets acquired should be considered a busi- ness. This amended standard has been applied to trans- actions entered into on or after January 1, 2020. The amended standard allows an entity to apply an optional concentration test, on a transaction-by-transaction 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 identifiable assets. If this optional concentration test is met, the set of activities and assets is determined not to be a busi- ness. The adoption of this amended standard on Janu- ary 1, 2020, did not have a significant impact on our con- solidated financial statements and is not expected to have a significant impact 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. F-14 Notes to the Novartis Group consolidated financial statements  2. Significant transactions The Group applied the acquisition method of account- ing for businesses acquired, and did not elect to apply the optional concentration test to account for acquired business as an asset separately acquired. Significant transactions in 2022 Innovative Medicines – acquisition of Gyroscope Therapeutics Holdings plc On December 22, 2021, Novartis entered into an agree- ment to acquire all outstanding shares of Gyroscope Therapeutics Holdings plc (Gyroscope), a UK-based ocular gene therapy company. Gyroscope focuses on the discovery and development of gene therapy treat- ments for retinal indications. The purchase price con- sisted of a cash payment of USD 0.8 billion, subject to certain customary purchase price adjustments, and potential additional milestone payments of up to USD 0.7 billion, which Gyroscope shareholders are eligible to receive upon achievement of specified milestones. The acquisition closed on February 17, 2022. The fair value of the total purchase consideration was USD 1.0 billion. The amount consisted of an upfront cash payment of USD 0.8 billion (including customary pur- chase price adjustments) and the fair value of contingent consideration of USD 0.2 billion, which Gyroscope share- holders are eligible to receive upon achievement of spec- ified milestones. The purchase price allocation resulted in net identifiable assets of USD 0.9 billion, consisting primarily of intangible assets of USD 1.1 billion and net deferred tax liabilities of USD 0.2 billion. Goodwill amounted to USD 0.1 billion. The results of operations since the date of acquisi- tion are not material. Significant transactions in 2021 Sandoz – acquisition of GSK’s cephalosporin antibiotics business On February 10, 2021, Sandoz entered into an agreement with certain subsidiaries of GlaxoSmithKline plc (GSK) for the acquisition of the GSK’s cephalosporin antibiot- ics business. Under the agreement, Sandoz acquired the global rights to three established brands (Zinnat®, Zinacef® and Fortum®) in more than 100 markets. It excluded the rights in the US, Australia and Germany to certain of those brands, which were previously divested by GSK, and the rights in India, Pakistan, Egypt, Japan (to certain of the brands) and China, which will be retained by GSK. The transaction closed on October 8, 2021. The purchase price consisted of a USD 350 million upfront payment paid at closing and potential milestone payments up to USD 150 million, which GSK will be eli- gible to receive upon the achievement of certain annual sales milestones for the portfolio. The fair value of the total purchase consideration was USD 415 million. The amount consisted of a payment of USD 351 million, including purchase price adjustments, and the fair value of contingent consideration of USD 64 million, which GSK is eligible to receive upon the achieve- ment of specified milestones. The purchase price allo- cation resulted in net identifiable assets of USD 308 mil- lion, consisting of USD 292 million intangible assets and USD 16 million deferred tax assets. Goodwill amounted to USD 107 million. The 2021 results of operations since the date of acquisition were not material. Corporate – divestment of the investment in Roche Holding AG On November 3, 2021, Novartis entered into a Share Repurchase Agreement with Roche Holding AG under which Novartis agreed to sell 53.3 million (approximately 33.3%) bearer shares of Roche Holding AG voting shares in a bilateral transaction to Roche Holding AG for a total consideration of USD 20.7 billion. As a result, Novartis discontinued the use of equity method accounting start- ing from November 3, 2021. The transaction closed on December 6, 2021. Novartis realized a gain of USD 14.6 billion, recorded in income from associated companies. Significant transactions in 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 tender offer to acquire all outstanding shares of The Medicines Company for USD 85 per share, or a total con- sideration of approximately USD 9.6 billion in cash on a fully diluted basis, including the equivalent share value related to The Medicines Company’s convertible notes, in accordance with their terms. The tender offer expired on January 3, 2020, and on January 6, 2020, the acquir- ing subsidiary merged with and into The Medicines Com- pany, resulting in The Medicines Company becoming an indirect wholly owned subsidiary of Novartis. Novartis financed the transaction through available cash, and short- and long-term borrowings. 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. The fair value of the total purchase consideration was USD 9.6 billion. The purchase price allocation resulted in net identifiable assets of approximately USD 7.1 billion, consisting of USD 8.5 billion intangible assets, USD 1.4 F-15 Notes to the Novartis Group consolidated financial statements billion net deferred tax liabilities and goodwill of approx- imately USD 2.5 billion. The 2020 results of operations since the date of acquisition were not material. 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 acquired the shares in Aspen Japan K.K. and associated assets held by AGI. The trans- action closed on January 31, 2020. Aspen’s portfolio in Japan consisted 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. The purchase price consisted of EUR 274 million (USD 303 million) upfront payment, less customary pur- chase price adjustment of EUR 27 million (USD 30 mil- lion), plus potential milestone payments of up to EUR 70 million (USD 77 million), which AGI is eligible to receive upon the achievement of specified milestones. The fair value of the total purchase consideration was EUR 294 million (USD 324 million). The amount consisted of a cash payment of EUR 247 million (USD 273 million) and the fair value of contingent consideration of EUR 47 million (USD 51 million), which AGI is eligible to receive upon the achievement of specified milestones. The pur- chase price allocation resulted in net identifiable assets of USD 238 million, consisting of USD 196 million intan- gible assets, USD 26 million other net assets and USD 16 million net deferred tax assets. Goodwill amounted to USD 86 million. The 2020 results of operations since the date of acquisition were not material. Sandoz – retention of US dermatology business and generic US oral solids portfolio, previously planned to be divested On September 6, 2018, Novartis announced that it entered into a stock and asset purchase agreement (SAPA) with Aurobindo Pharma USA Inc. (Aurobindo) for the sale of selected portions of its Sandoz US portfolio, specifically the Sandoz US dermatology business and generic US oral solids portfolio, for USD 0.8 billion in cash and potential earnouts. The closing was conditional on obtaining regulatory approval. In March 2020, Novartis took the decision to retain the Sandoz US generic oral solids and dermatology busi- nesses and on April 2, 2020 entered into a mutual agree- ment with Aurobindo to terminate the transaction. The decision was taken as approval from the US Federal Trade Commission for the transaction was not obtained within the agreed timelines. The cumulative amount of the depreciation on prop- erty, plant and equipment (USD 38 million) and amorti- zation on intangible assets (USD 102 million) not recorded in the consolidated income statement since the date of classification as held for sale was recognized in the con- solidated income statement in the first quarter of 2020. In addition, an impairment of currently marketed prod- ucts of USD 42 million was recognized in the first quar- ter of 2020 consolidated income statement. As at March 31, 2020, the assets and liabilities of the Sandoz US generic oral solids and dermatology busi- nesses were reclassified out of assets and liabilities of disposal group held for sale. The prior year balance sheet was not required to be restated. There were no cumulative income or expenses included in the other comprehensive income relating to the disposal group. F-16 Notes to the Novartis Group consolidated financial statements  3. Segmentation of key figures 2022, 2021 and 2020 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. 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 pharmaceuticals. Effective as of April 4, 2022, the Innovative Medicines Division is organized in two commercial organizational units: Innovative Medicines International and Innovative Medicines US, and is focused on the core therapeutic areas: cardiovascular; immunology; neuroscience; solid tumors and hematology; as well as other promoted brands (in the therapeutic areas of ophthalmology and respiratory) and established brands. Prior to the announcement on April 4, 2022, the Innovative Medicines Division was organized into two global business units: Novartis Oncology and Novartis Pharmaceuticals. 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 fin- ished dosage forms of small molecule pharmaceuticals for sale to third parties across a broad range of thera- peutic areas, including finished dosage form of anti-in- fectives sold to third parties. In Anti-Infectives, Sandoz manufactures and supplies active pharmaceutical ingre- dients and intermediates, mainly antibiotics, for internal use by Retail Generics and for sale to third-party cus- tomers. In Biopharmaceuticals, Sandoz develops, man- ufactures and markets protein- or other biotechnolo- gy-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 corporate coordination functions in major countries. In addition, 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 debt (cash and cash equivalents, marketable securities less financial debts), investments in associ- ated companies, and current and deferred taxes and non-segment-specific environmental remediation and post-employment benefit liabilities. Our divisions are supported by Novartis Institutes for BioMedical Research, Global Drug Development, and the Operations unit. • 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 the development of its biosimilars portfo- lio. • The Operations unit, combines the Novartis Technical Operations (NTO) and Customer & Technology Solu- tions (CTS), following the internal reorganization announced on April 4, 2022. The Operations unit man- ages our manufacturing operations across our Innovative Medicines and Sandoz Divisions, and deliv- ers business support services across the Group, such as information technology, real estate and facility ser- vices and procurement. 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 to third parties, operating income and net operating assets. Segment net operating assets consist primarily of property, plant and equipment; right-of-use assets; intangible assets; good- will; inventories; and trade and other operating receiv- ables less operating liabilities. F-17 Notes to the Novartis Group consolidated financial statements Segmentation – consolidated income statements (USD millions) Net sales to third parties Sales to other segments Net sales Other revenues Cost of goods sold Gross profit Innovative Medicines Sandoz Corporate (including eliminations)1 Group 2022 2021 2022 2021 2022 2021 2022 2021 41 296 41 995 9 249 9 631 50 545 51 626 825 795 205 180 – 1 030 – 975 42 121 42 790 9 454 9 811 – 1 030 – 975 50 545 51 626 1 249 1 179 28 61 6 11 1 283 1 251 – 11 569 – 11 751 – 4 978 – 5 147 1 061 1 031 – 15 486 – 15 867 31 801 32 218 4 504 4 725 37 67 36 342 37 010 Selling, general and administration – 11 679 – 12 306 – 2 062 – 2 062 – 512 – 518 – 14 253 – 14 886 Research and development – 9 172 – 8 641 – 824 – 899 – 9 996 – 9 540 Other income Other expense Operating income 531 1 149 103 233 171 470 805 1 852 – 2 695 – 1 732 – 273 – 397 – 733 – 618 – 3 701 – 2 747 8 786 10 688 1 448 1 600 – 1 037 – 599 9 197 11 689 (Loss)/income from associated companies – 2 5 2 2 – 9 15 332 – 9 15 339 Interest expense Other financial income and expense Income before taxes Income taxes Net income Attributable to:    Shareholders of Novartis AG    Non-controlling interests Included in net income are:    Interest income – 837 – 811 20 – 80 8 371 26 137 – 1 416 – 2 119 6 955 24 018 6 955 24 021 0 – 3 379 71    Depreciation of property, plant and equipment – 837 – 859 – 204 – 210 – 122 – 139 – 1 163 – 1 208    Depreciation of right-of-use assets    Amortization of intangible assets – 252 – 265 – 33 – 39 – 3 728 – 3 638 – 222 – 238 – 15 – 32 – 14 – 300 – 318 – 27 – 3 982 – 3 903    Impairment charges on property, plant and equipment, net – 407 – 271 – 9 – 1 – 407 – 281    Impairment of right-of-use assets – 3 – 3    Impairment charges on intangible assets, net – 1 299 – 367 – 25 – 28 – 2 – 8 – 1 326 – 403    Impairment charges and fair value    changes on financial assets, net    Additions to restructuring provisions – 134 43 – 1 069 – 240    Equity-based compensation of Novartis equity plans – 706 – 721 – 126 – 5 – 260 38 – 40 – 62 – 62 – 259 – 26 – 1 368 – 328 – 65 – 280 – 193 – 1 048 – 979 1 Eliminations mainly relate to the elimination of sales to other segments and the corresponding cost of goods sold. F-18 Notes to the Novartis Group consolidated financial statements (USD millions) Net sales to third parties Sales to other segments Net sales Other revenues Cost of goods sold Gross profit Innovative Medicines Sandoz Corporate (including eliminations)1 Group 2021 2020 2021 2020 2021 2020 2021 2020 41 995 39 013 9 631 9 646 51 626 48 659 795 792 180 189 – 975 – 981 42 790 39 805 9 811 9 835 – 975 – 981 51 626 48 659 1 179 1 018 61 53 11 168 1 251 1 239 – 11 751 – 10 927 – 5 147 – 5 252 1 031 1 058 – 15 867 – 15 121 32 218 29 896 4 725 4 636 67 245 37 010 34 777 Selling, general and administration – 12 306 – 11 657 – 2 062 – 2 076 – 518 – 464 – 14 886 – 14 197 Research and development – 8 641 – 8 118 – 899 – 862 – 9 540 – 8 980 Other income Other expense Operating income 1 149 922 233 176 470 644 1 852 1 742 – 1 732 – 1 871 – 397 – 831 – 618 – 488 – 2 747 – 3 190 10 688 9 172 1 600 1 043 – 599 – 63 11 689 10 152 Income from associated companies 5 1 2 2 15 332 670 15 339 673 Interest expense Other financial income and expense Income before taxes Income taxes Net income Attributable to:    Shareholders of Novartis AG    Non-controlling interests Included in net income are:    Interest income – 811 – 869 – 80 – 78 26 137 9 878 – 2 119 – 1 807 24 018 8 071 24 021 8 072 – 3 – 1 71 91    Depreciation of property, plant and equipment – 859 – 912 – 210 – 282 – 139 – 124 – 1 208 – 1 318    Depreciation of right-of-use assets    Amortization of intangible assets – 265 – 273 – 39 – 41 – 3 638 – 3 080 – 238 – 370    Impairment charges on property, plant and equipment, net – 271 – 324 – 9 – 116    Impairment charges on intangible assets, net – 367 – 768 – 28 – 141 – 14 – 27 – 1 – 8 – 16 – 318 – 330 – 12 – 3 903 – 3 462 – 281 – 440 – 5 – 403 – 914    Impairment charges and fair value    changes on financial assets, net    Additions to restructuring provisions    Equity-based compensation of Novartis equity plans 43 153 – 5 182 38 335 – 240 – 217 – 721 – 714 – 62 – 65 – 98 – 26 – 39 – 328 – 354 – 64 – 193 – 180 – 979 – 958 1 Eliminations mainly relate to the elimination of sales to other segments and the corresponding cost of goods sold. F-19 Notes to the Novartis Group consolidated financial statements Segmentation – consolidated balance sheets (USD millions) Total assets Total liabilities Total equity Net debt 2 Innovative Medicines Sandoz Corporate (including eliminations)1 Group 2022 2021 2022 2021 2022 2021 2022 2021 75 510 79 220 16 078 16 192 25 865 36 383 117 453 131 795 – 16 966 – 15 929 – 3 710 – 3 632 – 37 354 – 44 412 – 58 030 – 63 973 59 423 67 822 7 245 868 7 245 868 Net operating assets 58 544 63 291 12 368 12 560 – 4 244 – 7 161 66 668 68 690 Included in assets and liabilities are:    Total property, plant and equipment 8 488 9 168 1 861 1 901 415 476 10 764 11 545    Additions to property, plant    and equipment 3    Total right-of-use assets    Additions to right-of-use assets 3 842 991 292 1 233 1 349 196 222 90 31 349 104 26 85 90 1 219 1 430 108 108 1 431 1 561 20 73 247 321    Total goodwill and intangible assets 51 357 53 919 9 230 9 603 358 255 60 945 63 777    Additions to goodwill and    intangible assets 3    Total investment in associated    companies    Additions to investment in associated    companies    Cash and cash equivalents, marketable securities,    commodities, time deposits and derivative    financial instruments    Financial debts and derivative    financial instruments    Current income tax liabilities and deferred tax liabilities 1 791 1 491 163 102 139 143 2 093 1 736 107 170 9 7 27 28 143 205 25 24 13 19 38 43 18 930 28 329 18 930 28 329 26 175 29 197 26 175 29 197 5 219 5 485 5 219 5 485 1 Eliminations mainly relate to the elimination of intercompany receivables and payables to other segments and inventories 2 Note 29 provides additional disclosures related to net debt 3 Excluding the impact of business acquisitions 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 to third parties for the years ended December 31, 2022, 2021 and 2020, and for selected non-current assets for the years ended December 31, 2022 and 2021: Net sales to third parties1 Total of selected non-current assets2 2022 % 2021 % 2020 % 2022 % 2021 United States 17 653 35 16 818 33 16 484 34 35 353 970 2 873 2 800 2 23 708 (USD millions) Country Switzerland France Germany China Japan Other Group Region Europe Americas 2 257 4 278 3 128 2 205 20 054 50 545 18 467 21 536 Asia/Africa/Australasia 10 542 32 48 25 770 37 054 4 3 1 3 615 2 378 703 217 4 8 6 4 2 522 4 870 3 052 2 683 5 9 6 5 2 442 4 518 2 573 2 804 5 9 5 6 3 188 2 229 599 165 41 20 808 40 19 038 39 8 241 12 7 351 100 51 626 100 48 659 100 73 483 100 77 088 37 42 21 20 197 20 463 10 966 39 40 21 18 715 19 725 10 219 38 41 21 35 896 35 806 1 781 49 49 2 37 525 37 522 2 041 % 33 48 5 3 1 10 100 49 49 2 Group 50 545 100 51 626 100 48 659 100 73 483 100 77 088 100 1 Net sales to third parties by location of customer 2 Total of property, plant and equipment; right-of-use assets; goodwill; intangible assets; investment in associated companies and other non-current assets excluding post- employment benefit assets F-20 Notes to the Novartis Group consolidated financial statements The Group’s largest, second-largest and third-largest cus- tomers account for approximately 16%, 11% and 7% of net sales to third parties, respectively (2021: 17%, 11% and 6%, respectively; 2020: 17%, 11% and 6%, respectively). All seg- ments had sales to these customers in 2022, 2021 and 2020. The highest amounts of trade receivables outstanding were for these same three customers and amounted to approximately 16%, 14% and 7%, respectively, of the trade receivables at December 31, 2022 (2021: 16%, 12% and 7%, respectively). Segmentation – net sales to third parties Net sales to third parties by region1 Innovative Medicines Europe US Asia/Africa/Australasia Canada and Latin America Total    Of which in Established Markets    Of which in Emerging Growth Markets Sandoz Europe US Asia/Africa/Australasia Canada and Latin America Total    Of which in Established Markets    Of which in Emerging Growth Markets Group Europe US Asia/Africa/Australasia Canada and Latin America Total    Of which in Established Markets    Of which in Emerging Growth Markets 2022 USD m 2021 USD m 13 554 14 919 15 899 14 999 8 929 2 914 9 304 2 773 41 296 41 995 30 548 31 459 10 748 10 536 4 913 1 754 1 613 969 9 249 6 460 2 789 5 278 1 819 1 662 872 9 631 6 855 2 776 18 467 20 197 17 653 16 818 10 542 10 966 3 883 3 645 50 545 51 626 37 008 38 314 Change (2021 to 2022) USD % – 9 6 – 4 5 – 2 – 3 2 – 7 – 4 – 3 11 – 4 – 6 0 – 9 5 – 4 7 – 2 – 3 2020 USD m 13 484 14 342 8 718 2 469 39 013 29 643 9 370 5 231 2 142 1 501 772 9 646 7 089 2 557 18 715 16 484 10 219 3 241 48 659 36 732 13 537 13 312 2 11 927 Change (2020 to 2021) USD % 11 5 7 12 8 6 12 1 – 15 11 13 0 – 3 9 8 2 7 12 6 4 12 1 Net sales to third parties by location of customer. Emerging Growth Markets comprise all markets other than the Established Markets of the US, Canada, Western Europe, Japan, Australia and New Zealand. F-21   Notes to the Novartis Group consolidated financial statements  Innovative Medicines Division net sales to third parties by core therapeutic area; other promoted brands; and established brands Change (2021 to 2022) USD m 1 USD % 2021 Change (2020 to 2020 2021) USD m 1 USD % 2022 USD m Change (2021 to 2022) USD m 1 USD % 2021 Change (2020 to 2020 2021) USD m 1 USD % 2022 USD m Other Promoted Brands Lucentis Xiidra Ultibro Group Beovu Other respiratory Total Other Promoted Brands 1 874 2 160 – 13 1 933 487 479 203 84 468 4 584 – 18 186 53 9 58 12 24 – 6 – 2 376 623 190 26 104 3 127 3 451 – 9 3 148 10 Total Promoted Brands Established Brands Sandostatin Galvus Group Gleevec/Glivec Exforge Group Diovan Group Afinitor/Votubia Voltaren/Cataflam Zortress/Certican Exjade/Jadenu Neoral/Sandimmun(e) 31 396 29 754 6 25 319 18 1 238 1 413 – 12 1 439 859 1 092 – 21 1 199 – 2 – 9 745 1 024 – 27 1 188 – 14 743 652 512 334 329 323 310 901 – 18 980 – 8 773 – 16 1 003 – 23 938 – 45 1 083 – 13 373 – 10 360 4 431 – 24 452 – 5 563 – 43 653 – 14 368 – 16 393 – 6 nm Contract manufacturing 214 108 98 Other 3 641 4 257 – 14 4 944 – 14 Total Established Brands 9 900 12 241 – 19 13 694 – 11 Total division net sales to third parties 41 296 41 995 – 2 39 013 8 1 Reclassified to reflect the new Innovative Medicines divisional structures announced on April 4, 2022 2 Net sales to third parties reflect Xolair sales for all indications. Cardiovascular Entresto Leqvio 4 644 3 548 31 2 497 112 12 nm Total Cardiovascular 4 756 3 560 34 2 497 Immunology Cosentyx Xolair 2 Ilaris Other 4 788 4 718 1 3 995 1 365 1 428 – 4 1 251 1 133 1 059 1 873 7 nm Total Immunology 7 287 7 205 1 6 119 Neuroscience Gilenya Zolgensma Kesimpta Mayzent Aimovig Other 2 013 2 787 – 28 3 003 1 370 1 351 1 920 1 092 357 218 1 372 281 215 1 194 27 1 0 1 15 170 164 4 272 Total Neuroscience 5 051 5 007 Solid Tumors Tafinlar + Mekinist 1 770 1 693 5 1 542 Kisqali Votrient Lutathera Piqray Pluvicto Tabrecta 1 231 937 31 474 471 373 271 133 577 – 18 475 329 90 – 1 13 nm 48 687 635 445 320 2 nm 35 157 Total Solid Tumors 4 723 4 101 15 3 666 12 Hematology Promacta/Revolade 2 088 2 016 4 1 738 Tasigna Jakavi Kymriah Adakveo Scemblix Other 1 923 2 060 – 7 1 958 1 561 1 595 – 2 1 339 536 194 149 1 587 164 7 1 474 105 – 9 18 nm 0 0 Total Hematology 6 452 6 430 42 nm 43 18 14 21 nm 18 – 7 47 nm 65 31 nm 17 10 36 – 9 7 3 16 5 19 24 56 nm 3 – 67 5 617 14 F-22 Notes to the Novartis Group consolidated financial statements Net sales to third parties of the top 20 Innovative Medicines Division brands in 2022 Brands Cosentyx Brand classification by therapeutic area, other promoted brands or established brands Immunology Entresto Cardiovascular Promacta/Revolade Hematology Gilenya Tasigna Lucentis Neuroscience Hematology Other Promoted Brands Tafinlar + Mekinist Solid Tumors Jakavi Hematology Zolgensma Neuroscience Xolair 1 Immunology Sandostatin Established Brands Kisqali Ilaris Solid Tumors Immunology Kesimpta Neuroscience Galvus Group Gleevec/Glivec Established Brands Established Brands Exforge Group Diovan Group Kymriah Established Brands Established Brands Hematology Afinitor/Votubia Established Brands Top 20 brands total Rest of portfolio Total division net sales to third parties 1 Net sales to third parties reflect Xolair sales for all indications. Key indications Psoriasis (PsO), ankylosing spondylitis (AS), psoriatic arthritis (PsA), non-radiographic axial spondyloarthritis (nr-axSPA) Chronic heart failure, hypertension Immune thrombocytopenia (ITP), severe aplastic anemia (SAA) Relapsing multiple sclerosis (RMS) Chronic myeloid leukemia (CML) Age-related macular degeneration (AMD), diabetic macular edema (DME), retinal vein occlusion (RVO) BRAF V600+ metastatic adjuvant melanoma, advanced non-small cell lung cancer (NSCLC), tumor agnostic with BRAF mutation indication Myelofibrosis (MF), polycytomia vera (PV), graft-versus-host disease (GvHD) Spinal muscular atrophy (SMA) Severe allergic asthma (SAA), chronic spontaneous urticaria (CSU), nasal polyps Carcinoid tumors, acromegaly HR+/HER2- metastatic breast cancer Auto-inflammatory (CAPS, TRAPS, HIDS/MKD, FMF, SJIA, AOSD, gout) Relapsing-remitting multiple sclerosis (RRMS) Type 2 diabetes Chronic myeloid leukemia (CML), gastrointestinal stromal tumors (GIST) Hypertension Hypertension r/r pediatric and young adults acute lymphoblastic leukemia (ALL), diffuse large B-cell lymphoma (DLBCL), follicular lymphoma (FL) Breast cancer/ tuberous sclerosis complex (TSC) F-23 US USD m Rest of world USD m Total USD m 2 770 2 018 4 788 2 354 2 290 4 644 1 083 1 005 2 088 1 153 860 2 013 877 1 046 1 923 1 874 1 874 678 1 092 1 770 1 561 1 561 434 936 1 370 1 365 1 365 800 438 1 238 472 759 1 231 570 563 1 133 921 171 1 092 205 14 55 196 859 540 859 745 729 597 340 743 652 536 171 341 512 12 753 19 384 32 137 3 146 6 013 9 159 15 899 25 397 41 296 Notes to the Novartis Group consolidated financial statements Net sales to third parties of the top 20 Innovative Medicines Division brands in 2021 Brands Cosentyx Entresto Gilenya Lucentis Tasigna Promacta/Revolade Brand classification by therapeutic area, other promoted brands or established brands 1 Immunology Cardiovascular Neuroscience Other Promoted Brands Hematology Hematology Tafinlar + Mekinist Solid Tumors Hematology Immunology Jakavi Xolair 2 Sandostatin Zolgensma Galvus Group Ilaris Gleevec/Glivec Established Brands Afinitor/Votubia Established Brands Kisqali Solid Tumors Exforge Group Diovan Group Kymriah Established Brands Established Brands Hematology Ultibro Group Other Promoted Brands Top 20 products total Rest of portfolio Total division net sales to third parties Key indications Psoriasis (PsO), ankylosing spondylitis (AS), psoriatic arthritis (PsA), non-radiographic axial spondyloarthritis (nr-axSPA) Chronic heart failure Relapsing multiple sclerosis (RMS) Age-related macular degeneration (AMD) Chronic myeloid leukemia (CML) Immune thrombocytopenia (ITP), severe aplastic anemia (SAA) BRAF V600+ metastatic adjuvant melanoma, advanced non-small cell lung cancer (NSCLC) Myelofibrosis (MF), polycythemia vera (PV) Severe allergic asthma (SAA), chronic spontaneous urticaria (CSU), nasal polyps Auto-inflammatory (CAPS, TRAPS, HIDS/MKD, FMF, SJIA, AOSD, gout) Chronic myeloid leukemia (CML), gastrointestinal stromal tumors (GIST) Breast cancer/ tuberous sclerosis complex (TSC) HR+/HER2- metastatic breast cancer Hypertension Hypertension r/r pediatric and young adults acute lymphoblastic leukemia (ALL), diffuse large B-cell lymphoma (DLBCL) Cronic obstructive pulmonary disease (COPD) US USD m Rest of world USD m Total USD m 2 883 1 835 4 718 1 712 1 836 1 427 1 360 2 160 882 947 1 178 1 069 3 548 2 787 2 160 2 060 2 016 606 1 087 1 693 1 595 1 595 1 428 1 428 843 469 570 882 1 092 501 558 1 413 1 351 1 092 1 059 263 761 1 024 521 417 938 339 598 937 14 51 230 887 722 357 901 773 587 584 584 11 688 20 976 32 664 3 311 6 020 9 331 14 999 26 996 41 995 Established Brands Carcinoid tumors, acromegaly Neuroscience Spinal muscular atrophy (SMA) Established Brands Type 2 diabetes Immunology 1 Brand classifications have been changed to reflect the new Innovative Medicines divisional structures announced on April 4, 2022. 2 Net sales to third parties reflect Xolair sales for all indications. F-24 Notes to the Novartis Group consolidated financial statements Net sales to third parties of the top 20 Innovative Medicines Division brands in 2020 Brands Cosentyx Gilenya Entresto Tasigna Lucentis Brand classification by therapeutic area, other promoted brands or established brands 1 Immunology Neuroscience Cardiovascular Hematology Other Promoted Brands Promacta/Revolade Hematology Tafinlar + Mekinist Solid Tumors Sandostatin Established Brands Jakavi Xolair 2 Hematology Immunology Galvus Group Gleevec/Glivec Established Brands Established Brands Afinitor/Votubia Established Brands Diovan Group Exforge Group Zolgensma Established Brands Established Brands Neuroscience Ilaris Kisqali Immunology Solid Tumors Key indications Psoriasis (PsO), ankylosing spondylitis (AS), psoriatic arthritis (PsA) Relapsing multiple sclerosis (RMS) Chronic heart failure Chronic myeloid leukemia (CML) Age-related macular degeneration (AMD) Immune thrombocytopenia (ITP), severe aplastic anemia (SAA) BRAF V600+ metastatic adjuvant melanoma, advanced non-small cell lung cancer (NSCLC) Carcinoid tumors, acromegaly Myelofibrosis (MF), polycythemia vera (PV) Severe allergic asthma (SAA), chronic spontaneous urticaria (CSU) Type 2 diabetes Chronic myeloid leukemia (CML), gastrointestinal stromal tumors (GIST) Breast cancer/ tuberous sclerosis complex (TSC) Hypertension Hypertension Spinal muscular atrophy (SMA) Auto-inflammatory (CAPS, TRAPS, HIDS/MKD, FMF, SJIA, AOSD gout) HR+/HER2- metastatic breast cancer Exjade/Jadenu Established Brands Chronic iron overload Votrient Solid Tumors Renal cell carcinoma (RCC) Top 20 products total Rest of portfolio Total division net sales to third parties 1 Brand classifications have been changed to reflect the new Innovative Medicines divisional structures announced on April 4, 2022. 2 Net sales to third parties reflect Xolair sales for all indications. Sandoz Division net sales to third parties by business franchise US USD m Rest of world USD m Total USD m 2 516 1 479 3 995 1 562 1 441 1 277 1 220 859 1 099 1 933 3 003 2 497 1 958 1 933 833 905 1 738 569 973 1 542 837 602 1 439 1 339 1 339 1 251 1 251 1 199 315 873 1 199 1 188 644 439 1 083 124 16 459 879 964 461 1 003 980 920 400 473 873 318 369 687 138 259 515 376 653 635 11 126 18 790 29 916 3 216 5 881 9 097 14 342 24 671 39 013 Retail Generics 1 Biopharmaceuticals Anti-Infectives 1 2022 USD m 6 776 2 093 380 2021 USD m 7 092 2 116 423 Total division net sales to third parties 9 249 9 631 Change (2021 to 2022) USD % – 4 – 1 – 10 – 4 Change (2020 to 2021) USD % – 2 10 – 11 0 2020 USD m 7 244 1 928 474 9 646 1 Sandoz total anti-infectives net sales to third parties amounted to USD 1.2 billion (2021: USD 1.1 billion; 2020: USD 1.2 billion), of which USD 777 million (2021: USD 707 million; 2020: USD 694 million) is sold through the Retail Generics business franchise and USD 380 million (2021: USD 423 million; 2020: USD 474 million) is sold to other third-party companies through the Anti-Infectives business franchise. The product portfolio of Sandoz is widely spread in 2022, 2021 and 2020. F-25 Notes to the Novartis Group consolidated financial statements Segmentation – other revenue Innovative Medicines Sandoz Corporate (including eliminations) Group (USD millions) 2022 2021 2020 2022 2021 2020 2022 2021 2020 2022 2021 2020 Profit-sharing income 921 873 Royalty income Milestone income Other 1 28 145 155 74 127 105 835 107 39 37 18 3 7 Total other revenues 1 249 1 179 1 018 28 24 28 9 61 25 11 17 53 6 11 168 921 52 148 162 873 109 155 114 835 300 50 54 6 11 168 1 283 1 251 1 239 1 Other includes revenue from activities such as manufacturing or other services rendered, to the extent such revenue is not recorded under net sales to third parties. 4. Associated companies Net income statement effect Other comprehensive income effect 1 Total comprehensive income effect (USD millions) 2022 2021 2020 2022 2021 2022 2021 2020 Roche Holding AG, Switzerland Others Associated companies 15 341 – 9 – 2 – 9 15 339 677 – 4 673 2020 – 56 46 46 – 56 – 9 15 385 15 387 – 9 – 2 621 – 4 617 1 In 2021, Novartis share of other comprehensive income recognized by associated companies, net of taxes of USD 3 million was recycled into the consolidated income statement as a result of the divestment of the investment in Roche Holding AG. No Novartis share of other comprehensive income recognized by associated companies was recycled to the consolidated income statement in 2022 and 2020. Novartis has certain non-significant investments and had a significant investment in Roche Holding AG, Basel (Roche), which was divested to Roche on December 6, 2021, that are accounted for as associated companies. Roche Holding AG On November 3, 2021, Novartis entered into an agree- ment with Roche Holding AG to divest its 33.3% of Roche Holding AG (Roche) voting shares, representing approx- imately 6.2% of Roche’s total outstanding voting and non-voting equity instruments, to Roche for USD 20.7 billion in cash. As a result, Novartis discontinued the use of equity method accounting starting from November 3, 2021. The divestment transaction closed on December 6, 2021, and Novartis realized a gain of USD 14.6 billion, recorded in income from associated companies. See Note 2. The Group’s holding in Roche voting shares was 33.3% at December 31, 2020. This investment repre- sented approximately 6.2% of Roche’s total outstanding voting and non-voting equity instruments at December 31, 2020. Since full-year financial data for Roche is not avail- able when Novartis produces its consolidated financial results, a survey of analyst estimates is used to estimate the Group’s share of Roche’s net income. Any differences between these estimates and actual results were adjusted in the Group’s consolidated financial state- ments when available. As Novartis discontinued the use of equity method accounting starting from November 3, 2021, and the divestment closed on December 6, 2021, no such adjustment has been made to the 2022 Group’s consolidated financial statements. In 2021, dividends received from Roche in relation to the distribution of its 2020 net income amounted to USD 522 million. The consolidated income statement effects from applying Novartis accounting principles for this invest- ment in 2021 and 2020 are as follows: (USD millions) Novartis share of Roche’s estimated current-year consolidated net income Prior-year adjustment Amortization of fair value adjustments relating to intangible assets, net of taxes of 2021: USD 10 million; 2020: USD 26 million Gain on divestment of the investment in Roche 1 Net income effect 2021 2020 815 40 913 – 64 – 70 – 172 14 556 15 341 677 1 The gain on divestment of the investment in Roche includes the recycling of currency translation effects (see Note 8.1) and other comprehensive income effects totaling USD 3.2 billion. F-26 Notes to the Novartis Group consolidated financial statements 5. Interest expense and other financial income and expense Interest expense Other financial income and expense (USD millions) Interest expense 2022 – 669 Interest expense on lease liabilities – 60 2021 – 651 – 62 2020 (USD millions) – 708 Interest income – 67 Other financial income Expense arising from discounting long-term liabilities and capitalized borrowing costs Total interest expense – 108 – 837 – 98 – 811 – 94 – 869 Financial expense Currency result, net Total other financial income and expense 2022 379 19 – 194 – 184 2021 2020 71 12 – 94 – 69 91 18 – 52 – 135 20 – 80 – 78 6. Income taxes Income before taxes (USD millions) Switzerland 1 Foreign 2022 2021 5 986 22 028 2 385 4 109 2020 9 786 92 Income before taxes 8 371 26 137 9 878 1 The 2021 income before taxes in Switzerland includes a USD 14.6 billion non-taxable gain on the divestment of the Group’s investment in Roche Holding AG (see Note 2 and Note 4). Current and deferred income tax expense The significant components of the provision for income taxes are as follows: (USD millions) Switzerland Foreign 2022 – 617 2021 – 958 2020 – 932 – 1 454 – 1 470 – 1 168 Current income tax expense – 2 071 – 2 428 – 2 100 Switzerland Foreign Deferred tax income – 142 797 655 23 286 309 – 137 430 293 Income tax expense – 1 416 – 2 119 – 1 807 Analysis of tax rate Novartis has a substantial business presence in many countries and is therefore subject to income taxes in dif- ferent tax jurisdictions. This leads to differences in income and expense items that are non-taxable or non-deductible (permanent differences) or are taxed at different statutory tax rates in those tax jurisdictions. As a result, there is a difference between our applicable tax rate and effective tax rate. The applicable tax rate changes from year to year due to changes in the mix of the Group’s pre-tax income and changes in statutory tax rates since it is calculated as the weighted average tax rate based on the pre-tax income of each subsidiary. The main elements contributing to the difference between the Group’s overall applicable tax rate and the effective tax rate are shown in the following table: (As a percentage) Applicable tax rate 2022 2021 2020 16.8 14.8 13.6 Effect of disallowed expenditures 2.6 1.0 4.6 Effect of utilization of previously unrecognized tax losses brought forward from prior periods 0.0 0.0 – 0.3 Effect of income taxed at reduced rates – 0.3 – 0.1 – 0.3 Effect of income not subject to tax 1 – 0.1 – 7.5 – 0.7 Effect of tax credits and allowances – 3.8 – 1.4 – 2.3 Effect of release of contingent consideration liability – 0.5 – 0.1 – 0.2 Effect of tax rate change on current and deferred tax assets and liabilities Effect of derecognition and reversals of derecognition of deferred tax assets Effect of write-down and reversal of write-down of investments in subsidiaries Effect of prior-year items Effect of changes in uncertain tax positions Effect of other items Effective tax rate – 0.1 0.0 0.3 1.2 0.0 0.2 0.0 0.0 – 0.8 – 0.4 1.4 0.1 0.1 1.3 2.3 2.0 0.0 – 0.1 16.9 8.1 18.3 1 2021 includes the effect of income not subject to tax (– 7.3%) arising from the non-taxable gain on the divestment of our investment in Roche. See Notes 2 and 4 for further details. Our effective tax rate fluctuates based primarily on, among other factors, changes in pre-tax income between countries with varying statutory tax rates, income taxed at reduced tax rates, effect of disallowed expenditures, effect of income not subject to tax, effect of tax credits and allowances, effect of prior-year items, changes in the measurement of deferred tax assets, changes in uncertain tax positions and changes in tax laws. The table above provides the details of the significant items F-27 Notes to the Novartis Group consolidated financial statements that impact the comparability of the effective tax rate between years. The utilization of tax-loss carry-forwards lowered the tax charge by USD 1 million in 2022, by USD 5 million in 2021, and by USD 29 million in 2020. 7. Earnings per share Net income attributable to shareholders of Novartis AG (USD millions) Number of shares (in millions) 2022 2021 6 955 24 021 2020 8 072 Weighted average number of shares outstanding used in basic earnings per share 2 181 2 243 2 277 Adjustment for vesting of restricted shares, restricted share units and dilutive shares from options 16 17 19 Weighted average number of shares in diluted earnings per share 2 197 2 260 2 296 Basic earnings per share (USD) Diluted earnings per share (USD) 3.19 10.71 3.17 10.63 3.55 3.52 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 2022, 2021 or 2020, as all options were dilutive in all years. F-28 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, which under IFRS are not recorded in the consolidated income statement. These include fair value adjustments on financial instruments, actuarial gains or losses on defined benefit pension plans, and currency translation effects, net of taxes. (USD millions) Fair value Actuarial adjustments gains/(losses) on financial from defined instruments benefit plans Note Cumulative Total value adjustments currency attributable to translation Novartis AG effects shareholders Non- controlling interest Total value adjustments Value adjustments at December 31, 2019 120 – 5 919 1 142 – 4 657 – 29 – 4 686 Fair value adjustments on equity securities, net of taxes of USD -36 million 1 250 250 – 201 – 201 250 – 201 145 145 – 2 143 Net investment hedge Defined benefit plans, net of taxes of USD -3 million Currency translation effects, net of taxes of USD 10 million Total value adjustments in 2020 8.1 250 145 3 193 2 992 Fair value adjustments on equity securities sold, reclassified to retained earnings Value adjustments related to divestments Impact of change in ownership of consolidated entities – 150 2 – 1 3 193 3 387 – 150 2 – 1 3 194 3 386 – 150 2 1 – 1 1 Value adjustments at December 31, 2020 220 – 5 773 4 134 – 1 419 – 29 – 1 448 Fair value adjustments on equity securities, net of taxes of USD -44 million 1 Net investment hedge, net of taxes of USD 33 million Defined benefit plans, net of taxes of USD -323 million Currency translation effects, net of taxes of USD 17 million Total value adjustments in 2021 Fair value adjustments on equity securities sold, reclassified to retained earnings net of taxes of USD 48 million Value adjustments related to divestments 194 194 216 216 194 216 1 808 1 808 1 1 809 8.1 – 4 757 – 4 757 194 1 808 – 4 541 – 2 539 – 5 – 4 – 4 762 – 2 543 – 164 – 62 – 3 – 164 – 65 – 164 – 65 Value adjustments at December 31, 2021 188 – 3 968 – 407 – 4 187 – 33 – 4 220 Fair value adjustments on equity securities, net of taxes of USD 81 million 1 Net investment hedge, net of taxes of USD -30 million Defined benefit plans, net of taxes of USD -104 million Currency translation effects, net of taxes of USD 18 million Total value adjustments in 2022 Fair value adjustments on equity securities sold, reclassified to retained earnings net of taxes of nil Value adjustments related to divestments, net of taxes of USD -4 million – 382 – 382 91 91 – 382 91 – 104 – 104 1 – 103 8.1 – 382 – 104 – 444 – 353 – 444 – 839 – 6 – 5 – 450 – 844 – 4 34 – 4 34 – 4 34 Value adjustments at December 31, 2022 – 198 – 4 038 – 760 – 4 996 – 38 – 5 034 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 F-29 Notes to the Novartis Group consolidated financial statements 8.1) In 2022, net cumulative currency translation gains of USD 13 million were recycled through the income state- ment as a result of the divestments of subsidiaries. In 2021, net cumulative currency translation gains of USD 3.2 billion were recycled through the income statement as a result of the divestment of the investment in Roche. See Notes 2 and 4. In 2020, there were no currency translation losses or gains recycled through the income statement. 9. Property, plant and equipment The following table summarizes the movements of property, plant and equipment during 2022: (USD millions) At January 1, 2022 Cost Land Buildings Construction in progress Machinery and other equipment Total 492 11 819 1 508 13 328 27 147 Accumulated depreciation and impairment – 7 – 5 744 – 65 – 9 786 – 15 602 Net book value 485 6 075 1 443 3 542 11 545 At January 1, 2022 Impact of acquisitions of businesses Reclassifications Additions Disposals and derecognitions Depreciation charge Impairment charge Reversal of impairment charge Currency translation effects At December 31, 2022 At December 31, 2022 Cost 485 6 075 1 443 3 542 11 545 3 – 28 – 7 1 – 12 442 297 124 – 49 – 437 – 351 – 166 5 493 – 964 780 – 33 – 13 1 – 57 13 667 312 – 45 13 1 219 – 155 – 726 – 1 163 – 43 – 414 5 7 – 53 – 288 1 157 3 672 10 764 451 11 396 1 184 11 842 24 873 Accumulated depreciation and impairment – 9 – 5 903 – 27 – 8 170 – 14 109 Net book value 442 5 493 1 157 3 672 10 764 Commitments for purchases of property, plant and equipment Capitalized borrowing costs 549 5 F-30   Notes to the Novartis Group consolidated financial statements The following table summarizes the movements of property, plant and equipment during 2021: (USD millions) At January 1, 2021 Cost Accumulated depreciation and impairment Net book value At January 1, 2021 Reclassifications Additions Disposals and derecognitions Depreciation charge Impairment charge Reversal of impairment charge Currency translation effects At December 31, 2021 At December 31, 2021 Cost Buildings Construction in progress Machinery and other equipment Total 12 377 1 248 14 038 28 218 – 5 807 – 66 – 10 063 – 15 955 6 570 1 182 3 975 12 263 Land 555 – 19 536 536 6 570 1 – 30 – 4 5 – 23 485 197 109 – 78 – 453 – 137 70 – 203 6 075 1 182 – 610 1 027 – 12 – 76 16 – 84 3 975 12 263 413 293 – 30 1 430 – 150 – 755 – 1 208 – 167 12 – 199 – 384 103 – 509 1 443 3 542 11 545 492 11 819 1 508 13 328 27 147 Accumulated depreciation and impairment – 7 – 5 744 – 65 – 9 786 – 15 602 Net book value 485 6 075 1 443 3 542 11 545 Commitments for purchases of property, plant and equipment Capitalized borrowing costs 204 4 The following table shows the property, plant and equipment impairment charges and reversals by reporting seg- ment: (USD millions) Innovative Medicines Sandoz Corporate Total Impairment charges Impairment reversals 2022 – 411 – 3 2021 – 315 – 68 – 1 2020 – 326 – 121 – 414 – 384 – 447 2022 2021 2020 4 3 7 44 59 103 2 5 7 F-31 Notes to the Novartis Group consolidated financial statements  10. Right-of-use assets and lease liabilities The following table summarizes the movements of the right-of-use assets: The following table shows the right-of-use assets carry- ing value and depreciation charge at December 31, 2022 and 2021, by underlying class of asset: (USD millions) Right-of-use assets at January 1 Impact of acquisitions of businesses Additions Depreciation charge Impairment charge 1 Lease contract terminations 2 Currency translation effects 2022 1 561 12 247 – 300 – 3 – 34 – 52 2021 1 676 321 – 318 – 66 – 52 Total right-of-use assets at December 31 1 431 1 561 1 Impairment charges in 2022 were recorded in the Innovative Medicines segment. 2 Lease contract terminations also includes modifications to existing leases that result in reductions to the right-of-use assets, and reductions due to sub-leasing. (USD millions) Land Buildings Vehicles December 31, Depreciation December 31, Depreciation charge 2021 2021 2022 carrying value 2022 carrying value charge 505 745 117 16 177 96 522 866 136 11 192 105 Machinery and equipment, and other assets Total right-of-use assets 64 11 37 10 1 431 300 1 561 318 The following table shows the lease liabilities by maturity at December 31, 2022 and 2021: (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 Commitments for leases not yet commenced Lease liabilities Lease liabilities Lease liabilities undiscounted Lease liabilities undiscounted 2021 2021 2022 2022 251 190 167 137 122 922 1 789 – 251 1 538 297 232 201 172 154 2 149 3 205 – 297 2 908 83 275 216 162 139 122 982 1 896 – 275 1 621 324 258 198 172 154 2 243 3 349 – 324 3 025 134 At December 31, 2022, and December 31, 2021, there were no material future cash outflows, including exten- sion options, excluded from the measurement of lease liabilities. The Group’s most material lease with a lease term extension, representing a lease liability value of USD 0.7 billion (2021: USD 0.6 billion), has a determined lease term end date of 2071 (2021: 2071). Non-enforceable extension options of up to 10 years have not been included within the measurement of this lease liability, and do not have a material impact to the carrying value of the lease for both 2022 and 2021. Should the landlord agree to a lease extension, rent will be referenced to the market rates as at the commencement of the extension period. In 2022, the Group completed three sale and lease- back transactions for certain property, plant and equip- ment as part of the Groups plans to focus on key oper- ating locations. The transactions resulted in net cash inflows of USD 49 million and the recognition of USD 23 million of lease liabilities, and USD 13 million of right-of- use assets. The right-of-use assets value reflects the proportion of the property, plant and equipment retained. Extension options have been included where manage- ment believe that such options will be exercised. The lia- bilities reflect the net present value of future lease payments. The net gain on the sale and leaseback trans- actions amounted to USD 17 million. There were no sig- nificant sale and leaseback transactions in 2021 or 2020. The following table provides additional disclosures related to right-of-use assets and lease liabilities for 2022, 2021 and 2020: (USD millions) 2022 Interest expense on lease liabilities 1 60 Expense on short-term leases Expense on low-value leases 3 6 2021 62 6 7 2020 67 4 7 Total cash outflows for leases 355 381 379    Thereof:    Cash outflows for short-term leases    and low-value leases 2    Payments of interest 3 9 51    Payments of lease liabilities 4 295 13 52 316 11 56 312 1 The weighted average interest rate is 3.3% (2021: 3.2%, 2020: 3.4%). 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, 2022, 2021 and 2020, is similar to the portfolio of short-term leases the Group entered into during 2022, 2021 and 2020. 3 Included within total net cash flows from operating activities 4 Reported as cash outflows in financing activities net of lease incentives received, if any. F-32 Notes to the Novartis Group consolidated financial statements The net investment held and income from subleasing right-of-use assets were not significant for 2022, 2021, and 2020. Income from leasing Novartis property, plant and equipment to third parties for 2022, 2021 and 2020 was not significant. 11. Goodwill and intangible assets The following table summarizes the movements of goodwill and intangible assets in 2022: Goodwill Intangible assets other than goodwill (USD millions) At January 1, 2022 Cost In-process research and Total development Technologies Currently marketed products Other intangible assets Total 29 900 8 013 1 080 56 213 2 905 68 211 Accumulated amortization and impairment – 305 – 2 514 – 903 – 29 107 – 1 505 – 34 029 Net book value 29 595 5 499 177 27 106 1 400 34 182 At January 1, 2022 Impact of acquisitions of businesses Reclassifications 1 Additions Disposals and derecognitions 2 Amortization charge Impairment charge Currency translation effects At December 31, 2022 At December 31, 2022 Cost 29 595 161 5 499 1 209 177 27 106 1 400 34 182 1 209 – 1 429 2 1 403 24 – 28 – 427 330 – 95 – 917 – 176 1 175 588 2 093 – 3 – 2 – 100 – 37 – 3 603 – 342 – 3 982 – 15 – 322 – 72 – 1 326 – 6 – 243 – 7 – 432 29 301 4 421 121 25 513 1 589 31 644 29 596 7 092 1 038 58 249 3 305 69 684 Accumulated amortization and impairment – 295 – 2 671 – 917 – 32 736 – 1 716 – 38 040 Net book value 29 301 4 421 121 25 513 1 589 31 644 1 Reclassifications between various asset categories as a result of product launches of acquired in-process research and development and completion of software development 2 Derecognition of assets that are no longer being used or developed and are not considered to have a significant disposal value or other alternative use F-33 Notes to the Novartis Group consolidated financial statements The following table summarizes the movements of goodwill and intangible assets in 2021: Goodwill Intangible assets other than goodwill (USD millions) At January 1, 2021 Cost In-process research and Total development Technologies Currently marketed products Other intangible assets Total 30 321 6 893 1 115 57 333 2 384 67 725 Accumulated amortization and impairment – 322 – 2 193 – 885 – 26 566 – 1 272 – 30 916 Net book value At January 1, 2021 29 999 4 700 230 30 767 1 112 36 809 29 999 4 700 230 30 767 1 112 36 809 Impact of acquisitions of businesses 238 Reclassifications 1 Additions Disposals and derecognitions 2 Amortization charge Impairment charge Currency translation effects At December 31, 2021 At December 31, 2021 Cost 262 – 20 958 15 292 5 270 – 36 98 652 508 1 736 – 1 – 37 – 41 – 3 607 – 255 – 3 903 – 642 – 350 – 51 – 17 – 10 – 1 – 584 – 35 – 27 – 403 – 672 29 595 5 499 177 27 106 1 400 34 182 29 900 8 013 1 080 56 213 2 905 68 211 Accumulated amortization and impairment – 305 – 2 514 – 903 – 29 107 – 1 505 – 34 029 Net book value 29 595 5 499 177 27 106 1 400 34 182 1 Reclassifications between various asset categories as a result of product launches of acquired in-process research and development and completion of software development 2 Derecognition of assets that are no longer being used or developed and are not considered to have a significant disposal value or other alternative use The following table summarizes the allocation of the net book values of goodwill and intangible assets by report- ing segment at December 31, 2022: Goodwill1 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 21 531 4 186 14 24 487 1 139 29 826 7 770 235 107 1 026 92 1 460 358 358 Net book value at December 31, 2022 29 301 4 421 121 25 513 1 589 31 644 1 The Innovative Medicines and Sandoz Divisions’ represent the grouping of cash-generating units, to which goodwill is allocated. The following table summarizes the allocation of the net book values of goodwill and intangible assets by report- ing segment at December 31, 2021: Goodwill1 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 21 562 5 313 15 25 938 1 091 32 357 8 026 186 162 1 168 61 1 577 7 248 248 Net book value at December 31, 2021 29 595 5 499 177 27 106 1 400 34 182 1 The Innovative Medicines and Sandoz Divisions’ and Corporate represent the grouping of cash-generating units, to which goodwill is allocated. As at December 31, 2022, the most significant intangi- ble assets within currently marketed products category are Leqvio (Innovative Medicines: acquisition of The Medicines Company) and Zolgensma (Innovative Medicines: acquisition of Avexis Inc.). As at December 31, 2022, the carrying value and remaining amortization period for Leqvio is USD 7.4 billion and 13 years, respec- tively (2021: USD 7.9 billion and 14 years, respectively), and for Zolgensma USD 5.9 billion and 8 years, respec- tively (2021: USD 6.6 billion and 9 years, respectively). The Innovative Medicines and Sandoz Divisions’ cash-generating units, to which goodwill is allocated, F-34 Notes to the Novartis Group consolidated financial statements each comprise a group of smaller cash-generating units. The valuation method of the recoverable amount of the group of cash-generating units, to which goodwill is allo- cated, is based on the fair value less costs of disposal. The following assumptions are used in the calcula- tions: (As a percentage) Terminal growth rate Discount rate (post-tax) Innovative Medicines 1.5 8.0 Sandoz 1.0 8.0 The discount rates for all divisions consider the Group’s weighted average cost of capital, adjusted to approximate the weighted average cost of capital of a comparable market participant. The fair value less costs of disposal, for all cash-gen- erating units containing goodwill, is reviewed for the impact of reasonably possible changes in key assump- tions. In particular, we considered an increase in the dis- count 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—Impairment of goodwill and intangible assets” provides additional disclosures on how the Group performs goodwill and intangible asset impairment testing. The following table shows the intangible asset impairment charges and reversals by reporting segment: (USD millions) Innovative Medicines 1 Sandoz Corporate Total Impairment charges Impairment reversals 2022 2021 2020 2022 – 1 299 – 25 – 2 2021 – 367 – 28 – 8 2020 – 768 – 141 – 5 – 1 326 – 403 – 914 1 2022 includes an impairment of USD 0.6 billion related to the write-down of IPR&D related to cessation of clinical development program UNR844. 2021 includes an impairment of USD 0.2 billion related to the write-down of IPR&D related to cessation of clinical development program GTX312. 2020 includes an impairment of USD 0.5 billion related to the write-down of IPR&D related to cessation of clinical development program ZPL389 for atopic dermatitis and USD 0.2 billion related to a partial write-down of the Votrient currently marketed product (Votrient carrying value was USD 0.9 billion in 2022 and USD 1.3 billion in 2021). F-35 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 employees Tax loss Other assets, provisions forwards and accruals carry- Total Inventories Gross deferred tax assets at January 1, 2022 125 1 307 1 026 2 273 374 2 727 7 832 Gross deferred tax liabilities at January 1, 2022 – 381 – 4 704 – 591 – 148 – 1 335 – 7 159 Net deferred tax balance at January 1, 2022 – 256 – 3 397 435 2 125 374 1 392 673 673 655 1 – 43 – 244 11 1 1 63 1 19 At January 1, 2022 Credited/(charged) to income Charged to equity – 256 – 3 397 435 2 125 374 1 392 69 628 – 5 – 43 5 Credited/(charged) to other comprehensive income – 2 – 104 Impact of acquisitions of businesses – 300 Other movements 4 10 – 7 – 6 55 – 9 Net deferred tax balance at December 31, 2022 – 185 – 3 059 319 2 076 425 1 477 1 053 Gross deferred tax assets at December 31, 2022 158 1 726 739 2 214 425 2 789 8 051 Gross deferred tax liabilities at December 31, 2022 – 343 – 4 785 – 420 – 138 – 1 312 – 6 998 Net deferred tax balance at December 31, 2022 – 185 – 3 059 319 2 076 425 1 477 1 053 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, 2022 Deferred tax liabilities at December 31, 2022 Net deferred tax balance at December 31, 2022 4 312 3 739 – 2 686 1 053 Gross deferred tax assets at January 1, 2021 189 1 351 1 137 2 502 507 2 658 8 344 Gross deferred tax liabilities at January 1, 2021 – 430 – 5 269 – 340 – 159 – 10 – 1 344 – 7 552 Net deferred tax balance at January 1, 2021 – 241 – 3 918 797 2 343 497 1 314 792 At January 1, 2021 Credited/(charged) to income Charged to equity – 241 – 3 918 – 27 567 797 – 22 2 343 497 1 314 – 215 – 121 127 – 35 792 309 – 35 Credited/(charged) to other comprehensive income – 323 6 – 317 Impact of acquisitions of businesses Other movements – 58 12 12 Net deferred tax balance at December 31, 2021 – 256 – 3 397 – 17 435 – 3 2 125 12 – 14 374 – 20 1 392 – 46 – 30 673 Gross deferred tax assets at December 31, 2021 125 1 307 1 026 2 273 374 2 727 7 832 Gross deferred tax liabilities at December 31, 2021 – 381 – 4 704 – 591 – 148 – 1 335 – 7 159 Net deferred tax balance at December 31, 2021 – 256 – 3 397 435 2 125 374 1 392 673 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, 2021 Deferred tax liabilities at December 31, 2021 Net deferred tax balance at December 31, 2021 4 089 3 743 – 3 070 673 F-36 Notes to the Novartis Group consolidated financial statements Deferred tax liabilities have not been recognized for the withholding tax and other taxes that would be payable on the remittance of earnings of foreign subsidiaries, insofar as the Group has the ability to control any future reversal and the unremitted earnings are retained in the foreign subsidiaries for reinvestment. The total unremit- ted earnings retained for reinvestment in the Group’s for- eign subsidiaries that would be subject to withholding tax or other taxes if remitted to the Group are estimated at approximately USD 32 billion in 2022, (2021: USD 29 billion). The gross value of tax-loss carry-forwards that have or have not been recognized as deferred tax assets, with their expiry dates, is as follows: (USD millions) One year Two years Three years Four years Five years Unrecognized Recognized 2022 total 18 37 25 138 79 0 5 5 0 688 18 42 30 138 767 More than five years 3 880 2 380 6 260 Not subject to expiry 433 452 885 Total 4 610 3 530 8 140 (USD millions) One year Two years Three years Four years Five years Unrecognized Rcognized 2021 total 15 14 37 26 146 4 6 10 11 20 19 20 47 37 166 5 408 1 102 6 799 More than five years 3 536 1 872 Not subject to expiry 418 684 Total 4 192 2 607 (USD millions) 2022 2021 2020 Tax losses carried forward that expired 6 18 14 Deferred tax assets related to carry-forwards of taxable losses and tax credits of relevant Group entities are rec- ognized to the extent it is considered probable that future taxable profits will be available in the respective tax juris- dictions against which such losses and credits can be utilized. 13. Financial and other non-current assets Financial assets Other non-current assets (USD millions) Equity securities Debt securities Fund investments 2022 2021 (USD millions) 1 145 1 663 Deferred compensation plans 37 281 34 Prepaid post-employment benefit plans 1 366 Other non-current assets 2022 419 491 200 2021 520 1 415 275 Total financial investments 1 463 2 063 Total other non-current assets 1 110 2 210 Long-term receivables from finance subleases Other long-term receivables Contingent consideration receivables 1 59 197 607 Long-term loans, advances and security deposits 85 70 184 641 78 Total financial assets 2 411 3 036 1 Note 29 provides additional disclosures related to contingent consideration. 1 Note 25 provides additional disclosures related to post-emplyment benefits. F-37 Notes to the Novartis Group consolidated financial statements  14. Inventories (USD millions) Raw material, consumables Work in progress Finished products Total inventories 2022 934 3 673 2 568 7 175 2021 870 3 160 2 636 6 666 The following table shows the amount of inventory rec- ognized as an expense in “Cost of goods sold” in the consolidated income statements: (USD billions) Cost of goods sold 2022 – 8.6 2021 – 8.8 2020 – 8.5 The following table shows the recognized amount of inventory provision and reversals of inventory provision recorded in the consolidated income statements: (USD millions) Inventory provisions 2022 – 633 Reversals of inventory provisions 161 2021 – 573 158 2020 – 702 255 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 2022 8 128 – 62 2021 8 088 – 83 8 066 8 005 The following table summarizes the movement in the provision for doubtful trade receivables: (USD millions) January 1 Provisions for doubtful trade receivables charged to the consolidated income statement Utilization of provisions for doubtful trade receivables Reversal of provisions for doubtful trade receivables credited to the consolidated income statement Currency translation effects December 31 2022 – 83 – 47 9 56 3 2021 – 93 – 39 9 34 6 2020 – 95 – 59 13 53 – 5 – 62 – 83 – 93 The following table shows 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 2022 7 664 190 110 62 23 79 2021 7 639 162 99 63 28 97 Provisions for doubtful trade receivables Total trade receivables, net – 62 8 066 – 83 8 005 Trade receivable balances represent amounts due from our customers, which are mainly drug wholesalers, retail- ers, private health systems, government agencies, man- aged care providers, pharmacy benefit managers and government-supported healthcare systems. We partic- ularly monitor the level of trade receivables in countries deemed to have an elevated credit risk. We consider macroeconomic environment, historical experience, country and political risk, in addition to other relevant information when assessing risk. These risk factors are monitored regularly to determine any adjustments in risk classification. The majority of the past due trade receiv- ables from elevated credit risk countries are due from local governments or from government-funded entities. Deteriorating credit and economic conditions as well as other factors in these elevated credit risk countries have resulted in, and may continue to result in, an increase in the average length of time that it takes to collect these F-38 Notes to the Novartis Group consolidated financial statements trade receivables, and may require the Group to re-eval- uate the expected credit loss amount of these trade receivables in future periods. At December 31, 2022, amounts past due for more than one year are not signif- icant in elevated credit risk countries. Total trade receivables include amounts denomi- nated in the following major currencies: (USD millions) US dollar (USD) Euro (EUR) Russian ruble (RUB) Japanese yen (JPY) British pound (GBP) Chinese yuan (CNY) Canadian dollar (CAD) Brazilian real (BRL) Australian dollar (AUD) Swiss franc (CHF) Other currencies Total trade receivables, net 2022 3 709 1 426 2021 3 344 1 408 430 177 176 155 151 145 137 108 473 383 200 197 139 129 139 106 1 452 8 066 1 487 8 005 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) Commodities Debt securities Time deposits and short-term investments with original maturity more than 90 days Derivative financial instruments Total marketable securities, commodities, time deposits and derivative financial instruments 2022 111 2021 111 9 2 741 11 089 12 965 204 105 11 413 15 922 The vast majority of debt securities, time deposits and short-term investments with an original maturity of more than 90 days was denominated in USD as of December 31, 2022, and 2021. 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 2022 2 877 4 640 2021 3 396 9 011 7 517 12 407 F-39 Notes to the Novartis Group consolidated financial statements 17. Other current assets (USD millions) VAT receivable Withholding tax recoverable Prepaid expenses Contingent consideration receivable 1 Other receivables and current assets Total other current assets 1 Note 29 provides additional disclosures related to contingent consideration. 2022 509 50 911 43 958 2021 487 58 1 102 793 2 471 2 440 18. Equity The following table shows the movement in the share capital: (USD millions) Share capital 1 Treasury shares Outstanding share capital Jan 1, 2020 Movement in year Dec 31, 2020 Movement in year Dec 31, 2021 Movement in year Dec 31, 2022 936 – 80 856 – 23 27 4 913 – 53 860 – 12 5 – 7 901 – 48 853 – 11 – 44 – 55 890 – 92 798 1 The Novartis AG share capital consists of registered shares with a nominal value of CHF 0.50 each. No authorized and conditional capital exists. The following table shows the movement in the shares: 2022 2021 2020 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 2 434.4 – 199.5 2 234.9 2 467.0 – 210.2 2 256.8 2 527.3 – 262.3 2 265.0 Shares canceled for capital reduction 2 Shares acquired to be canceled 3 Other share purchases 4 Exercise of options and employee transactions 5 18.9 Equity-based compensation 5 Shares delivered to Alcon employees – 30.7 30.7 – 32.6 32.6 – 60.3 60.3 – 126.2 – 126.2 – 1.4 – 1.4 – 30.7 – 30.7 – 1.5 – 1.5 1.9 10.4 1.9 10.4 0.6 9.6 0.6 9.6 – 32.6 – 32.6 – 1.7 – 1.7 14.7 11.0 14.7 11.0 0.0 0.0 0.1 0.1 0.4 0.4 Total movements – 30.7 – 84.6 – 115.3 – 32.6 10.7 – 21.9 – 60.3 52.1 – 8.2 Balance at end of year 2 403.7 – 284.1 2 119.6 2 434.4 – 199.5 2 234.9 2 467.0 – 210.2 2 256.8 1 Approximately 99.0 million treasury shares (2021: 102.5 million; 2020: 103.0 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 2019 Annual General Meeting (AGM) for transactions after February 28, 2019, until March 2, 2021. Transactions after March 2, 2021, were executed under the CHF 10 billion share buyback authority approved at the 2021 AGM and the additional CHF 10 billion authority approved at the 2022 AGM. 4 Shares acquired from employees, which were previously granted to them under the respective equity-based participation plans 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) 2022 3.10 2021 3.00 2020 2.95 7.5 7.4 7.0 F-40 Notes to the Novartis Group consolidated financial statements 18.2) The following table summarizes the treasury shares movements: 2022 2021 2020 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 – 126.2 – 10 787 – 30.7 – 2 775 – 32.6 – 2 897 Other share purchases 2 Purchase of treasury shares Exercise of options and employee transactions 3 18.9 Equity-based compensation 4 Shares delivered to Alcon employees Total – 1.4 – 123 – 1.5 – 145 – 1.7 – 159 – 127.6 – 10 910 – 32.2 – 2 920 – 34.3 – 3 056 1.9 10.4 0.0 88 854 5 0.6 9.6 0.1 39 745 17 14.7 11.0 0.4 806 730 30 – 115.3 – 9 963 – 21.9 – 2 119 – 8.2 – 1 490 1 Shares repurchased on the SIX Swiss Exchange second trading line under a CHF 10 billion share buyback authority approved at the 2019 Annual General Meeting (AGM) for transactions after February 28, 2019, until March 2, 2021. Transactions after March 2, 2021, were executed under the CHF 10 billion share buyback authority approved at the 2021 AGM and the additional CHF 10 billion authority approved at the 2022 AGM. 2 Shares acquired from employees, which were previously granted to them under the respective equity-based participation plans 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. 18.3) In December 2021, Novartis entered into an irrevo- cable, non-discretionary arrangement with a bank to repurchase Novartis shares on the second trading line under its up-to USD 15.0 billion share buyback. The arrangement was updated in July 2022. Novartis is able to cancel this arrangement at any time but could be sub- ject to a 90-day waiting period. As of December 31, 2022, these waiting period con- ditions were not applicable and as a result, there was no requirement to record a liability under this arrangement as of December 31, 2022. The liability under this arrange- ment amounted to USD 2.8 billion as of December 31, 2021. In June 2021, Novartis entered into an irrevocable, non-discretionary arrangement with a bank to repur- chase Novartis shares to mitigate dilution related to par- ticipation plans of employees. Novartis would have been able to cancel this arrangement at any time but would have been subject to a 90-day waiting period. This trading plan commitment was fully executed and expired in June 2021, and as a consequence, there is no liability related to this plan recognized as of December 31, 2021. In November 2020, Novartis entered into an irrevo- cable, non-discretionary arrangement with a bank to repurchase Novartis shares on the second trading line under its up-to USD 2.5 billion share buyback. Novartis would have been able to cancel this arrangement at any time, but would have been subject to a 90-day waiting period. The commitment under this arrangement there- fore reflected the obligated purchases by the bank under such trading plan over a rolling 90-day period, or if shorter, until the maturity date of such trading plan. The commitment under this arrangement amounted to USD 1.8 billion as of December 31, 2020. This trading plan commitment was fully executed and expired in March 2021, and as a consequence, there is no liability related to this plan recognized as of December 31, 2021. In August 2020, Novartis entered into an irrevocable, non-discretionary arrangement with a bank to repurchase Novartis shares to mitigate dilution related to participation plans of associates. Novartis would have been able to cancel this arrangement at any time but would have been subjected to a 90-day waiting period. This trading plan commitment was fully executed and expired, and as a consequence, there is no liability related to this plan recognized as of December 31, 2020. 18.4) In October 2020, Novartis entered into an agree- ment with the market maker for its employee options to repurchase a portion of the outstanding written call options. A total of 3.7 million options were repurchased under this agreement. This agreement was terminated in November 2020. 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 include, for subsidiaries in hyper- inflationary economies, the impact of the restatement of the equity balances of the current year as well as restate- ment of the non-monetary assets and liabilities with the general price index at the beginning of the period. See Note 29 for additional disclosures. 18.8) In 2021, transaction costs that were directly attrib- utable to the distribution (spin-off) of Alcon Inc. to Novartis AG shareholders and that would otherwise have been avoided, were recorded to equity. F-41 Notes to the Novartis Group consolidated financial statements 18.9) At December 31, 2022, the market maker held 3 million (2021: 3 million; 2020: 1 million) written call options, originally issued as part of the share-based compensa- tion for employees, that have not yet been exercised. The weighted average exercise price of these options is USD 66.07 (2021: USD 61.45; 2020: USD 60.09), and they have contractual lives of 10 years, with remaining lives less than one year (2021: two years; 2020: three years). 19. Non-current financial debt (USD millions) Straight bonds Liabilities to banks and other financial institutions 1 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 2.3% (2021: 0.9%) 2022 2021 22 341 25 296 144 227 22 485 25 523 – 2 241 – 2 621 20 244 22 902 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 86% at December 31, 2022, and 87% at December 31, 2021. The average interest rate on total financial debt in 2022 was 2.4% (2021: 1.9%). Note 29 contains a maturity table of the Group’s future contractual interest payments commitments. F-42 Notes to the Novartis Group consolidated financial statements The following table provides a breakdown of straight bonds: Notional amount Currency (millions) Issuance year Maturity year Issuer 2021 (USD Issue price millions) millions) 2022 (USD Coupon 2.400% 3.700% 3.400% 4.400% USD USD USD USD 1.625% EUR 0.250% 0.625% 1.050% 3.000% 4.000% 0.125% 0.625% 2.400% 3.100% 1.125% 0.500% 1.375% 1.700% 1.750% 2.000% 2.200% 2.750% CHF CHF CHF USD USD EUR EUR USD USD EUR EUR EUR EUR USD USD USD USD 1 500 500 2 150 1 850 600 500 550 325 1 750 1 250 1 250 500 1 000 1 000 600 750 750 750 1 000 1 250 1 500 1 250 0.000% 1 EUR 1 850 Total straight bonds 2012 2012 2014 2014 2014 2015 2015 2015 2015 2015 2016 2016 2017 2017 2017 2018 2018 2018 2020 2020 2020 2020 2020 2022 Novartis Capital Corporation, New York, United States 99.225% 1 498 2042 Novartis Capital Corporation, New York, United States 98.325% 490 490 2024 Novartis Capital Corporation, New York, United States 99.287% 2 147 2 144 2044 Novartis Capital Corporation, New York, United States 99.196% 1 827 1 826 2026 Novartis Finance S.A., Luxembourg, Luxembourg 2025 Novartis AG, Basel, Switzerland 2029 Novartis AG, Basel, Switzerland 2035 Novartis AG, Basel, Switzerland 99.697% 100.640% 100.502% 100.479% 638 541 595 352 676 547 602 356 2025 Novartis Capital Corporation, New York, United States 99.010% 1 742 1 740 2045 Novartis Capital Corporation, New York, United States 98.029% 1 221 1 220 2023 Novartis Finance S.A., Luxembourg, Luxembourg 99.127% 1 330 1 409 2028 Novartis Finance S.A., Luxembourg, Luxembourg 98.480% 528 559 2022 Novartis Capital Corporation, New York, United States 99.449% 1 000 2027 Novartis Capital Corporation, New York, United States 99.109% 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% 2025 Novartis Capital Corporation, New York, United States 99.852% 994 638 798 797 792 998 993 677 846 846 840 998 2027 Novartis Capital Corporation, New York, United States 99.909% 1 246 1 246 2030 Novartis Capital Corporation, New York, United States 99.869% 1 494 1 493 2050 Novartis Capital Corporation, New York, United States 97.712% 1 215 1 214 2028 Novartis Finance S.A., Luxembourg, Luxembourg 99.354% 1 958 2 076 22 341 25 296 1 The EUR 1 850 million bond issued in 2020 features a coupon step-up of 0.25% commencing with the first interest payment date after December 31, 2025, if one or both of the 2025 Patient Access Targets are not met. These 2025 Patient Access Targets are the 2025 Flagship Programs Patient Reach Target and the 2025 Strategic Innovative Therapies Patient Reach Target, as defined in the bond prospectus. As of December 31, 2022, there is no indication that these 2025 Patient Access Targets will not be met. The following tables provide a breakdown of total non-current financial debt, including current portion by maturity and currency: The following table shows the comparison of balance sheet carrying value and fair value of total non-current financial debt, including current portion: (USD millions) 2022 Balance sheet 2022 Fair values 2021 Balance sheet 2021 Fair values Straight bonds 22 341 20 277 25 296 27 079 Others Total 144 144 227 227 22 485 20 421 25 523 27 306 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. Breakdown by maturity: (USD millions) 2022 2023 2024 2025 2026 2027 After 2027 Total Breakdown by currency: (USD millions) US dollar (USD) Euro (EUR) Japanese yen (JPY) Swiss franc (CHF) Others Total 2022 2 241 2 147 3 281 638 2021 2 621 2 342 2 144 3 284 693 2 909 2 916 11 269 11 523 22 485 25 523 2022 2021 13 376 15 862 7 478 7 930 76 174 1 488 1 505 67 52 22 485 25 523 F-43 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 2022 2021 1 723 2 640 554 362 535 154 704 874 662 487 567 341 956 519 Total provisions and other non-current liabilities 4 906 6 172 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. number of other PRPs at each site as well as the iden- tity and financial position of such parties in light of the joint and several nature of the liability. The expected timing of the related cash outflows as of December 31, 2022, is currently projected as follows: Environmental remediation provisions The following table shows the movements in the envi- ronmental liability provisions: 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 provisions (USD millions) Due within two years Expected cash outflows 128 163 251 46 588 (USD millions) January 1 Cash payments Releases Additions Currency translation effects December 31 Less current provision Non-current environmental remediation provisions at December 31 2022 616 – 6 – 18 6 – 10 588 – 53 2021 809 – 169 – 105 105 – 24 616 – 49 2020 714 – 10 – 27 82 50 809 – 167 535 567 642 The significant components of the environmental reme- diation provisions consist of costs to sufficiently clean and refurbish contaminated sites to the extent neces- sary, and to continue surveillance at sites where the envi- ronmental 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 an annual basis and adjusted as necessary. In the United States, Novartis has been named under federal legislation (the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended) as a potentially responsible party (PRP) in respect of certain sites. Novartis actively participates in, or monitors, the cleanup activities at the sites in which it is a PRP. The provision takes into consideration the 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. These not-provisioned-for matters include indi- vidual product liability cases and certain other legal matters. Plaintiffs’ have alleged claims in these matters and the Group does not believe that information about the amount sought by plaintiffs, if that is known, would be meaningful with respect to those legal proceedings. This is due to a number of factors, including, but not lim- ited to, the stage of proceedings, the entitlement of par- ties to appeal a decision and clarity as to theories of lia- bility, damages and governing law. Therefore, it is not practicable to provide information about the potential financial impact of these matters. In addition, in some of F-44 Notes to the Novartis Group consolidated financial statements these matters there are claims for punitive or multiple (treble) damages, civil penalties and disgorgement of profits that in the view of Novartis are either wholly or partially unspecified, or wholly or partially unquantifiable at present; the Group believes that information about these amounts claimed by plaintiffs generally is not meaningful for purposes of determining a reliable esti- mate 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- gent liabilities. Summary of significant legal proceedings The following is a summary of significant legal proceed- ings to which Novartis or its subsidiaries are currently a party, or were a party and that concluded in 2022. Investigations and related litigations Southern District of New York (S.D.N.Y.) Gilenya marketing practices investigation and litigation In 2013, Novartis Pharmaceuticals Corporation (NPC) received a civil investigative demand from the United States Attorney’s Office (USAO) for the S.D.N.Y. request- ing the production of documents and information relat- ing 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 individual relator in a qui tam complaint. In 2022, NPC’s motion to dismiss this complaint was granted, which was appealed. The claims are being vigorously contested. Government generic pricing antitrust investigations, antitrust class actions Since 2016, Sandoz Inc. has received a grand jury sub- poena and a civil investigative demand and interrogato- ries from the Antitrust and Civil Divisions of the US Department of Justice (DOJ) into alleged price fixing and market allocation of generic drugs in the United States as well as alleged federal False Claims Act (FCA) viola- tions. Sandoz Inc. also received a subpoena and inter- rogatories from the Attorney General of the State of Con- necticut in connection with a similar States’ investigation. In 2020, Sandoz Inc. reached a resolution with the DOJ Antitrust Division, pursuant to which Sandoz Inc. paid USD 195 million and entered into a deferred prosecution agreement. The Sandoz Inc. resolution related to instances of misconduct at the Company between 2013 and 2015 with regard to certain generic drugs sold in the United States. Under the terms of that agreement, Sandoz Inc. will continue to take steps to enhance its compliance program, employee training and monitoring, and will continue to cooperate with the US government’s ongoing investigation into the generic pharmaceutical industry. Sandoz Inc. also finalized a resolution with the DOJ Civil Division and in 2021 paid USD 185 million, which includes interest from the date of the agreement in prin- ciple, to settle related claims arising under the FCA, and entered into a corporate integrity agreement with the Office of Inspector General (OIG) of the US Department of Health and Human Services (HHS). This resolution with the DOJ resolves all federal government matters related to price fixing allegations. Since the third quarter of 2016, Sandoz Inc. and Foug- era Pharmaceuticals Inc. have been sued alongside other generic pharmaceutical companies in numerous individ- ual and putative class action complaints by direct and indirect private purchasers and by over 50 US states and territories, represented by their respective Attorneys General. Plaintiffs claim that defendants, including Sandoz Inc., engaged in price fixing and market alloca- tion of generic drugs in the United States, and seek dam- ages and injunctive relief. The litigation includes com- plaints alleging product-specific conspiracies, as well as complaints alleging the existence of an overarching industry conspiracy, and assert claims for damages and penalties under federal and state antitrust and consumer protection acts. The cases have been consolidated for pretrial purposes in the United States District Court (USDC) for the Eastern District of Pennsylvania, and the claims are being vigorously contested. 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 these allega- tions. In 2019, the CdS upheld the ICA decision and fine. Following that CdS decision, several additional Italian regions and hospitals sent letters claiming damages for an aggregate amount of approximately USD 330 million. None of these claims have been asserted in legal pro- ceedings and no further letters have been sent since. Novartis continues to appeal the CdS decision. In 2019, the French Competition Authority (FCA) issued a State- ment 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 degeneration from 2008 to F-45 Notes to the Novartis Group consolidated financial statements 2013. In 2020, the FCA issued a decision finding that the Novartis entities had infringed competition law by abus- ing a dominant position and imposing a fine equivalent to approximately USD 452 million. Novartis paid the fine, again subject to recoupment, and is appealing the FCA’s decision. Novartis is the subject of similar investigations and proceedings involving competition authorities in Bel- gium and Greece and is currently in the appeal process in Turkey. Novartis continues to vigorously contest all claims in all those countries. Novartis is also challeng- ing policies and regulations allowing off-label/unlicensed use and reimbursement for economic reasons in Turkey. Swiss and EU investigation In September 2022, the Swiss Competition Commission (COMCO) initiated an investigation of Novartis acquisi- tion of certain patents from Genentech in April 2020 and their subsequent enforcement against Eli Lilly and other parties, allegedly in an attempt to protect Cosentyx from competing products. COMCO is investigating whether enforcement of the patents violates the Swiss Cartel Act. The European Commission also requested information from Novartis regarding this matter. Novartis is cooper- ating with the authorities and will vigorously contest any allegations. Greece investigation The Greek authorities are investigating legacy allega- tions of potentially inappropriate economic benefits to HCPs, government officials and others in Greece. These authorities include the Greek Coordinating Body for Inspection and Control, and the Greek Body of Prose- cution of Financial Crime (SDOE), from which the Com- pany received a summons in 2018 and 2020. Novartis has cooperated in these investigations. In 2021, SDOE imposed on Novartis Hellas a fine equivalent to approx- imately USD 1.2 million, which Novartis Hellas has appealed. In 2022, the Greek State served a civil lawsuit on Novartis Hellas, seeking approximately USD 225 mil- lion for moral damages allegedly arising from the con- duct that was the subject of the Company’s 2020 set- tlement with the DOJ regarding allegations of inappropriate economic benefits in Greece that was dis- closed in the 2020 Annual Report and the 2020 Form 20-F. The claims are being vigorously contested. 340B Drug Pricing Program investigations In 2021, NPC received a notification from the US Health Resources and Services Administration (HRSA) which stated that HRSA believes NPC’s contract pharmacy pol- icy violates the 340B statute, and threatened potential enforcement action. NPC subsequently sued HRSA in the USDC for the District of Columbia to challenge HRSA’s determination and to enjoin HRSA from taking action with respect to NPC’s contract pharmacy policy. HRSA then referred the matter regarding NPC’s contract pharmacy policy to OIG, which could result in the impo- sition of civil monetary penalties on NPC. The USDC issued a decision rejecting HRSA’s interpretation of the 340B statute, vacating the violation notification and remanding the matter to HRSA. HRSA appealed, and the United States Court of Appeals for the DC Circuit heard argument on the case in 2022. In addition, in 2021, Emory University Hospital Midtown filed an Administrative Dis- pute Resolution (ADR) proceeding against NPC, seek- ing the return of alleged overcharges resulting from NPC’s contract pharmacy policy. NPC has moved to dis- miss the proceeding pending resolution of the HRSA lit- igation. Finally, also in 2021, NPC received a civil inves- tigative subpoena from the Office of the Attorney General of the State of Vermont requesting the production of documents and information concerning NPC’s participa- tion in the 340B Drug Pricing Program in Vermont; NPC provided documents and information to the Office of the Attorney General. Antitrust class actions 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. In 2022, Novartis agreed to a settlement in principle to pay USD 245 mil- lion to resolve these cases. These settlements are sub- ject to mutually agreeable terms, finalization of docu- mentation and, in some cases, court approval. Product liability litigation Reclast NPC is a defendant in more than 20 US product liability actions involving Reclast and alleging atypical femur fracture injuries, all of which are in New Jersey state or federal court and in California state court, coordinated with claims against other bisphosphonate manufactur- ers. The claims are being vigorously contested. Taxotere® (docetaxel) Sandoz is a defendant in more than 3 100 US product liability actions involving Taxotere® (docetaxel), an oncology product, many of which have been transferred to a multidistrict litigation in the Eastern District of Lou- isiana. 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. In 2022, actions involving claims related to alleged eye injuries caused by the use of Taxotere® were coordinated in a separate multidistrict litigation in the Eastern District of Louisiana. The claims are being vigorously contested. Amiodarone Sandoz entities are named in two multi-plaintiff US prod- uct liability cases involving amiodarone, a cardiac drug indicated to treat life-threatening arrhythmias that have not responded to other treatment. The complaints allege failure to warn, off-label promotion, and failure to include medication guides to pharmacies. The claims are being vigorously contested. F-46 Notes to the Novartis Group consolidated financial statements 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. These claims include several putative class actions in Canada. Claims have also been brought alleging injury from carcinogenic impurities in ranitidine-containing medicines. These claims also include several putative class actions in Canada and a multidistrict litigation in Florida. All of these claims are being vigorously contested. Tasigna NPC is a defendant in more than 400 US product liabil- ity actions involving Tasigna, alleging that the product caused various cardiovascular effects and that NPC failed to provide adequate warnings about those alleged side effects. State court actions are pending in a multi- county litigation in Bergen County, New Jersey, and fed- eral cases are pending in a multidistrict litigation in the Middle District of Florida. The claims are being vigorously contested. Other matters Shareholder derivative lawsuit In 2021, NPC, Sandoz Inc., Novartis Capital Corporation and certain present and former directors and officers of Novartis were named as defendants, and Novartis was named as a nominal defendant, in a purported share- holder derivative lawsuit filed in New York state court. The plaintiffs, derivatively as purported Novartis share- holders on behalf of Novartis, seek damages and other remedies based on alleged conduct by the corporate and individual defendants. In 2022, the court granted Novartis motion to dismiss the lawsuit, which the plain- tiffs have appealed. Concluded legal matters Average Wholesale Price (AWP) litigation – Concluded matter Lawsuits were brought, the latest in February 2016, by various US state governmental entities and private par- ties against various pharmaceutical companies, includ- ing NPC, alleging that they fraudulently overstated the AWP that is or has been used by payers, including state Medicaid agencies, to calculate reimbursements to healthcare providers. In 2022, NPC settled a putative class action brought by private payers in New Jersey, which resolved the last AWP lawsuit. This matter is now concluded. Entresto matter– Concluded matter In 2021, NPC received a civil investigative demand from the DOJ seeking information from 2016 to the present regarding the marketing and pricing of Entresto, includ- ing remuneration provided to HCPs. In December 2022, the DOJ advised that it has no additional requests and that the matter is considered closed. This matter is now concluded. South Korea investigation – Concluded matter 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 healthcare pro- fessionals (HCPs). This resulted in a non-material fine, which the prosecutor appealed. In 2021, the appellate court upheld the fine, and the prosecutor appealed that decision. In January 2023, the Supreme Court dismissed the appeal. This matter is now concluded. Summary of product liability, governmental investigations and other legal matters provision movements (USD millions) January 1 2022 397 2021 487 Impact of acquisitions of businesses 4 2020 1 369 11 Cash payments – 105 – 292 – 1 863 Releases of provisions Additions to provisions Currency translation effects December 31 Less current portion Non-current product liabilities, governmental investigations and other legal matters provisions at December 31 – 52 466 – 8 702 – 548 – 44 251 – 5 397 – 56 – 31 1 018 – 17 487 – 306 154 341 181 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-47 Notes to the Novartis Group consolidated financial statements  21. Current financial debt and derivative financial instruments (USD millions) 2022 2021 Interest-bearing accounts of employees payable on demand 1 Bank and other financial debt 2 Commercial paper Current portion of non-current financial debt Derivative financial instruments 863 2 772 2 241 55 1 814 899 893 2 621 68 Total current financial debt and derivative financial instruments 5 931 6 295 1 Weighted average interest rate 0.25% through September 30, 2022 (2021: 0.25%) 2 Weighted average interest rate 9.7% (2021: 6.1%) During the third quarter of 2022, Novartis closed the interest-bearing accounts of employees payable on demand, and paid out USD 0.9 billion to the respective beneficiaries on October 3, 2022. The net cash outflows from interest-bearing accounts of employees payable on demand were reported within the line change in current financial debts in the consolidated statements of cash flows. See Note 23.6. The carrying 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 provisions Deferred income Provisions for product liabilities, governmental investigations and other legal matters 1 Accrued share-based payments Contingent consideration 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 consideration. 3 Note 18.3 provides additional disclosures related to commitment for repurchase of own shares. 2022 836 1 131 1 059 767 116 6 732 2 321 53 123 548 235 131 743 2021 619 345 1 089 752 127 6 481 2 260 49 123 56 253 119 2 809 588 14 795 15 670 Provisions are based upon management’s best estimate and adjusted for actual experience. Such adjustments to historic estimates have not been material. F-48 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: (USD millions) January 1 Effect of currency translation, business combinations Payments/utilizations Adjustments of prior years charged to income statement Current year income statement charge Change in provisions offset against gross trade receivables December 31 2022 6 481 – 210 2021 6 256 – 218 2020 5 595 234 – 22 261 – 19 838 – 19 294 – 322 – 245 – 151 23 072 20 413 19 773 – 28 113 99 6 732 6 481 6 256 The provisions for deductions from revenue include specific healthcare plans and program rebates as well as non-healthcare plans and program-related rebates, returns and other deductions. The provisions for deductions from revenue are adjusted to reflect experience and to reflect 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 deductions from revenue. Restructuring provisions movements (USD millions) January 1 Additions Cash payments Releases Transfers Currency translation effects December 31 2022 345 1 368 – 468 – 42 – 53 – 19 1 131 2021 459 328 – 344 – 54 – 27 – 17 345 2020 438 354 – 268 – 87 22 459 In 2022, additions to provisions of USD 1.4 billion were mainly related to the following reorganizations: • Initiative announced in April 2022 to implement a new streamlined organizational model designed to support innovation, growth and productivity. • The continuation of the Innovative Medicines Division and the Operation unit (formerly Novartis Technical Operations and the Customer & Technology Solutions) 2021 restructuring initiatives. In 2021, additions to provisions of USD 328 million were mainly related to the following reorganizations: • The Innovative Medicines Division commenced a plan to restructure its field force and supporting functions in response to changes in its go-to-market structure with increased utilization of digital technology. • Group-wide initiatives to streamline manufacturing platforms and manufacturing functions and implement new technologies continued. In addition, the Opera- tions unit (formerly Customer & Technology Solutions) continued the phased implementation of the new oper- ating model to transition activities to service centers. In 2020, additions to provisions of USD 354 million were mainly related to the following reorganizations: • The Innovative Medicines Division restructured its field force and supporting functions in Region Europe. • The Sandoz Division initiatives to realign its organiza- tional structures to improve competitiveness that com- menced in 2019 continued. • Group-wide initiatives to streamline manufacturing platforms and manufacturing functions through the setup of operations centers and implementation of new technologies, in the Innovative Medicines Division and the Sandoz Division, continued. In addition, the Oper- ations unit (formerly Customer & Technology Solutions) continued the phased implementation of the new oper- ating model to change outsourcing structures and tran- sition activities to service centers. F-49 Notes to the Novartis Group consolidated financial statements  23. Details to the consolidated statements of cash flows 23.1) Non-cash items and other adjustments The following table shows the reversal of non-cash items and other adjustments in the consolidated statements of cash flows. (USD millions) Depreciation, amortization and impairments on:    Property, plant and equipment    Right-of-use assets    Intangible assets    Financial assets 1 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 Loss/(income) from associated companies 2 Income taxes Net financial expense Other Total 2022 2021 2020 1 570 1 489 1 758 303 318 5 308 4 306 260 1 403 – 38 896 – 333 – 677 823 736 9 – 15 339 1 416 2 119 817 – 30 891 330 4 376 – 335 1 411 – 478 738 – 673 1 807 947 11 546 – 5 299 9 881 1 Includes fair value changes 2 2021 included the gain of USD 14.6 billion recognized from the divestment of the Group’s investment in Roche (see Notes 2 and 4). In 2022, other than through business combinations, there were USD 635 million additions to intangible assets with deferred payments. In 2022, there were USD 247 million (2021: USD 321 million, 2020: USD 346 million) additions to right-of-use assets recognized. 23.2) Total amount of income taxes paid In 2022, the total amount of income taxes paid was USD 2.0 billion (2021: USD 2.3 billion), which was included within “Net cash flows from operating activities.” In 2020, the total amount of income taxes paid was USD 1.9 billion, of which USD 1.8 billion was included within “Net cash flows from operating activities,” and USD 88 million was included within “Net cash flows used in invest- ing activities from discontinued operations.” 23.3) Cash flows from changes in working capital and other operating items included in the net cash flows from operating activities (USD millions) (Increase)/decrease in inventories (Increase)/decrease in trade receivables Decrease in trade payables Change in other current and non-current assets Change in other current liabilities Other adjustments, net Total 2022 – 830 – 589 – 48 – 194 658 2021 81 – 389 – 21 – 202 772 0 2020 – 543 137 – 324 229 211 – 1 – 1 003 241 – 291 23.4) Cash flows arising from acquisitions and divestments of interests in associated companies, net In 2021, acquisitions and divestments of interests in associated companies, net included USD 20.7 billion proceeds from the divestment of the Group’s investment in Roche (see Notes 2 and 4). F-50 Notes to the Novartis Group consolidated financial statements 23.5) Cash flows arising from acquisitions and divestments of businesses, net The following table is a summary of the cash flow impact of acquisitions and divestments of businesses. The most significant trans actions are described in Note 2. (USD millions) Net assets recognized as a result of acquisitions of businesses Note 2022 2021 2020 24 – 1 077 – 735 – 10 173 Fair value of previously held equity interests Contingent consideration payables, net Payments, deferred consideration and other adjustments, net Cash flows used for acquisitions of businesses Cash flows (used for)/from divestments of businesses, net 1 Cash flows used for acquisitions and divestments of businesses, net 21 205 – 13 – 864 – 15 – 879 42 59 1 7 98 62 – 633 – 10 006 66 49 – 567 – 9 957 1 In 2022, USD 15 million net cash outflows from divestments of businesses included USD 20 million reduction to cash and cash equivalents due to the derecognized cash and cash equivalents following a loss of control of a company upon expiry of an option to purchase the company, partly offset by USD 5 million net cash inflows from business divestments in 2022 and in prior years. In 2022, the net identifiable assets of divested businesses amounted to USD 173 million, comprised of non-current assets of USD 132 million, current assets of USD 113 million, including USD 71 million cash and cash equivalents and of non-current and current liabilities of USD 72 million. Deferred sales price receivables and other adjustments amounted to USD 41 million. In 2021, USD 66 million included USD 52 million net cash inflows from divestments in previous years, and a USD 14 million net cash inflow from a business divestment in 2021, comprised of intangible assets. In 2020, USD 49 million represented the net cash inflows from divestments in previous years. Notes 2 and 24 provide further information regarding acquisitions and divestments of businesses. All acquisitions were for cash. 23.6) Reconciliation of liabilities arising from financing activities (USD millions) January 1, 2022 Increase in non-current financial debts Repayments of the current portion of non-current financial debts Change in current financial debts 1 Payments of lease liabilities Interest payments for amounts included in lease liabilities classified as cash flows from operating activities New, modified and terminated leases, net Impact of acquisitions and divestments of businesses, net Changes in fair values, lease interest and other changes, net Amortization of bonds discount Currency translation effects Reclassification from non-current to current, net December 31, 2022 Current financial debts and derivative financial Non-current Current lease liabilities instruments lease liabilities Non-current financial debts 22 902 6 295 1 621 275 16 – 2 575 295 – 295 – 51 49 3 60 – 14 224 251 173 9 – 41 – 224 1 538 17 – 366 – 2 325 20 244 – 13 5 – 401 2 325 5 931 1 Change in current financial debts included net cash outflows from interest-bearing accounts of employees payable on demand amounting to USD 1.7 billion. See Note 21. F-51 Notes to the Novartis Group consolidated financial statements (USD millions) January 1, 2021 Increase in non-current financial debts Repayments of the current portion 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, modified and terminated leases, net Impact of acquisitions of businesses Changes in fair values, lease interest and other changes, net Amortization of bonds discount Currency translation effects Reclassification from non-current to current, net December 31, 2021 (USD millions) January 1, 2020 Current financial debts and derivative financial Non-current Current lease liabilities instruments lease liabilities Non-current financial debts 26 259 9 785 1 719 286 16 – 2 162 – 3 524 – 316 – 52 61 62 – 13 247 275 192 – 43 – 247 1 621 1 – 124 4 – 309 2 624 6 295 Current financial debts and derivative financial Non-current Current lease liabilities instruments lease liabilities 25 – 774 – 2 624 22 902 Non-current financial debts 20 353 7 031 1 703 246 Increase in non-current financial debts 7 126 Repayments of the current portion 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, modified and terminated leases, net Impact of acquisitions of businesses Changes in fair values, lease interest and other changes, net Amortization of bonds discount Currency translation effects Reclassification from non-current to current, net December 31, 2020 – 2 003 2 261 – 1 16 832 – 2 067 26 259 32 5 392 2 067 9 785 221 36 – 30 39 – 250 1 719 – 312 – 56 73 8 65 12 250 286 23.7) Supplemental disclosures related to the Alcon business distributed to Novartis AG shareholders In 2020, net cash flows used in investing activities from discontinued operations of USD 127 million included the investing activities of the Alcon business, which was spun-off to Novartis AG shareholders on April 8, 2019, and cash outflows for transaction-related expenditures attributable to the series of portfolio transformation transac- tions completed in 2015. In 2020, net cash flows used in financing activities from discontinued operations of USD 50 million were for transaction cost payments directly attributable to the distribution (spin-off) of the Alcon business to Novartis AG shareholders on April 8, 2019. F-52 Notes to the Novartis Group consolidated financial statements 24. Acquisitions of businesses Fair value of assets and liabilities arising from acquisitions of businesses: (USD millions) Property, plant and equipment Right-of-use assets Currently marketed products Acquired research and development Other intangible assets Deferred tax assets Non-current financial and other assets Inventories Trade receivables and financial and other current assets Cash and cash equivalents Deferred tax liabilities Current and non-current financial debts Current and non-current lease liabilities Trade payables and other liabilities Net identifiable assets acquired Acquired cash and cash equivalents Non-controlling interests Goodwill Net assets recognized as a result of acquisitions of businesses 2022 2021 2020 13 12 1 209 56 5 89 26 32 196 8 600 218 476 49 84 109 76 292 262 98 28 1 10 – 300 – 74 – 1 977 – 12 – 67 1 005 – 89 161 1 077 – 1 – 4 612 – 10 – 105 238 735 – 32 – 44 – 144 7 669 – 76 2 580 10 173 Note 2 details significant acquisitions of businesses, spe- cifically of Gyroscope in 2022, the cephalosporin anti- biotics business from GSK in 2021; and of the The Medicines Company and the Japanese business of AGI in 2020. The goodwill arising out of these acquisitions is attributable to the buyer-specific synergies, the assem- bled workforce, and the accounting for deferred tax lia- bilities on the acquired assets. In 2022, no goodwill (2021: USD 107 million; 2020: USD 74 million) is tax deductible. 25. Post-employment benefits for employees 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 employees. 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 83% of the Group’s total DBO for post-em- ployment 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 the benefits are linked to contributions paid into the plan, interest credits granted and conversion rates applied. 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 employee’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 employee 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 employees. The boards of trustees are responsible for the plan design and asset investment strategy. F-53 Notes to the Novartis Group consolidated financial statements In December 2020, the Board of Trustees of the Novartis Swiss Pension Fund agreed to adjust the annu- ity conversion rate at retirement with effect from Janu- ary 1, 2022. This amendment did not affect existing pen- sioners, and its impact on existing plan participants will be mitigated by way of defined compensatory measures. This amendment resulted in a net pre-tax curtailment gain of USD 101 million (CHF 90 million) recognized in 2020. 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, employees 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. The following tables are a summary of the funded and unfunded defined benefit obligation for pension and other post-employment benefit plans of employees at December 31, 2022 and 2021: (USD millions) Benefit obligation at January 1 Current service cost Interest cost Past service costs and settlements Administrative expenses Remeasurement gains arising from changes in financial assumptions 1 Remeasurement (gains)/losses arising from changes in demographic assumptions Experience-related remeasurement losses/(gains) Currency translation effects Benefit payments Contributions of employees Effect of acquisitions, divestments or transfers Benefit obligation at December 31 Fair value of plan assets at January 1 Interest income Return on plan assets excluding interest income Currency translation effects Novartis Group contributions Contributions of employees 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 Currency translation effects Interest income on limitation of fund surplus Pension plans Other post-employment benefit plans 2022 2021 23 583 25 602 348 249 – 40 23 – 5 046 – 53 199 415 151 63 24 – 713 – 377 531 – 650 – 865 – 1 253 – 1 450 174 – 1 179 23 17 533 23 583 22 420 22 317 220 – 2 500 – 539 424 174 – 1 105 1 512 – 726 490 179 – 7 2022 560 12 17 1 – 94 – 28 – 2 – 44 422 73 2 – 12 41 2021 632 11 16 – 3 – 20 4 – 47 – 1 – 32 560 89 2 7 7 – 1 253 – 1 450 – 44 – 32 18 945 22 420 60 73 1 412 – 1 163 – 362 – 487 – 62 – 2 504 – 76 – 2 – 51 – 16 6 – 1 Limitation on recognition of fund surplus at December 31 2 – 2 644 – 62 Net liability in the balance sheet at December 31 – 1 232 – 1 225 – 362 – 487 1 The remeasurement gains arising from changes in financial assumptions is driven mainly by changes in the actuarial discount rates used to determine the benefit obligation. 2 As of December 31, 2022, the most significant pension plans where the asset ceiling was required to be applied were in Switzerland and amounted to USD 2 587 million. F-54 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 Current service cost Net interest expense Administrative expenses Past service costs and settlements Remeasurements Currency translation effects Novartis Group contributions Effect of acquisitions, divestments or transfers Change in limitation on recognition of fund surplus Net liability at December 31 Amounts recognized in the consolidated balance sheet Prepaid benefit cost Accrued benefit liability Pension plans Other post-employment benefit plans 2022 2021 – 1 225 – 3 336 – 348 – 415 – 31 – 23 39 – 47 – 24 – 70 2 400 2 071 35 424 1 – 2 504 145 490 – 23 – 16 2022 – 487 – 12 – 15 – 1 110 2 41 2021 – 543 – 11 – 14 3 70 1 7 – 1 232 – 1 225 – 362 – 487 491 1 415 – 1 723 – 2 640 – 362 – 487 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 11 824 2 746 2 963 17 533 15 268 3 645 4 670 23 583 2022 2021 Thereof unfunded By type of member    Active    Deferred pensioners    Pensioners 556 363 919 688 439 1 127 4 799 431 830 931 861 6 161 6 478 620 1 412 8 510 1 691 1 208 1 730 2 938 7 025 1 485 1 171 9 681 8 790 1 817 1 528 12 135 Fair value of plan assets at December 31 14 701 1 978 2 266 18 945 16 436 2 551 3 433 22 420 Funded status 2 877 – 768 – 697 1 412 1 168 – 1 094 – 1 237 – 1 163 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 346 286 30 8 308 60 2022 Rest of the world 76 76 18 0 58 0 United States 473 400 60 13 400 73 2021 Rest of the world 87 87 23 0 64 0 Total 422 362 48 8 366 60 Total 560 487 83 13 464 73 Funded status – 286 – 76 – 362 – 400 – 87 – 487 F-55 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 employees: 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 2022 2021 2020 2022 2021 2020 3.0% 0.4% 2.9% 2.2% 22 24 0.9% 0.5% 2.7% 0.5% 22 24 0.6% 0.3% 2.7% 0.1% 22 24 6.3% 3.3% 2.9% 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 employee’s savings account where the assumption on interest accrued often changes broadly 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 usually tend to rise when interest rates decrease and therefore often counteract the negative impact of the rising defined ben- efit 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. The Group’s actuaries use mortality tables which take into account historic patterns and expected changes, such as further increases in longevity. In 2022 the mortality assumptions used for the pen- sion plans in Switzerland were based on BVG 2020 tables with future improvements based on the BVG gen- erational model. In US for the Pension and Postretire- ment Medical Benefit Plans, the Society of Actuaries Pri- 2012 mortality tables with generational improvements based on Scale MP-2021 are used. 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: (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 F-56 Change in 2022 year-end defined benefit pension obligation Change in 2021 year-end defined benefit pension obligation – 466 – 790 491 535 316 – 63 38 – 37 37 – 37 839 869 512 – 136 58 – 58 54 – 54 Notes to the Novartis Group consolidated financial statements The healthcare cost trend rate assumptions used for other post- employment benefits are as follows: December 31, December 31, 2021 2022 Investment in shares of Novartis AG 2022 2021 2020    Number of shares (in millions) Market value (in USD billions) 2.3 0.2 2.3 0.2 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 6.5% 6.0% 6.3% 4.5% 4.5% 4.5% 2031 2028 2028 The following table shows the weighted average plan asset allocation of funded defined benefit pension plans at December 31, 2022 and 2021: Pension plans Long-term Long-term target minimum maximum target 15 20 5 0 0 40 60 30 20 15 2022 2021 24 31 21 18 6 27 33 19 15 6 (as a percentage) Equity securities Debt securities Real estate Alternative investments Cash and other investments Total Cash and most of the equity and debt securities have a quoted market price in an active market. Real estate and alternative investments, which include hedge fund, pri- vate equity, infrastructure and commodity investments, usually have a quoted market price or a regularly updated net asset value. The strategic allocation of assets of the different pen- sion plans is determined with the objective of achieving an investment return that, together with the contributions paid by the Group and its employees, 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: The weighted average duration of the defined benefit pension obligation is 11.8 years (2021: 14.9 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 require additional funding are those in the United Kingdom and Germany. The expected future cash flows in respect of pension and other post-employment benefit plans at December 31, 2022, were as follows: (USD millions) Pension plans Novartis Group contributions 100 100 2023 (estimated) Expected future benefit payments 2023 2024 2025 2026 2027 2028–2032 Other post- employment benefit plans 38 38 38 38 38 38 171 397 1 268 1 441 1 128 1 114 1 099 5 310 Defined contribution plans In many subsidiaries, employees are covered by defined contribution plans. Contributions charged to the consol- idated income statement for the defined contribution plans were: (USD millions) 2022 2021 2020 Contributions for defined contribution plans 520 523 501 The Group’s total personnel costs amounted to USD 14.9 billion in 2022. F-57   Notes to the Novartis Group consolidated financial statements  26. Equity-based participation plans for employees The expense related to all equity-based participation plans and the liabilities arising from equity-based pay- ment transactions were as follows: (USD millions) 2022 2021 2020 Expense related to equity-based participation plans 1 048 979 Liabilities arising from equity-based payment transactions 235 253 958 269 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 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 per- formance period. Employee share savings plan Novartis operates employee share savings and purchase plans in certain countries. The most significant is described below. The Employee Share Ownership Plan (ESOP) in Swit- zerland offers participants to 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. Employ- ees eligible for the equity plan “Select” are not eligible to receive ESOP matching shares. The Novartis Group CEO, the other Executive Committee members and the NTLs are not eligible to participate in this plan. Novartis Employee share purchase plan In 2022 Novartis started to grant shares under the Employee Share Purchase Plan. The plan enables employees to voluntarily purchase Novartis shares through payroll deductions at a discounted price. While the plan is global in scope, the first phase covers: North America (the US, Puerto Rico and Canada). The shares are not subject to a vesting period. Novartis equity plan “Select” The equity plan “Select” is a global equity incentive plan under which eligible employees 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 and NTLs are not eligible to participate in the equity plan “Select.” The equity plan “Select” currently allows participants employed and living in Switzerland to choose the form of their equity compensation 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, meaning all outstanding options exercisable at December 31, 2022, will expire in January 2023. Each tradable share option entitles the holder to purchase after vesting (and before the 10th anniversary from the grant date) one Novartis share at a stated exer- cise 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. 2022 2021 Weighted average exercise Options (millions) price Options (USD) (millions) Weighted average exercise price (USD) Options outstanding at January 1 1.7 63.6 2.6 62.0 Sold or exercised – 1.2 62.6 – 0.9 58.9 Outstanding at December 31 Exercisable at December 31 0.5 0.5 66.0 66.0 1.7 1.7 63.6 63.6 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 86.1. Options under Novartis equity plan “Select” for North America The following table shows the activity associated with the ADR options during the period: F-58 Notes to the Novartis Group consolidated financial statements 2022 2021 Weighted average ADR exercise options (millions) price options (USD) (millions) Weighted average ADR exercise price (USD) Options outstanding at January 1 4.0 64.4 6.7 62.9 Sold or exercised – 2.9 63.7 – 2.7 60.7 Outstanding at December 31 Exercisable at December 31 1.1 1.1 66.1 66.1 4.0 4.0 64.4 64.4 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 89.1. Long-Term 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. For LTPP awards starting in 2019, following the combination of the two LTPP and Long-Term Relative Performance Plan (LTRPP), the performance criteria are based on both Novartis internal performance metrics and variables that can be observed in the market, which is the ranking of the Novartis total shareholder return (TSR) relative to a global healthcare peer group of 14 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. Long-Term Relative Performance Plan The LTRPP was an equity plan for the Novartis ECN and NTLs and the awards were subject to a three-year per- formance and vesting period. The last grant under this plan was made in 2018. The LTRPP performance crite- ria were based on variables that could be observed in the market, which was the ranking of the Novartis TSR relative to a global healthcare peer group of 14 other companies, over rolling three-year performance periods. The TSR for Novartis and the peer companies was cal- culated as described in the LTPP section above. Other share awards Selected employees may exceptionally receive Special Share Awards of RSs or RSUs. These Special Share Awards provide an opportunity to reward outstanding achievements or exceptional performance, and aim to retain key contributors. They are based on a formal inter- nal selection process, through which the individual per- formance of each candidate is thoroughly assessed at several management levels. Special Share Awards had a minimum three-year vesting period before 2021 and mainly three years thereafter. In exceptional circum- stances, Special Share Awards may be awarded to attract special expertise and new talents to the organization. Externally recruited ECN members are eli- gible only for special awards that are “buyouts” in the case that it is to replace equity forfeited with their for- mer employer. The equity is provided on a like-for-like basis as the forfeited equity, at the same value with the same vesting period, and with or without a performance condition. Worldwide, employees at different levels in the orga- nization were awarded RSs and RSUs in 2022, 2021 and 2020. In addition, in 2022, 2021 and 2020, Board members received unrestricted shares as part of their regular com- pensation. F-59 Notes to the Novartis Group consolidated financial statements  Summary of share grants The table below provides a summary of share grants (shares, RSs, RSUs and PSUs) for all plans: Annual Incentive – RSU – Restricted shares Share savings plans – RSU – Shares Novartis Employee Share Purchase Plan Select North America (RSU) Select outside North America – RSU – Restricted shares Long-Term Performance Plan (PSU) Other share awards – RSU – Restricted shares – Shares 2022 2021 Number Weighted average fair of shares value at grant date in USD in millions Number Weighted average fair of shares value at grant date in USD in millions 0.2 0.1 0.4 1.2 0.8 4.9 2.0 0.7 1.7 0.5 0.1 0.1 74.7 85.0 75.0 85.0 82.8 74.5 75.1 85.0 82.0 76.3 86.9 86.1 0.2 0.1 0.4 1.1 87.5 97.0 86.9 97.0 4.3 86.9 1.8 0.6 1.8 86.9 97.0 89.5 0.6 78.4 0.1 91.9 F-60 Notes to the Novartis Group consolidated financial statements  27. Transactions with related parties Roche Holding AG Novartis has two agreements with Genentech, Inc., United States (Genentech), and one agreement with Spark Therapeutics, Inc., United States (Spark). Both companies are subsidiaries of Roche Holding AG (Roche), which were indirectly included in the consoli- dated financial statements using equity accounting until November 3, 2021, when Novartis entered into an agree- ment with Roche to divest its 33.3% of Roche voting shares. On December 6, 2021, Novartis divested its investment in Roche, on which date Roche ceased to be a related party (see Notes 2 and 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 to third par- ties of Lucentis products outside the United States. From January 1, 2021 until December 6, 2021, Lucentis sales of USD 2.0 billion (2020: 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. From January 1, 2021 until December 6, 2021, Novartis recognized total sales of Xolair of USD 1.3 billion (2020: USD 1.3 billion), including sales to Genentech/Roche for the United States market. Luxturna In 2018, Novartis entered into an exclusive licensing and commercialization agreement and a supply agreement with Spark for Luxturna outside the United States. The agreements include regulatory 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 188 million from January 1, 2021 until December 6, 2021 (net income in 2020: USD 217 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 current and past years. Executive Officers and Non-Executive Directors compensation At December 31, 2022, there were 11 Executive Com- mittee members (“Executive Officers”). During 2022, 5 Executive Officers stepped down. At December 31, 2021, there were 12 Executive Officers. During 2021, 3 Executive Officers stepped down. At December 31, 2020, there were 13 Executive Officers. The total compensation for Executive Committee members and the 15 Non-Executive Directors (14 in 2021 and 14 in 2020) using the Group’s accounting policies for equity-based compensation and pension benefits was as fol- lows: (USD millions) Cash and other compensation Post-employment benefits Equity-based compensation Total Executive Officers Non-Executive Directors Total 2022 25.0 2.8 42.6 70.4 2021 20.3 2.5 37.3 60.1 2020 25.6 2.7 41.1 69.4 2022 4.6 2021 2020 4.7 4.6 4.8 9.4 5.2 9.9 5.2 9.8 2022 29.6 2.8 47.4 79.8 2021 25.0 2.5 42.5 70.0 2020 30.2 2.7 46.3 79.2 During 2022, there was an increase in the IFRS compen- sation expense for executive officers compared to 2021, driven by accelerated expenses (cash and other com- pensation and equity-based compensation) required under IFRS for the executive members who stepped down in 2022, in accordance with their employment con- tracts and the relevant incentive plan terms, compared to the accelerated expenses due to executive officers who stepped down in 2021. F-61 Notes to the Novartis Group consolidated financial statements During 2021, the IFRS compensation expense decreased due to one role less at the ECN, and lower cash and equity compensation attributable to former ECN members, partially offset by the net increase of the IFRS compensation expense of current ECN members. 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 2022, 2021 and 2020, the following payments (or waivers of claims) were made to former Board members or to “persons closely” linked to them: Dr. Krauer CHF 60 000 60 000 Currency 2022 2021 2020 Dr. Alex Krauer, was an Honorary Chairman of Novartis and was 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. The last payment under this arrangement was in 2021. 28. Commitments and contingent liabilities Research and development commitments The Group has entered into long-term research and development agreements with various institutions related to intangible assets. These agreements provide for potential milestone payments by Novartis, which are dependent on successful clinical development, or meet- ing specified sales targets, or other conditions which are specified in the agreements. As of December 31, 2022, the amount and estimated timing of the Group’s commitments to make payments under those agreements, which are shown without risk adjustment and on an undiscounted basis, were as fol- lows: 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. (USD millions) 2023 2024 2025 2026 2027 Thereafter Total 2022 420 808 448 282 687 3 169 5 814 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, 2022, the total uncalled capital com- mitments for the Group’s investments in funds amounts to USD 83 million. Note 29 contains further information on the Group’s investments in funds. Contingent liabilities 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 F-62 Notes to the Novartis Group consolidated financial statements claims that could have a material adverse effect on its results of operations or cash flow. investigations and settlements may be the subject of separate private litigation. 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. These government settle- ments have involved and may in the future involve 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 and antitrust cases often require companies to enter into corporate integrity agreements, which are intended to regulate company behavior for a period of years. Our affiliates Novartis Corporation and Sandoz Inc. are parties to such agreements, which will expire in 2025 and 2026, respec- tively. Also, matters underlying governmental While provisions have been made for probable out- flows of economic resources, which management deems to be reasonable or appropriate, 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. The timing and the outcome of legal proceedings and their potential finan- cial effect are not predictable. 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-63 Notes to the Novartis Group consolidated financial statements  29. Financial instruments – additional disclosures The following tables show the carrying values of finan- cial instruments by measurement category as of Decem- ber 31, 2022 and 2021. Except for straight bonds (see Note 19), the carrying values are equal to, or a reason- able approximation of, the fair values. 2022 Financial Financial instruments at fair value through the instruments at through other consolidated income statement amortized comprehensive income instruments at fair value Financial costs Note Other financial liabilities at amortized costs 9 828 37 317 281 129 204 650 16 13/17 27 971 874 1 581 21 21 19 19 21 10 863 2 772 22 341 144 5 146 31 266 1 067 55 1 122 1 789 1 789 (USD millions) Cash and cash equivalents Time deposits and short-term investments with original maturity more than 90 days Trade receivables Other receivables and current assets Marketable securities – debt securities Long-term financial investments – equity securities Long-term financial investments – debt securities Long-term financial investments – fund investments Long-term loans, advances, security deposits and other long-term receivables Associated companies at fair value through profit and loss 16 16 15 17 16 13 13 13 13 7 517 11 089 8 066 958 341 Derivative financial instruments Contingent consideration receivables Total financial assets Bank and other short-term financial debt Commercial paper Straight bonds Long-term liabilities to banks and other financial institutions Trade payables Contingent consideration liabilities (see Note 20/22) and other financial liabilities Derivative financial instruments Lease liabilities Total financial liabilities F-64 Notes to the Novartis Group consolidated financial statements 2021 Financial Financial instruments at fair value through the instruments at through other consolidated income statement amortized comprehensive income instruments at fair value Financial costs Note Other financial liabilities at amortized costs (USD millions) Cash and cash equivalents 1 Time deposits and short-term investments with original maturity more than 90 days Trade receivables Other receivables and current assets Marketable securities – debt securities Long-term financial investments – equity securities Long-term financial investments – debt securities Long-term financial investments – fund investments Long-term loans, advances, security deposits and other long-term receivables Associated companies at fair value through profit and loss Derivative financial instruments Contingent consideration receivables Total financial assets Interest-bearing accounts of employees payable on demand Bank and other short-term financial debt Commercial paper Straight bonds Long-term liabilities to banks and other financial institutions Trade payables Commitment for repurchase of own shares Contingent consideration liabilities (see Note 20/22) and other financial liabilities Derivative financial instruments Lease liabilities Total financial liabilities 16 16 15 17 16 13 13 13 13 16 13 21 21 21 19 19 18/22 21 10 10 397 2 010 12 965 8 005 793 332 2 741 1 195 34 468 366 192 105 641 32 492 5 980 1 772 1 814 899 893 25 296 227 5 553 2 809 37 491 1 094 68 1 162 1 896 1 896 1 Includes short-term highly rated government-backed debt securities, with an original maturity of three months or less 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, 2022 and 2021. 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, 2022 and 2021. (USD millions) Forward foreign exchange rate contracts Commodity purchase contract Options on equity securities Contract or underlying principal amount 2022 2021 7 907 13 248 97 39 17 82 Positive fair values Negative fair values 2022 189 15 2021 92 13 2022 – 41 2021 – 35 – 14 – 33 Total derivative financial instruments included in marketable securities and in current financial debts 8 043 13 347 204 105 – 55 – 68 F-65 Notes to the Novartis Group consolidated financial statements The following table shows a breakdown by currency of the contract or underlying principal amount of derivative financial instruments at December 31, 2022 and 2021: (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 Commodity purchase contract Options on equity securities Total derivative financial instruments EUR 687 80 2022 USD Other Total 5 659 1 561 7 907 17 39 97 39 767 5 715 1 561 8 043 EUR 2021 USD Other Total 1 485 5 158 6 605 13 248 17 82 17 82 1 485 5 257 6 605 13 347 Derivative financial instruments effective for hedge accounting purposes At the end of 2022 and 2021, 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 increasing subjectivity associated with the inputs to derive fair valuation for these assets and liabilities, which are as follows: The assets carried at Level 1 fair value are equity and debt securities as well as fund investments listed in active markets. The assets generally included in Level 2 fair value hierarchy are derivatives, and certain debt securities. The liabilities generally included in this fair value hierarchy consist of derivatives. These are valued using corrobo- rated market data. 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 funds and unquoted equity security investments. Contingent consideration and other financial liabilities carried at fair value are included in this category. (USD millions) Financial assets Marketable securities Debt securities Derivative financial instruments Total marketable securities and derivative financial instruments at fair value Current contingent consideration receivables Long-term financial investments Debt and equity securities Fund investments Non-current contingent consideration receivables Total long-term financial investments at fair value Associated companies at fair value through profit and loss Financial liabilities Current contingent consideration liabilities Derivative financial instruments Total current financial liabilities at fair values Non-current contingent consideration liabilities Other financial liabilities Total non-current financial liabilities at fair value F-66 2022 Level 1 Level 2 Level 3 Total 9 204 213 10 9 204 213 43 1 182 281 607 43 699 261 607 473 20 493 10 1 567 2 070 129 129 – 55 – 55 – 131 – 131 – 704 – 232 – 936 – 131 – 55 – 186 – 704 – 232 – 936 Notes to the Novartis Group consolidated financial statements (USD millions) Financial assets Cash and cash equivalents Debt securities 1 Total cash and cash equivalents at fair value Marketable securities and derivative financial instruments Debt securities Derivative financial instruments Total marketable securities and derivative financial instruments at fair value Long-term financial investments Debt and equity securities Fund investments Contingent consideration receivables Total long-term financial investments at fair value Associated companies at fair value through profit and loss Financial liabilities Contingent consideration payables Derivative financial instruments Other financial liabilities Total financial liabilities at fair value 2021 Level 1 Level 2 Level 3 Total 2 010 2 010 2 719 2 719 1 080 28 1 108 22 105 127 2 010 2 010 2 741 105 2 846 1 697 366 641 617 338 641 1 596 2 704 192 192 – 68 – 1 075 – 1 075 – 19 – 68 – 19 – 68 – 1 094 – 1 162 1 Includes short-term highly rated government-backed debt securities, with an original maturity of three months or less 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: 2022 (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, including currency translation effects Purchases Cash receipts and payments Disposals Reclassification December 31 Associated companies at fair value through profit and loss investments investments receivables Fund Long-term Contingent Contingent financial consideration consideration liabilities Other financial liabiltiies 192 338 617 641 – 1 075 – 19 4 35 53 530 15 – 63 – 78 – 84 – 114 – 18 4 11 – 4 129 – 12 – 2 261 24 160 – 13 – 40 699 11 – 231 – 238 – 44 44 28 650 – 835 – 232 Total of fair value gains and losses recognized in the consolidated income statement for assets and liabilities held at December 31, 2022 – 63 – 74 – 49 53 416 – 3 F-67 Notes to the Novartis Group consolidated financial statements 2021 (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, including currency translation effects 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, 2021 Associated companies at fair value through profit and loss investments investments receivables Fund Long-term Contingent Contingent financial consideration consideration payables 211 366 460 625 – 1 046 2 70 69 124 182 – 26 – 8 – 13 – 44 – 189 – 2 34 – 27 192 – 1 12 – 71 – 30 338 51 137 – 43 – 44 617 – 22 – 42 22 – 88 44 641 – 1 075 – 24 62 56 80 – 7 During 2022, there was one transfer of equity securities from Level 3 to Level 1 for USD 44 million (2021: USD 73 million), due to Initial Public Offering of the invested com- pany. During 2022, there were no transfers of equity securities from Level 1 to Level 3 due to de-listing (2021: USD 29 million). 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 316 million and USD 55 million, respec- tively. 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 and contingent consideration receivables, this would change the amounts recorded in the 2022 consolidated income statement by USD 154 million and USD 140 million, respectively. Equity securities measured at fair value through other comprehensive income Equity securities held as strategic investments, typically held outside the Novartis Venture Fund, are generally designated at date of acquisition as financial assets val- ued at fair value through other comprehensive income with no subsequent recycling through profit and loss. These are made up of individually non-significant invest- ments. At December 31, 2022, the Group holds 65 non- listed equity securities (December 31, 2021: 60) and 46 listed equity securities (December 31, 2021: 40) in this category with the following fair values: (USD millions) Listed equity securities Non-listed equity securities Total equity securities 2022 438 390 828 2021 888 307 1 195 During 2022 and 2021, dividends received from these equity securities were insignificant. In 2022, in accor- dance with the consolidated foundations Alcon Inc. shares divestment plans, Alcon Inc. shares with a fair value of USD 22 million were sold (2021: USD 9 million), and the USD 7 million gain on disposal (2021: USD 1 mil- lion gain) was transferred from other comprehensive income to retained earnings during 2022. In addition, in 2022, equity securities that were no longer considered strategic, with a fair value of USD 3 million (2021: USD 254 million), were sold, and the USD 3 million loss on disposal (2021: USD 211 million gain) was transferred from other comprehensive income to retained earnings (see Note 8). F-68 Notes to the Novartis Group consolidated financial statements Nature and extent of risks arising from financial instruments Market risk Market risk in general comprises currency risk, interest rate risk and price risk, such as commodity and equity prices. Novartis is exposed to market risk, primarily related to foreign currency exchange rates, interest rates and the market value of the investments. The Group actively monitors and seeks to reduce, where it deems it appropriate to do so, fluctuations in these exposures. It is the Group’s policy and practice to enter into a vari- ety of derivative financial instruments to manage the vol- atility of these exposures. It does not enter into any finan- cial 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. 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 expe- rience a devaluation of their currency. If this occurs, it could impact the effective prices we would be able to charge for our products and also have an adverse impact on both our consolidated income statement and balance sheet. Subsidiaries whose functional currencies have expe- rienced a cumulative inflation rate of more than 100% over the past three years apply the principles of IAS 29 “Financial reporting in Hyperinflationary Economies.” The hyperinflationary economies in which Novartis oper- ates are Argentina, Venezuela and Turkey. Venezuela and Argentina were hyperinflationary for all periods pre- sented, and Turkey became hyperinflationary effective May 1, 2022, requiring retroactive implementation of hyperinflation accounting as of January 1, 2022. The impacts of applying IAS 29 were 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 may enter into foreign cur- rency option contracts to hedge. Net investments in subsidiaries in foreign countries are long-term investments. Their fair value changes through movements of foreign currency exchange rates. The Group has designated a certain portion of its long- term euro-denominated straight bonds, maturing in 2028, as hedges of the translation risk arising on certain of these net investments in foreign operations with euro functional currency. As of December 31, 2022, long-term financial debt with a carrying amount of EUR 1.8 billion (USD 2.0 billion; December 31, 2021: USD 2.1 billion), has been designated as a hedge instrument. During 2022, USD 91 million of net of taxes unrealized income (2021: USD 216 million) was recognized in other comprehen- sive 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 2022, 2021 and 2020. 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 (for example payment guarantees, credit insurance and factoring). 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 F-69 Notes to the Novartis Group consolidated financial statements 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 16% of net sales to third parties, and the second largest and third largest customers accounted for 11% and 7% of net sales to third parties, respectively (2021: 17%, 11% and 6%, respectively; 2020: 17%, 11% and 6%, respectively). The highest amounts of trade receivables outstand- ing were for these same three customers and amounted to 16%, 14% and 7%, respectively, of the Group’s trade receivables at December 31, 2022 (2021: 16%, 12% and 7%, 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 pay- ment system, Continuous Linked Settlement (CLS), pro- viding multilateral netting (payment-versus-payment set- tlement) of cash flows from foreign exchange transactions. The Group’s cash and cash equivalents are held with major regulated financial institutions; the three largest ones hold approximately 13.2%, 9.2% and 6.8%, respec- tively (2021: 9.7%, 9.7% and 7.6%, respectively). As of December 31, 2021, the Group’s cash and cash equiva- lents also included short-term highly rated govern- ment-backed debt securities, with an original maturity of three months or less, for approximately 16% (2022: nil). 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. 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. Management monitors the Group’s net debt or liquid- ity 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 one Japanese commercial paper pro- gram under which it can issue up to JPY  150 billion (approximately USD 1.1 billion) of unsecured commercial paper notes. Commercial paper notes totaling USD 2.8 billion under these three programs were outstanding as per December 31, 2022 (2021: USD 0.9 billion). Novartis further has a committed credit facility of USD 6.0 billion, which was extended in September 2022. This credit facility is provided by a syndicate of banks and is intended to be used as a backstop for the US commercial paper programs. The facility matures in September 2025 and was undrawn as per December 31, 2022, and December 31, 2021. F-70 Notes to the Novartis Group consolidated financial statements 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 liabilities for contingent consideration at December 31, 2022, and December 31, 2021: 2022 (USD millions) Current assets Marketable securities, time deposits and short-term investments with original maturity more than 90 days and accrued interest Commodities Derivative financial instruments Cash and cash equivalents Total current financial assets Non-current liabilities Financial debt Financial debt – undiscounted Total non-current financial debt Current liabilities Financial debt Financial debt – undiscounted Derivative financial instruments Total current financial debt Due later than Due later than Due later than one year Due within but less than but less than but less than five years one month three months three months one month one year Due after five years Total 4 142 6 911 36 9 11 098 23 147 19 4 011 3 506 111 15 111 204 7 517 8 176 10 564 55 135 18 930 – 8 975 – 11 269 – 20 244 – 9 002 – 11 394 – 20 396 – 8 975 – 11 269 – 20 244 – 3 215 – 146 – 2 515 – 3 215 – 146 – 2 517 – 38 – 13 – 4 – 3 253 – 159 – 2 519 – 5 876 – 5 878 – 55 – 5 931 Net debt 4 923 10 405 – 2 464 – 8 975 – 11 134 – 7 245 (USD millions) Current assets Marketable securities, time deposits and short-term investments with original maturity more than 90 days and accrued interest Commodities Derivative financial instruments 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 2021 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 11 14 585 1 088 4 18 15 706 21 64 7 7 406 5 001 111 13 111 105 12 407 7 438 19 650 1 095 4 142 28 329 – 8 464 – 14 438 – 22 902 – 8 490 – 14 587 – 23 077 – 8 464 – 14 438 – 22 902 – 2 780 – 521 – 2 926 – 2 780 – 521 – 2 928 – 50 – 16 – 2 – 2 830 – 537 – 2 928 – 6 227 – 6 229 – 68 – 6 295 Net debt 4 608 19 113 – 1 833 – 8 460 – 14 296 – 868 The carrying amounts of financial liabilities included in the above analysis are not materially different to the con- tractual amounts due on maturity. The positive and negative fair values on derivative financial instruments repre- sent the net contractual amounts to be exchanged at maturity. F-71 Notes to the Novartis Group consolidated financial statements 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 2022 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 – 2 029 – 4 598 – 316 – 6 943 Potential inflows in various currencies – from financial derivative assets 2 029 4 712 321 7 062 (USD millions) Derivative financial instruments and accrued interest on derivative financial instruments 2021 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 – 843 – 5 482 – 461 – 6 786 Potential inflows in various currencies – from financial derivative assets 847 5 516 457 6 820 Other contractual liabilities that are not part of management’s monitoring of the net debt or liquidity consist of the following items: 2022 (USD millions) Contractual interest on non-current liabilities Lease liabilities 1 Trade payables Contingent consideration liabilities 1 Note 10 provides additional disclosures related to lease liabilities. (USD millions) Contractual interest on non-current liabilities Lease liabilities 1 Trade payables Commitment for repurchase of own shares Contingent consideration liabilities 1 Note 10 provides additional disclosures related to lease liabilities. Due later than Due later than one year Due within but less than but less than five years one year three months three months Due after five years Total – 64 – 71 – 5 020 – 16 – 412 – 1 432 – 3 624 – 5 532 – 180 – 126 – 115 – 616 – 922 – 1 789 – 5 146 – 437 – 267 – 835 2021 Due later than Due later than one year three months Due within but less than but less than five years one year three months Due after five years Total – 82 – 78 – 5 373 – 2 809 – 445 – 1 628 – 3 908 – 6 063 – 197 – 180 – 639 – 982 – 1 896 – 5 553 – 2 809 – 54 – 65 – 517 – 439 – 1 075 Capital risk management Sensitivity analysis 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, 2022, 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. The Group uses sensitivity analysis disclosures to pro- vide quantitative information about market risks to which it is exposed. The sensitivity analysis disclosures are in line with the Group’s financial risk management policy, and are based on a one-parameter risk model that considers a one-factor linear relationship between risk factors and F-72 Notes to the Novartis Group consolidated financial statements exposures. They consider aggregated risk exposures arising from the most significant risk factors (currency risk, interest rate risk and equity price risk) and include all financial assets and financial liabilities as set forth in the table on page F-64. The disclosures below illustrate the potential impact on the Group’s consolidated financial statements as a result of hypothetical market movements in foreign cur- rency exchange rates, interest rates and equity prices. The range of variables chosen reflects management’s view of changes that are reasonably possible over a one- year period. Foreign currency exchange rate sensitivity 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, as well as in the Swiss franc. A strengthening (weakening) of the US dollar against these currencies as of December 31, 2022 and 2021 would have affected the measurement of financial instruments denominated in these foreign currencies. This analysis assumes that all other variables, in partic- ular interest rates, remain constant. A hypothetical 5% increase or decrease in the foreign currency exchange rates against the US dollar would have impacted the Group’s consolidated income statement as presented below: (USD millions) 2022 2021 5% increase in foreign currency exchange rates against USD 5% decrease in foreign currency exchange rates against USD – 6 7 3 – 3 As of December 31, 2022, the Group designated EUR 1.8 billion (December 31, 2021: EUR 1.8 billion) of its long- term euro-denominated straight bonds as hedges of the translation risk arising on certain net investments in for- eign operations with euro functional currency. This anal- ysis assumes that all other variables, in particular inter- est rates, remain constant. A hypothetical 5% increase, or decrease, in the foreign currency exchange rates against the US dollar, without considering the translation effect of these net investments, would have impacted the Group’s consolidated equity as presented below: Interest rate sensitivity Our portfolio of fixed-income instruments as of Decem- ber 31, 2022, was mainly composed of time deposits and debt securities. Novartis uses duration models to approximate the possible change in the value of fixed-income instru- ments. Based on these models, management believes that a 100-basis point change in interest is deemed a reasonable possible change over a one-year period. Based on exposures in 2022 and 2021, a hypotheti- cal 100-basis point increase (decrease) in interest rates would not have resulted in a significant increase (decrease) in the fair values of the fixed-income instru- ments. In addition, a hypothetical 100-basis point increase (decrease) in interest rates would not have resulted in a material increase (decrease) of cash flows attributable to such fixed-income instruments. The vast majority of our outstanding financial debts are straight bonds with fixed interest rates and are there- fore not affected by movements in interest rates. Equity price sensitivity Fund investments and equity securities held by the Novartis Venture Fund are valued at fair value through profit and loss. Equity securities held as strategic invest- ments, typically held outside the Novartis Venture Fund, are generally designated at date of acquisition as finan- cial assets valued at fair value through other compre- hensive income with no subsequent recycling through profit and loss. The fair value of these fund investments and equity securities was USD 1.6 billion as of December 31, 2022 (December 31, 2021: USD 2.2 billion). The fair values of these investments are impacted by the volatility of the stock market, valuation parameters applied (for non- listed equities) and changes in general economic factors. This analysis assumes that all other variables, in partic- ular interest rates, remain constant. A hypothetical increase or decrease of 15% in the risk factors would have impacted the Group’s consolidated income state- ment as presented below: (USD millions) 15% increase in equity prices 2022 109 2021 154 15% decrease in equity prices – 109 – 154 (USD millions) 2022 2021 5% increase in foreign currency exchange rates against USD 93 99 A hypothetical increase or decrease of 15% in the risk factors would have impacted the Group’s consolidated equity as presented below: 5% decrease in foreign currency exchange rates against USD – 98 – 104 (USD millions) 15% increase in equity prices 2022 124 2021 179 15% decrease in equity prices – 124 – 179 F-73 Notes to the Novartis Group consolidated financial statements 30. Events subsequent to the December 31, 2022, consolidated balance sheet date South Korea investigation – Concluded matter In January 2023, the Supreme Court dismissed the appeal by the Seoul Western District Prosecutor on the criminal investigation on, among other things, allegations that Novartis Korea utilized medical journals to provide inappropriate economic benefits to healthcare profes- sionals (HCPs). This matter is now concluded. For addi- tional information see Note 20. Dividend proposal for 2022 and approval of the Group’s 2022 consolidated financial statements On January 31, 2023, the Novartis AG Board of Direc- tors proposed the acceptance of the 2022 consolidated financial statements of the Novartis Group for approval by the Annual General Meeting on March 7, 2023. Fur- thermore, also on January 31, 2023, the Board proposed a dividend of CHF 3.20 per share to be approved at the Annual General Meeting on March 7, 2023. If approved, total dividend payments would amount to approximately USD 7.3 billion (2021: USD 7.5 billion), using the CHF/USD December 31, 2022, exchange rate. F-74 Notes to the Novartis Group consolidated financial statements  31. Principal Group subsidiaries and associated companies The following table lists the principal subsidiaries controlled by Novartis, associated companies in which Novartis is deemed to have significant influence, and foundations required to be consolidated under IFRS. It includes all sub- sidiaries, associated companies and consolidated foundations with total assets or net sales to third parties in excess of USD 25 million. The equity interest percentage shown in the table also represents the share in voting rights in those entities. BioMedical Research Co., Ltd., Shanghai USD 320.0 m 100% As at December 31, 2022 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 2 Novartis Securities Investment Ltd., Hamilton Novartis Finance Services Ltd., Hamilton Triangle International Reinsurance Limited, Hamilton Trinity River Insurance Co Ltd., Hamilton Brazil Novartis Biociências S.A., São Paulo Sandoz do Brasil Indústria Farmacêutica Ltda., Cambé, PR Canada Novartis Pharmaceuticals Canada Inc., Dorval, Quebec Sandoz Canada Inc., Boucherville, Quebec 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 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 Share capital Equity 1 interest As at December 31, 2022 Share capital Equity 1 interest 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 72.1 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% BRL BRL 507.1 m 190.0 m 100% 100% CAD CAD 1.2 m 80.8 m 100% 100% CLP 2.0 bn 100% USD HKD 30.0 m 200 100% 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% France Novartis Groupe France S.A., Rueil-Malmaison Novartis Pharma S.A.S., Rueil-Malmaison Novartis Gene Therapies France SAS, Rueil-Malmaison Advanced Accelerator Applications S.A., Rueil-Malmaison Advanced Accelerator Applications Molecular Imaging France, Saint-Genis-Pouilly CELLforCURE, Les Ulis Sandoz S.A.S., Levallois-Perret Germany Novartis Deutschland GmbH, Nuremberg Novartis Business Services GmbH, Wehr Novartis Pharma GmbH, Nuremberg Novartis Pharma Produktions GmbH, Wehr Sandoz International GmbH, Holzkirchen 1 A Pharma GmbH, Holzkirchen 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 Integrated Services Limited, Cork City Novartis Gene Therapies EU Limited, Dublin Israel Novartis Israel Ltd., Tel Aviv Italy Novartis Farma S.p.A., Milan Advanced Accelerator Applications (Italy) S.r.l., Pozzilli Sandoz S.p.A., Origgio Japan 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 2 Novartis Finance S.A., Luxembourg City EUR EUR EUR EUR EUR EUR EUR 903.0 m 43.4 m 100% 100% 100% 9.6 m 99.23% 10 000 7.5 m 99.23% 100% 4.2 m 100% 5.4 m 155.5 m 25.6 m 2.0 m 25 000 EUR EUR EUR EUR EUR 100 000 EUR 26 000 EUR EUR EUR 26 000 93.7 m 42.1 m 100% 100% 100% 100% 100% 100% 100% 100% 100% EUR 233.9 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 EUR 25 000 100 100 100% 100% 100% ILS 1 000 100% EUR EUR EUR 18.2 m 119 000 1.7 m 100% 99.23% 100% JPY JPY JPY 100.0 m 100.0 m 100.0 m 100% 100% 100% EUR 3.0 m 100% USD USD 100 000 100.0 m 100% 100% Malaysia Novartis Corporation (Malaysia) Sdn. Bhd., Petaling Jaya MYR 3.3 m 100% Mexico Novartis Farmacéutica, S.A. de C.V., Mexico City Sandoz, S.A. de C.V., Mexico City 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% 99.23% 100% NZD 820 000 100% USD 4.0 m 100% Morocco Novartis Pharma Maroc SA, Casablanca EGP EGP 250 000 1.3 bn 99.96% 100% EUR 459 000 100% 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 F-75 Notes to the Novartis Group consolidated financial statements As at December 31, 2022 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 Share capital Equity 1 interest TWD 170.0 m 100% THB 302.0 m 100% TRY TRY TRY 448.0 m 6.7 m 100% 100% 880.0 m 99.99% Ilaçlari Sanayi ve Ticaret A.S., Gebze – Kocaeli TRY 96.0 m 100% 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 Advanced Accelerator Applications (UK & Ireland), London Neutec Pharma Limited, London Gyroscope Therapeutics Limited, London Sandoz Limited, Frimley / Camberley United States of America Novartis Corporation, East Hanover, NJ Novartis Finance Corporation, East Hanover, NJ 2 Novartis Capital Corporation, East Hanover, NJ Novartis Services, Inc., East Hanover, NJ Novartis US Foundation, East Hanover, NJ 3 Novartis Pharmaceuticals Corporation, East Hanover, NJ 2 Advanced Accelerator Applications USA, Inc., Millburn, NJ Novartis Gene Therapies, Inc., Bannockburn, IL Novartis Technology LLC, East Hanover, NJ Novartis Institutes for BioMedical Research, Inc., Cambridge, MA Cadent Therapeutics, Cambridge, MA Endocyte, Inc., East Hanover, NJ Navigate BioPharma Services, Inc., Carlsbad, CA The Medicines Company, East Hanover, NJ Sandoz Inc., Princeton, NJ Oriel Therapeutics, Inc., Durham, NC Fougera Pharmaceuticals Inc., Melville, NY Eon Labs, Inc., Princeton, NJ UAH 8.0 m 100% AED 7.0 m 100% GBP GBP GBP GBP GBP GBP GBP USD USD USD USD -- USD USD USD -- USD USD USD USD USD USD USD USD USD 25.5 m 5.4 m 250.0 m 100 7.7 m 1 492 2.0 m 100% 100% 100% 99.23% 100% 100% 100% 72.2 m 1 000 1 1 -- 650 1 1 -- 100% 100% 100% 100% -- 100% 99.23% 100% -- 1 0.1 1 1 1 000 25 000 50.0 m 1 1 100% 100% 100% 100% 100% 100% 100% 100% 100% VES 0 100% VND 70 bn 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 and Herzegovina, Bulgaria, Cameroon, Dominican Republic, Ghana, Guatemala, Ivory Coast, Kazakhstan, Kenya, Kuwait, North Macedonia, Nigeria, Peru, Senegal and Uruguay. 1 Share capital may not reflect the taxable share capital and does not include any paid-in surplus. 2 Significant subsidiary under SEC Regulation S-X Rule 1-02(w) 3 Fully consolidated Foundation m = million; bn = billion KRW 24.5 bn 100% Venezuela Novartis de Venezuela, S.A., Caracas Vietnam Novartis Vietnam Company Limited, Ho Chi Minh City As at December 31, 2022 Norway Novartis Norge AS, Oslo Pakistan Novartis Pharma (Pakistan) Limited, Karachi Panama Novartis Pharma (Logistics), Inc., Panama City 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 Share capital Equity 1 interest NOK 1.5 m 100% PKR 6.7 bn 99.99% USD 10 000 100% 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% Portugal Novartis Portugal, S.G.P.S., Lda., Porto Salvo Novartis Farma – Produtos Farmacêuticos, S.A., Porto Salvo Sandoz Farmacêutica, Lda., Porto Salvo EUR 500 000 EUR EUR 499 900 2.4 m 100% 100% 100% 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 JSC 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, Midrand 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 RON RON RUB RUB RUB 3.0 m 119.5 m 100% 100% 20.0 m 500.0 m 57.4 m 100% 100% 100% SAR 30.0 m 100% 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% EUR 63.0 m 100% EUR EUR 270 450 22.6 m 99.23% 100% SEK 5.0 m 100% 10.0 m 100.2 m CHF CHF CHF 100 000 CHF 100 000 -- -- -- -- -- -- -- -- 100% 100% 100% 100% -- -- -- -- S.A., Les Franqueses del Vallés / Barcelona Abadia Retuerta S.A., Sardón de Duero / Valladolid EUR EUR 9.3 m 6.0 m 100% 100% Sweden Novartis Sverige AB, Stockholm Switzerland Novartis International AG, Basel Novartis Holding AG, Basel 2 Novartis International Pharmaceutical Investment AG, Basel Novartis Bioventures AG, Basel Novartis Forschungsstiftung, Basel 3 Novartis Stiftung für Kaderausbildung, Basel 3 Novartis-Mitarbeiterbeteiligungsstiftung, Basel 3 Novartis Stiftung für Mensch und Umwelt, Basel 3 Stiftung der Novartis AG für Erziehung, Ausbildung und Bildung, Basel 3 50 000 -- 1.0 m Novartis Overseas Investments AG, Basel Japat AG, Basel Novartis Pharma AG, Basel 2 Novartis Pharma Services AG, Basel Novartis Pharma Schweizerhalle AG, Muttenz Novartis Pharma Stein AG, Stein Novartis Pharma Schweiz AG, Risch Cellerys AG, Schlieren Arctos Medical AG, Bern Novartis Innovative Therapies AG, Risch Advanced Accelerator Applications International SA, Geneva CHF Sandoz AG, Basel 2 CHF CHF 100 000 Sandoz Pharmaceuticals AG, Risch -- CHF CHF CHF CHF CHF CHF 251 000 CHF CHF 129 630 CHF 360 020 CHF 100 000 -- 100% 100% 100% 100% 100% 100% 100% 20% 100% 100% 9.3 m 99.23% 100% 5.0 m 100% 350.0 m 20.0 m 18.9 m 5.0 m F-76 Statutory Auditor’s Report Statutory Auditor’s Report 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, 2022, the consolidated income statement, con- solidated statement of comprehensive income, consol- idated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion, the consolidated financial statements (pages F-1 to F-76) give a true and fair view of the con- solidated financial position of the Group as at December 31, 2022, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Stan- dards (IFRS) and comply with Swiss law. Basis for opinion We conducted our audit in accordance with Swiss law, International Standards on Auditing (ISAs) and Swiss Standards on Auditing (SA-CH). Our responsibilities under those provisions and standards are further described in the “Auditor’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, together with the requirements of the Swiss audit profession, as well as the International Ethics Standards Board for Accoun- tants’ International Code of Ethics for Professional Accountants (including International Independence Standards) (IESBA Code), 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. Key Audit Matters • Assessment of the recoverable amount for the Leqvio and Xiidra intangible assets • Provisions for deductions from revenue related to Innovative Medicines US Managed Care, Medicare Part D and Medicaid rebate programs Key audit matters are those matters that, in our profes- sional 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. Assessment of the recoverable amount for the Leqvio and Xiidra intangible assets Key Audit Matter As discussed in Note 1 to the consolidated financial state- ments, the Group determined the recoverable amount of the intangible assets other than goodwill based on the fair value less costs of disposal method for which no directly observable market inputs were available. As dis- cussed in Note 11, the Group has intangible assets in its Innovative Medicines Division other than goodwill total- ing USD 29’826 million as at December 31, 2022, a por- tion of which related to the currently marketed products Leqvio and Xiidra. We identified the assessment of the recoverable amount, specifically the sales forecasts of the Leqvio and Xiidra intangible assets, as a Key Audit Matter. Sig- nificant auditor judgment and subjectivity was required to assess the sales forecasts assumptions which were a significant input in the determination of the recover- able amount of these intangible assets. Our response The following are the primary procedures we performed to address this Key Audit Matter: • We evaluated the design and tested the operating effectiveness of a certain internal control related to the Group’s intangible asset impairment process for Leqvio and Xiidra, including the development of the sales fore- casts; • We evaluated the reasonableness of management’s sales forecasts for Leqvio and Xiidra by (1) comparing certain underlying assumptions to company-specific operational information and management’s communi- cations to the board of directors, (2) comparing the most recent sales performance to previous drug launches, and (3) comparing certain underlying assumptions to available external market and industry data; and • We assessed management’s ability to accurately fore- cast sales by comparing historical sales forecasts for Leqvio and Xiidra to actual results. For further information on the assessment of the recov- erable amount for the Leqvio and Xiidra intangible assets refer to the following: Page F-6 (Note 1 Significant accounting policies), Page F-17 (Note 3 Segmentation of key figures 2022, 2021 and 2020) and Page F-33 (Note 11 Goodwill and intangible assets) F-77 Statutory Auditor’s Report Provisions for deductions from revenue related to Innovative Medicines US Managed Care, Medicare Part D and Medicaid rebate programs Key Audit Matter As discussed in Note 1 to the consolidated financial state- ments, the Group records provisions for estimated rebates as a deduction from revenue when the related revenue is recognized. Rebates involve the use of assumptions and judgements in the determination of the provision rates at the time revenues are recorded. Pro- vision rates are influenced by the terms and conditions in the individual agreements, historical experience, prod- uct sales and growth rate, population growth, product pricing, the mix of contracts and products, the level of inventory in the distribution channel, regulations, con- tracts, and channels and payers. As discussed in Note 22, provisions for deductions from revenue totaled USD 6’732 million as at December 31, 2022, a portion of which related to Innovative Medicines US Managed Care, Medi- care Part D and Medicaid rebate programs (hereafter “IM US rebates”). We identified the estimation of the IM US rebates pro- visions, specifically the provision rebate rates, as a Key Audit Matter. The evaluation of the provision rebate rates required a high degree of subjective auditor judgment as it involved estimating the portion of the Group’s revenue which will ultimately be subject to a related rebate. Our response The following are the primary audit procedures we per- formed to address this Key Audit Matter: • We evaluated the design and tested the operating effectiveness of certain internal controls over the Group’s IM US rebates process related to the develop- ment of the provision rebate rates; • We developed our own independent expectation of the IM US rebates provisions, by using internal information, including historical experience and trend analysis of actual rebate claims paid, and comparing it to manage- ment’s actual recorded balances; • For a sample of actual rebate claims processed by the Group, we evaluated the claims against the contractual and mandated terms of the rebate arrangements; and • We assessed management’s ability to accurately esti- mate the IM US rebates provisions by comparing his- torically recorded provisions to the actual amount that was ultimately paid by the Group. For further information on the provisions for deductions from revenue related to Innovative Medicines US Man- aged Care, Medicare Part D and Medicaid rebate pro- grams refer to the following: Page F-6 (Note 1 Significant accounting policies), Page F-17 (Note 3 Segmentation of key figures 2022, 2021 and 2020), Page F-38 (Note 15 Trade receivables) and Page F-48 (Note 22 Provisions and other current liabilities) Other Matter The consolidated financial statements of the Group for the year ended December 31, 2021 were audited by another auditor who expressed an unmodified opinion on those statements on February 1, 2022. 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 the information included in the Annual Report, but does not include the consolidated financial statements, the stand-alone financial statements of the company, the compensation report and our auditor’s reports thereon. Our opinion on the consolidated financial statements does not cover the other information in the Annual Report and we do not express any form of assurance conclu- sion thereon. In connection with our audit of the consolidated finan- cial statements, our responsibility is to read the other information in the Annual Report and, in doing so, con- sider whether the other information is materially incon- sistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we con- clude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Board of Directors’ Responsibilities 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 F-78 Statutory Auditor’s Report SA-CH will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggre- gate, 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 SA-CH, we exercise professional judgment and maintain professional skepticism throughout 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, but not for the pur- pose of expressing an opinion on the effectiveness of the Group’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 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, primarily through the Audit and Compliance Committee, regard- ing, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we iden- tify during our audit. We also provide the Board of Directors with a state- ment that we have complied with relevant ethical require- ments regarding independence, and communicate with them all relationships and other matters that may rea- sonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. 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 para. 1 item 3 CO and PS-CH 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. KPMG AG Richard Broadbelt Licensed Audit Expert Auditor in charge Sara Burke Basel, January 31, 2023 F-79 Financial statements of Novartis AG Financial statements of Novartis AG Income statements (For the years ended December 31, 2022 and 2021) (CHF millions)    Income from investment in Group subsidiaries    License income    Other income Total income    Amortization of goodwill    Impairment of investment in Group subsidiaries    General and administrative 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 2022 25 096 230 2 25 328 3 – 252 4 4 – 13 – 265 25 063 556 – 160 25 459 – 67 25 392 2021 8 082 228 2 8 312 – 252 – 85 – 13 – 350 7 962 442 – 160 – 1 8 243 – 69 8 174 A-1 Financial statements of Novartis AG Balance sheets (At December 31, 2022 and 2021) (CHF millions) Assets Current assets    Cash and cash equivalents Interest-bearing current receivables    Group subsidiaries Other current receivables    Group subsidiaries Total current assets Non-current assets Financial assets    Group subsidiaries Investments    Group subsidiaries Goodwill 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 Total liabilities Equity Share capital Legal reserves    General legal reserve    Legal reserve for treasury shares held by subsidiaries 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 Note 2022 2021 3 3 6 6 640 2 777 97 63 6 740 2 843 6 14 458 14 933 5 3 14 303 14 172 1 915 2 167 30 676 31 272 37 416 34 115 6 4 907 51 90 46 5 094 33 370 92 495 7 1 376 1 377 483 1 859 2 354 482 1 859 6 953 8 1 202 1 217 9 10 320 450 770 667 320 907 1 227 739 17 353 18 342 25 392 8 174 42 745 26 516 43 412 27 255 9 – 10 322 – 2 537 35 062 27 162 37 416 34 115 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 article 961d, para- graph 1 SCO, and has not prepared additional disclo- sures, a separate cash flow statement and a manage- ment report for SCO purposes. 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 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 Goodwill is capitalized and amortized over a period of 20 years. Goodwill is reviewed for impairment on an annual basis. If necessary, an impairment loss is recog- nized. 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. Financial assets are valued at acquisition cost less adjustments for foreign currency losses and any other impairment of value. Provisions Provisions are made to cover general business risks of the Group. A-3 Notes to the financial statements of Novartis AG 3. Goodwill (CHF millions) Goodwill Gross cost 1 Accumulated amortization January 1 Amortization charges December 31 Net book value at December 31 1 There was no change during 2022 and 2021. 2022 2021 4 939 4 939 – 2 772 – 2 520 – 252 – 252 – 3 024 – 2 772 1 915 2 167 4. Financial income and expenses (CHF millions)    Interest    Foreign exchange    Others Total 2022 2021 Income Expenses Income Expenses – 160 525 31 428 14 – 159 – 1 556 – 160 442 – 160 5. Investments The principal direct and indirect subsidiaries and other holdings of Novartis AG are shown in Note 31 to the Group’s consolidated financial statements. 6. Interest-bearing current receivables and liabilities and financial assets Interest-bearing current receivables and liabilities with Group subsidiaries contain intragroup arrangements under which the company grants or receives credits that are available on demand. Financial assets with Group subsidiaries include financing arrangements and loans to direct or indirect subsidiaries of Novartis AG. A-4 Notes to the financial statements of Novartis AG 7. Bonds Straight bonds Coupon 0.250% 0.625% 1.050% Nominal Currency amount Issuance year Maturity year Issuer CHF CHF CHF 500 550 325 2015 2015 2015 2025 Novartis AG, Basel, Switzerland 2029 Novartis AG, Basel, Switzerland 2035 Novartis AG, Basel, Switzerland Total straight bonds Breakdowns by maturity (CHF millions) 2025 After 2027 Total 2021 CHF Issue price millions millions 2022 CHF 100.640% 100.502% 100.479% 500 551 325 501 551 325 1 376 1 377 2022 500 876 2021 501 876 1 376 1 377 Comparison of balance sheet and fair value (CHF millions) Straight bonds Total 2022 Balance sheet 2022 2021 Fair value Balance sheet 2021 Fair value 1 376 1 376 1 266 1 266 1 377 1 377 1 438 1 438 8. Share capital January 1 2 434 420 920 1 217.2 2 467 060 920 Number of shares canceled/capital reduced during the period – 30 699 668 – 15.3 – 32 640 000 December 31 2 403 721 252 1 201.9 2 434 420 920 2022 Number of shares Share capital CHF millions 2021 Number of shares Share capital CHF millions 1 233.5 – 16.3 1 217.2 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 1 217.2 million at December 31, 2021, to CHF 1 201.9 million at December 31, 2022, due to a share capital reduction as a result of the cancellation of 30.7 million repurchased shares with a nominal value of CHF  15.3 million. The cancellation was approved at the Annual General Meeting on March 4, 2022, and became effective on May 11, 2022. During 2021, the total share capital decreased from CHF 1 233.5 million at December 31, 2020, to CHF 1 217.2 million at December 31, 2021, due to a share capital reduction as a result of the cancellation of 32.6 million repurchased shares with a nominal value of CHF 16.3 million. The cancellation was approved at the Annual General Meeting on March 2, 2021, and became effec- tive on July 8, 2021. A-5 Notes to the financial statements of Novartis AG 9. Treasury shares Treasury shares held by subsidiaries 1 January 1 Number of shares purchased/sold; reserves transferred December 31 1 Excluding foundations 2022 2021 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 14 987 803 – 7 458 744 7 529 059 907 23 325 658 – 457 – 8 337 855 450 14 987 803 1 389 – 482 907 2022 2021 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 82 007 126 95 543 832 2 537 7 785 83 947 458 – 1 940 332 177 550 958 10 322 82 007 126 2 655 – 118 2 537 Total treasury shares 1 January 1 Total number of shares purchased/sold or canceled; reserves transferred December 31 1 Excluding foundations 2022 Number of shares Total treasury shares CHF millions 2021 Number of shares Total treasury shares CHF millions 96 994 929 3 444 107 273 116 88 085 088 7 328 – 10 278 187 185 080 017 10 772 96 994 929 4 044 – 600 3 444 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 2022 totaled 127.7 million (2021: 32.2 million), with an average purchase price of CHF 82 (2021: CHF 82). No treasury share sales were executed during 2022 and 2021. Share-based compensation transactions totaled 9.7 million shares (2021: 9.9 million shares). The number of treasury shares held by the Company and its subsidiaries meet the definitions and require- ments of article 659b SCO. As at December 31, 2022, treasury shares held by Novartis AG and its fully-owned subsidiaries totaled 185 080 017. It should be noted that within the Novartis Group’s IFRS consolidated financial statements, some Novartis entities are included in the consolidation scope. These entities are mainly founda- tions, which as at December 31, 2022 did not qualify as subsidiaries in the sense of article 659b SCO. With effective date of January 1, 2023, article 659b SCO was amended to change the definition of subsid- iaries to include foundations of the Company.   This change will have the impact as of January 1, 2023 to increase the reported number of treasury shares held by subsidiaries to reflect the Company foundations’ Novartis AG shares held (January 1, 2023: 96 969 226). As of the entry into force of the revised Swiss corpo- rate law on January 1, 2023, Novartis ordinary shares held by Swiss foundations controlled by Novartis will no longer carry the right to vote and therefore will be included as treasury shares for determining compliance with the legal requirements for legal reserves under arti- cles 659 et. seq. and 663b.10 SCO for the treasury shares. For further information related to the amendment to SCO article 659b, see Note 10. A-6 Notes to the financial statements of Novartis AG 10. Free reserves (CHF millions) January 1 Reduction due to cancellation of treasury shares (CHF 545 million / CHF 2 016 million of repurchased shares less their nominal value of CHF 15 million / CHF 16 million) Transfer from legal reserve for treasury shares 1 December 31 1 Transfer from legal reserve for treasury shares (including expired dividends) 2022 739 2021 2 256 – 530 – 2 000 458 667 483 739 With effective date of January 1, 2023, article 659b SCO was amended to change the definition of subsid- iaries to include foundations of the Company. This change will have the impact as of January 1, 2023 to increase the amount of legal reserves by the cost basis of the treasury shares held by subsidiaries in the amount of CHF 2 246 million, for the 96 969 226 Novartis AG shares held by Company foundations, (from CHF 450 million to CHF 2  696 million), with a corresponding decrease in free reserves of CHF 667 million and retained earnings of CHF 1 579 million. 11. Contingent liabilities (CHF millions) Guarantees in favor of subsidiaries to cover capital and interest of bonds, credit facilities and commercial paper programs – total maximum amount CHF 39 416 million (2021: CHF 42 329 million) Other guarantees in favor of subsidiaries, associated companies and others – total maximum amount CHF 1 737 million (2021: CHF 1 966 million) Total contingent liabilities Dec 31, 2022 Dec 31, 2021 21 997 22 739 559 632 22 556 23 371 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 2021, Novartis AG entered into an irre- vocable, non-discretionary arrangement with a bank to repurchase Novartis AG shares on the second trading line under its up-to USD 15.0 billion share buyback. The arrangement was updated in July 2022. Novartis AG is able to cancel this arrangement but would be subject to a 90-day waiting period under certain conditions. There was no requirement to record a contingent liability under this arrangement. A-7 Notes to the financial statements of Novartis AG 12. Registration, voting restrictions and major shareholders The Company’s Articles of Incorporation state that no person or entity shall be registered with the right to vote for more than 2% of the share capital, as set forth in the commercial register. In particular cases, the Board of Directors may allow exemptions from the limitation for registration in the Novartis Share Register. According to the Novartis Share Register, sharehold- ers who owned 2% or more of the Company’s capital at December 31, 2022, and were entitled to voting rights on all of their shares, excluding treasury shares held by Novartis AG or its fully owned subsidiaries, were as fol- lows: % holding of % holding of share capital share capital Dec 31, 2022 Dec 31, 2021 Furthermore, there were the following other significant share holders: % holding of % holding of share capital share capital Dec 31, 2022 Dec 31, 2021 Shareholders registered as nominees: Chase Nominees Ltd., London Nortrust Nominees Ltd., London The Bank of New York Mellon, New York    Through The Bank of New York Mellon, Everett 8.4 3.8 2.9 1.6    Through The Bank of New York Mellon, New York 0.9    Through The Bank of New York Mellon,    SA/NV, Brussels 0.4 8.8 4.2 3.0 1.6 1.1 0.3 Shareholder acting as American Depositary Share (ADS) depositary: JPMorgan Chase Bank, N.A., New York 9.4 11.1 Shareholders registered for their own account: Emasan AG, Basel UBS Fund Management (Switzerland) AG, Basel Credit Suisse Funds AG, Zurich 3.7 2.3 2.1 3.7 2.3 2.1 The following shareholder was disclosed through a noti- fication filed with Novartis AG, but was not registered as of December 31, 2022, in the Novartis Share Register: • Norges Bank (Central Bank of Norway), Oslo, which held 2.3% (2021: 2.1%) The following shareholder was disclosed through a noti- fication filed with Novartis AG and the SIX Swiss Exchange, but was registered with less than 2% of the share capital as of December 31, 2022, in the Novartis Share Register: • BlackRock, Inc., New York, which held between 5% and 10% A-8 Notes to the financial statements of Novartis AG 13. Equity instrument disclosures for the Board of Directors and Executive Committee members Share ownership requirements for Board members The Chairman is required to own a minimum of 30 000 Novartis shares, and other members of the Board of Directors are required to own at least 5 000 Novartis shares within five years after joining the Board of Direc- tors, to ensure their interests are aligned with those of shareholders. Board members are prohibited from hedging or pledging their ownership positions in Novartis shares that are part of their guideline share ownership require- ment, and are required to hold these shares for 12 months after retiring from the Board of Directors. As at Decem- ber 31, 2022, all current and former members of the Board of Directors who were required to meet the mini- mum share ownership requirements did so. Shares, ADRs and share options owned by Board members As at December 31, 2022, 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, 2022, and as at December 31, 2021, is shown in the table below. Shares and ADRs owned by Board members1 Number of shares 1,2 At At December 31, December 31, 2021 2022 Joerg Reinhardt 3 Simon Moroney Patrice Bula Nancy C. Andrews Ton Buechner Elizabeth Doherty Bridgette Heller Daniel Hochstrasser Frans van Houten Ana de Pro Gonzalo Andreas von Planta Charles L. Sawyers William T. Winters Sub-Total 632 730 609 156 4 102 8 802 8 931 20 461 12 836 4 296 804 2 240 6 543 7 257 17 856 10 743 2 655 0 14 442 10 813 823 0 168 717 166 390 15 888 14 214 27 659 24 436 920 491 872 303 Board members who stepped down at the 2022 AGM Enrico Vanni 32 078 12 751 44 829 30 965 13 222 44 187 965 320 916 490 Ann Fudge Sub-Total Total na – not applicable 1 Includes holdings of “persons closely linked” to Board members (see the “persons closely linked” definition). 2 Each share provides entitlement to one vote. 3 The 2021 Annual Report included an underestimated number of owned shares for Joerg Reinhardt. It should stipulate 609 156 shares owned compared to 418 706 as reported. 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 addition, the CEO and CFO are required to hold the equity vesting under the LTPP plan (granted since 2021) for a minimum of two years after the vesting date. 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 accord- ingly. Function CEO Ownership level 5 x base compensation Other Executive Committee members 3 x base compensation A-9 Notes to the financial statements of Novartis AG 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 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 compliance with the share owner- ship guideline on an annual basis. As at December 31, 2022, all members who have served at least five years on the Executive Committee have met or exceeded their personal Novartis share own- ership requirements. Shares, ADRs, equity rights and share options owned by Executive Committee members As at December 31, 2022, 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, 2022, and as at December 31, 2021. 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. Shares, ADRs and other equity rights owned by Executive Committee members1 Vasant Narasimhan 228 614 177 888 406 502 170 111 218 826 388 937 Vested shares and ADRs Unvested shares Total as at and other December 31, 2022 equity rights 2 Vested shares Unvested shares Total as at and other December 31, 2021 and ADRs equity rights 2 Shreeram Aradhye (from May 16, 2022) 1 241 13 153 14 394 Victor Bulto (from May 1, 2022) Aharon Gal (from July 18, 2022) Karen Hale Harry Kirsch Robert Kowalski Steffen Lang 0 36 386 36 386 17 948 45 012 62 960 0 28 568 28 568 0 0 0 0 0 0 0 0 0 0 9 059 9 059 312 682 87 266 399 948 285 186 113 110 398 296 0 32 495 32 495 0 37 562 37 562 118 057 56 180 174 237 125 286 65 918 191 204 Fiona Marshall (from November 1, 2022) 0 34 980 34 980 0 0 0 Klaus Moosmayer Marie-France Tschudin Subtotal 3 16 713 30 708 47 421 8 312 34 732 43 044 52 818 75 146 127 964 39 353 84 863 124 216 748 073 617 782 1 365 855 628 248 564 070 1 192 318 Executive Committee members who stepped down during 2022 James Bradner (until October 31, 2022) Richard Saynor (until October 25, 2022) 0 0 104 402 104 402 43 744 110 808 154 552 64 960 64 960 0 33 713 33 713 Susanne Schaffert (until April 4, 2022) 4 142 844 71 226 214 070 120 003 87 801 207 804 John Tsai (until May 15, 2022) 4 13 550 71 638 85 188 25 768 87 461 113 229 Robert Weltevreden (until April 4, 2022) 28 755 41 753 70 508 27 758 44 064 71 822 Subtotal Total 185 149 353 979 539 128 217 273 363 847 581 120 933 222 971 761 1 904 983 845 521 927 917 1 773 438 1 Includes holdings of “persons closely linked” to Executive Committee members (see “—persons closely linked” definition). 2 Includes restricted shares, RSUs and target number of PSUs. 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 Excludes members who stepped down during the year. 4 The 2021 Annual Report included an underestimated number of owned shares for Susanne Schaffert and Jon Tsai. It should respectively stipulate 120 003 and 25 768 shares owned compared to 116 173 and 23 382 as reported. A-10 Appropriation of available earnings and reserves of Novartis AG Appropriation of available earnings and reserves of Novartis AG Appropriation of available earnings of Novartis AG as per balance sheet and declaration of dividend (CHF) Available unappropriated earnings Balance brought forward before capital reduction Reduction due to cancellation of treasury shares1 Net income of the year Total available earnings at the end of the year Transfer to legal reserves for treasury shares2 2022 2021 19 318 747 323 18 776 584 858 – 1 966 414 116 – 434 511 117 25 392 232 198 8 173 868 621 42 744 565 405 26 515 942 362 – 1 578 834 054 Total available earnings at the disposal of the Annual General Meeting 41 165 731 351 26 515 942 362 Appropriation proposed by the Board of Directors Payment of a gross dividend (before taxes and duties) of CHF 3.20 (2021: CHF 3.10) on 2 205 489 460 (2021: 2 326 572 339) dividend-bearing shares3 with a nominal value of CHF 0.50 each – 7 057 566 272 – 7 212 374 251 Total available earnings after appropriation Dividend waived for additional treasury shares held by the Company Balance to be carried forward 34 108 165 079 19 303 568 111 15 179 212 34 108 165 079 19 318 747 323 1 Based on the Annual General Meeting resolution of March 4, 2022 and March 2, 2021 2 With effective date of January 1, 2023, article 659b SCO was amended to change the definition of subsidiaries to include foundations of the Company. This amendment requires an additional allocation of legal reserve for treasury shares held by foundations as of January 1, 2023, resulting in a reduction in available earnings at the disposal of the Annual General Meeting 3 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 13, 2023. The last trading day with entitlement to receive the dividend is March 8, 2023. As from March 9, 2023, the shares will be traded ex-dividend. A-11 Statutory Auditor’s Report Statutory Auditor’s Report 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 (the Company), which comprise the balance sheet as at December 31, 2022, and the income statement for the year then ended, and notes to the financial statements, including a summary of significant accounting policies. In our opinion, the financial statements (pages A-1 to A-11) 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 Standards on Auditing (SA-CH). Our respon- sibilities under those provisions and standards are fur- ther described in the “Auditor’s Responsibilities for the Audit of the Financial Statements” section of our report. We are independent of the Company in accordance with the provisions of Swiss law, together with the require- ments of the Swiss audit profession and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our profes- sional judgment, were of most significance in our audit of the financial statements of the current period. We have determined that there are no key audit matters to com- municate in our report. Other Matter The financial statements of Novartis AG for the year ended December 31, 2021 were audited by another audi- tor who expressed an unmodified opinion on those state- ments on February 1, 2022. 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 the information included in the annual report, but does not include the consolidated financial statements, the stand-alone financial statements of the Company, the compensation report and our auditor’s reports thereon. Our opinion on the 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 financial state- ments, our responsibility is to read the other information in the Annual Report and, in doing so, consider whether the other information is materially inconsistent with the 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 con- clude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Board of Directors’ Responsibilities 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 Company’s ability to continue as a going concern, disclosing, 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 Company or to cease operations, 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 SA-CH will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, indi- vidually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A-12 Statutory Auditor’s Report As part of an audit in accordance with Swiss law and SA-CH, we exercise professional judgment and maintain professional skepticism throughout 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 Company’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 Compa- ny’s ability to continue as a going concern. If we con- clude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such dis- closures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern. We communicate with the Board of Directors, primarily through the Audit and Compliance Committee regard- ing, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we iden- tify during our audit. We also provide the Board of Directors or its relevant committee with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. From the matters communicated with the Board of Directors or its relevant committee, we determine those matters that were of most significance in the audit of the financial statements of the current period and are there- fore the key audit matters. We describe these matters in our auditor’s report, unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such commu- nication. Report on Other Legal and Regulatory Requirements In accordance with article 728a para. 1 item 3 CO and PS-CH 890, we confirm that an internal control system exists, which has been designed for the preparation of financial statements according to the instructions of the Board of Directors. We further confirm that the proposed appropriation of available earnings complies with Swiss law and the Company’s articles of incorporation. We recommend that the financial statements submitted to you be approved. KPMG AG Richard Broadbelt Licensed Audit expert Auditor in Charge Norman Dittes Licensed Audit Expert Basel, January 31, 2023 A-13 

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